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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997, or
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________ to
_____________.
Commission File No. 0-23862
FONIX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 87-0380088
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
60 EAST SOUTH TEMPLE STREET, SUITE 1225
SALT LAKE CITY, UTAH 84111
(Address of principal executive offices with Zip Code)
(801) 328-0161
(Registrant's telephone number, including area code)
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock ($0.0001 par value per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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] No [_].
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $124,541,303 calculated using a closing price of
$4.875 per share on April 8, 1998. For purposes of this calculation, the
registrant has included only the number of shares held by its officers and
directors directly of record as of April 8, 1998 (and not counting shares
beneficially owned on that date) in determining the shares held by non-
affiliates. As of April 8, 1998, there were issued and outstanding 51,303,521
shares of the Company's Common Stock (excludes 166,667 shares issuable upon
conversion of 166,667 shares of Series A Preferred Stock outstanding as of April
8, 1998).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[_]
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FONIX CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Page
----
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
OVERVIEW
fonix, a development stage company, is a Delaware corporation engaged in
research and development of certain proprietary automatic speech recognition,
text-to-speech (speech synthesis), compression and neural network technologies
and other human-computer interface technologies and products. fonix licenses
its technologies to and has entered into co-development relationships and
strategic alliances with third parties that are participants in the horizontal
computer industry (including producers of application software, operating
systems, computers and microprocessor chips) or are research and development
entities, including academia and industry and commercial speech product
developers. fonix intends for the foreseeable future to continue this practice
and will seek to generate revenues from its proprietary speech recognition
technologies from licensing fees and royalties and strategic partnerships and
alliances. To date, the Company has entered into two strategic partnerships and
one license agreement relating to its automatic speech recognition technologies.
The Company received its first revenue in February 1998.
The Company created a wholly owned subsidiary in March 1998, for the purpose of
acquiring AcuVoice, Inc., a California corporation ("AcuVoice"). AcuVoice has
developed and markets text-to-speech or speech synthesis technologies and
products directly to end-users, systems integrators and original equipment
manufacturers ("OEMs") for use in the telecommunications, multi-media, education
and assistive technology markets. To date, 96 companies have purchased AcuVoice
text-to-speech developer kits and many now have introduced products utilizing
AcuVoice technologies. The acquisition of AcuVoice by the Company provides an
opportunity to introduce fonix-branded products into the market for the first
time in the Company's history.
The executive offices of the Company are located at 60 East South Temple Street,
Suite 1225, Salt Lake City, Utah 84111, and its telephone number is (801) 328-
0161. The executive offices of AcuVoice are located at 84 West Santa Clara
Street, Suite 720, San Jose, CA 95113, and its telephone number is (408) 289-
1661. The Company also maintains offices in Lexington, Massachusetts and a
research facility in Draper, Utah.
TECHNOLOGY OVERVIEW
Automatic Speech Recognition
Presently available traditional voice recognition technologies have been used in
a variety of products for industrial, telecommunications, business and personal
applications. Speech recognition algorithms in software have been developed and
refined over the past ten years. However, the increase in processing speed and
memory capacity of personal computers has accounted for much of the improvement
in traditional speech recognition systems during that period. This improvement
includes vocabulary size, recognition accuracy and continuous speech recognition
ability. Currently available speech recognition systems for personal computers
include speech command systems for navigating the Windows(R) interface and
inexpensive, discrete word dictation systems offered by Dragon Systems, IBM, and
Lernout & Hauspie. Recently, general and specific vocabulary continuous speech
dictation systems also have been introduced by Philips, IBM, Dragon Systems and
others. In addition, telephony applications with menu choice systems and small
vocabulary dialogue systems have been demonstrated by Nuance, Nortel, and
others.
Despite the nominal advances in performance of such presently available systems,
there are significant limitations inherent in all of these systems, each of
which continues to use traditional approaches generally based on Hidden Markov
Models ("HMMs") technology. These traditional approaches have not appreciably
advanced since the late 1980's. Applications based on such traditional speech
recognition systems for personal computers all require close-talking microphones
in relatively low noise environments and a formal speaking style to achieve
acceptable accuracy. In so-called continuous dictation systems, significant
adaptation to user speech, speaking style, and content area also are required.
These traditional systems are generally restricted to speech recognition for a
single individual dictating in a quiet environment; presently available
telephony-based systems are even more limited in general functionality.
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The present industry standard methodology, the HMMs, use a general template or
pattern matching technique based on statistical language models. Massachusetts
Institute of Technology researcher, Dr. Victor Zue, has noted that speech-
recognition systems based on such technology
"utilize little or no specific-speech knowledge, but rely instead primarily
on general-purpose pattern-recognition algorithms. While such techniques
are adequate for a small class of well-constrained speech recognition
problems, their extendibility to multiple speakers, large vocabularies,
and/or continuous speech is highly questionable. In fact, even for the
applications that these devices are designed to serve, their performance
typically falls far short of human performance."
HMMs' widely recognized weaknesses are many: (i) they do not meet the needs for
many mass market implementations, (ii) they have limited input feature types,
(iii) they account for only limited context, (iv) they have limited ability to
generalize acoustic and language structure, (v) they require training data from
the end-user for acceptable performance, (vi) models become extremely large and
complex as vocabulary grows, and (vii) there is a lack of hardware parallel
processing capability.
In contrast to HMMs, fonix researchers have developed what the Company believes
to be a fundamentally new approach to the analysis of human speech sounds and
the contextual recognition of speech. The core fonix automatic speech
recognition technologies (the "ASRT" or "Core Technologies") attempt to
approximate the techniques employed by the human auditory system and language
understanding centers in the human brain. The ASRT use information in speech
sounds perceptible to humans but not discernible by current automatic speech
recognition systems. They also employ neural net technologies (artificial
intelligence techniques) for identifying speech components and word sequences
contextually, similar to the way in which scientists believe information is
processed by the human brain. As presently developed, the ASRT are comprised of
several components including a phonetic sound representation recognition engine,
audio signal processing, a feature extraction process, a phoneme estimation
process, and a linguistic process consisting of two components, one of which is
expert- or rule-based and one of which is based on proprietary neural net
technologies, that are designed to interpret human speech contextually.
fonix believes the reliable recognition of natural, spontaneous speech spoken by
one or more individuals in a variety of common environments by means of a
conveniently placed microphone, all based on its ASRT, will significantly
improve the performance, utility and convenience of applications currently based
on traditional HMMs technology such as computer interface navigation, data
input, text generation, telephony transactions, continuous dictation and other
applications. Additionally, the Company believes that its ASRT will make
possible major new speech recognition applications such as the transcription of
business meetings and conversations, real-time speech-to-speech language
translation, natural dialogues with computers for information access and
consumer electronic devices controlled by natural language.
Thus, in the near term, the Company believes that its ASRT will initially offer
unique speech processing techniques that will be both complementary and
significantly enhancing to currently available speech recognition systems.
fonix intends to continue to license its ASRT, to continue to co-develop the
ASRT with research and development groups in government, industry, and academia
and ultimately to market a suite of fonix-branded products. As discussed more
fully below, fonix recently entered into the Siemens Agreement to conduct joint
research and development for applications in the telecommunications industry of
certain technologies related to the ASRT. fonix anticipates that it will enter
into additional strategic alliances and co-development agreements in other
industry segments. In the long term, the Company anticipates that automatic
speech recognition systems employing the Company's unique new ASRT will dominate
the market and set the industry standard for all automatic speech recognition
applications because of its anticipated capacities to overcome the weaknesses of
HMMs. In addition, the Company expects that certain elements of its Core
Technologies will have industry-leading applications in such non-speech
recognition industries, market segments and disciplines as artificial
intelligence and data compression. Although these plans represent management's
belief and expectation based on its current understanding of the market and its
experience in the industry, there can be no assurance that actual results will
meet these expectations. See "Certain Significant Risk Factors." In the last
two fiscal years, the Company has expended $7,066,294 and $4,758,012 on research
and development activities. Since its inception (October 1, 1993), the Company
has spent $17,937,293 on research and development of the ASRT. The Company
expects that a substantial part of its capital resources will continue to be
devoted to research and development of the ASRT and other proprietary
technologies for the foreseeable future.
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Text-to-Speech (Speech Synthesis)
In March 1998, a wholly owned subsidiary of the Company acquired AcuVoice in a
statutory merger. The subsidiary changed its name to AcuVoice, Inc. immediately
following the merger and will continue the business of AcuVoice using that name.
AcuVoice began in 1986 to develop and market a new approach to synthesized
speech, a system using actual recordings of "units" of human speech (i.e., the
sound pulsation). Since the unit of speech consists of more than one phoneme
(i.e., sound), AcuVoice's approach has been called a "large segment
concatenative speech synthesis" approach. Other companies such as DEC and AT&T
began in the early 1960s and continue until the present to use a system called
"parametric speech synthesis." Parametric systems continue to be plagued with
problems of speech quality, because their unit is not an actual recording, but a
computer's version of what a human voice sounds like. Poor speech quality also
occurs because the parametric unit consists, for the most part, of a single
phoneme, such as the "t" in the word "time."
Although as early as 1994 AcuVoice released versatile prototypes of its system,
it was not until early 1996 that the AcuVoice Speech Synthesizer was ready for
sale into the telecommunications, multi-media, educational and assistive
technology markets. AcuVoice won awards as "best text-to-speech" product at the
Computer Technology Expo '97 and '98 and the best of show award at AVIOS '97.
Presently AcuVoice products are being sold to a fast-growing body of end-users,
systems integrators and OEMs.
EMPLOYEES
As of March 31, 1998, the Company employed 94 persons. Of this total, 7 persons
are employed at AcuVoice.
RECENT DEVELOPMENTS
Consistent with the objectives, vision and strategy of the Company outlined
above, fonix has entered into several key transactions in recent months. These
are discussed briefly in the following section.
The Siemens Transaction
On November 14, 1997, the Company entered into a Master Agreement for Joint
Collaboration (the "Siemens Agreement") with Siemens Aktiengesellschaft
("Siemens") pursuant to which the Company and Siemens have agreed to pursue
through a strategic alliance, research and development of certain technologies
related to the ASRT and the commercialization of such technologies for the
telecommunications industry. On February 11, 1998, the Company and Siemens
entered into the First Statement of Work and License Agreement contemplated by
the Siemens Agreement, pursuant to which Siemens paid the Company a non-
refundable license fee (for which the Company has no further obligation)
relating to the development and production of the fonix ASRT in integrated
circuits suitable for certain telecommunications applications. Siemens also
purchased 1,000,000 Common Stock purchase warrants and was granted an option to
purchase shares of Common Stock. The Siemens Agreement provides for the payment
to the Company of additional license fees when the Company and Siemens have
entered into further agreements for the development of specific technologies,
although there can be no assurance that such additional agreements will be
entered into.
The OGI Master Technology Collaboration Agreement
On October 14, 1997, the Company entered into a Master Technology Collaboration
Agreement (the "OGI Agreement") with the Oregon Graduate Institute of Science
and Technology ("OGI"), pursuant to which the Company and OGI have agreed to
pursue research and development of certain aspects of the Company's ASRT. Under
the terms of the first statement of work between the Company and OGI entered
into pursuant to the OGI Agreement, the parties are collaborating on advanced
ASRT applications for entry in the 1999 DARPA competition. The Defense Advanced
Research Projects Agency, or DARPA, has been a major supporter of speech
technology research. The OGI Agreement contemplates that the Company and OGI
will enter into additional agreements to pursue research and development of
other aspects of the ASRT. There can be no assurance that additional agreements
will be entered into by the Company and OGI. OGI is a major academic research
and development facility for speech technology and provides fonix with access to
leading speech researchers such as Dr. Ron Cole, the director of OGI's Center
for Spoken Language Understanding. Dr. Cole became a consultant to the Company
following execution of the OGI Agreement.
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Acquisition of AcuVoice
On March 13, 1998, the Company acquired AcuVoice. The transaction described
below by which the Company acquired AcuVoice is referred to herein as the
"Merger." AcuVoice was incorporated in 1984, and since that time has been
engaged in the development of a software only text-to-human-speech synthesis
technology called "concatenative speech synthesis," now recognized in the speech
technology industry as a leading method of achieving natural sounding speech
from a computer.
The Merger was effected by an exchange of restricted shares of fonix Common
Stock for the issued and outstanding Common Stock of AcuVoice and a cash
payment. A total of 2,692,218 shares of fonix Common Stock were issued in
exchange for AcuVoice Common Stock and a total of $8,000,232 was paid in cash
(including amounts paid in lieu of fractional shares). The Closing was deemed
to have occurred on March 13, 1998, notwithstanding the fact that certain acts
were completed following that date.
The Merger will become effective at such time as the Certificate of Merger
required under Utah law is filed with the Utah Division of Corporations and
Commercial Code and the Secretary of State of California.
In the fall of 1997, John A. Oberteuffer, Ph.D., a leading expert in the field
of speech recognition and speech synthesis technologies, who since March 1997
has served on the fonix Board, and who presently is employed as the Company's
Vice President--Technology, introduced the Company to AcuVoice. Dr. Oberteuffer
originally met E. David Barton, the Chairman, President and a substantial
shareholder of AcuVoice in 1992, but neither Dr. Oberteuffer nor any other
officer or director of fonix had any affiliation with or interest in AcuVoice
prior to the completion of the Merger.
AcuVoice released the first versatile prototypes of its system in 1994. By
early 1996, the AcuVoice Speech Synthesizer was ready for sale into the
telecommunications, multi-media, educational and assistive technology markets.
Companies which have purchased developer kits from AcuVoice and are now
developing products for the market include IBM, General Motors, Kurzweil
Educational Systems, Pratt & Whitney, Octel Communications, Andersen Consulting,
NEC, Dialogic, and Bell Atlantic. Companies which have developed products using
AcuVoice developer kits, and now are selling or using products containing
AcuVoice text-to-speech include AT&T, Motorola, Northern Telecom, Lucky Goldstar
(Korea), Aumtech Inc., Mail Call, Inc., IMG, Hurdman Communications (Better
Business Bureau), SmartDial, Signet, Concierge, Ultimate Technology, FirstCall,
XL Vision, Applied Future Technologies and Productivity Works.
To the Company's knowledge, no other company has succeeded in developing a
versatile system of large segment concatenative synthesis. However, the
AcuVoice speech synthesis products compete with other concatenative and
parametric speech synthesis products. AcuVoice's main competitors are Lernout
&Hauspie, Lucent Technologies, Eloquent Technologies and Apple.
AcuVoice's competitors offer a range of voices (male, female, child) and
languages. AcuVoice is accelerating its current development of a female voice,
and is actively pursuing strategic alliances in order to develop synthesis
products for major languages other than English.
fonix believes that the AcuVoice text-to-speech technologies will be an
important and complementary addition to the suite of Core Technologies the
Company has developed to date and will develop in the future. For example,
because both voice synthesis and voice recognition technologies are dependent
upon the analysis of human speech patterns, those technologies share many
similar challenges, and a solution in one arena often will be portable to the
other. Additionally, the Company believes that a state-of-the-art voice
synthesis technology, coupled with the Company's Core Technologies, will
substantially increase the marketability of both technologies by broadening the
potential product applications, thereby increasing the pool of potential
licensees of the technologies.
1998 Private Placement
In March 1998, the Company completed a private placement (the "Offering") of
6,666,666 shares of its restricted Common Stock to seven separate investment
funds. The total purchase price to be paid by the investors pursuant to the
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Offering is $30,000,000. Of that amount, $15,000,000 was provided to the
Company on March 12, 1998, in return for which the Company issued a total of
3,333,333 shares of restricted stock, pro rata to the investors in proportion to
the total amount of the purchase price paid by them. The remainder of the
purchase price is to be paid by the investors on that date that is 60 days after
the effectiveness of a registration statement that the Company will prepare and
file with the Securities and Exchange Commission covering all of the restricted
Common Stock to be issued in connection with the Offering, provided that, as of
such date, certain conditions are satisfied. Specifically, such conditions
include the following: (i) that the registration statement covering all of the
Common Stock to be issued is effective as of such date, (ii) the representations
and warranties of the Company as set forth in the documents underlying the
Offering shall be correct in all material respects, (iii) the market price of
the Company's Common Stock shall exceed $4.50 per share, (iv) the dollar volume
of trading in the Company's Common Stock for the 10-trading-day period preceding
such date shall equal or exceed $1,000,000, (v) that there shall be at least 18
market makers for the Company's Common Stock, and (vi) there shall be no
material adverse change in the Company's business or financial condition.
Additionally, the investors in the Offering will have certain "reset" rights
pursuant to which the investors will receive additional shares of restricted
Common Stock if the average market price of the Company's Common Stock for the
60-day periods following the initial closing date and the second funding date
does not equal or exceed $5.40 per share. The number of additional shares that
will be issued pursuant to such reset provisions will be determined by dividing
(x) the product of (A) the amount by which such 60-day average price is less
than $5.40 and (B) the number of shares of Common Stock issued to the investor
by (y) the 60-day average price. The investors in the offering also have
certain first rights of refusal and other rights if the Company conducts other
offerings in the near future with other investors and the terms of such other
offerings are more advantageous to such other investors than the terms of the
Offering.
The Synergetics Transaction
Prior to March 1997, the Company's scientific research and development
activities were conducted by a third party, Synergetics, Inc. ("Synergetics"),
pursuant to product development and assignment contracts (collectively, the
"Synergetics Agreement"). Under that arrangement, Synergetics provided
personnel and facilities, and the Company financed the 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 and the Company was obligated to use its
best efforts in raising all of the necessary funding for the development of the
ASRT. Moreover, under the Synergetics Agreement, the Company was obligated to
pay to Synergetics a royalty of 10 percent (the "Royalty") of revenues from
sales of the ASRT or products incorporating the ASRT. Synergetics compensated
its developers and others contributing to the development effort by granting
project shares to share in royalty payments received by Synergetics ("Project
Shares"). 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 ASRT. On April 6, 1998,
the Company and Synergetics entered into a Royalty Modification Agreement to
finalize the Modification Terms. Under the terms of the Royalty Modification
Agreement, the Company agreed to offer an aggregate of 4,800,000 non-
transferable Common Stock purchase warrants to the holders of the Project Shares
in consideration for which Synergetics agreed to cancel any further obligation
on the part of the Company to pay the Royalty. The exercise price of the
warrants is $10 per share. The Company has agreed to register the shares of
Common Stock underlying the warrants and no warrants will be offered to the
holders of the Project Shares until such time as the registration statement
relating to such shares has been declared effective by the Securities and
Exchange Commission. After issuance, the warrants will not be exercisable until
the first to occur of (i) the date that the per share closing bid price of the
Common Stock is equal to or greater than $37.50 per share for a period of 15
consecutive trading days, or (ii) September 30, 2000. In addition, the warrants
will become immediately exercisable in the event of a merger or similar
transaction in which the Company is not the surviving entity or the sale of
substantially all of the Company assets.
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CERTAIN SIGNIFICANT RISK FACTORS
The short and long-term success of the Company is subject to certain risks, many
of which are substantial in nature and outside the control of the Company.
Shareholders and prospective shareholders in the Company should consider
carefully the following risk factors, in addition to other information contained
herein. All forward-looking statements contained herein are deemed by the
Company to be covered by and to qualify for the safe harbor protection provided
by the private securities litigation reform act of 1995 (the "1995 Act").
Shareholders and prospective shareholders should understand that several factors
govern whether any forward-looking statement contained herein will or can be
achieved. Any one of those factors could cause actual results to differ
materially from those projected herein. These forward-looking statements include
plans and objectives of management for future operations, including the
strategies, plans and objectives relating to the products and the future
economic performance of the Company and its subsidiaries discussed above. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of any such statement should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
LIMITED REVENUES; SUBSTANTIAL AND CONTINUING LOSSES; ACCUMULATED DEFICIT; FUTURE
DILUTION
Since commencing its business of developing its 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 on Form 10-K as the "Core Technologies") until
February 1998, the Company had no revenues from operations. In February 1998,
the Company received its first revenue under a license granted to Siemens
related to integrated circuits suitable for certain telecommunications
applications. Since its inception, however, 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
attributable to Common Stockholders of $25,175,939 for the year ended December
31, 1997. The auditors' reports on the Company's financial statements include
an explanatory paragraph regarding substantial doubt about 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 additional 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, 1997, the Company's accumulated deficit was
$45,017,476. fonix anticipates incurring additional research and development
expenses for the foreseeable future, which will require substantial amounts of
additional cash on an ongoing basis. fonix 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. fonix 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 at least 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 preclude the Company from receiving necessary
additional capital when and as needed. Furthermore, 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. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEVELOPMENT STAGE OF FONIX'S 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, at December
31, 1997, there were no products incorporating the Core Technologies. As a
development stage company, the Company continues its efforts to enter into
revenue-generating licensing and co-development arrangements or strategic
alliances with third parties. Other than the arrangements with Siemens and OGI
described elsewhere in this Report, the Company has no licensing or co-
development agreements with any third party and
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other than the non-refundable license fee paid by Siemens, the Company has
received no revenue to date from its ASRT. fonix 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 such as Siemens and therefore has no plans to manufacture products
incorporating the ASRT for the foreseeable future. There can be no assurance
that the Company will be able to license its Core Technologies to third parties
other than Siemens or enter into additional co-development or strategic alliance
agreements.
IMPLEMENTATION OF BUSINESS STRATEGY
fonix's business strategy is to achieve revenues through appropriate strategic
alliances, co-development arrangements and license agreements. To date, the
Company has entered into one revenue-generating license and a strategic alliance
with Siemens, a strategic collaborative alliance with OGI, and the acquisition
of AcuVoice. Although the Company will receive revenues from the sale of
AcuVoice products and technology, only the Siemens agreement has produced
revenue to date from the Company's Core Technologies. fonix'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. fonix may not be able to
achieve the revenue growth 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.
MANAGEMENT OF EXPANDED OPERATIONS
The Company may not be equipped to successfully manage any future periods of
rapid growth or expansion, which could be expected to place a significant strain
on the Company's managerial, operating, financial and other resources. The
Company is highly dependent upon the efforts of management, and the Company's
future performance will depend, in part, upon the ability of management to
manage growth effectively (including the growth resulting from the recent
acquisition of AcuVoice), which will require the Company to implement additional
financial control systems and management information systems capabilities, to
further develop its operating, administrative, financial and accounting systems
and controls, to maintain close coordination among engineering, accounting,
finance, marketing, sales and operations, and to hire and train additional
technical and marketing personnel. There is intense competition for management,
technical and marketing personnel in the areas of the Company's activities. The
loss of the services of any of the Company's management or the failure to
attract and retain additional key employees could have a material adverse effect
on the Company's business, operating results and financial condition.
BUDGET AND COST OVERRUNS; PRODUCTION DELAYS
The Company budgets the cost of each project, reviews cost reports and updates
its cost projections regularly. However, there can be no assurance that the
actual production costs for its projects will remain within budget. Risks such
as production delays, higher talent costs, increased subcontractor costs, and
other unanticipated events may substantially increase production costs and delay
or even prevent completion of the production of any one or more of the Company's
projects now or in the future. The failure to remain within budget and timely
complete a production may have a material adverse effect on the Company's
operations.
UNPROVEN MARKET; RISKS OF NEW TECHNOLOGY
The market for speech recognition technologies is relatively new. fonix'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). fonix 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,
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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
fonix's strategy for commercialization of its Core Technologies depends, in
material part, upon the formation of strategic alliances and licensing
arrangements and, ultimately, marketing a suite of fonix-branded products. To
date, the Company has formed only two strategic alliances, with Siemens and OGI,
and the Company's ability to generate revenue in association with those
alliances is subject to several factors, including the negotiation and execution
of and performance under additional agreements with Siemens pertaining to the
development and/or application of specific technologies and the joint
development of commercially viable technologies under the OGI Agreement and the
successful licensing of such technologies to third-parties. fonix anticipates
that, in addition to the arrangement with Siemens, it will need to enter into
additional revenue-generating strategic alliances or co-development arrangements
with other parties to fully implement its business strategy, although the
Company has not entered into any such additional arrangements to date. There
can be no assurance that the strategic alliances with Siemens or OGI will
generate substantial royalty or license fees or that the Company will be able to
establish additional strategic alliance or licensing arrangements, or if
established that any such additional arrangements or licenses will be on terms
favorable to the Company, or that any strategic alliances or licensing
arrangements ultimately will be successful. Moreover, even under the Siemens or
OGI arrangements or any additional licensing or co-development arrangements, if
any are signed, the extent of revenues to the Company resulting from such
agreements will depend on factors beyond the Company's control such as the
timing and extent of manufacture of products incorporating the Company's Core
Technologies, the scope of the marketing effort related to such products, the
price of any product or products incorporating the Company's Core Technologies,
and competition from new or existing products. Additionally, disputes may arise
with respect to the ownership of and royalty or other payments for rights to any
technology developed with strategic partners. These and other possible
disagreements between strategic partners and the Company could lead to delays in
the collaborative research, development or commercialization of certain product
candidates, or could require or result in litigation or arbitration, which could
be time consuming and expensive, and which could have a material adverse effect
on the Company's business, financial condition and results of operations.
COMPETITION AND TECHNOLOGICAL CHANGE
The computer hardware and software industries are highly and intensely
competitive. In particular, the speech recognition field and the computer voice
and communications industries are characterized by rapid technological change.
Competition in the field of speech recognition is based largely on marketing
ability and resources and 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 HMM 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 some have far greater financial and
other resources than the Company and/or its potential licensees and co-
developers, as well as broader name-recognition,
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more-established technology reputations, and mature distribution channels for
their products. Multiple computer speech recognition products are presently
available that provide continuous speech dictation capabilities. Such products
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 more entrants into this
already competitive arena. There can be no assurance that the distinguishing
characteristics of the Core Technologies as 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 the Company
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.
fonix 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 1997, the Company
incurred total research and development expenses of $7,066,294. fonix
anticipates that its research and development expenditures will continue at
present rates or increased rates for the foreseeable future. fonix's actual
future capital requirements, however, will depend on many factors, including
further development of its Core Technologies, the Company's ability to enter
into additional revenue-generating 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. In the event that 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.
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 maintenance standards. Since February 23, 1998, companies
with securities listed on the Nasdaq SmallCap market are able to satisfy
continued listing requirements by reference, among other factors, to their total
market capitalization. If the Company fails to meet any of 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 Common Stock would
likely 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.
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.
fonix is unaware of any facts or circumstances suggesting that the
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Core Technologies or the Company's anticipated use thereof infringes or will
infringe any third party intellectual property rights. Regardless of the
foregoing, there can be no assurance that the Core Technologies will not
infringe upon third party intellectual property rights, nor can there be any
assurance that a third party will not assert that the Company has infringed its
intellectual property rights, in which case the Company could be involved in
protracted and costly litigation which could seriously impede the Company's
development or otherwise adversely affect its operations. Additionally, attempts
may be made to copy or reverse engineer aspects of the Core Technologies, or to
obtain, use or exploit information or methods which the Company deems
proprietary. Policing the use of the Core Technologies and perhaps infringing
technology is difficult and expensive. Litigation or other action may be
necessary in the future to protect the Company's proprietary rights and to
determine the validity and scope of the proprietary rights of others. Such
litigation or proceedings could result in substantial costs and diversions of
resources and management's attention, and could have a material adverse impact
upon the Company's business, operating results and financial condition. In
addition to patents, the Company relies on proprietary technology that it
closely guards as trade secrets. The Company has required nondisclosure 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. fonix 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.
DEPENDENCE ON KEY PERSONNEL
fonix is dependent on the knowledge, skill and expertise of several key
scientific employees and consultants, including but not limited to John A.
Oberteuffer, Ph.D., C. Hal Hansen, Dale Lynn Shepherd, R. Brian Moncur, Tony R.
Martinez, Ph.D., Ron Cole, Ph.D., Caroline Henton, Ph.D. and E. David Barton,
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 including obtaining non-competition and
non-disclosure agreements from all of its employees, if one or more of the
Company's key scientific employees or consultants resigns from the Company to
join a competitor (to the extent not prohibited by such person's non-competition
and non-disclosure agreement), 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. fonix does not
presently have any key man life insurance on any of its employees.
OTHER DEMANDS ON MANAGEMENT
In addition to occupying positions as the Company's Chief Executive Officer,
President and Chief Operating Officer, and Executive Vice President,
respectively, Messrs. Stephen M. Studdert, Thomas A. Murdock and Roger D. Dudley
are executive officers and owners of Studdert Companies Corp. ("SCC"), an
international investment, finance and management firm based in Salt Lake City,
Utah. SCC engages in a variety of commercial activities unrelated to the
Company, including but not limited to its present performance under a management
services contract with K.L.S. Enviro Resources, Inc.("KLSE"), a Nevada
corporation with a class of securities registered under the Exchange Act. Under
the agreement there is no specific amount of time required of the SCC principals
in connection with SCC's services to KLSE. Since SCC executed the management
services contract, there has been no material reduction in the amount of time
spent by Messrs. Studdert, Murdock and Dudley in the performance of their duties
as executive officers of the Company. fonix estimates that, since January 1,
1997, Messrs. Studdert, Murdock and Dudley, on average, have worked more than 40
hours per week in their respective capacities as executive officers of the
Company. Further, in addition to serving as Vice
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President, Technology for the Company, Dr. John A. Oberteuffer is the sole
shareholder and President of Voice Information Associates, Inc. ("VIA"), a
company which publishes ASRNews, and provides marketing consulting and other
related services to other ASR companies, groups and associations. Under the
terms of his employment agreement with fonix, executed in February 1998, Dr.
Oberteuffer is not required to devote more than 4 days per week to the business
of fonix. Although the Company anticipates that Dr. Oberteuffer can fully
discharge all of his duties and responsibilities to the Company by working 4
days per week, the Company has no comparable prior experience with such an
arrangement. fonix does not expect there to be in the foreseeable future any
material change in the amount of time spent by those persons in their capacities
as executive officers of the Company or in the Company's overall operations as a
result of the management services contract between SCC and KLSE, or as a result
of any other activities of SCC or VIA. However, there can be no assurance that
the outside activities of Messrs. Studdert, Murdock, Dudley or Oberteuffer, in
connection with SCC, KLSE, VIA or otherwise, will not materially impede their
ability to perform as executive officers of the Company, in which case the
Company's operations and financial condition could be adversely affected.
ASSETS CONSISTING OF INTANGIBLE INTELLECTUAL PROPERTY RIGHTS
fonix's assets include intangible assets, principally intellectual rights such
as patents, trademarks and trade secrets, the value of which will depend
significantly upon the success of the Company's development of the Core
Technologies and its ability to enter into licensing and co-development
arrangements with third parties. In the event of default on indebtedness or
liquidation of the Company, there can be no assurance that the value of these
assets will be sufficient to satisfy its obligations.
RISKS ASSOCIATED WITH PENDING LITIGATION
The Company has been named as a defendant in two civil actions. See Part I,
Item 3, "Legal Proceedings." After consideration of the nature of the claims
and the facts relating to these actions, the Company believes that the
resolution of them will not have a material effect on the Company's business,
financial condition and results of operations; however, the results of these
actions, including any potential settlements, are uncertain and there can be no
assurance to that effect. At a minimum these actions will result in some
diversion of management time and effort from the operation of the business.
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
fonix is subject to anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibits the Company from engaging in a
"business combination" with an "interested shareholder" for a period of three
years after the date of the transaction in which the person first becomes an
"interested shareholder," unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect of
delaying or preventing changes of control or management of the Company, which
could adversely affect the market price of the Company's Common Stock. These
provisions, and other provisions of the Company's Certificate of Incorporation,
may have the effect of deterring hostile takeovers or delaying or preventing
changes in control or management of the Company, including transactions in which
shareholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
shareholders to approve transactions that they may deem to be in their best
interests.
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been characterized by wide
fluctuations and the Common Stock must be considered a speculative investment.
Persons should not invest in fonix Common Stock unless they can bear the
economic risks thereof, including the possibility of losing their entire
investment. fonix believes that factors such as announcements of developments
related to the Company's business, announcements by competitors, the issuance of
patents, financings, and other factors have caused the price of the Company's
stock and its trading volume to fluctuate, in some cases substantially, and
could continue to do so in the future. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market price for many technology companies and that have often been
unrelated to the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. The trading prices of many technology companies' stocks are at or near
their historical highs, and reflect price/earnings ratios substantially above
historical
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norms. In the Company's case the absence of revenues from operations before
February 1998 indicates that the market price of the Company's Common Stock
fluctuates as a result of highly speculative factors.
ABSENCE OF DIVIDENDS
fonix has never paid dividends on or in connection with its Common Stock and
does not intend to pay any dividends to common shareholders for the foreseeable
future.
YEAR 2000 RISKS
Since its inception, the Company has attempted to leverage technology, including
increasingly sophisticated computer hardware and software, in managing the
Company's business and operations. Historically, the Company has implemented
computer systems for accounting and financial management, purchasing, research,
development and design, and other purposes. The computer industry recently has
recognized that many existing computer programs, many of which are large,
custom-programmed mainframe applications that have continuously been written and
amended over a long time period and by a variety of different programmers, use
only two digits to identify a year in the date field. Such programs were
designed, developed and modified without considering the impact of the upcoming
change in the century. If not corrected, many such computer applications could
fail or create erroneous results by or at the Year 2000 by erroneously
identifying the year "00" as 1900, rather than 2000. Correcting a Year 2000
problem on a large mainframe or network application, however, can be difficult
and expensive. In many cases, the original developer of the subject software is
either defunct or otherwise unable or unwilling to address the problem.
Moreover, because many individuals may have programmed different pieces of a
program, and some of them may have died or cannot be located, many companies
will be forced to review the code comprising their software on a line-by-line
basis, which can take enormous amounts of time and significant financial
resources. The Year 2000 issue affects virtually all companies and
organizations, including the Company. If a company does not successfully
address its Year 2000 issues, it may face material adverse consequences. The
Company is in the process of insuring that its internal computer systems are
Year 2000 compliant. The Company's own Core Technologies are designed to be
Year 2000 compliant. With respect to third-party providers whose services are
critical to the Company, the Company intends to monitor the efforts of such
providers as they become Year 2000 compliant. Management is presently not aware
of any Year 2000 issues that have been encountered by any such third-party which
could materially affect the Company's operations. Notwithstanding the
foregoing, there can be no assurance that the Company will not experience
operational difficulties as a result of Year 2000 issues, either arising out of
internal operations, or caused by third-party service providers, which
individually or collectively could have an adverse impact on business operations
or require the Company to incur unanticipated expenses to remedy any problems.
RISKS ASSOCIATED WITH ACUVOICE
The business of AcuVoice recently acquired by the Company is also subject to
many of the same risks and uncertainties discussed above, including, but not
limited to the risks associated with intense competition for text-to-speech
products, technological obsolescence and the acceptance of new technologies, the
need for additional capital, and introduction of new and unproven technologies.
In addition, there are risks to the Company associated with the AcuVoice
acquisition. This is the first such acquisition completed by the Company.
Accordingly, there may be difficulties and inefficiencies encountered in the
process of integrating the business, products and personnel of AcuVoice with
those of the Company. It may be some time before any inefficiencies or
difficulties are overcome and the Company begins to benefit from economies of
scale, synergies from the combination of the business, technology and personnel,
and the addition of new products to the Company's business. There can be no
assurance that the transition will not involve significant additional expense or
result in delays in the expected completion of on-going development products or
other business objectives of the Company. Furthermore, as management of the
Company seeks to supervise and manage the activities of AcuVoice, which are
conducted at some distance from the primary corporate offices and research
facilities of the Company, there may be considerable increase in expense and
management time spent in administration of the combined businesses.
ITEM 2. PROPERTIES
The Company owns no real property. Commencing in October 1996, the Company
leased a 25,600 square foot facility in Draper, Utah, from an unaffiliated third
party at which it conducts its principal scientific research and development
activities. The Company's lease of that facility is for a term of 8 years (with
a right to terminate after five years), and with
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an option to renew for 5 years. The average base monthly lease payment over the
8-year life of the lease for that facility is $28,389.
In addition to the Draper facility, the Company sub-leases office space at
market rates for its corporate headquarters and administrative operations in
Salt Lake City, Utah, from Studdert Companies Corp., a Utah corporation ("SCC").
SCC is owned and controlled by three individuals who are executive officers and
directors of the Company and who each beneficially owns more than 10% of the
Company's Common Stock. [See "Certain Relationships and Related Transactions,"
and "Security Ownership of Certain Beneficial Owners and Management"]. The base
monthly rental for the sub-leased space during 1997 was approximately $6,500,
plus reimbursable direct expenses for the use of telephone, facsimile, photocopy
and other business equipment. The three executive officers of the Company have
personally guaranteed this lease in favor of SCC's landlord.
AcuVoice leases 1,620 square feet of office space in San Jose, California. The
lease on this space is on a month-to-month basis, with rents of $2,581 per
month. The Company is presently seeking to relocate these operations to a
larger facility.
The Company also leases approximately 1,500 square feet of office space in
Lexington, Massachusetts. The term of this lease is for one year (through
October 1998) and monthly rents are $1,500.
The Company believes that the facilities described above are adequate for its
current needs.
ITEM 3. LEGAL PROCEEDINGS
THE POLOMBA ACTION
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.
THE J&L ACTION
On March 11, 1998 an action (the "J&L Action) was filed against the Company in
the Supreme Court of the State of New York for the County of New York by Jesup &
Lamont Securities Corporation ("J&L"). The J&L Action alleges that the Company
had agreed to pay to J&L a fee in connection with a private placement of the
Company completed in March 1998. The claim is for a cash payment of $1,200,000
and 30,000 restricted shares of the Company's Common Stock. The matter is still
in the early stages of litigation and the Company has not yet engaged in any
discovery with respect to
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the allegations by J&L. The Company believes that the J&L Action is without
merit and intends to vigorously defend the J&L Action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders during the
fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
fonix Common Stock has been listed on the Nasdaq SmallCap Market since July 31,
1996 (trading symbol: "FONX"). Prior to being listed on the Nasdaq SmallCap
Market, the Company's Common Stock was quoted on the NASD Electronic Bulletin
Board system. The following table shows the range of high and low sales price
information for the Company's Common Stock as quoted on Nasdaq for the four
quarters of calendar 1997, the third and fourth quarters of calendar 1996 and as
quoted by the Electronic Bulletin Board for the first and second quarters of
1996. The quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commissions and may not represent actual transactions.
Calendar Year 1997 Calendar Year 1996
------------------ ------------------
High Low High Low
---- ---- ---- ----
First Quarter $9.00 $7.13 $ 3.97 $2.53
Second Quarter 8.75 6.50 12.25 3.28
Third Quarter 7.44 6.00 10.03 7.80
Fourth Quarter 7.00 2.88 9.13 5.00
On April 8, 1998, the high and low sales prices for the Company's Common Stock
were $5.3125 and $4.875 per share, respectively, as reported by Nasdaq.
As of April 8, 1998, there were 51,303,521 shares of fonix Common Stock
outstanding, held by 239 holders of record and approximately 5,132 beneficial
holders. This number of beneficial holders represents an estimate of the number
of actual holders of the Company's stock, including beneficial owners of shares
held in "nominee" or "street" name. The actual number of beneficial owners is
not known to the Company.
The Company has never declared any dividends on its Common Stock and it is
expected that earnings, if any, in future periods will be retained to further
the development of the Company's ASRT. No dividends can be paid on the Common
Stock of the Company until such time as all accrued and unpaid dividends on the
Company's Preferred Stock have been paid.
RECENT SALES OF UNREGISTERED EQUITY SECURITIES
Consulting Agreements
During fiscal year 1997, the Company issued a total of 592,500 restricted shares
of Common Stock to various third parties in payment for services rendered under
consulting and other agreements. The shares were issued pursuant to and in
reliance on exemptions from registration under the Securities Act of 1933, as
amended (the "1933 Act"), particularly pursuant to Section 4(2) and the rules
and regulations promulgated thereunder. The value of the shares issued in these
transactions, based on the fair market value of the shares on the several dates
of issuance was approximately $3,812,971 or an average of approximately $6.44
per share.
Southbrook International Investments, Ltd.
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
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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 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. 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.
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 Preferred Stock, convertible into Common Stock under the same
terms as the debentures. Also in connection with this modification, the Company
issued 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.
Additionally, the Company entered into an amended and restated registration
rights agreement with the investor under which the Company registered the Common
Stock issuable upon conversion of the Preferred Stock and exercise of the
warrants. Under the MOU, the Company agreed that it would convert the remaining
$2,150,000 balance into 107,500 shares of Preferred Stock effective as of
September 30, 1997. Prior to the actual issuance of such Preferred Stock,
however, the investor converted the balance of $2,150,000 into 431,619 shares of
Common Stock. The Company received a second payment in the amount of $2,500,000
in exchange for 125,000 shares of Preferred Stock. All of these preferred shares
and related dividends were converted into 548,770 shares of Common Stock.
The issuance of the securities described above was, and the issuance of the
Common Stock underlying the Preferred Stock, warrants and options identified
above will be, accomplished without registration under the 1933 Act, pursuant to
exemptions or exceptions from the registration requirement of the 1933 Act
afforded by Section 4(2) of 1933 Act and the rules and regulations promulgated
thereunder and/or Regulation S under the 1933 Act.
JNC Opportunity Fund Ltd. and Diversified Strategies Fund, L.P.
The Company entered into a Memorandum of Understanding ("MOU2") dated as of
September 30, 1997, with JNC Opportunity Fund, Ltd. ("JNC") and Diversified
Strategies Fund, L.P. ("DSF") (JNC and DSF are collectively referred to in this
Report as the "Series C Investors"). The Series C Investors each are investment
entities that have no prior affiliation or relationship of any kind with the
Company or its affiliates prior to the execution of the MOU2. Under the MOU2,
the Series C Investors agreed to subscribe for the purchase of 187,500 shares of
Series C Preferred for a purchase price of $3,750,000. Each share of Series C
Preferred has a "stated" or principal value of $20, on which amount dividends
accrue at the rate of 5% per annum and are payable quarterly in cash or Common
Stock at the option of the Company. The Series C Preferred is convertible into
that number of shares of Common Stock as is determined by dividing the aggregate
stated value of the Series C Preferred to be converted by the lesser of $5.9813
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.
Subsequent to September 30, 1997, the Company and the Series C Investors
executed definitive documents in connection with the transactions described in
the MOU2, which documents included, among others, a Preferred Stock Purchase
Agreement (the "Series C Agreement") and a Registration Rights Agreement (the
"Series C Registration Rights Agreement"). Also in connection with the issuance
of the Series C Preferred as described in the MOU2 and the Series C Agreement,
the Series C Investors received the Series C Warrants. Under the Series C
Registration Rights Agreement, the Company registered the Common Stock issuable
upon conversion of the Series C Preferred, payment of dividends thereon and
exercise of the Series C Warrants. The Company received the entire purchase
price of the Series C Preferred, $3,750,000, and the Series C Investors have
since converted all of the shares of Series C Preferred and related dividends
into 1,312,897 shares of Common Stock, 17,198 of which were converted during
fiscal year 1997.
The issuance of the securities described above was, and the issuance of the
Common Stock underlying the Preferred Stock, warrants and options identified
above will be, accomplished without registration under the 1933 Act, pursuant to
exemptions or exceptions from the registration requirement of the 1933 Act
afforded by Section 4(2) of the 1933 Act and the rules and regulations
promulgated thereunder and/or Regulation S under the 1933 Act.
Page 17 of 46
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below is derived from the
Company's consolidated statements of operations and balance sheets for each of
the four fiscal years ended December 31, 1997, 1996, 1995 and 1994. The
Company's inception was October 1, 1993. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related Notes thereto included in this Report.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues $ -- $ -- $ -- $ --
General and administrative expenses 12,947,112 3,530,400 3,553,665 1,339,987
Research and development expenses 7,066,294 4,758,012 2,704,165 2,522,090
Loss from operations (20,013,406) (8,288,412) (6,257,830) (3,862,077)
Other income (expense) (1,558,678) 458,904 (88,067) (52,262)
Gain (loss) on extraordinary item (881,864) -- 30,548 --
Net loss (22,453,948) (7,829,508) (6,315,349) (3,914,339)
Basic and diluted net loss per common share $ (0.59) $ (0.21) $ (0.30) $ (0.28)
=========== ============ =========== ===========
Weighted average number of common shares
outstanding 42,320,188 36,982,610 21,343,349 14,095,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994
------------ ------------ ----------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Current assets $21,148,689 $23,967,601 $7,912,728 $2,150,286
Total assets 22,894,566 25,331,270 7,984,306 2,150,286
Current liabilities 20,469,866 19,061,081 6,674,572 4,117,995
Long-term debt, net of current portion 52,225 -- -- --
Stockholders' equity (deficit) 2,372,475 6,270,189 1,309,734 (1,967,709)
</TABLE>
Page 18 of 46
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-K 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.
In November 1997, the Company entered into the Siemens Agreement pursuant to
which the Company and Siemens have agreed to pursue research and development of
certain technologies related to the ASRT and the commercialization of such
technologies for the telecommunications industry through a strategic alliance.
Pursuant to the terms of the Siemens Agreement, the Company and Siemens entered
into the First Statement of Work and License Agreement pursuant to which Siemens
paid the Company a license fee for the development and production of fonix ASRT
in integrated circuits suitable for certain telecommunications applications. The
Siemens Agreement calls for the payment to the Company of additional license
fees when the Company and Siemens have entered into further agreements for the
development of specific technologies, although there can be no assurance that
the parties will enter into such additional agreements. On October 14, 1997,
the Company entered into a Master Technology Collaboration Agreement (the "OGI
Agreement") with the Oregon Graduate Institute of Science and Technology ("OGI")
pursuant to which the Company and OGI have agreed to pursue research and
development of certain ASRT. Under the terms of the first Statement of Work
between the Company and OGI entered into pursuant to the OGI Agreement, the
parties are collaborating on advanced ASR applications for entry in the 1999
DARPA competition. The OGI Agreement contemplates that the Company and OGI will
enter into other agreements to pursue research and development of certain
technologies related to the ASRT, although there can be no assurance that such
additional agreements will be entered into by the Company and OGI.
Other than the arrangements with Siemens and OGI, the Company has no licensing
or co-development agreements with any third party and other than the non-
refundable license fee paid by Siemens, the Company has received no revenue to
date. fonix 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 such as Siemens and
therefore has no plans to manufacture products incorporating the ASRT for the
foreseeable future. The Company is presently engaged in discussions with
potential licensees and co-developers. There can be no assurance that the
Company will be able to license its Core Technologies to third parties other
than Siemens or enter into additional co-development or strategic alliance
agreements.
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.
The Company acquired AcuVoice in March 1998, after the end of the year covered
by this Report. The following discussion does not take into consideration any
of the operating results of AcuVoice.
Page 19 of 46
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
1997 COMPARED TO 1996
Prior to March 1997, the Company conducted its scientific research and
development activities through Synergetics, Inc. ("Synergetics"), pursuant to
product development and assignment contracts (collectively the "Synergetics
Agreement"). Synergetics provided personnel and facilities and the Company
financed scientific research and development of the ASRT 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
Synergetics Agreement, and the Company was obligated to use its best efforts in
raising all of the necessary funding for the development of the ASRT.
Synergetics submitted 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. Under the
Synergetics Agreement, the Company had also agreed to pay a royalty to
Synergetics equal to 10 percent of revenues from sales of the ASRT or products
incorporating the ASRT (the "Royalty"). 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.
All research and development activity previously conducted by Synergetics was
moved in-house to the Company in or about March 1997 at the time the agreement
in principle was reached. On April 6, 1998, the parties finalized their
understanding in a written agreement (the "Modification Agreement"). Under the
Modification Agreement, the Company no longer has any obligation to pay 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. Assignment to the Company of all technology relating to
the ASRT is confirmed by the Modification Agreement.
Because the Company did not license its ASRT until February 1998, the Company
did not generate any revenues during 1997 or 1996. From inception on October 1,
1993 through December 31, 1997, the Company has invested $17,937,293 in research
and development relating to its Core Technologies. During the year ended
December 31, 1997, the Company incurred research and development expenses of
$7,066,294, an increase of $2,308,282 over the previous year. This increase is
due primarily to the addition of research and development personnel, equipment
and facilities. The Company anticipates similar or increased research and
development costs as it expands and continues to develop and market its Core
Technologies.
General and administrative expenses were $12,947,112 and $3,530,400,
respectively, for the years ended December 31, 1997 and 1996. This increase
over the previous year was due primarily to non-cash expenses associated with
the issuance of debt and equity securities and an increase in consulting and
outside services. Consulting and outside services were $7,134,115 and
$1,456,297 for the years ended December 31, 1997 and 1996, respectively, an
increase of $5,677,818 in 1997. In 1997, $4,112,970 of the consulting and
outside services was a non-cash expense for the issuance of Common Stock for
services associated with potential strategic alliances. Additionally, the
Company incurred increased expenses in salaries, rents, legal and accounting
fees, and fees paid for outside consulting services.
Due to the lack of revenues and significant research and development and general
and administrative expenses, the Company has incurred losses from operations
since inception totaling $40,183,963, of which $20,013,406 and $8,288,412 were
incurred in the years ended December 31, 1997 and 1996, respectively. At
December 31, 1997, the Company had an accumulated deficit of $45,017,746 and
stockholders' equity of $2,372,475. 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 1998.
Net other expense was $1,558,678 for the year ended December 31, 1997, an
increase in net expense of $2,017,582 over the previous year. This increase was
due primarily to expenses associated with the issuance of convertible debentures
and warrants. In addition, the Company has drawn on its line of credit to fund
its operations, thereby investing smaller amounts of cash reserves which
decreased interest income and increased interest expense.
The Company extinguished debentures in the amount of $2,150,000 and related
accrued interest of $28,213 by issuing 108,911 shares of Series B Preferred
Stock. In connection with the extinguishment of the debentures and the issuance
of Series B Preferred Stock, the Company expensed unamortized prepaid financing
costs in the amount of $220,014 as
Page 20 of 46
<PAGE>
a loss on extinguishment of debt. In connection with this extinguishment, the
Company issued a warrant to purchase up to 175,000 shares of Common Stock. The
Company recorded the fair value of the warrant of $661,850 as an additional loss
on extinguishment of debt.
1996 COMPARED TO 1995
The Company generated no revenues during 1996 and 1995. From October 1, 1993
(date of inception) through December 31, 1996, the Company expended $10,870,999
in research and development relating to its Core Technologies. During the years
ended December 31, 1996 and 1995, the Company incurred research and development
expenses of $4,758,012 and $2,704,165, respectively, an increase of $2,053,847
in 1996. This increase was due primarily to the addition of research and
development personnel, equipment and facilities.
General and administrative expenses were $3,530,400 and $3,553,665,
respectively, for the years ended December 31, 1996 and December 31, 1995.
General and administrative expenses decreased slightly during these periods
primarily due to minimal increases in office employees and related salaries
offsetting in part, larger decreases in management fees, legal and accounting
fees and consulting services.
Due to the lack of revenues and significant research and development and general
and administrative expenses, the Company incurred losses from operations from
inception through December 31, 1996 totaling $20,170,557, of which $8,288,412
and $6,257,830 were incurred in the years ended December 31, 1996 and 1995,
respectively. At December 31, 1996, the Company had an accumulated deficit of
$19,841,807 and stockholders' equity of $6,270,189.
Net other income was $458,904 for the year ended December 31, 1996, an increase
of $546,971 over the previous year. This increase was due primarily to earnings
on the Company's increased cash reserves. Interest income increased $988,330
from $191,929 for the year ended December 31, 1995 to $1,180,259 for the year
ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's current assets exceeded its current liabilities by $678,823 at
December 31, 1997 compared to $4,906,520 at December 31, 1996. The current
ratio was 1.03 at December 31, 1997, compared to 1.26 at December 31, 1996.
Current assets decreased by $2,818,912 to $21,148,689 from December 31, 1996 to
December 31, 1997. Current liabilities increased by $1,408,785 to $20,469,866
during the same period. The decrease in working capital from 1996 to 1997 is
primarily attributable to the Company's use of its cash reserves to fund
increased operating expenses during the year ended December 31, 1997. Total
assets were $22,894,566 at December 31, 1997 compared to $25,331,270 at December
31, 1996.
From its inception, the Company's principal source of capital has been private
and other exempt sales of the Company's debt and equity securities. Private
and other exempt sales of the Company's debt and equity securities resulted in
net cash proceeds of $9,058,000 and $11,888,443 for the years ended December 31,
1997 and 1996, respectively.
On June 18, 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 Convertible Debentures. The debentures were due June 18, 2007, bore
interest at 5 percent and were convertible into shares of the Company's Common
Stock at anytime after issuance at the holder's option. The conversion feature
provided for a conversion rate of 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 percent for any conversion on or prior to the
120/th/ day after the original issue date and 87.5 percent for any conversion
thereafter. On June 18, 1997, the Company received $3,000,000 in proceeds
related to the issuance of Series B Convertible Debentures. Using the
conversion terms most beneficial to the investor, the Company recorded a prepaid
financing cost of approximately $427,900 in connection with the debenture to be
amortized as additional interest expense over the 120 day period commencing June
18, 1997. 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. The Company
recorded the fair value of the warrants, totaling $897,750, as a charge to
interest expense. On July 31, 1997 and September 26,1997, $500,000 and $350,000
of the Series B Convertible Debentures were converted into 87,498 and 58,249
shares of Common Stock, respectively.
Page 21 of 46
<PAGE>
Effective September 30, 1997, the Company and the Series B Convertible Debenture
holders agreed to modify the Agreement. The holder extinguished all then
outstanding debentures in the amount of $2,150,000 and related accrued interest
of $28,213 for 108,911 shares of Series B Preferred Stock having essentially the
same terms as the debentures. In connection with the extinguishment of the
Series B Convertible Debentures and the issuance of Series B Preferred Stock,
the Company recorded all unamortized prepaid financing costs as a loss on
extinguishment of debt. Also in connection with this modification, the Company
issued 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, as a loss on extinguishment of debt.
Dividends accrue on the stated value ($20 per share) of Series B Preferred Stock
at a rate of 5 percent per year, 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. In the event of
liquidation the holders of the Series B Preferred Stock are entitled to an
amount equal to the stated value ($20 per share) plus accrued but unpaid
dividends whether declared or not. The holders of Series B Preferred Stock have
no voting rights. The Series B Preferred Stock, together with dividends accrued
thereon, may be converted into shares of the Company's Common Stock at the
lesser of $6.81 or the average of the per share market value for the five
trading days immediately preceding the conversion date multiplied by 90 percent
for any conversion on or prior to the 120/th/ day after the original issue date
and 87.5 percent for any conversion thereafter. Using the conversion terms most
beneficial to the holder, the Company recorded a dividend of $219,614, which
represents a discount of 10 percent, which is available to the holder upon
issuance. The additional 2.5 percent discount of $68,509 was amortized as a
dividend over the remaining days in the 120 vesting period. Prior to the actual
issuance of the Series B Preferred Stock in exchange for the outstanding balance
under the debenture, the holder converted the balance of $2,150,000 into 431,679
shares of Common Stock.
The Company sold an additional 125,000 shares of Series B Preferred Stock for
$2,500,000 less $145,000 in related fees. Using the conversion terms most
beneficial to the holder, the Company recorded a dividend of $576,667 which
represents a discount of 10 percent, which is available to the holder on or
before 120 days subsequent to closing. A 2.5 percent discount of $87,905 is
being amortized as a dividend over 120 days. As a condition for issuing
convertible Preferred Stock, the holder was granted a put option by SMD, L.L.C.
("SMD"), a company controlled by three shareholders who are officers of fonix.
The put option requires SMD to purchase the Series B Preferred Stock from the
holder at the holder's option, but only in the event that the Common Stock of
the Company is removed from listing on the Nasdaq Small Cap Market or any other
national securities exchange. There was no agreement which would have required
the Company to reimburse SMD should SMD be required to purchase the Series B
Preferred Stock from the holder. In connection with this put option, the Company
recorded an expense and a corresponding capital contribution of $125,000. As of
December 31, 1997, 97,500 of the Series B Preferred Stock and related dividends
had been converted into 355,188 shares of Common Stock. In January 1998, the
remaining 27,500 shares of Series B Preferred Stock and related dividends were
converted into 193,582 shares of Common Stock and there are no shares of Series
B Preferred Stock outstanding.
In September 1997, the Series A Convertible Debenture was converted into 166,667
shares of Series A Preferred Stock. The holder of the Series A Preferred Stock
has the same voting rights as Common stockholders, has the right to elect one
person to the board of directors and receives a one time preferential dividend
of $2.905 per share of Series A Preferred Stock prior to the payment of any
dividend on any class or series of stock. At the option of the holder, each
share of Series A Preferred Stock is convertible into one share of Common Stock
and in the event that the Common Stock price has equaled or exceeded $10 for a
fifteen day period, the Series A Preferred Stock shares are automatically
converted into Common Stock. In the event of liquidation, the holder is
entitled to a liquidating distribution of $36.33 per share and a conversion of
Series A Preferred Stock at an amount equal to 1.5 shares of Common Stock for
each share of Series A Preferred Stock.
Effective September 30, 1997, the Company entered into an agreement with an
unrelated investment entity whereby that entity agreed to purchase 187,500
shares of the Company's Series C Preferred Stock for $3,750,000. The cash
purchase price was received in October 1997. Dividends accrue on the stated
value of Series C Preferred Stock at a rate of 5 percent per year, 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. In the event of liquidation the holders of the Series C
Preferred Stock are entitled to an amount equal to the stated value ($20 per
share) plus accrued but unpaid dividends whether declared or not. The holders
of Series C Preferred Stock have no voting rights. The Series
Page 22 of 46
<PAGE>
C 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 percent for any conversion on or prior
to the 120/th/ day after the original issue date, 90 percent for any conversion
between 121 and 180 days and 88 percent for any conversion thereafter. Using the
conversion terms most beneficial to the holder, the Company recorded a dividend
of $1,060,718, which represents a discount of 9 percent, which is available to
the holder on or before 120 days subsequent to closing. The additional 3 percent
discount of $164,002 is being amortized as a dividend over 180 days. As a
condition for issuing convertible Preferred Stock, the Series C Preferred
Stockholder was granted a put option by SMD. The put option required SMD to
purchase the Series C Preferred Stock from the holder at the holder's option,
but only in the event that the Common Stock of the Company is removed from
listing on the Nasdaq Small Cap Market or any other national securities exchange
or if the trading price of the Company's Common Stock drops below $3.00 per
share for two consecutive days. No agreement required the Company to reimburse
SMD should SMD have been required to purchase the Preferred Stock from the
holder. In connection with this put option, the Company recorded an expense and
a corresponding capital contribution of $375,000. Associated with the issuance
of the Series C Preferred Stock, the Company issued 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. The Company recorded the fair market value of
the warrant of $600,000 as determined as of October 24, 1997 using the Black-
Scholes pricing model. During the year ended December 31, 1997, the Company
issued 17,198 shares of Common Stock upon conversion of 2,500 shares of Series C
Preferred Stock and related accrued dividends. Subsequent to December 31, 1997,
the balance of 185,000 shares of Series C Preferred Stock and related dividends
were converted into 1,295,699 shares of the Company's Common Stock and there are
presently no shares of Series C Preferred Stock outstanding.
Although the Company has signed its first Statement of Work with Siemens and the
Company anticipates that it will enter into additional third party license or
licenses or co-development agreements for its ASRT with Siemens and other
parties during fiscal year 1998, there can be no assurance that this will occur.
Even with the current Siemens agreement in place, the Company's operating
expenses remain higher than revenues from operations. Accordingly, the Company
expects to incur significant losses at least through the end of fiscal 1998 and
until such time as it is able to enter into substantial licensing and co-
development agreements and receive substantial revenues from such arrangements,
of which there can be no assurance.
The Company has established a relationship with a major regional federally
insured financial institution pursuant to which the Company is permitted to
borrow against its own funds on deposit with the institution. As of December
31, 1997 and 1996, the Company had funds on deposit of $20,000,000. As of
December 31, 1997, the Company owed $18,612,272 to the institution, compared
with $16,377,358 the previous year. The weighted average outstanding balance
during 1997 and 1996 was $18,861,104 and $11,786,889, respectively. The
weighted average interest rate was 5.94 percent and 5.80 percent during 1997 and
1996, respectively. This note is due April 29, 1998 and bore an interest rate
of 6.50 percent at December 31,1997. This revolving note is renegotiated
quarterly and the Company plans to continue renewing the note indefinitely. The
net difference between 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 approximately 1 percent. Interest income and
expense is payable monthly and the principal amount is payable in full at
maturity.
Presently, the Company anticipates that it will need to raise additional funds
to be able to satisfy its cash requirements during the next twelve months. The
scientific research and development, corporate operations and marketing expenses
will continue to require additional capital. In addition, the Company has
recently acquired AcuVoice and is actively seeking additional acquisition
opportunities. These transactions will require additional capital resources,
even if the Company uses its securities in payment of all or part of the
purchase price of such acquisitions. Because the Company presently has only
limited 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 additional 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 such 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 (or in connection
with acquisitions) would result in dilution to the stockholders of the Company
which could be substantial.
Page 23 of 46
<PAGE>
The Company's Core Technologies are designed to be Year 2000 compliant. The
Company intends to monitor the efforts of third-party providers whose services
are critical to the Company as they become Year 2000 compliant. Management is
presently not aware of any Year 2000 issues that have been encountered by any
such third-party which could materially affect the Company's operations.
Notwithstanding the foregoing, there can be no assurance that the Company will
not experience operational difficulties as a result of Year 2000 issues, either
arising out of internal operations, or caused by third-party service providers,
which individually or collectively could have an adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy any
problems. providers as they become Year 2000 compliant.
The Company presently has no plans to purchase any new plant or office
facilities. The Company is currently planning to lease a larger office facility
in the San Jose, California area to house a growing AcuVoice staff and
anticipates that it will incur approximately $950,000 in capital expenditures
for equipment Company-wide during 1998.
OUTLOOK
CORPORATE OBJECTIVES, TECHNOLOGY VISION AND ACQUISITION STRATEGY
The Company has positioned itself as a developer of "next generation" speech
technology. The management team of fonix has assembled leading talents in the
speech recognition and speech synthesis arenas. The Board of Directors and
management have developed a business strategy that identifies the Company's
strengths and objectives, outlines a vision of the next major market opportunity
in the computer industry (implementation of speech technologies) and articulates
a corporate and technology strategy that includes strategic alliances,
collaborative development agreements, strategic acquisitions and, ultimately,
marketing a suit of fonix-branded products.
Management believes the strengths of fonix include:
. Next generation Core Technologies
. Strong Board of Directors and management team
. Inclusive, supportive corporate culture
Management believes that these strengths can be used by the Company to provide
added access to capital markets, facilitate accomplishment of the objectives of
the Company and position the Company as an attractive investment and development
partner.
The Company believes that its Core Technologies will be the platform for the
next generation of automatic speech technology and products. Most speech
recognition products offered by other companies are based on technologies such
as HMMs, that are largely in the public domain and represent nothing
particularly "new" or creative. The fonix Core Technologies are based on
proprietary, patented technology. The Company will continue to seek patent
protection of the Core Technologies and will seek to add, through acquisitions,
such as the AcuVoice merger, products and technologies that are either patented
or unique in the marketplace. Management believes this strategy will set the
Company's advanced speech products apart from the competition.
The Company is determined to become a multi-market, multi-product enterprise
offering advanced speech and human-computer interface technologies for business,
consumer and service applications. Advance human-computer interface
technologies and multi-modal systems include:
. speech recognition and synthesis
. speaker identification
. pen and touch screen input
. haptic (manual) input and output
. facial and gesture input and output
Anticipated products incorporating such advanced multi-modal human computer
interface technology include the following:
. PC's and cellular phones
Page 24 of 46
<PAGE>
. automotive and home environment speech controls
. automated information and transaction kiosks and telephone systems
with natural dialogue and gesture controls
This next generation technology presents important product and service
opportunities for companies like fonix in a variety of industry segments,
including:
. semiconductors
. telecommunications
. computers
. software
. consumer electronics
. entertainment
fonix is a technology company. Since its inception, the Company has focused on
the development of its Core Technologies and related complimentary technologies.
The Company will pursue the development and acquisition of advanced speech and
computer-interface technologies that will enhance or may be enhanced by its own
Core Technologies. fonix will pursue this development through strategic
alliances, such as the Siemens agreement in the telecommunications industry, and
through collaborative research arrangements such as its agreement with OGI.
Acquisition targets will (i) have technologies that are complementary to the
Core Technologies, (ii) offer existing products and marketing strengths that
provide immediate revenues to the Company, (iii) open new marketing channels for
existing technologies or products of the Company, (iv) provide new product
vehicles for the Core Technologies and (v) possess vertical market applications
expertise that can be leveraged by the Company in further product development
and marketing opportunities. The Company has observed that there are numerous
small "boutique" speech technology vendors. An alliance with or acquisition of
such vendors by the Company can offer these small companies greater access to
human and financial resources which, it is hoped, will lead to greater market
share, improved product development and support, and creation of additional
applications. The Company believes that the ideal candidates will be involved
in one or more of these categories:
. Core speech and language technology, which would include companies
with speech products or technology involving text-to-speech, multiple
languages, natural language processing, translation, speaker
identification, and microphone design.
. Speech products and applications, such as interactive natural dialogue
systems, telephone systems, large vocabulary medical, legal systems,
compression, and chip-based systems.
. Other computer interface technologies, such as pen input and
handwriting recognition, haptic (manual) input and output, face and
gesture recognition, pentop and wearable computers.
As the Company proceeds to implement its strategy and to reach its objectives,
it anticipates realizing several benefits for itself and for its shareholders.
In 1998, the Company will, for the first time in its history, begin to realize
recurring revenues. In addition, the Company expects further development of
complementary technologies, added product and applications development
expertise, access to market channels, leverage of strategic alliances, increased
access to capital markets, and additional opportunities for strategic alliances
in other industry segments.
The strategy described above is not without risk, and shareholders and others
interested in the Company and its Common Stock should carefully consider the
risks contained elsewhere in this Report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Business," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Outlook,"
including statements concerning (i) the Company's strategy, (ii) the Company's
expansion plans, (iii) the market for the Company's technology, products and
services, (iv) the effects of future government regulation of the Company's
products, (v) the development and launch of new products and the results
Page 25 of 46
<PAGE>
of research and development efforts, and (vi) the growth of the Company's
business, contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not necessarily limited to, those
discussed under the heading "Certain Significant Risk Factors," elsewhere in
this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements:
<TABLE>
<CAPTION>
<S> <C>
Reports of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-5
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996
and 1995 and for the Period from October 1, 1993 (Date of Inception) to December 31, 1997 F-6
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996
and 1995 and for the Period from October 1, 1993 (Date of Inception) to December 31, 1997 F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995 and for the Period from October 1, 1993 (Date of Inception) to December 31, 1997 F-10
Notes to Consolidated Financial Statements F-12
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Subsequent to the year ended December 31, 1997, in February 1998, the Company
appointed Arthur Andersen LLP ("Andersen") to replace Deloitte & Touche LLP
("Deloitte") as independent auditors of the Company for the fiscal year ended
December 31, 1997. Deloitte resigned as the Company's independent auditors on
February 23, 1998.
The report of Deloitte on the Company's consolidated financial statements for
the year ended December 31, 1996 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle, except that Deloitte's report on the consolidated
financial statements for the year ended December 31, 1996 included an
explanatory paragraph with respect to the Company being in the development stage
and its having suffered recurring losses which raise substantial doubt about its
ability to continue as a going concern.
The decision to engage Andersen as the Company's independent auditors was
approved by the Company's board of directors.
In connection with the audit for the year ended December 31, 1996, and through
February 23, 1998, the Company has had no disagreements with Deloitte on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Deloitte would have caused it to make reference thereto in its
report on the consolidated financial statements for such year.
During the year ended December 31, 1996, and through February 23, 1998, there
have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-
K).
Page 26 of 46
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the executive
officers and directors of the Company as of April 8, 1998:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stephen M. Studdert 49 Chairman and CEO
Thomas A. Murdock 53 Director, President and Chief Operating Officer
Roger D. Dudley 45 Director, Executive Vice President, Corporate Finance
John A. Oberteuffer, Ph.D. 57 Director, Vice President, Technology
Douglas L. Rex 52 Vice President, Chief Financial Officer and Treasurer
Alan C. Ashton, Ph.D. 54 Director
Joseph Verner Reed 61 Director
James B. Hayes 58 Director
Rick D. Nydegger 49 Director
Reginald K. Brack 60 Director
</TABLE>
All directors hold office until the next annual meeting of the stockholders of
the Company or until their successors have been elected and qualified. The
officers of the Company are elected annually and serve at the pleasure of the
Board of Directors.
STEPHEN M. STUDDERT, Chairman, Chief Executive Officer. Mr. Studdert, 49,
is a co-founder of the Company and has been Chairman since the merger of
Phonic Technologies, Inc. ("PTI") and the Company in June 1994, and has
been the Company's Chief Executive Officer since May 1996. He also is the
Chairman of the Board of Directors of K.L.S. Enviro Resources, Inc.
("KLSE"), a company with a class of securities registered under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Since 1992, Mr. Studdert has been Chairman of Studdert Companies
Corp. ("SCC"), an international investment management company that is owned
and controlled by three individuals who each are executive officers and
directors of the Company. He served as a White House advisor to U.S.
Presidents Bush, Reagan and Ford. Mr. Studdert has served as a member of
the President's Export Council and the Foreign Trade Practices
Subcommittee, and he is a director and former chairman of the Federal Home
Loan Bank of Seattle.
THOMAS A. MURDOCK, President, Chief Operating Officer and Director. Mr.
Murdock, 53, is a co-founder and has served as an executive officer and
member of the Company's Board of Directors since June 1994. Mr. Murdock
also has served as President of SCC since 1992 and Assistant to the
Chairman and Director of Synergetics, Inc., a research company located in
Utah that formerly has provided research and development services in
connection with the Company's automatic computer voice recognition and
related technologies. For much of his career, Mr. Murdock has been a
commercial banker and a senior corporate executive with significant
international emphasis and experience. Mr. Murdock also serves as a
director of KLSE.
ROGER D. DUDLEY, Executive Vice President, Corporate Finance, and Director.
Mr. Dudley, 45, is a co-founder and has served as an executive officer and
member of the Company's Board of Directors since June 1994. Mr. Dudley is
also executive vice president of SCC, a position he has held since 1993.
After several years at IBM in marketing and sales, he began his career in
the investment banking and asset management industry. He has extensive
experience in real estate asset management and in project development. He
also serves as an executive officer of an entity which manages a foreign
investment fund. He is also a director of KLSE.
JOHN A. OBERTEUFFER, Ph.D., Vice President Technology and Director. Dr.
Oberteuffer, 57, has been a Director of the Company since March 1997 and
Vice President Technology since January 1998. He is also the founder and
president of Voice Information Associates, Inc. ("VIA"). VIA is a
consulting group providing strategic technical, market evaluation, product
development and corporate information to the automatic speech recognition
industry. In addition, VIA publishes the monthly newsletter, ASRNews. Dr.
Oberteuffer also is
Page 27 of 46
<PAGE>
executive director of the American Voice Input/Output Society ("AVIOS").
He was formerly vice president, personal computer systems, of Voice
Processing Corp. (now merged with Voice Control Systems, Inc.), and also
was founder and CEO of Iris Graphics, which was acquired by Seitex Corp.
Dr. Oberteuffer received his bachelor's and master's degrees from Williams
College, and his Ph.D. in Physics from Northwestern University, and he was
a member of the research staff at Massachusetts Institute of Technology for
five years.
DOUGLAS L. REX has served as the Chief Financial Officer of the Company
since May 1997. For the past seven years Mr. Rex has been President of
Tebbs & Smith P.C., a business consulting, tax planning, accounting and
auditing firm. Mr. Rex is a member of the American Institute of Certified
Public Accountants (AICPA) and the Utah Association of Certified Public
Accountants (UACPA). Mr. Rex is also the Chief Financial Officer of KLSE.
Mr. Rex is also a Vice President and the CFO of SCC.
ALAN C. ASHTON, Ph.D., Director. Dr. Ashton, 54, has served on the
Company's Board of Directors since October 23, 1995. He conducted research
and taught computer science for more than 16 years before launching his own
word-processing computer software company, WordPerfect Corporation, where
he also served as an executive officer and director. WordPerfect employed
more than 4,000 employees worldwide and realized annual revenues of more
than $700 million before being acquired by Novell, Inc. in 1994. Dr.
Ashton served as a director Novell from 1994 until 1996. He presently
serves on the board of directors of Geneva Steel and SkyMall, Inc. Novell,
Geneva Steel and SkyMall each have a class of securities registered under
Section 12 of the Exchange Act. Dr. Ashton also currently serves on the
governing board of Utah Valley State College.
JOSEPH VERNER REED, Director. Ambassador Reed, 61, has served as a
director of the Company since June 1994. He is President of the
Secretariat and was Under Secretary General of the United Nations in New
York. Following a career as a senior advisor to the Chairman of the Chase
Manhattan Bank, Ambassador Reed received several Presidential appointments
in the United States diplomatic service, including that of United States
Ambassador to Morocco, United States Ambassador to the United Nations, and
Chief of Protocol of the United States. He has extensive corporate
experience and holds honorary doctorates from several universities. Since
December 31, 1996, Ambassador Reed also has served as a director of KLSE, a
company with a class of securities registered under Section 12 of the
Exchange Act.
JAMES B. HAYES, Director. Mr. Hayes, 58, is the former Publisher of
FORTUNE, one of America's most prestigious business publications, and a
former Vice President of Time, Inc. He joined Time, Inc. in 1959 and held
various positions including Publisher of Discover. In July 1995, he was
appointed President and Chief Executive Officer of Junior Achievement,
Inc., a position he continues to occupy. He was one of 15 U.S. business
executives selected for a Presidential Mission to the former Soviet Union
to discuss business development and economic cooperation. He presently is
Chairman of Moorehouse School of Medicine. Mr. Hayes has served on the
Company's Board of Directors since June 1994.
RICK D. NYDEGGER, Director. Mr. Nydegger, 49, is a patent and trademark
attorney. Mr. Nydegger was a founder and, during the past five years, has
been a shareholder and director of the law firm Workman, Nydegger & Seeley
in Salt Lake City, Utah, a firm specializing in patent, trademark,
copyright, trade secret, unfair competition, licensing and intellectual
property matters. Mr. Nydegger received his law degree from the J. Reuben
Clark Law School (cum laude, 1974) in Provo, Utah. He has published
numerous articles in trade journals and law reviews on the subject of
computer law and intellectual property. Mr. Nydegger is registered to
practice before the U.S. Patent and Trademark Office and has been admitted
to practice before the U.S. Court of Appeals in the Federal Circuit and the
Fifth and Tenth Circuits, as well as the U.S. Supreme Court. Mr. Nydegger
has been a member of the Company's Board of Directors since December 1996.
He also joined the Board of Directors of KLSE in December 1996.
REGINALD K. BRACK, Director. Mr. Brack, 60, was named to the Board of
Directors in September 1997. He is the chairman emeritus of Time Inc.,
serving as the CEO of Time Inc. from 1986 until 1994 and as chairman of the
board until 1997. Time Inc., a wholly owned subsidiary of Time Warner
Inc., is the world's largest book and magazine publishing company and the
fastest growing on-line media entity.
Page 28 of 46
<PAGE>
SIGNIFICANT EMPLOYEES AND CONSULTANTS
In addition to the officers and directors identified above, the Company expects
the following individuals (listed in alphabetical order) to make significant
contributions to the Company's business.
CARL HAL HANSEN. Mr. Hansen, 47, is Senior Project Engineer for the
Company's automatic speech recognition technologies ("ASRT"), and Chairman
and CEO of Synergetics. Mr. Hansen holds a degree in Electronics from the
Utah Trade Technical Institute of Provo, Utah. For approximately fourteen
years, Mr. Hansen was employed by Signetics, Inc. in various capacities,
including Test Equipment Engineer, Characterization Engineer, Product
Engineer, and as an Electronic Specialist. He was involved in the design,
fabrication and release of layout design for PC boards and interfaces. In
1991, Mr. Hansen founded Synergetics, where he continues to have direct
leadership with respect to new product development and engineering. Since
March 13, 1997, he has been a full-time consultant to the Company.
CAROLINE HENTON, Ph.D. Dr. Henton, 43, is Vice President and Strategic
Technology Adviser of the Company since February 1998. Dr. Henton received
a masters degree in General Linguistics and a Doctorate in Acoustic
Phonetics from the University of Oxford. After an academic career in the
UK and California, she joined Apple Computer, Inc. to produce the high
quality synthetic speech available on all Apple platforms. For the past
five years, Dr. Henton has been Director of Language Development for Voice
Processing Corp. (Cambridge, MA) and Director of Linguistic Development for
the DECtalk speech synthesizer produced by Digital Equipment Corp. She has
also acted as a consultant in speech synthesis, linguistics, localization,
speech interface design and as a voice talent for Sun Microsystems, Inc.,
Claris Corp., Digital Sound Corp., Lexicon naming Inc., Interval Research
Inc., Apple Computer, General Magic, Inc., and Digital Equipment Corp.
TONY R. MARTINEZ, Ph.D. Dr. Martinez, 38, is senior consulting scientist
for the Company's neural network development. He received his Ph.D. in
computer science at UCLA in 1986. He is an associate professor of Computer
Science at Brigham Young University and currently heads up the Neural
Network and Machine Learning Laboratory in the BYU Ph.D./MS program. His
main research is in neural networks, machine learning, ASOCS, connectionist
systems, massively parallel algorithms and architectures, and non-von
Neuman computing methods. He is associate editor of the Journal of
Artificial Neural Networks.
R. BRIAN MONCUR. Mr. Moncur, 39, was employed by Synergetics from 1992 to
March 13, 1997, when he became a full-time employee of the Company. He
graduated from Brigham Young University with a Bachelor of Science degree
in chemical engineering. Before his employment with Synergetics, Mr.
Moncur was employed by Signetics, Inc. and Mentorgraphics, where he was a
Senior Process Engineer and Software Development Engineer.
DALE LYNN SHEPHERD. Mr. Shepherd, 38, was employed by Synergetics from
1992 to March 13, 1997, when he became a full-time employee of the Company.
He graduated from Brigham Young University with a Bachelor of Science
Degree in Electrical Engineering. He also received a Masters of Business
Administration from B.Y.U. Before his employment with Synergetics, Mr.
Shepherd was employed with Mentorgraphics where he acted as a software
systems architect in automatic semiconductor design. Before
Mentorgraphics, Mr. Shepherd worked on a contract basis with Signetics,
Inc.
E. DAVID BARTON. Mr. Barton was a founder of AcuVoice and continues to
serve as its Chief Executive Officer. Before founding AcuVoice in 1985,
Mr. Barton was the founder and Chief Executive Officer of Bartco
International, Inc., a Texas corporation from 1976 to 1985. Since 1959,
Mr. Barton has held a number of executive positions with companies doing
business in the U.S. and abroad. He holds a BA in Psychology and an MA in
Psychology and Language from the Catholic University of America, an MA in
Japanese Language, History and Culture from the Institute of Oriental
Languages in Tokyo, Japan, and an MS (with credits in Linguistics,
Phonology and Semantics) from the University of New York.
None of the executive officers or directors of the Company are related to any
other officer or director of the Company.
Page 29 of 46
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid to
the Company's Chief Executive Officer and the Company's other executive officers
whose annual compensation exceeded $100,000 during the last fiscal year (other
than the Chief Executive Officer), collectively the "Named Executive Officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS
- -----------------------------------------------------------------------------------
SECURITIES
OTHER UNDERLYING
ANNUAL OPTIONS/
NAME AND PRINCIPAL POSITION YEAR (1) SALARY BONUS SARS(#)
- --------------------------- ------- -------- --------- ----------
<S> <C> <C> <C> <C>
Stephen M. Studdert 1995 -- /(2)/ -- /(2)/ 0
CEO (4/96-Present) 1996 $ 131,539 -- /(2)/ 400,000
1997 $ 305,385 -- /(2)/ 400,000
Thomas A. Murdock 1995 -- /(2)/ -- /(2)/ 0
CEO (6/94 to 4/96) 1996 $ 131,539 -- /(2)/ 400,000
President, COO 1997 $ 305,385 -- /(2)/ 400,000
Roger D. Dudley 1995 -- /(2)/ -- /(2)/ 0
Exec. VP 1996 $ 131,539 -- /(2)/ 400,000
1997 $ 305,385 -- /(2)/ 400,000
- ---------------------------
</TABLE>
(1) All options granted to named executive officers during fiscal 1996
were granted under the Company's 1996 Director's Stock Option Plan as
compensation for their service on the Company's Board of Directors
[See Director Compensation, below]. All options granted in 1997 were
granted pursuant to the Company's 1997 Stock Option Plan.
(2) During fiscal 1995 and part of 1996, these executive officers were not
compensated directly by the Company. During those periods, any
compensation received by the Named Executive Officers for any services
rendered by them to the Company was paid by SCC, an entity owned and
controlled by the Named Executive Officers. [See, "Certain
Relationships and Related Transactions."] Although the Company makes
no representation about the compensation arrangements between SCC and
its employees, including the Named Executive Officers, the total
compensation paid by the Company to SCC during such periods is as
follows:
<TABLE>
<CAPTION>
Management Fee Management Fee
Year (Cash) (Stock)
---- -------------- --------------
<S> <C> <C>
1995 $111,339 3,699,900 *
1996 $120,000 --
</TABLE>
The management services contract between the Company and SCC obligated
the Company to pay SCC a monthly management fee of $50,000, which
amounts were invoiced monthly by SCC but often accrued due to the
Company's cash flow constraints. By July 1995, the Company owed SCC
approximately $1,417,000 of accrued but unpaid management fees. On
November 16, 1994, the
Page 30 of 46
<PAGE>
Company's Board of Directors approved the issuance of warrants (the
"SCC Warrants") to purchase up to 3,700,000 shares of the Company's
Common Stock to SCC. The authorized purchase price of the SCC Warrants
was $.033 per share, and the authorized exercise price for each share
of Common Stock underlying the SCC Warrants was $.35. The Board of
Directors' resolution authorizing the issuance of the SCC Warrants
specified that the purchase price for the SCC Warrants and the
exercise price for shares of Common Stock underlying the SCC Warrants
could be satisfied by canceling invoices for services previously
rendered to the Company under the Consulting Agreement or by cash
payment. On July 31, 1995, the Company issued and SCC purchased the
SCC Warrants. The purchase price of the SCC Warrants was $.033 per
share of Common Stock underlying the SCC Warrants, or an aggregate of
$122,100. On August 11, 1995, SCC exercised the SCC Warrants at an
exercise price of $.35 per share of Common Stock underlying the SCC
Warrants. Both the $122,100 purchase price and the $1,295,000
aggregate exercise price for the SCC Warrants were satisfied by the
cancellation of amounts invoiced to the Company by SCC pursuant to the
SCC Agreement during the fiscal year ended December 31, 1994 and the
period between January 1, 1995 and August 11, 1995. Such cancellation
was accomplished on a dollar-for-dollar basis. The total dollar value
of the transaction subsequently was adjusted upward and expensed as
compensation paid by the Company in the amount of $3,699,900. [See,
"Certain Relationships and Related Transactions."]
The Company presently has executive employment agreements with each of
the Named Executive Officers. The material terms of each executive
employment agreement with each executive officer are identical and are
as follows: The term of each employment contract is from November 1,
1996 through December 31, 2001. Annual base compensation for each
executive for the first three years of such term is $250,000 from
November 1, 1996 through December 31, 1996; $325,000 from January 1,
1997 through December 31, 1997; and $425,000 from January 1, 1998
through December 31, 1999. The annual base compensation for the final
two years of the employment agreement is $550,000 from January 1, 2000
through December 31, 2000; and $750,000 from January 1, 2001 through
December 31, 2001. However, for these final two contract years, annual
base compensation and the performance-based incentive compensation
will be subject to review by the Company's Board of Directors based
upon either or both of the market price of the Company's Common Stock
and profits derived by the Company from annual revenues from
operations. In addition, each executive officer is entitled to annual
performance-based incentive compensation payable on or before December
31 of each calendar year during the contract term. During the first
three years of the contract term, the performance-based incentive
compensation is determined with relation to the market price of the
Company's Common Stock, adjusted for stock dividends and splits. If
the price of the Company's Common Stock maintains an average price
equal to or greater than the level set forth below over a period of
any three consecutive months during the calendar year, the
performance-based incentive compensation will be paid in the
corresponding percentage amount of annual base salary for each year
as follows:
Quarterly Average Stock Price Percentage Bonus
----------------------------- ----------------
$10.00 30%
$12.50 35%
$15.00 40%
$20.00 45%
$25.00+ 50%
Each such executive officer also is entitled to customary insurance
benefits, office and support staff and the use of an automobile. In
addition, if any executive is terminated without cause during the
contract term then all salary then and thereafter due and owing under
the executive employment agreement shall, at the executive's option,
be immediately paid in a lump sum payment to the executive officer and
all stock options, warrants and other similar rights granted by the
Company and then vested or earned shall be immediately granted to the
executive officer without restriction or limitation of any kind.
Further, the Board of Directors authorized the payment of a cash bonus
to SCC in an amount sufficient to pay all personal state and federal
income taxes on the 3.7 million
Page 31 of 46
<PAGE>
shares purchased by SCC on August 11, 1995 and on the bonus amount.
The amounts allocated for this bonus was $2.5 million, of which
$2,102,585 had been paid out as of December 31, 1997.
Each executive employment agreement contains a non-disclosure,
confidentiality, non-solicitation and non-competition clause. Under
the terms of the non-competition clause, each executive has agreed
that for a period of one year after the termination of his employment
with the Company that the executive not engage in any capacity in a
business which competes with or may compete with the Company.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
- -------------------------------------------------------------------------------- ----------------------------
(a) (b) (c) (d) (e) (f) (g)
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE
GRANTED EMPLOYEES PRICE EXPIRATION
NAME (#) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
- ------------------- ------------ ---------------- ----------- ------------- --------- ----------
Stephen M. Studdert 200,000 4.2% $6.00 10/28/2007 $60,000 $120,000
Thomas A. Murdock 200,000 4.2% $6.00 10/28/2007 $60,000 $120,000
Roger D. Dudley 200,000 4.2% $6.00 10/28/2007 $60,000 $120,000
</TABLE>
No options were exercised by the Named Executive Officers during the fiscal year
and no options held by them were in the money as of December 31, 1997.
BOARD OF DIRECTORS MEETINGS, COMMITTEES AND DIRECTOR COMPENSATION
The Company's Board of Directors took action at 7 duly noticed meetings of the
Board during 1997. Each director attended (in person or telephonically) at
least 75% of the meetings of the Company's Board of Directors except for Messrs.
Hayes and Reed, who attended or otherwise participated in 5 of the 7 meetings.
During 1997, the Company's Board of Directors had the following committees: 1996
Directors' Stock Option Plan Committee, comprised of Messrs. Ashton, Reed and
Studdert; 1997 Stock and Incentive Plan Committee, comprised of Messrs Nydegger
and Reed, Audit Committee, comprised of Messrs. Hayes, Reed and Dudley, and
Compensation Committee, comprised of Messrs. Studdert, Reed, Ashton and
Nydegger. These standing committees conducted meetings in conjunction with
meetings of the full Board of Directors.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Preliminary Note: Notwithstanding anything to the contrary set forth in any of
the previous filings made by the Company under the Securities Act or the 1934
Act that might incorporate future filings, including, but not limited to, this
Annual Report on Form 10-K, in whole or in part, the following Executive
Compensation Report and the performance graph appearing herein shall not be
deemed to be incorporated by reference into any such future filings.
This Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Named
Executive Officers, including its Chief Executive Officer, Stephen M. Studdert,
during the year ended December 31, 1997.
Page 32 of 46
<PAGE>
Compensation Policy. The Committee's policy with respect to executive
compensation has been designed to:
. Adequately and fairly compensate executive officers in relation
to their responsibilities, capabilities and contributions to the
Company and in a manner that is commensurate with compensation
paid by companies of comparable size or within the Company's
industry;
. Reward executive officers for the achievement of short-term
operating goals and for the enhancement of the long-term value of
the Company; and
. Align the interests of the executive officers with those of the
Company's shareholders with respect to short-term operating goals
and long-term increases in the price of the Company's Common
Stock.
The components of compensation paid to executive officers consist of: (a) base
salary, (b) incentive compensation in the form of annual bonus payments and
stock options awarded by the Company under the Company's Stock Incentive Plans
and (c) certain other benefits provided to the Company's executive officers.
The Company's Compensation Committee is responsible for reviewing and approving
cash compensation paid by the Company to its executive officers and members of
the Company's senior management team, including annual bonuses and stock options
awarded under the Company's Stock Incentive Plans, selecting the individuals who
will be awarded bonuses and stock options under the Stock Incentive Plans, and
for determining the timing, pricing and amount of all stock options granted
thereunder, each within the terms of the Company's Stock Incentive Plans.
The Company's executive compensation program historically has emphasized the use
of incentive-based compensation to reward the Company's executive officers and
members of senior management for the achievement of goals established by the
Board of Directors. The Company uses stock options to provide an incentive for
a substantial number of its officers and employees, including selected members
of management, and to reward such officers and employees for achieving goals
that have been established for the Company. The Company believes its incentive
compensation plan rewards management when the Company and its shareholders have
benefitted from achieving the Company's goals and targeted research and
development objectives, all of which the Compensation Committee feels will
dictate, in large part, the Company's future operating results. The Compensation
Committee believes that its policy of compensating officers and employees with
incentive-based compensation fairly and adequately compensates those individuals
in relation to their responsibilities, capabilities and contribution to the
Company, and in a manner that is commensurate with compensation paid by
companies of comparable size or within the Company's industry.
Components of Compensation. The primary components of compensation paid by the
Company to its executive officers and senior management personnel, and the
relationship of such components of compensation to the Company's performance,
are discussed below:
. Base Salary. The Compensation Committee periodically reviews and
approves the base salary paid by the Company to its executive
officers and members of the senior management team. Adjustments
to base salaries are determined based upon a number of factors,
including the Company's performance (to the extent such
performance can fairly be attributed or related to each
executive's performance), as well as the nature of each
executive's responsibilities, capabilities and contributions. In
addition, the Compensation Committee periodically reviews the
base salaries of its senior management personnel in an attempt to
ascertain whether those salaries fairly reflect job
responsibilities and prevailing market conditions and rates of
pay. The Compensation Committee believes that base salaries for
the Company's executive officers have historically been
reasonable in relation to the Company's size and performance in
comparison with the compensation paid by similarly sized
companies or companies within the Company's industry.
. Incentive Compensation. As discussed above, a substantial portion
of each executive officer's compensation package is in the form
of incentive compensation designed to reward the achievement of
short-term operating goals and long-term increases in shareholder
value. The Company's Stock Incentive Plans allow the Board of
Directors or the Compensation
Page 33 of 46
<PAGE>
Committee to grant stock options to executive officers and
employees for the purchase of shares of the Company's Common
Stock. Under the terms of the Stock Incentive Plans, the Board of
Directors and the Compensation Committee have authority, within
the terms of the Stock Incentive Plans, to select the executive
officers and employees who will be granted stock options and to
determine the timing, pricing and number of stock options to be
awarded. The Compensation Committee believes that the stock
options granted under the Stock Incentive Plans reward executive
officers only to the extent that shareholders have benefitted
from increases in the value of the Company's Common Stock.
. Other Benefits. The Company maintains certain other plans and
arrangements for the benefit of its executive officers and
members of senior management. The Company believes these benefits
are reasonable in relation to the executive compensation
practices of other similarly sized companies or companies within
the Company's industry.
Compensation of the Chief Executive Officer. As described elsewhere in this
Report, the Company has entered into executive employment agreements with
Messrs. Studdert, Murdock and Dudley. The material terms of each executive
employment agreement with each executive officer are identical and are described
above. The Compensation Committee believes that the monthly compensation under
such contracts adequately and fairly compensates these executive officers in
relation to their respective responsibilities, capabilities, contributions and
dedication to the Company and secures for the Company the benefit of their
leadership, management and financial skills and capabilities. Moreover, the
Compensation Committee believes that the salary and other benefits are
reasonable in relation to the responsibilities, capabilities, contributions and
dedication of these men to the Company and are warranted to keep them in line
with the compensation earned by chief executive officers employed by companies
of comparable size or within the Company's industry.
Conclusion. The Compensation Committee believes that the concepts discussed
above further the shareholders' interests because a significant part of
executive compensation is based upon the Company achieving its research and
development goals and other specific goals set by the Board of Directors. At the
same time, the Compensation Committee believes that the program encourages
responsible management of the Company in the short-term. The Compensation
Committee regularly considers plan design so that the total program is as
effective as possible in furthering shareholder interests.
The Compensation Committee bases its review on the experience of its own
members, on information requested from management personnel, and on discussions
with and information compiled by various independent consultants retained by the
Company.
Respectfully submitted,
Compensation Committee:
Stephen M. Studdert
Joseph Verner Reed
Alan C. Ashton
Rick D. Nydegger
COMPENSATION OF DIRECTORS
Prior to April 1996, the Company's directors received no compensation for their
service as such, although the Company historically has reimbursed its directors
for actual expenses incurred in traveling to and participating in director's
meetings, and the Company intends to continue that policy for the foreseeable
future. On April 30, 1996, the Company's board of directors adopted, and the
Company's shareholders subsequently approved, the Company's 1996 Directors'
Stock Option Plan (the "Directors Plan"). Under the Directors Plan, members of
the Board as constituted on the date of adoption received options to purchase
200,000 shares of the Company's Common Stock for each year (or any portion
thereof consisting of at least six months) during which such persons had served
on the board for each of fiscal years 1994 and 1995 and were granted 200,000 for
each of fiscal 1996 and 1997 which options vest after completion of at least six
months' service on the Board during those fiscal years. Such options have
terms of 10 years.
Page 34 of 46
<PAGE>
Thus, under the Directors Plan, during the fiscal year ended
December 31, 1997, the Company granted stock options to members of the Board as
follows:
STOCK OPTIONS GRANTED TO DIRECTORS DURING FISCAL YEAR 1997
<TABLE>
<CAPTION>
SHARES DATE EXERCISE SHARES VESTED
NAME GRANTED (#) GRANTED PRICE PER SHARE AT FY-END
- ---- ----------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Stephen M. Studdert 200,000 10/28/97 $6.00 600,000
Alan C. Ashton 200,000 10/28/97 $6.00 200,000
Joseph Verner Reed 200,000 10/28/97 $6.00 600,000
James B. Hayes 200,000 10/28/97 $6.00 600,000
Rick D. Nydegger 200,000 3/13/97 $7.13 200,000
200,000 10/28/97 $6.00 0
Reginald K. Brack 200,000 10/28/97 $6.00 0
Thomas A. Murdock 200,000 10/28/97 $6.00 600,000
Roger D. Dudley 200,000 10/28/97 $6.00 600,000
</TABLE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
regulation of the Securities and Exchange Commission to furnish the Company with
copies of all Section 16(a) forms which they file. Based solely on its review
of the copies of such forms furnished to the Company during the fiscal year
ended December 31, 1997, the Company is aware of the following untimely filings:
the grant of the options to each director in October 1997 was reported on a Form
5 which was filed after the 45/th/ day following the fiscal year end. However,
the Company believes that all other transactions required to be reported under
Section 16(a) of the Securities Exchange Act were reported on timely filed
reports by the affected individuals.
Page 35 of 46
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the yearly cumulative total returns from the
Company's Common Stock during the five fiscal year period ended December 31,
1997, with the cumulative total return on the Media General Index and the
Standard Industrial Classification (SIC) Code Index for that same period. The
comparison assumes $100 was invested on January 1, 1993 in the Company's Common
Stock and in the Common Stock of the companies in the referenced Indexes and
further assumes reinvestments of dividends.
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG FONIX CORPORATION, MEDIA GENERAL INDEX AND SIC CODE INDEX
<CAPTION>
Media
Measurement period fonix General SIC Code
(Fiscal Year Covered) Corporation Index Index
- --------------------- ----------- -------- --------
<S> <C> <C> <C>
Measurement PT -
12/1992 $100.00 $100.00 $100.00
FYE 12/1993 $102.67 $119.95 $124.40
FYE 12/1994 $ 93.99 $125.94 $ 82.68
FYE 12/1995 $222.72 $163.35 $ 75.34
FYE 12/1996 $495.88 $202.99 $ 78.19
FYE 12/1997 $174.00 $248.30 $104.53
</TABLE>
Page 36 of 46
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 1998, the number of shares of
Common Stock of the Company beneficially owned by all persons known to be
holders of more than 5 percent of the Company's Common Stock and by the
Executive Officers and Directors of the Company individually and as a group.
Unless indicated otherwise, the address of the shareholder is the Company's
offices, 60 East South Temple Street, Suite 1225, Salt Lake City, Utah 84111.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME AND ADDRESS OF 5% BENEFICIAL OWNERS, BENEFICIALLY PERCENT OF
EXECUTIVE OFFICERS AND DIRECTORS OWNED CLASS/(1)/
- ----------------------------------------- ------------------ ----------
<S> <C> <C>
Thomas A. Murdock 26,947,981/(2)/ 51.2%
President, COO and Director
Alan C. Ashton, Director 12,329,167/(3)(4)/ 23.7%
c/o Beesmark Investments, L.C.
261 East 1200 South
Orem, Utah 84097
Beesmark Investments, L.C. 11,729,167/(4)/ 22.8%
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
Roger D. Dudley, Executive Vice President 8,329,596/(5)/ 15.9%
and Director
Stephen M. Studdert, Chairman of the Board 8,329,296/(6)/ 15.9%
Chief Executive Officer
Studdert Companies Corp. 3,700,000/(7)/ 7.2%
5% Beneficial Owner
Joseph Verner Reed, Director 1,020,000/(8)/ 2.0%
73 Sterling Road
Greenwich, Connecticut 06831
James B. Hayes, Director 1,020,000/(8)/ 2.0%
One Education Way
Colorado Springs, Colorado 80906
Rick D. Nydegger, Director 400,000 1.0%
10217 North Oak Creek Lane
Highland, Utah 84003
John A. Oberteuffer, Ph.D. 180,000 *
Voice Information Associates, Inc.
14 Glen Road South
Lexington, Massachusetts 02173
Reginald K. Brack, Director 226,500/(9)/ *
Douglas L. Rex, Chief Financial Officer 205,300/(10)/ *
Officers and Directors as a Group (10 persons) 33,086,587 56.4%
- ---------------
</TABLE>
[Footnotes on following page.]
Page 37 of 46
<PAGE>
* Less than 1 percent.
/(1)/ Percentages rounded to nearest 1/10th of one percent. Except as
indicated in the footnotes below, each of the persons listed
exercises sole voting and investment power over the shares of the
Company's Common Stock listed for each such person in the table.
/(2)/ Includes 25,657,749 shares of Common Stock deposited in a voting
trust (the "Voting Trust") as to which Mr. Murdock is the sole
trustee. Persons who have deposited their shares of the Company's
Common Stock into the Voting Trust have dividend and liquidation
rights in proportion to the number of shares of the Company's
Common Stock they have deposited in the Voting Trust, but have no
voting rights with respect to such shares. All voting rights
associated with the shares deposited into the Voting Trust are
exercisable solely and exclusively by the Trustee of the Voting
Trust. The Voting Trust expires, unless extended according to its
terms, on the earlier of September 30, 1999 or any of the
following events: (i) the Trustee terminates it; (ii) the
participating shareholders unanimously terminate it; or (iii) the
Company is dissolved or liquidated. Although as the sole trustee
of the Voting Trust Mr. Murdock exercises the voting rights of all
of the shares deposited into the Voting Trust, and accordingly has
listed all shares in the Table above, he has no economic or
pecuniary interest in any of the shares deposited into the Voting
Trust except 3,465,083 shares as to which he directly owns the
economic interest, 3,700,000 shares the economic rights as to
which are owned by SCC, of which Mr. Murdock is a 1/3 equity owner
and 11,400 shares the economic rights as to which are owned by a
limited liability company of which Mr. Murdock is a 1/3 equity
owner. Also includes 2,813 shares owned directly by Mr. Murdock,
140,232 shares (including shares issuable upon the exercise of
options) beneficially owned by members of Mr. Murdock's immediate
family and 1,150,000 shares of Common Stock underlying stock
options exercisable presently or within 60 days.
/(3)/ Includes all Common Stock beneficially owned by Beesmark
Investments, L.C. ("Beesmark") but only to the extent that Dr.
Ashton is one of two managers of Beesmark, and, as such, is deemed
to share investment power with respect to shares beneficially
owned by Beesmark. Also includes 600,000 shares of Common Stock
underlying stock options exercisable by Dr. Ashton presently or
within 60 days.
/(4)/ Beesmark's beneficial ownership includes 166,667 shares of Common
Stock presently issuable upon the conversion of shares of Series A
Preferred Stock. All shares are deposited into the Voting Trust.
The managers of Beesmark are Alan C. Ashton and Karen Ashton. As
managers of Beesmark, they each are deemed to share voting control
over shares beneficially owned by Beesmark. Mrs. Ashton
beneficially owns no shares other those deemed to be owned by her
as a control person of Beesmark, and consequently her beneficial
ownership is not separately reported.
/(5)/ Includes (i) 3,465,083 shares owned by Mr. Dudley and deposited
into the Voting Trust, (ii) 3,700,000 shares owned by SCC as to
which Mr. Dudley shares investment power because of his management
position with and 1/3 ownership of SCC, which shares are deposited
in the Voting Trust; (iii) 2,813 shares owned directly by Mr.
Dudley; (iv) 300 shares owned by Mr. Dudley's minor children; (v)
11,400 shares owned by SMD, as to which Mr. Dudley has 1/3
indirect equity ownership and control and that are deposited into
the Voting Trust; and (vi) 1,150,000 shares underlying stock
options exercisable presently or within 60 days.
/(6)/ Includes (i) 3,465,083 shares owned by Mr. Studdert and deposited
into the Voting Trust, (ii) 3,700,000 shares owned by SCC as to
which Mr. Studdert shares investment power because of his
management position with and 1/3 ownership of SCC, which shares
are deposited in the Voting Trust; (iii) 2,813 shares owned
directly by Mr. Studdert; (iv) 11,400 shares owned by SMD, as to
which Mr. Studdert has 1/3 direct equity ownership and control and
which are deposited in the Voting Trust; and (v) 1,150,000 shares
underlying stock options exercisable presently or within 60 days.
Page 38 of 46
<PAGE>
/(7)/ All shares deposited into the Voting Trust.
/(8)/ Includes 1,000,000 shares of Common Stock underlying presently
exercisable stock options.
/(9)/ Includes 26,000 shares owned directly by Mr. Brack and 500 shares
owned by Mr. Brack's son and 200,000 shares underlying options.
/(10)/ Includes 2,400 shares owned directly by Mr. Rex, 2,400 shares
owned by his spouse, 500 shares owned by an entity owned and
controlled by him, and 200,000 shares underlying presently
exercisable stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Studdert Companies Corp.
SCC is a Utah corporation that provides investment and management services. The
officers, directors and owners of SCC are Stephen M. Studdert, Thomas A. Murdock
and Roger D. Dudley, each of whom is a director and an executive officer of the
Company and each of whom beneficially owns more than ten percent of the
Company's issued and outstanding Common Stock. Between June 1994, when the
Company commenced its present business of developing its ASRT, and April 30,
1996, the Company did not pay or award any compensation in any form directly to
the Company's executive officers. Rather, in June 1994 the Company entered into
an Independent Consulting Agreement (the "SCC Agreement") with SCC pursuant to
which SCC, through Messrs. Studdert, Murdock and Dudley, rendered certain
management and financial services to the Company.
In 1993, SCC began to render management services to PTI, the Company's
predecessor in interest, with respect to PTI's business of developing the ASRT.
Those services included providing day-to-day administrative management services,
debt financing directly to PTI, procuring debt financing from third parties, and
commencing a search for a joint venture partner or merger candidate at monthly
charges ranging from $50,000 to $100,000. In June 1994, PTI merged with and
into a subsidiary of the Company, after which the Company entered into the SCC
Agreement with SCC dated as of June 22, 1994. Under the SCC Agreement, SCC
agreed that for a period of two years it would manage all aspects of the
Company's day-to-day business, have authority to engage on behalf of the Company
such employees, agents and professionals as it deemed appropriate, and be
reimbursed for its reasonable costs and expenses incurred for and on behalf of
the Company. In return for such services, the Company agreed to compensate SCC
in the amount of $50,000 per month, which monthly amount was exclusive of (i)
fees for capital raising activities by SCC on the Company's behalf and (ii)
actual expenses incurred by SCC.
Pursuant to the SCC Agreement, the Company paid to SCC $209,300 during the year
ended December 31, 1994. At December 31, 1994, the Company owed SCC $1,164,200
for accrued management fees and $66,805 for expenses incurred. Between January
and July 1995, SCC continued to invoice the Company for services rendered under
the Consulting Agreement. By July 1995, the Company owed SCC approximately
$1,417,000 pursuant to the terms of the SCC Agreement. On November 16, 1994,
the Company's Board of Directors approved the issuance of warrants to purchase
up to 3,700,000 shares of the Company's Common Stock to SCC (the "SCC
Warrants"). The authorized purchase price of the SCC Warrants was $.033 per
share, and the authorized exercise price for each share of Common Stock
underlying the SCC Warrants was $.35. The Board of Directors' resolution
authorizing the issuance of the SCC Warrants specified that the purchase price
for the SCC Warrants and the exercise price for shares of Common Stock
underlying the SCC Warrants could be satisfied by canceling invoices for
services previously rendered to the Company under the Consulting Agreement or by
cash payment. The November 16, 1994 Board meeting was attended by a quorum of
the Board, but only one director who was not also a principal of SCC was
present. Subsequently, on April 11, 1995, pursuant to the unanimous consent of
all disinterested directors in lieu of a special Board meeting, all of the
Company's disinterested directors ratified the adoption of the resolution
authorizing the Company to offer the SCC Warrants. On July 31, 1995, the
Company issued and SCC purchased the SCC Warrants. The purchase price of the
SCC Warrants was $.033 per share of Common Stock underlying the SCC Warrants, or
an aggregate of $122,100. On August 11, 1995, SCC exercised the SCC Warrants at
an exercise price of $.35 per share of Common Stock underlying the SCC Warrants.
Both the $122,100 purchase price and the $1,295,000 aggregate exercise price for
the SCC Warrants were satisfied by the cancellation of amounts invoiced to the
Company by SCC pursuant to the SCC Agreement during
Page 39 of 46
<PAGE>
the fiscal year ended December 31, 1994 and the period between January 1, 1995
and August 11, 1995. Such cancellation was accomplished on a dollar-for-dollar
basis.
Between August 1995 and October 1995, SCC continued to invoice the Company for
its $50,000 monthly management fee under the Consulting Agreement, portions of
which amounts continued to accrue. On October 23, 1995, the Company entered
into an investment agreement (the "Beesmark Agreement") with Beesmark. In
connection with the Company's execution of the Beesmark Agreement, SCC and the
Company collaterally agreed that any then accrued but unpaid balance due to SCC
for management services rendered under the SCC Agreement would be placed on
"conditional status" and deferred until the Company successfully completed
certain developmental milestones set forth in the Beesmark Agreement, at which
time such amounts would be due and payable in full. With respect to management
services to be rendered by SCC after the closing of the Beesmark Agreement, SCC
agreed that the Company would pay only $30,000 of the monthly invoiced $50,000,
the balance to be placed on conditional status. Thus, of the total $600,000
invoiced to the Company by SCC during the year ended December 31, 1995, the
Company paid SCC $90,000 in cash; $257,000 of accrued but unpaid amounts were
placed on conditional status under the Investment Agreement; and $253,000 was
canceled in partial payment of the exercise price of the SCC Warrants. In
addition to the amounts invoiced by SCC for management fees during the 1995
fiscal year, the Company also reimbursed SCC for actual expenses incurred in the
amount of $337,405. Thus, at December 31, 1995, the Company owed SCC $257,000
in management fees, all of which was on conditional status under the terms of
the Beesmark Agreement and was payable to SCC only in the event that the Company
achieved the developmental milestones set forth in the Beesmark Agreement. At
December 31, 1995, the Company also owed SCC $3,825 for expenses incurred.
Additionally, during the year ended December 31, 1995, SCC charged a total of
$70,915 in capital raising fees to the Company. Of that amount, $49,576 was
written off by SCC in connection with the Beesmark Agreement, and $21,339 was
paid to SCC.
Between January 1, 1996 and April 30, 1996, SCC invoiced the Company for
services under the SCC Agreement in the amount of $200,000. Of that amount,
$80,000 was placed on conditional status pursuant to the Beesmark Agreement and
$120,000 was paid to SCC. On April 30, 1996, the disinterested members of the
Company's Board of Directors authorized the Company to enter into an agreement
with SCC modifying the SCC Agreement effective May 1, 1996. Under the SCC
Agreement, as modified, SCC no longer invoices the Company for management
services, but continues to invoice the Company for reimbursement of actual
expenses incurred on the Company's behalf. SCC and the Company agreed that any
amounts invoiced under the SCC Agreement but placed on conditional status
pursuant to the Beesmark Agreement would remain outstanding obligations of the
Company payable only if the Company achieved the milestones specified in the
Beesmark Agreement. The Company further agreed to pay any then accrued but
unpaid amounts invoiced under the SCC Agreement, including amounts owed and
carried over from the year ended December 31, 1995, which amounts totaled
$5,862, as well as outstanding amounts for expenses incurred. In connection
with the modification of the SCC Agreement, the disinterested members of the
Company's Board of Directors approved base salaries for fiscal year 1996 for
each of the Company's executive officers, effective as of April 1996, as
follows: Stephen M. Studdert, Chief Executive Officer -- $180,000; Thomas A.
Murdock, President and Chief Operating Officer -- $180,000; and Roger D. Dudley,
Executive Vice President and Chief Financial Officer -- $180,000. Effective
November 15, 1996, the disinterested members of the Company's Board of Directors
approved an increase in the base salaries of the executive officers from
$180,000 to $250,000 per annum for the remainder of fiscal 1996, with base
compensation increasing annually over the five-year term of those persons'
employment agreements. [See Item 10. Executive Compensation]. In September
1996, Beesmark made the last of the funding payments provided for under the
terms of the Beesmark Agreement. On February 10, 1997, the Company paid to SCC
the entire balance due to SCC for accrued management fees in the amount of
$337,000. Thus, during the year ended December 31, 1996, the Company paid to
SCC a total of $120,000 for management fees and SCC was reimbursed for actual
expenses incurred on the Company's behalf in the amount of $740,052. During
1996, the Company made no payments to SCC for capital raising activities. The
Company and SCC have agreed to extend the SCC Agreement, at least insofar as the
Company has agreed to reimburse SCC for actual expenses incurred on behalf of
the Company, until December 1998.
The Company paid no compensation in any form directly to any of its executive
officers during fiscal 1995 and until April 1, 1996. However, as the principals
of SCC, during such periods, the Company's executive officers received a portion
of the amounts paid by the Company to SCC under the SCC Agreement. See
"Executive Compensation."
Page 40 of 46
<PAGE>
Cancellation of Debt By SCC and Thomas A. Murdock
In connection with the Beesmark Agreement, SCC and the Company entered into a
collateral agreement whereby SCC agreed that it would cancel principal debt of
$135,368 and accrued interest of $19,298 owed by the Company to SCC in
connection with a promissory note executed by PTI and assumed by the Company at
the time of the merger of PTI with and into a subsidiary of the Company. In
another collateral agreement, the Company and Thomas A. Murdock, a director and
executive officer of the Company, agreed that the Company would cancel principal
debt of $286,493 and accrued interest of $65,715 due to Mr. Murdock under a
promissory note initially made by PTI and assumed by the Company at the time of
the merger of PTI with and into a subsidiary of the Company.
Alan C. Ashton and Beesmark Investments, L.C.
On October 23, 1995, the Company, Beesmark and Dr. Ashton entered into the
Beesmark Agreement. Dr. Ashton is presently a director of the Company, although
he did not occupy such position when the Beesmark Agreement was negotiated and
executed. Dr. Ashton also is a co-manager of and has an indirect pecuniary
interest in a portion of Beesmark's assets. Pursuant to the Beesmark Agreement,
Beesmark agreed to provide a total of $6,050,000 of funding to the Company over
a period of approximately 11 months, provided that during that time the Company
was able to timely meet, to Beesmark's satisfaction, specified developmental
milestones. In return for the funding provided to Beesmark, the Company issued
11,562,500 shares of Common Stock at a price of $.48 per share and a $500,000
Series A Convertible Subordinated Debenture. The Debenture was subsequently
converted to 166,667 shares of Series A Preferred Stock.
Synergetics
Thomas A. Murdock, a director and the Chief Operating Officer of the Company, is
also one of seven directors of Synergetics. In addition, Mr. Murdock, Stephen
M. Studdert and Roger D. Dudley, each of whom is an executive officer and
director of the Company, own shares of the Common Stock of Synergetics, although
such share ownership in the aggregate constitutes less than 5% of the total
shares of Synergetics common stock issued and outstanding.
John A. Oberteuffer
Mr. Oberteuffer has been a director of the Company since March 1997 and an
executive officer of the Company since January 1998. Mr. Oberteuffer is also
the founder and president of Voice Information Associates, Inc. ("VIA"), a
consulting group providing strategic technical, market evaluation, product
development and corporate information to the speech recognition industry.
During fiscal year 1997, the Company paid approximately $110,000 in consulting
fees to VIA for services provided to the Company. In April 1998, the Company
entered into an agreement with Dr. Oberteuffer under which Dr. Oberteuffer
assigned certain patent and other rights to certain technology for 500,000
Common Stock purchase warrants. The exercise price of the warrants is $5.13 per
share (the closing price of the Company's Common Stock on the date of the
agreement). 250,000 warrants are exercisable for a three-year period commencing
with the date of the agreement and the balance of the warrants become
exercisable at such time as a patent is issued relating to the technology.
SMD
From September 4, 1997, through October 15, 1997 and again on December 31, 1997,
the Company borrowed funds from SMD pursuant to a revolving, unsecured
promissory note, bearing interest at the rate of 12% per annum. The aggregate
of all amounts loaned under the note was $2,000,000 and the highest outstanding
balance at any one time was $1,550,000. All amounts have been repaid, together
with $5,542.14 in interest. The loan and its terms were approved by the
independent members of the board of directors of the Company.
On March 19, 1998, the Company granted an aggregate of 450,000 stock options to
the three executive officers and directors who also own SMD. These options have
a ten-year life and an exercise price of $5.16 per share.
Page 41 of 46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Documents filed as part of this Form 10-K:
1. Consolidated Financial Statements (included in Part II, Item 8)
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995 and for the Period October 1, 1993 (Date of
Inception) to December 31, 1997
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997,1996 and 1995 and for the Period October 1, 1993
(Date of Inception) to December 31, 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995 and for the Period October 1, 1993 (Date of
Inception) to December 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: Financial statement schedules have
been omitted because they are not required or are not applicable, or
because the required information is shown in the financial statements
or notes thereto.
3. Exhibits: The following Exhibits are filed with this Form 10-K
pursuant to Item 601(a) of Regulation S-K:
Exhibit No. Description of Exhibit
----------- ----------------------
(2) Agreement and Plan of Reorganization among the Company,
fonix Acquisition Corporation and AcuVoice dated as of
January 13, 1998, incorporated by reference from the
Company's Current Report on Form 8-K, filed March 20, 1998
(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
(3)(iv) Certificate of Amendment of Certificate of Incorporation
dated as of September 24, 1997, which is incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997
(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
Page 42 of 46
<PAGE>
(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, which is incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997
(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, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997
(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, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1997
(9)(i) Voting Trust Agreement dated as of December 10, 1993 by and
among Phonic Technologies, Inc., Stephen M. Studdert, Thomas
A. Murdock and Roger D. Dudley, which is incorporated by
reference from the Company's Current Report on Form 8-K
dated as of June 17, 1994
(9)(ii) Amendment of Voting Trust Agreement by and among the
Company, Stephen M. Studdert, Thomas A. Murdock, Roger D.
Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
October 23, 1995, incorporated by reference from the
Company's Current Report on Form 8-K dated as of October 23,
1995
(9)(iii) Second Amendment of Voting Trust Agreement by and among the
Company, Stephen M. Studdert, Thomas A. Murdock, Roger D.
Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
July 2, 1996, incorporated by reference from the Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1996
(9)(iv) Third Amendment of Voting Trust Agreement by and among the
Company, Stephen M. Studdert, Thomas A. Murdock, Roger D.
Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
September 20, 1996, incorporated by reference from the
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996
(9)(v) Fourth Amendment of Voting Trust Agreement by and among the
Company, Stephen M. Studdert, Thomas A. Murdock, Roger D.
Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
September 20, 1996, incorporated by reference from the
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996
(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
Page 43 of 46
<PAGE>
(10)(iii) Memorandum of Understanding dated as of March 13, 1997, by
and among the Company, Synergetics, Inc. and C. Hal Hansen,
which is incorporated by reference from the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1996
(10)(iv) Employment Agreement by and between the Company and Stephen
M. Studdert, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996
(10)(v) Employment Agreement by and between the Company and Thomas
A. Murdock, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996
(10)(vi) Employment Agreement by and between the Company and Roger D.
Dudley, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996
(10)(vii) Convertible Debenture Purchase Agreement dated as of June
18, 1997 between the Company and Southbrook International
Investments, Ltd., 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., which is incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997
(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., which is incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997
(10)(x) Restated Master Agreement for Joint Collaboration between
the Company and Siemens, dated November 14, 1997, filed
herewith
(10)(xi) Restated First Statement of Work and License Agreement
between the Company and Siemens, dated February 11, 1998, as
revised*
(10)(xii) Master Technology Collaboration Agreement between the
Company and OGI, dated October 14, 1997, filed herewith.
(10)(xiii) Common Stock Purchase Agreement among the Company and JNC
Opportunity Fund Ltd. and Diversified Strategies Fund, LP,
dated as of March 9, 1998, filed herewith
(10)(xiv) Common Stock Purchase Agreement between the Company and
Thomson Kernaghan & Co., dated as of March 9, 1998, filed
herewith.
(10)(xv) Royalty Modification Agreement among the Company and
Synergetics, dated as of April 6, 1998, filed herewith
(10)(xvi) Purchase Agreement with John Oberteuffer and the Company
dated April 9, 1998, filed herewith
(10)(xvii) Employment Agreement by and between the Company and John A.
Oberteuffer, filed herewith
(10)(xviii) First Amendment to Master Agreement for Joint Collaboration
between the Company and Siemens, dated February 13, 1998,
filed herewith.
(10)(xix) Second Amendment to Master Agreement for Joint Collaboration
between the Company and Siemens, dated March 13, 1998, filed
herewith.
Page 44 of 46
<PAGE>
(22) Subsidiaries of Registrant, filed herewith
(23)(i) Consent of Arthur Andersen LLP
(23)(ii) Consent of Pritchett Siler & Hardy, P.C.
(23)(iii) Consent of Deloitte & Touche LLP
(27) Financial Data Schedule
____________________
* This document contains confidential information. The Confidential Portion
has been filed separately with the Commission pursuant to an application
for confidential treatment of such information.
(B) Reports filed on Form 8-K during the last quarter of the fiscal year ended
December 31, 1997:
On October 27, 1997, the Company filed a Current Report on Form 8-K to
report modifications and additional payments under a convertible debenture
purchase agreement with an investor and to file pro forma financial
information that included the proceeds received in connection with such
modifications.
Page 45 of 46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 13th day of April,
1998.
FONIX CORPORATION
Date: 13 April 1998 By: /s/ Stephen M. Studdert
--------------------- ---------------------------------------
Stephen M. Studdert, Chairman and
Chief Executive Officer
Date: 13 April 1998 By: /s/ Douglas L. Rex
--------------------- ---------------------------------------
Douglas L. Rex, Chief Financial Officer
(Principal Financial and Accounting
Oficer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
/s/ Stephen M. Studdert
- -------------------------- _______________________________________
Stephen M. Studdert, Chairman, Alan C. Ashton, Ph.D., Director
Principal Executive Officer
13 April 1998
- -------------------------- _______________________________________
Date Date
/s/ Roger D. Dudley /s/ Joseph Verner Reed
- -------------------------- ---------------------------------------
Roger D. Dudley, Director Ambassador Joseph Verner Reed, Director
13 April 1998 13 April 1998
- -------------------------- ---------------------------------------
Date Date
/s/ Thomas A. Murdock
__________________________ _______________________________________
Thomas A. Murdock, Director James B. Hayes, Director
14 April 1998
__________________________ _______________________________________
Date Date
/s/ John A. Oberteuffer /s/ Rick D. Nydegger
- -------------------------- _______________________________________
John A. Oberteuffer, Ph.D., Rick D. Nydegger, Director
Director
13 April 1998 14 April 1998
- ------------------------------ _______________________________________
Date Date
/s/ Reginald K. Brack
- ------------------------------
Reginald K. Brack, Director
12 April 1998
- ------------------------------
Date
Page 46 of 46
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and 1996.......................................... F-5
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995
and for the period from October 1, 1993 (Date of Inception) to December 31, 1997................... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995
and for the period from October 1, 1993 (Date of Inception) to December 31, 1997................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995
and for the period from October 1, 1993 (Date of Inception) to December 31, 1997................... F-10
Notes to Consolidated Financial Statements............................................................ F-12
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To fonix/(TM)/ corporation:
We have audited the accompanying consolidated balance sheet of fonix/(TM)/
corporation (a Utah corporation in the development stage) and subsidiary as of
December 31, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended, and for the period
from inception (October 1, 1993) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of the Company as of December
31, 1996 and for the year then ended, and for the period from inception (October
1, 1993) to December 31, 1996, were audited by other auditors whose report dated
March 28, 1997, expressed an unqualified opinion on those statements and
included an explanatory paragraph regarding the Company's ability to continue as
a going concern. The consolidated financial statements for the period from
inception (October 1, 1993) to December 31, 1996 reflect a net loss of
$19,841,807 of the total net loss. The consolidated financial statements of the
Company for the year ended December 31, 1995 and for the period from inception
(October 1, 1993) to December 31, 1995 were audited by other auditors whose
report dated March 4, 1996, expressed an unqualified opinion on those statements
and included an explanatory paragraph regarding the Company's ability to
continue as a going concern. The other auditors' report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for such
prior periods, is based solely on the report of such other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the reports of other auditors for the
cumulative information for the period from inception (October 1, 1993) to
December 31, 1996, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
fonix/(TM)/ corporation and subsidiary as of December 31, 1997 and the results
of their operations and their cash flows for the year then ended and for the
period from inception (October 1, 1993) to December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has generated no revenues
through December 31,1997 and has incurred significant recurring losses since its
inception. The Company expects these losses to continue at least through
December 31, 1998. As of December 31, 1997, the Company has an accumulated
deficit of $45,017,746, minimal stockholders' equity of $2,372,475 and minimal
working capital of $678,823. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
respect to these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
April 8, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
fonix/(TM)/ corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of fonix/(TM)/
corporation and subsidiary (a development stage company) as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year then ended, and for the period from October
1, 1993 (date of inception) to December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The Company's
consolidated financial statements as of and for the year ended December 31,
1995, and for the period from October 1, 1993 (date of inception) to December
31, 1995 were audited by other auditors whose report, dated March 4, 1996,
expressed an unqualified opinion on those statements and included an explanatory
paragraph regarding the Company's ability to continue as a going concern. The
financial statements for the period October 1, 1993 (date of inception) through
December 31, 1995 reflect a net loss of $12,012,299 of the total net loss. The
other auditors' report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such prior periods, is based solely on the
report of such other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
financial statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 1996 and the results of its
operations and its cash flows for the year then ended, and for the period from
October 1, 1993 (date of inception) to December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company is a development
stage enterprise engaged in developing automated speech recognition
technologies. As discussed in Note 1 to the consolidated financial statements,
the Company's operating losses since inception raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 28, 1997
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
fonix/(TM)/ corporation
Salt Lake City, Utah
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of fonix/(TM)/ corporation and subsidiary [a
development stage company] for the year ended December 31, 1995, and for the
period from October 1, 1993 (date of inception) to December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
fonix/(TM)/ corporation and subsidiary (a development stage company) for the
year ended December 31, 1995 and for the period from October 1, 1993 (date of
inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company is still in the development
stage and has suffered recurring losses which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PRITCHETT, SILER & HARDY, P.C.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
March 4, 1996
F-4
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- ------
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,501,676 $ 22,805,786
Notes receivable 600,000 1,000,000
Interest and other receivables 14,919 157,643
Prepaid assets 32,094 4,172
------------ ------------
Total current assets 21,148,689 23,967,601
Property and equipment, net of accumulated
depreciation of $464,100 in 1997 and $80,232 in 1996 1,567,279 1,279,746
Intangible assets, net of accumulated amortization
of $25,509 in 1997 and $4,168 in 1996 138,951 53,011
Other assets 39,647 30,912
------------ ------------
Total assets $ 22,894,566 $ 25,331,270
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Revolving note payable $ 18,612,272 $ 16,377,358
Revolving note payable - related party 551,510 -
Accounts payable 291,638 307,931
Accrued liabilities 505,619 114,049
Accrued liabilities - related party 459,502 1,761,743
Capital lease obligation - current portion 49,325 -
Series A convertible debenture - 500,000
------------ ------------
Total current liabilities 20,469,866 19,061,081
Capital lease obligation, net of current portion 52,225 -
------------ ------------
Total liabilities 20,522,091 19,061,081
------------ ------------
Commitments and contingencies (Notes 1, 11 and 13)
Stockholders' equity:
Preferred stock, $.0001 par value; 100,000,000 shares authorized:
Series A, convertible; 166,667 shares outstanding in
1997 (aggregate liquidation preference of $6,055,012) 500,000 -
Series B, 5% cumulative convertible; 27,500 shares outstanding in
1997 (aggregate liquidation preference of $555,197) 667,659 -
Series C, 5% cumulative convertible; 185,000 shares outstanding in
1997 (aggregate liquidation preference of $3,734,550) 4,644,785 -
Common stock, $.0001 par value; 100,000,000 shares authorized;
43,583,875 and 41,626,563 shares outstanding, respectively 4,358 4,163
Additional paid-in capital 38,637,059 26,107,473
Outstanding warrants 2,936,360 360
Deficit accumulated during the development stage (45,017,746) (19,841,807)
------------ ------------
Total stockholders' equity 2,372,475 6,270,189
------------ ------------
$ 22,894,566 $ 25,331,270
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
OCTOBER 1,
1993
YEARS ENDED DECEMBER 31, (INCEPTION) TO
------------------------------------------- DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
------------ ------------ ----------- -----------------
Expenses:
General and administrative 12,947,112 3,530,400 3,553,665 22,246,670
Research and development 7,066,294 4,758,012 2,704,165 17,937,293
------------ ------------ ----------- -----------------
Total expenses 20,013,406 8,288,412 6,257,830 40,183,963
------------ ------------ ----------- -----------------
Loss from operations (20,013,406) (8,288,412) (6,257,830) (40,183,963)
------------ ------------ ----------- -----------------
Other income (expense):
Interest income 1,199,610 1,180,259 191,929 2,592,067
Interest expense (2,758,288) (721,355) (279,996) (3,852,543)
------------ ------------ ----------- -----------------
Total other income (expense), net (1,558,678) 458,904 (88,067) (1,260,476)
------------ ------------ ----------- -----------------
Loss before extraordinary items (21,572,084) (7,829,508) (6,345,897) (41,444,439)
Extraordinary items:
Loss on extinguishment of debt (881,864) - - (881,864)
Gain on forgiveness of debt - - 30,548 30,548
------------ ------------ ----------- -----------------
Net loss $(22,453,948) $ (7,829,508) $(6,315,349) $ (42,295,755)
============ ============ =========== =================
Basic and diluted net loss per
common share $ (0.59) $ (0.21) $ (0.30)
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 - $ - - $ - - $ - 37,045,000 $ 3,704
Reverse stock split one share for ninety shares - - - - - - (36,633,389) (3,663)
Restatement for reverse acquisition of fonix
corporation by Phonic Technology, Inc. - - - - - - 9,983,638 999
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, October 1, 1993 (date of inception) - - - - - - 10,395,249 1,040
Net loss for the period October 1, 1993
(date of inception) to December 31, 1993 - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 - - - - - - 10,395,249 1,040
Acquisition of Taris, Inc. - - - - - - 411,611 41
Shares issued for services at $.14 to $.18 per share - - - - - - 1,650,000 165
Shares issued for services at $.25 per share - - - - - - 20,000 2
Shares issued for conversion of notes payable
and interest payable at $.04 per share - - - - - - 3,900,000 390
Shares issued for cash at $1.19 to $3.13 per
share, less offering costs of $368,450 - - - - - - 1,819,293 181
Net loss for the year ended December 31, 1994 - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 - - - - - - 18,196,153 1,819
Shares issued during the year for cash at $.45 to
$2.50 per share, less offering costs of $267,714 - - - - - - 6,442,538 645
Shares issued during the year for services
rendered and cancellation of accounts payable
at $.55 to $1.55 per share - - - - - - 516,630 52
Warrants issued during the year for
cancellation of accounts payable at $.033
per warrant (additional compensation expense
of $2,282,900 or $.62 per share was recorded) - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-in Outstanding Development
Capital Warrants Stage Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992 $ 136,659 $ (29,495) $ 110,868
Reverse stock split one share for ninety shares 3,663 - - -
Restatement for reverse acquisition of fonix
corporation by Phonic Technology, Inc. (141,362) - 29,495 (110,868)
- ------------------------------------------------------------------------------------------------------------------
Balance, October 1, 1993 (date of inception) (1,040) - - -
Net loss for the period October 1, 1993
(date of inception) to December 31, 1993 - - (1,782,611) (1,782,611)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 (1,040) - (1,782,611) (1,782,611)
Acquisition of Taris, Inc. 1,240 - - 1,281
Shares issued for services at $.14 to $.18 per share 249,835 - - 250,000
Shares issued for services at $.25 per share 4,998 - - 5,000
Shares issued for conversion of notes payable
and interest payable at $.04 per share 156,515 - - 156,905
Shares issued for cash at $1.19 to $3.13 per
share, less offering costs of $368,450 3,315,874 - - 3,316,055
Net loss for the year ended December 31, 1994 - - (3,914,339) (3,914,339)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 3,727,422 - (5,696,950) (1,967,709)
Shares issued during the year for cash at $.45 to
$2.50 per share, less offering costs of $267,714 4,509,542 - - 4,510,187
Shares issued during the year for services
rendered and cancellation of accounts payable
at $.55 to $1.55 per share 355,319 - - 355,371
Warrants issued during the year for
cancellation of accounts payable at $.033
per warrant (additional compensation expense
of $2,282,900 or $.62 per share was recorded) - 2,405,000 - 2,405,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares issued during the year upon conversion of
warrants for cancellation of accounts
payable at $.35 per share - $ - - $ - - $ - 3,700,000 $ 370
Warrants issued during the year for cash at .0033 to
$.10 per warrant, less offering costs of $5,040 - - - - - - - -
Shares issued during the year upon conversion of
warrants for cash at $.50 to $1.00 per share - - - - - - 550,000 55
Forgiveness of debt with related parties - - - - - - - -
Net loss for the year ended December 31, 1995 - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 - - - - - - 29,405,321 2,941
Shares issued during the year for finders' fees
at $1.52 to $2.72 per share - - - - - - 420,000 42
Shares issued during the year upon conversion
of warrants for cash at $.50 per share - - - - - - 60,000 6
Shares issued during the year for cash at $.48 to
$3.38 per share, less offering costs of $2,033,286 - - - - - - 11,741,242 1,174
Net loss for the year ended December 31, 1996 - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 - - - - - - 41,626,563 4,163
Shares issued for services at $3.75 to $5.31 per share - - - - - - 87,500 9
Shares issued for services at $6.50 to $8.38 per share - - - - - - 505,000 50
Warrants issued during the year for services - - - - - - - -
Shares issued upon the exercise of warrants
for services at $2.00 per share - - - - - - 150,000 15
Shares issued during the year for cash at $2.50
per share - - - - - - 150,000 15
Warrants issued during the year in connection with
the issuance of a convertible debenture and
convertible preferred stock - - - - - - - -
Shares issued upon conversion of convertible
debenture to common shares - - - - - - 145,747 15
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Paid-in Outstanding Development
Capital Warrants Stage Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued during the year upon conversion of
warrants for cancellation of accounts
payable at $.35 per share $ 3,699,630 $ (2,405,000) $ - $ 1,295,000
Warrants issued during the year for cash at .0033 to
$.10 per warrant, less offering costs of $5,040 - 45,360 - 45,360
Shares issued during the year upon conversion of
warrants for cash at $.50 to $1.00 per share 519,945 (45,000) - 475,000
Forgiveness of debt with related parties 506,874 - -
Net loss for the year ended December 31, 1995 - - (6,315,349) (6,315,349)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 13,318,732 360 (12,012,299) 1,309,734
Shares issued during the year for finders' fees
at $1.52 to $2.72 per share 901,478 - - 901,520
Shares issued during the year upon conversion
of warrants for cash at $.50 per share 29,994 - - 30,000
Shares issued during the year for cash at $.48 to
$3.38 per share, less offering costs of $2,033,286 11,857,269 - - 11,858,443
Net loss for the year ended December 31, 1996 - - (7,829,508) (7,829,508)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 26,107,473 360 (19,841,807) 6,270,189
Shares issued for services at $3.75 to $5.31 per share 386,710 - - 386,719
Shares issued for services at $6.50 to $8.38 per share 3,426,202 - - 3,426,252
Warrants issued during the year for services - 1,165,500 - 1,165,500
Shares issued upon the exercise of warrants
for services at $2.00 per share 689,085 (389,100) - 300,000
Shares issued during the year for cash at $2.50
per share 1,256,235 - - 1,256,250
Warrants issued during the year in connection with
the issuance of a convertible debenture and
convertible preferred stock - 1,559,600 - 1,559,600
Shares issued upon conversion of convertible
debenture to common shares 857,835 - - 857,850
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series B preferred shares issued for extinguishment of
convertible debenture at $20 stated value per share - $ - 108,911 $ 2,178,213 - $ -
Sale of Series C preferred shares and warrants,
less cash fees of $201,500 - - - - 187,500 2,948,500
Sale of Series B preferred shares for cash, less cash
fees of $145,000 - - 125,000 2,355,000 - -
Capital contribution in connection with put options - - - - - -
Beneficial conversion features of Series B convertible
debenture - - - - - -
Series A preferred shares issued upon conversion
of convertible debenture at $3 per share 166,667 500,000 - - - -
Conversion of Series B and Series C preferred shares
to common shares - - (206,411) (4,828,488) (2,500) (62,772)
Shares issued during the year in connection with
exercise of options at $2.97 per share - - - - - -
Shares issued during the year in connection with the
exercise of warrants at $.50 per share - - - - - -
Accretion of Series C preferred stock - - - - - 600,000
Dividends on preferred stock - - - 962,934 - 1,159,057
Net loss for the year ended December 31, 1997 - - - - - -
Balance, December 31, 1997 166,667 $ 500,000 27,500 $ 667,659 185,000 $ 4,644,785
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the
----------------- Paid-in Outstanding Development
Shares Amount Capital Warrants Stage Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series B preferred shares issued for extinguishment of
convertible debenture at $20 stated value per share - $ - $ - $ - $ - $ 2,178,213
Sale of Series C preferred shares and warrants,
less cash fees of $201,500 - - - 600,000 - 3,548,500
Sale of Series B preferred shares for cash, less cash
fees of $145,000 - - - - - 2,355,000
Capital contribution in connection with put options - - 500,000 - - 500,000
Beneficial conversion features of Series B convertible
debenture - - 427,850 - - 427,850
Series A preferred shares issued upon conversion
of convertible debenture at $3 per share - - - - - 500,000
Conversion of Series B and Series C preferred shares
to common shares 804,065 80 4,891,180 - - -
Shares issued during the year in connection with
exercise of options at $2.97 per share 15,000 1 44,499 - - 44,500
Shares issued during the year in connection with the
exercise of warrants at $.50 per share 100,000 10 49,990 - - 50,000
Accretion of Series C preferred stock - - - - (600,000) -
Dividends on preferred stock - - - - (2,121,991) -
Net loss for the year ended December 31, 1997 - - - - (22,453,948) (22,453,948)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 43,583,875 $ 4,358 $ 38,637,059 $ 2,936,360 $(45,017,746) $ 2,372,475
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
October 1,
1993
Years Ended December 31, (Inception) to
--------------------------------------------------- December 31,
1997 1996 1995 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (22,453,948) $ (7,829,508) $ (6,315,349) $ (42,295,755)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services 4,112,970 901,520 167,750 5,437,240
Non-cash expense related to issuance of debentures,
warrants, preferred and common stock 3,967,337 - - 3,967,337
Non-cash compensation expense related to issuance
of stock options - - 2,282,900 2,282,900
Write-off of assets received in acquisition - - - 1,281
Depreciation and amortization 405,209 83,183 1,217 489,609
Extraordinary loss on extinguishment of debt 881,864 - - 881,864
Extraordinary gain on forgiveness of debt - - (30,548) (30,548
Changes in assets and liabilities:
Interest and other receivables 142,724 (131,419) (21,827) (14,919)
Prepaid assets (27,922) (4,172) - (32,094)
Other assets (8,735) (30,912) - (39,647)
Accounts payable 128,638 42,702 1,652,731 2,071,838
Accrued liabilities - related party 47,759 1,500,918 (970,180) 459,502
Accrued liabilities (922,367) 83,053 50,136 633,600
------------- ------------- ------------- --------------
Net cash used in operating activities (13,726,471) (5,384,635) (3,183,170) (26,187,792)
------------- ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (671,401) (1,311,236) (48,742) (2,031,379)
Investment in intangible assets (107,281) (33,126) (24,053) (164,460)
Issuance of notes receivable (1,483,600) (963,106) (36,894) (2,483,600)
Payments received on notes receivable 1,883,600 - - 1,883,600
------------- ------------- ------------- --------------
Net cash used in investing activities (378,682) (2,307,468) (109,689) (2,795,839)
------------- ------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from revolving note payable 2,234,914 10,759,836 3,619,300 18,612,272
Net proceeds from revolving note payable - related party 551,510 - - 551,510
Proceeds from other notes payable - - 824,551 2,351,667
Payments on other notes payable - - (977,818) (1,779,806)
Principal payments on capital lease obligation (43,381) - - (43,381)
Proceeds from issuance of convertible debentures, net 2,685,000 - 500,000 3,185,000
Proceeds from sale of warrants 600,000 - - 600,000
Proceeds from sale of common stock, net 469,500 11,888,443 5,030,547 20,704,545
Proceeds from sale of Series B and C preferred stock, net 5,303,500 - - 5,303,500
------------- ------------- ------------- --------------
Net cash provided by financing activities 11,801,043 22,648,279 8,996,580 49,485,307
------------- ------------- ------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,304,110) 14,956,176 5,703,721 20,501,676
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,805,786 7,849,610 2,145,889 -
------------- ------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,501,676 $ 22,805,786 $ 7,849,610 $ 20,501,676
============= ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
OCTOBER 1,
1993
YEARS ENDED DECEMBER 31, (INCEPTION) TO
--------------------------------------- DECEMBER 31,
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: 1997 1996 1995 1997
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Cash paid during the year for interest $ 1,148,553 $ 638,302 $ 229,039 $ 2,037,019
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
FOR THE YEAR ENDED DECEMBER 31, 1997:
A $500,000 Series A Convertible Debenture was converted into 166,667
shares of Series A Preferred Stock.
Series B Convertible Debentures in the amount of $850,000 and related
accrued interest of $7,850 were converted into 145,747 shares of common
stock.
Series B Convertible Debentures in the amount of $2,150,000 and related
accrued interest of $28,213 were converted into 108,911 shares of Series
B Preferred Stock.
During July, 1994, the Company converted $150,000 of notes payable and
$6,905 of accrued interest payable to restricted common stock.
On June 17, 1994, Taris, Inc., issued 10,395,249 shares of common stock in
exchange for all of the issued stock of Phonic Technologies, Inc.
Inasmuch as the 10,395,249 shares of common stock is deemed to have
acquired Taris, Inc.
Taris, Inc. had the following assets and liabilities at the transaction
date:
Dividends of $2,721,991 were recorded related to the beneficial conversion
features and accretion of Series B and Series C Convertible Preferred
Stock.
206,411 shares of Series B Preferred Stock and related dividends of
$13,422 were converted into 786,867 shares common stock.
2,500 shares of Series C Preferred Stock and related dividends of $472
were converted into 17,198 shares common stock.
Accounts payable of $144,931 was converted into a capital lease
obligation of the same amount.
FOR THE YEAR ENDED DECEMBER 31, 1996:
The Company issued 420,000 shares of common stock to unrelated parties
for finders' fees of $901,520.
FOR THE YEAR ENDED DECEMBER 31, 1995:
The Company was forgiven of related-party notes payable of $286,493 and
$135,386 with accrued interest of $65,715 and $19,298, respectively.
The Company was also forgiven of various accounts payable in the amount
of $30,548.
The Company issued 285,000 shares of common stock to unrelated parties
for services rendered valued at $167,750.
The Company issued 231,630 shares of common stock to unrelated parties to
cancel $187,621 in accounts payable.
The Company issued 3,700,000 shares of common stock upon conversion of
3,700,000 warrants to a company controlled by the majority shareholders
of the Company in lieu of payment of management fees for services
previously rendered of $1,417,100 included in accounts payable.
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - fonix/(TM)/ corporation (known as Taris, Inc. prior to
its acquisition of Phonic Technologies, Inc., as described below) (the
"Company") was organized under the laws of the state of Delaware on September
12, 1985. Taris, Inc. was a public company with no operations. Prior to June 17,
1994, Taris, Inc. effected a reverse stock split of one share for ninety shares.
The financial statements have been adjusted to reflect the stock split as though
it had happened January 1, 1993. Phonic Technologies, Inc. ("PTI"), a Utah
corporation and the Company's predecessor in interest with respect to some of
the Company's technology, was organized on October 1, 1993 (the Company's date
of inception) for the purpose of developing proprietary automatic speech
recognition technologies. On June 17, 1994, fonix/(TM)/ corporation
("fonix") entered into a merger agreement with PTI whereby fonix corporation
issued 10,395,249 shares of its common stock for all of the issued and
outstanding common shares of PTI. Upon completion of the merger, PTI
stockholders owned in excess of 90 percent of the outstanding common stock of
fonix. The transaction was accounted for as a reverse acquisition as though PTI
acquired fonix. The financial statements, therefore, reflect the operations of
fonix since the acquisition on June 17, 1994 and PTI since October 1, 1993.
The Company's primary emphasis and focus to date have been the development of
its sound recognition engine, neural network, audio signal processor, and
command processing engine for use in its core automatic speech recognition
technologies. The Company licenses its technologies to and has entered into co-
development relationships and strategic alliances with third parties that are
participants in the horizontal computer industry (including producers of
application software, operating systems, computers and microprocessor chips) or
are research and development entities, including academia and industry and
commercial speech product developers. The Company intends for the foreseeable
future to continue this practice and will seek to generate revenues from its
proprietary speech recognition technologies from licensing royalties and
strategic partnerships and alliances. To date, the Company has entered into two
strategic partnerships and one license agreement relating to its automatic
speech recognition technologies. The Company received its first revenue from
its automatic speech recognition technologies in February 1998 under a license
agreement (see Note 13). The Company has received a patent and continues to
seek additional United States and foreign patent protection for various aspects
of its technologies through the filing of domestic and international
applications. The U.S. Patent and Trademark Office issued the initial patent to
the Company describing 36 claims on June 17, 1997. Although the Company has
completed development of the key components of its core technologies, there can
be no assurance that fonix will be able to sell, license or otherwise market its
technologies to third parties in order to generate sufficient revenues to pay
its operating costs and complete the development of its technologies.
DEVELOPMENT STAGE PRESENTATION - fonix is a development stage company. The
Company generated no revenues and reported net losses totaling $22,453,948 for
the year ended December 31, 1997, and cumulative losses of $42,295,755 for the
period from inception to December 31, 1997. The Company has minimal
stockholders' equity of $2,372,475 and minimal working capital of $678,823 as of
December 31, 1997. Although the Company received its first revenue in February
1998, the Company expects to continue to incur significant losses through at
least December 31, 1998, primarily due to expenditures associated with the
marketing and development of its proprietary automatic speech recognition and
related technologies. These factors, as well as the risk factors set out
elsewhere in the Company's Annual Report on Form 10-K, raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Management plans to fund the operations of the
Company through proceeds from additional sales of equity securities (see Note
13).
CONSOLIDATION - The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, fonix systems
corporation ("fonix systems"), which is the primary operating entity in the
consolidated group. All significant intercompany balances and transactions have
been eliminated in consolidation.
F-12
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid short-term
investments with a maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is computed for financial statement purposes on a straight-line
basis over the estimated useful lives of the assets as follows:
Furniture and fixtures 5 years
Computer equipment 3 to 5 years
Leasehold improvements 8 years
Maintenance and repairs are charged to expense as incurred and major
improvements are capitalized. Gains or losses on sales or retirements are
included in the consolidated statements of operations in the year of
disposition.
INTANGIBLE ASSETS - Intangible assets consist of the direct costs incurred by
the Company in applying for patents on its technologies. Amortization is
computed on a straight-line basis over the estimated useful life of five years.
RESEARCH AND DEVELOPMENT - All expenditures for research and development are
charged to research and development expense as incurred. The Company incurred
total research and development expenses of $7,066,294, $4,758,012 and $2,704,165
for the years ended December 31, 1997, 1996 and 1995, respectively.
CONCENTRATION OF CREDIT RISKS - The Company's cash and cash equivalents are
maintained in bank deposit accounts which exceed federally insured limits. The
Company has not experienced any losses with respect to these deposits and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NET LOSS PER COMMON SHARE - Basic and diluted net loss per common share are
calculated by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the year.
At December 31, 1997, 1996 and 1995 there were outstanding common stock
equivalents to purchase 8,223,623, 2,450,000 and 410,000 shares of common stock,
respectively, that were not included in the computation of diluted net loss per
common share as their effect would have been anti-dilutive, thereby decreasing
the net loss per common share. Net loss per common share amounts and share
data have been restated for all periods presented to reflect basic and diluted
per share presentations.
The following table is a reconciliation of the net loss numerator of basic and
diluted net loss per common share for the years ended December 31, 1997, 1996
and 1995.
F-13
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- -----------------------
Per Share Per Share Per Share
Amount Amount Amount
Loss --------- Loss --------- Loss ---------
------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loss before extraordinary items $(21,572,084) $(7,829,508) $(6,345,897)
Preferred stock dividends (2,721,991) - -
------------ ----------- -----------
Loss attributable to common stockholders
before extraordinary items (24,294,075) $ (0.57) (7,829,508) $ (0.21) (6,345,897) $ (0.30)
Extraordinary items:
Loss on extinguishment of debt (881,864) (0.02) - - - -
Gain on forgiveness of debt - - - - 30,548 (0.00)
------------ --------- ----------- --------- ----------- ---------
Net loss attributable to common
stockholders $(25,175,939) $ (0.59) $(7,829,508) $ (0.21) $(6,315,349) $ (0.30)
============ ========= =========== ========= =========== =========
Weighted average common shares
outstanding 42,320,188 36,982,610 21,343,349
============ =========== ===========
</TABLE>
INCOME TAXES - The Company recognizes deferred income tax assets or liabilities
for the expected future tax consequences of events that have been recognized in
the financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial and income tax bases of assets and liabilities using enacted tax rates
expected to apply when differences are expected to be settled or realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The book value of the Company's financial
instruments approximates fair value. The estimated fair values have been
determined using appropriate market information and valuation methodologies.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
years' financial statements to conform with the current year presentation.
2. CERTIFICATE OF DEPOSIT
At December 31, 1997 and 1996, the Company maintained a $20,000,000 short-term
certificate of deposit at a bank which is included in cash and cash equivalents.
The certificate bore interest at 5.50 percent and 4.75 percent at December 31,
1997 and 1996, respectively. Interest is payable monthly. This certificate is
pledged as collateral on a revolving note payable (see Note 5).
3. NOTES RECEIVABLE
At December 31, 1997, the Company had a short-term unsecured, non-interest
bearing note receivable from an unrelated entity in the amount of $500,000. This
note receivable was issued in connection with the Company's intended acquisition
of that entity (see Note 13).
At December 31, 1997, the Company had a short-term unsecured, demand note
receivable from an unrelated entity in the amount of $100,000. Interest begins
to accrue at six percent per year on the date the Company demands payment. This
note receivable was issued in connection with the Company's intended acquisition
of that entity. This note is payable 90 days following demand by the Company
in the event both parties agree that the acquisition will not proceed.
Subsequent to December 31, 1997, the Company has advanced an additional $300,000
under similar terms.
At December 31, 1996, the Company had an unsecured note receivable from an
unrelated third party in the amount of $1,000,000 which bore interest at 12% per
annum and was due and payable thirty days after written notice from the Company.
Payment on this note was received in full during 1997.
F-14
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1997 1996
---------- ----------
Furniture and fixtures $ 640,992 $ 602,620
Computer equipment 1,321,016 687,987
Leasehold improvements 69,371 69,371
---------- ----------
Less accumulated depreciation and amortization 2,031,379 1,359,978
(464,100) (80,232)
---------- ----------
Net property and equipment $1,567,279 $1,279,746
========== ==========
5. REVOLVING NOTES PAYABLE
At December 31, 1997 and 1996, the Company has a revolving note payable to a
bank in the amount of $18,612,272 and $16,377,358, respectively. Borrowings
under the revolving note payable are limited to $20,000,000. The weighted
average outstanding balance during 1997 and 1996 was $18,861,104 and
$11,786,889, respectively. The weighted average interest rate was 5.94 percent
and 5.80 percent during 1997 and 1996, respectively. This note is due April 29,
1998, bore an interest rate of 6.50 percent at December 31,1997, and is secured
by a certificate of deposit in the amount of $20,000,000 (see Note 2). This
revolving note is renegotiated quarterly and interest is payable monthly. The
Company plans to continue renewing the note indefinitely.
The Company has an unsecured revolving note payable to a company owned by three
individuals who are executive officers and directors of the Company and who each
beneficially own more than 10 percent of the Company's common stock. At
December 31, 1997, $551,510 in principal and $22,243 in accrued interest was
outstanding under this revolving note payable. The weighted average balance
outstanding during the borrowing period was $555,407. This revolving note is
payable on demand and bears interest at an annual rate of 12 percent. The
maximum amount outstanding under this revolving note was $1,550,000 in 1997. In
connection with this revolving note, the Company accrued a loan fee of $93,000
payable to the related entity. To date, no interest has been paid on the note.
Subsequent to December 31, 1997, the principal balance has been reduced to
$37,853. The Company believes the terms of the related-party revolving note
payable are at least as favorable as the terms that could have been obtained
from an unrelated third party in a similar transaction.
6. CONVERTIBLE DEBENTURES
SERIES A CONVERTIBLE DEBENTURE - On October 23, 1995, the Company entered into a
Securities Purchase Agreement (the "Securities Purchase Agreement") with
Beesmark Investments, L.C., a Utah limited liability company controlled by an
individual who assumed a position on the Company's board of directors in
connection with the execution of the Securities Purchase Agreement. Under the
Securities Purchase Agreement, the Company issued a Series A Convertible
Debenture in the amount of $500,000. The debenture was originally due October
23,1996 and was subsequently extended to October 23, 1997 and then to October
23, 1998. The debenture bore an annual interest rate of 5 percent. On September
25, 1997, the debenture was converted into 166,667 shares of Series A Preferred
Stock.
SERIES B CONVERTIBLE DEBENTURES - On June 18, 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 Convertible Debentures. The debentures
were due June 18, 2007,
F-15
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
bore interest at 5 percent and were convertible into shares of the Company's
common stock at anytime after issuance at the holder's option. 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 percent for any
conversion on or prior to the 120/th/ day after the original issue date and 87.5
percent for any conversion thereafter. On June 18, 1997, the Company received
$3,000,000 in proceeds related to the issuance of Series B Convertible
Debentures. Using the conversion terms most beneficial to the investor, the
Company recorded a prepaid financing cost of approximately $427,900 in
connection with the debenture to be amortized as additional interest expense
over the 120 day period commencing June 18, 1997. 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. The Company recorded the fair value of the
warrants, totaling $897,750, as a charge to interest expense. The fair value of
the warrants was determined as of the date of grant using the Black-Scholes
pricing model assuming the following: dividend yield of 0 percent; expected
volatility of 65 percent; risk free interest rate of 5.9 percent and an expected
life to exercise of 5 years. On July 31, 1997 and September 26,1997, $500,000
and $350,000 of the Series B Convertible Debentures together with interest
earned thereon were converted into 87,498 and 58,249 shares of common stock,
respectively.
Effective September 30, 1997, the Company and the Series B Convertible Debenture
holders agreed to modify the Agreement to provide that the holders exchange all
then outstanding debentures in the amount of $2,150,000 and accrued interest
thereon in the amount of $28,213 into 108,911 shares of Series B Preferred Stock
that would have essentially the same terms as the debentures and that any
additional purchases under the Agreement would be for the purchase of Series B
Preferred Stock. In connection with the extinguishment of the Series B
Convertible Debenture and the issuance of Series B Preferred Stock, the Company
recorded all unamortized prepaid financing costs as a loss on extinguishment of
debt. Also in connection with this modification, the Company issued 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 as an additional loss on extinguishment
of debt. The fair value of the warrants was determined as of the date of the
grant using the Black-Scholes pricing model assuming the following: dividend
yield of 0 percent; expected volatility of 65 percent; risk free interest rate
of 5.8 percent and expected life to exercise of 5 years.
7. STOCKHOLDERS' EQUITY
COMMON STOCK - During the year ended December 31, 1997, the Company issued
1,957,312 shares of common stock. Of such shares, 150,000 were issued to an
unrelated private investor, 265,000 were issued upon the exercise of previously
granted warrants and options, 145,747 were issued upon conversion of convertible
debentures, 804,065 were issued upon the conversion of convertible preferred
stock and 592,500 were issued to unaffiliated individuals for services rendered
valued at $3,812,971.
During the year ended December 31,1996, the Company issued 11,741,242 shares of
common stock to unrelated private investors pursuant to various stock purchase
agreements and 60,000 shares were issued upon the exercise of warrants. In
connection with these stock issuances, the Company issued 420,000 shares of
common stock valued at $901,520 as payment of finders' fees to unrelated third
parties.
During the year ended December 31, 1995, the Company issued a total of
11,209,168 shares of common stock. Of this total, 6,442,538 shares were issued
to unrelated private investors pursuant to various stock purchase agreements. A
total of 516,630 shares were issued for non-cash consideration including
cancellation of $187,621 of accounts payable and $167,750 for services rendered.
An additional 4,250,000 shares were issued upon exercise of warrants.
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
and
F-16
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
restrictions of any series of preferred stock. At the same time, the board of
directors established a class of Series A Preferred Stock. In August 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 in such series and having such terms and conditions as the
Company's board of directors may designate. The amendment became effective
September 24, 1997. Subsequent to the approval of rights and preferences of
Series A Preferred Stock, the Company's board of directors adopted resolutions
establishing Series B Preferred Stock and Series C Preferred Stock in connection
with certain capital fund raising.
SERIES A PREFERRED STOCK - In September 1997, the Series A Convertible Debenture
was converted into 166,667 shares of Series A Preferred Stock. The holder of
the Series A Preferred Stock has the same voting rights as common stockholders,
has the right to elect one person to the board of directors and receives a one
time preferential dividend of $2.905 per share of Series A Preferred Stock prior
to the payment of any dividend on any class or series of stock. At the option
of the holder, each share of Series A Preferred Stock is convertible into one
share of common stock and in the event that the common stock price has equaled
or exceeded $10 for a fifteen day period, the Series A Preferred Stock shares
are automatically converted into common stock. In the event of liquidation, the
holder is entitled to a liquidating distribution of $36.33 per share and a
conversion of Series A Preferred Stock at an amount equal to 1.5 shares of
common stock for each share of Series A Preferred Stock.
SERIES B PREFERRED STOCK - Effective September 30, 1997, the Company and the
Series B Convertible Debenture holders agreed to modify the Agreement to provide
that the holders exchange all then outstanding debentures in the amount of
$2,150,000 and accrued interest thereon in the amount of $28,213 into 108,911
shares of Series B Preferred Stock. Dividends accrue on the stated value ($20
per share) of Series B Preferred Stock at a rate of 5 percent per year, 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 holders' option. In the event of liquidation, the holders of the Series
B Preferred Stock are entitled to an amount equal to the stated value plus
accrued but unpaid dividends whether declared or not. The holders of Series B
Preferred Stock have no voting rights. The Series B Preferred Stock, together
with dividends accrued thereon, may be converted into shares of the Company's
common stock at the lesser of $6.81 or the average of the per share market value
for the five trading days immediately preceding the conversion date multiplied
by 90 percent for any conversion on or prior to the 120/th/ day after the
original issue date and 87.5 percent for any conversion thereafter. Using the
conversion terms most beneficial to the holder, the Company recorded a dividend
of $219,614 which represents a discount of 10 percent, which is available to the
holder upon issuance. The additional 2.5 percent discount of $68,509 was
amortized as a dividend over the remaining days in the original 120 vesting
period the Series B Convertible Debentures. Prior to the actual issuance of the
Series B Preferred Stock in exchange for the outstanding balance under the
debenture, the holder converted the balance of $2,150,000, and related
dividends, into 431,679 shares of common stock.
On October 24, 1997, the Company sold an additional 125,000 shares of Series B
Preferred Stock for $2,500,000 less $145,000 in related offering costs. Using
the conversion terms most beneficial to the holder, the Company recorded a
dividend of $576,667 which represents a discount of 10 percent, which is
available to the holder on or before 120 days subsequent to closing. A 2.5
percent discount of $87,905 is being amortized as a dividend over 120 days. As
a condition for issuing convertible preferred stock, the holder was granted a
put option by SMD, L.L.C. ("SMD"), a company which is controlled by three
shareholders who are officers of fonix. The put option requires SMD to purchase
the Series B Preferred Stock from the holder at the holder's option but only in
the event that the common stock of fonix is removed from listing on the Nasdaq
Small Cap Market or any other national securities exchange. In addition, fonix
has not entered into any type of agreement which would require fonix to
reimburse SMD should SMD be required to purchase the Series B Preferred Stock
from the holder. In connection with this put option, the Company recorded a
financing expense and a corresponding capital contribution of $125,000. As of
December 31, 1997, 97,500 of the Series B Preferred Stock and dividends earned
thereon had been converted into 355,188 shares of common stock. In January
F-17
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998, the remaining 27,500 shares of Series B Preferred Stock and dividends
earned thereon were converted into 193,582 shares of common stock.
SERIES C PREFERRED STOCK - Effective September 30, 1997, the Company entered
into an agreement with an unrelated investment entity whereby that entity agreed
to purchase 187,500 shares of the Company's Series C Preferred Stock for
$3,750,000. The cash purchase price was received in October 1997. Dividends
accrue on the stated value ($20 per share) of Series C Preferred Stock at a rate
of 5 percent per year, 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 holders' option. In the event of
liquidation, the holders of the Series C Preferred Stock are entitled to an
amount equal to the stated value ($20 per share) plus accrued but unpaid
dividends whether declared or not. The holders of Series C Preferred Stock have
no voting rights. The Series C 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
percent for any conversion on or prior to the 120/th/ day after the original
issue date, 90 percent for any conversion between 121 and 180 days and 88
percent for any conversion thereafter. Using the conversion terms most
beneficial to the holder, the Company recorded a dividend of $1,060,718 which
represents a discount of 9 percent, which is available to the holder on or
before 120 days subsequent to closing. The additional 3 percent discount of
$164,002 is being amortized as a dividend over 180 days. As a condition for
issuing convertible preferred stock, the Series C Preferred Stockholder was
granted a put option by SMD. The put option requires SMD to purchase the Series
C Preferred Stock from the holder at the holder's option but only in the event
that the common stock of fonix is removed from listing on the Nasdaq Small Cap
Market or any other national securities exchange. In addition, fonix has not
entered into any type of agreement which would require fonix to reimburse SMD
should SMD be required to purchase the preferred stock from the holder. In
connection with this put option, the Company recorded a financing expense and a
corresponding capital contribution of $375,000. Associated with the issuance of
the Series C Preferred Stock, the Company issued 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. The Company recorded the fair value of the
warrant of $600,000 as determined as of October 24,1997 using the Black-Scholes
pricing model assuming the following: dividend yield of 0 percent; expected
volatility of 65 percent; risk free interest rate of 5.8 percent and expected
life to exercise of 3 years. During the year ended December 31, 1997, the
Company issued 17,198 shares of common stock upon conversion of 2,500 shares of
Series C Preferred Stock and related accrued dividends. Subsequent to December
31, 1997, the balance of 185,000 shares of Series C Preferred Stock and related
dividends were converted into 1,295,699 shares of the Company's common stock.
REGISTRATION RIGHTS AND RESERVED SHARES - During 1997, the Company entered into
an amended and restated registration rights agreement with investors under which
the Company agreed to register the common stock issuable upon the conversion of
all series of preferred stock and the exercise of 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
all series of preferred stock and any dividends then payable in stock thereon
and the exercise of warrants. As of December 31, 1997, the Company had reserved
1,655,948 shares of common stock for this purpose.
STOCK OPTIONS - On March 10, 1997, the Company's board of directors approved the
1997 Stock Option and Incentive Plan for directors, employees and other persons
acting on behalf of the Company, under which the aggregate number of shares
authorized for issuance is 7,500,000. The plan is administered by a committee
consisting of two or more directors of the Company. 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. As of December
31, 1997, the number of shares available for granting under this plan is
1,511,000.
In April 1996, the Company's board of directors approved the 1996 Directors'
Stock Option Plan, under which the aggregate number of shares authorized 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
F-18
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 options are granted. The option term is ten years from date of
grant. As of December 31, 1997, the number of shares available for granting
under this plan is 1,000,000.
In April 1996, the Company's board of directors approved a Long-Term Stock
Investment and Incentive Plan for officers, key employees and other persons
acting on behalf of the Company under which the aggregate number of shares
authorized 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 ten 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. As of December 31, 1997, the number of
shares available for granting under this plan is 709,000.
A summary of options granted under the Company's various stock option plans for
the years ended December 31, 1997 and 1996 is presented below (no options were
issued or outstanding during 1995):
<TABLE>
<CAPTION>
1997 1996
--------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Total options outstanding at beginning of year
Granted 4,626,000 $4.07 - $ -
Exercised 6,009,000 6.38 4,626,000 4.07
Forfeited (15,000) 2.97 - -
Canceled (30,000) 7.66 - -
(25,000) 5.00 - -
---------- ---------
Total options outstanding at end of year 10,565,000 5.38 4,626,000 4.07
========== =========
Total options exercisable at end of year 5,392,675 5.05 2,000,000 4.06
========== =========
Weighted average fair value of options granted
during the year $6.38 $4.07
</TABLE>
F-19
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of options outstanding and options exercisable under the Company's
various stock option plans at December 31, 1997 and 1996 is presented below (no
options were issued or outstanding during 1995):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISABLE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.97-3.66 140,000 8.3 years $3.61 60,669 $3.55
4.06 4,400,000 8.3 years 4.07 3,200,000 4.07
5.00-6.50 5,715,000 9.6 years 6.33 1,828,672 6.48
7.13-8.50 310,000 9.2 years 7.17 303,334 7.15
---------- ---------
2.97-8.50 10,565,000 9.0 years $5.38 5,392,675 $5.05
========== =========
</TABLE>
The Company accounts for its stock option plans as they relate to employees and
directors under Accounting Principles Board Opinion No. 25, and therefore, no
compensation expense has been recognized in the accompanying consolidated
statements of operations. Had compensation expense for these options been
determined in accordance with the method prescribed by Statement of Financial
Standards No. 123, "Accounting for Stock Based Compensation", the Company's net
loss per common share would have been increased to the pro forma amounts
indicated below for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Net loss attributable to common stockholders:
As reported $25,175,939 $ 7,829,508 $6,315,349
Pro forma 48,870,670 20,289,706 6,486,254
Basic and diluted net loss per common share:
As reported $ (0.59) $ (0.21) $ (0.30)
Pro forma (1.15) (0.55) (0.30)
</TABLE>
The fair value of options and warrants is estimated on the date granted using
the Black-Scholes pricing model with the following weighted-average assumptions
used for grants during 1997, 1996 and 1995:
Risk-free interest rate of 5.6 percent, 6.5 percent and 6.0 percent for 1997,
1996 and 1995, respectively; expected dividend yield of 0 percent for 1997, 1996
and 1995; expected exercise lives of 5 years, 10 years and 3 years for 1997,
1996 and 1995, respectively; expected volatility of 75 percent, 103 percent and
205 percent for 1997, 1996 and 1995, respectively. The estimated fair value of
options granted is subject to the assumptions made, and if the assumptions were
to change the estimated fair value amounts could be significantly different.
The pro forma net loss attributable to common stockholders for 1996 of
$20,289,706 has been adjusted from the amount reported in the prior year to
reflect a change in the Company's assumptions used to compute the estimated fair
value of the options.
F-20
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS - A summary of warrants granted by the Company during the years ended
December 31, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- ------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total outstanding at beginning of year 450,000 $1.50 410,000 $0.93 155,000 $0.50
Granted 975,000 6.92 100,000 3.24 4,505,000 0.51
Exercised (250,000) 1.40 (60,000) 0.50 (4,250,000) 0.47
--------- ------- ----------
Total outstanding at end of year 1,175,000 6.39 450,000 1.63 410,000 0.93
========= ======= ==========
Total exercisable at end of year 1,175,000 6.39 450,000 1.63 410,000 0.93
========= ======= ==========
</TABLE>
VOTING TRUST - As of December 31, 1997, 25,657,749 shares of the Company's
outstanding common stock were deposited in a voting trust (the "Voting Trust")
as to which the President and Chief Operating Officer of the Company is the sole
trustee. Persons who have deposited their shares of the Company's common stock
into the Voting Trust have dividend and liquidation rights in proportion to the
number of shares of the Company's common stock they have deposited in the Voting
Trust, but have no voting rights with respect to such shares. All voting rights
associated with the shares deposited into the Voting Trust are exercisable
solely and exclusively by the trustee of the Voting Trust. The Voting Trust
expires, unless extended according to its terms, on the earlier of September 30,
1999 or any of the following events: (i) the trustee terminates it; (ii) the
participating stockholders unanimously terminate it; or (iii) the Company is
dissolved or liquidated.
8. RELATED-PARTY TRANSACTIONS
Studdert Companies Corp.
Studdert Companies Corp. ("SCC") is a Utah corporation that provides investment
and management services. The officers, directors and owners of SCC are
directors and executive officers of the Company and each of whom beneficially
owns more than ten percent of the Company's issued and outstanding Common Stock.
Between June 1994, when the Company commenced its present business of developing
its ASRT, and April 30, 1996, the Company did not pay or award any compensation
in any form directly to the Company's executive officers. Rather, in June 1994,
the Company entered into an Independent Consulting Agreement (the "SCC
Agreement") with SCC pursuant to which SCC rendered certain management and
financial services to the Company.
Pursuant to the SCC Agreement, between January and July 1995, SCC invoiced the
Company for services rendered. By July 1995, the Company owed SCC approximately
$1,417,000 pursuant to the terms of the SCC Agreement. On July 31, 1995, the
Company issued warrants to purchase up to 3,700,000 shares of the Company's
common stock to SCC. The purchase price of the warrants was $.033 per share of
common stock, or an aggregate of $122,100. On August 11, 1995, SCC exercised
the warrants at an exercise price of $.35 per share. Both the $122,100 purchase
price and the $1,295,000 aggregate exercise price for the warrants were
satisfied by the cancellation of amounts invoiced to the Company by SCC pursuant
to the SCC Agreement during the fiscal year ended December 31, 1994 and the
period between January 1, 1995 and August 11, 1995. Such cancellation was
accomplished on a dollar-for-dollar basis.
Between August 1995 and October 1995, SCC continued to invoice the Company for
its $50,000 monthly management fee. On October 23, 1995, the Company entered
into an investment agreement (the "Beesmark Agreement") with Beesmark. In
connection with the Company's execution of the Beesmark Agreement, SCC and the
Company collaterally
F-21
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreed that any then accrued but unpaid balance due to SCC for management
services rendered under the SCC Agreement would be placed on "conditional
status" and deferred until the Company successfully completed certain
developmental milestones set forth in the Beesmark Agreement, at which time such
amounts would be due and payable in full. With respect to management services to
be rendered by SCC after the closing of the Beesmark Agreement, SCC agreed that
the Company would pay only $30,000 of the monthly invoiced $50,000, the balance
to be placed on conditional status. Thus, of the total $600,000 invoiced to the
Company by SCC during the year ended December 31, 1995, the Company paid SCC
$90,000 in cash; $257,000 of accrued but unpaid amounts were placed on
conditional status under the Beesmark Agreement; and $253,000 was canceled in
partial payment of the exercise price of the SCC Warrants. In addition to the
amounts invoiced by SCC for management fees during the 1995 fiscal year, the
Company also reimbursed SCC for actual expenses incurred in the amount of
$337,405. Thus, at December 31, 1995, the Company owed SCC $257,000 in
management fees, all of which was on conditional status under the terms of the
Beesmark Agreement and was payable to SCC only in the event that the Company
achieved the developmental milestones set forth in the Beesmark Agreement. At
December 31, 1995, the Company also owed SCC $3,825 for expenses incurred.
Additionally, during the year ended December 31, 1995, SCC charged a total of
$70,915 in capital raising fees to the Company. Of that amount, $49,576 was
written off by SCC in connection with the Beesmark Agreement, and $21,339 was
paid to SCC.
Between January 1, 1996 and April 30, 1996, SCC invoiced the Company for
services under the SCC Agreement in the amount of $200,000. Of that amount,
$80,000 was placed on conditional status pursuant to the Beesmark Agreement and
$120,000 was paid to SCC. On April 30, 1996, the disinterested members of the
Company's board of directors authorized the Company to enter into an agreement
with SCC modifying the SCC Agreement effective May 1, 1996. Under the SCC
Agreement, as modified, SCC no longer invoices the Company for management
services, but continues to invoice the Company for reimbursement of actual
expenses incurred on the Company's behalf. SCC and the Company agreed that any
amounts invoiced under the SCC Agreement but placed on conditional status
pursuant to the Beesmark Agreement would remain outstanding obligations of the
Company payable only if the Company achieved the milestones specified in the
Beesmark Agreement. The Company further agreed to pay any then accrued but
unpaid amounts invoiced under the SCC Agreement, including amounts owed and
carried over from the year ended December 31, 1995, which amounts totaled
$5,862, as well as outstanding amounts for expenses incurred. In September
1996, Beesmark made the last of the funding payments provided for under the
terms of the Beesmark Agreement. On February 10, 1997, the Company paid to SCC
the entire balance due to SCC for accrued management fees in the amount of
$337,000. Thus, during the year ended December 31, 1996, the Company paid to
SCC a total of $120,000 for management fees and SCC was reimbursed for actual
expenses incurred on the Company's behalf in the amount of $740,052. During
1996, the Company made no payments to SCC for capital raising activities. The
Company and SCC have agreed to extend the SCC Agreement, at least insofar as the
Company has agreed to reimburse SCC for actual expenses incurred on behalf of
the Company, until December 1998.
The Company paid no compensation in any form directly to any of its executive
officers during fiscal 1995 and until April 1, 1996. However, as the principals
of SCC, during such periods, the Company's executive officers received a portion
of the amounts paid by the Company to SCC under the SCC Agreement.
Related-party transactions with SCC not otherwise disclosed herein for the
years ended December 31, 1997, 1996 and 1995 were as follows:
F-22
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---------- --------
<S> <C> <C> <C>
Expenses:
Management fees $ - $ 200,000 $600,000
Interest - - 8,881
Rent 77,203 52,000 24,000
Liabilities:
Accounts payable - 411,743 -
Accrued liabilities 459,502 1,350,000 -
</TABLE>
The Company rents office space under a month-to-month lease from SCC and the
lease from SCC is guaranteed by the officers, owners and directors of SCC. The
Company believes the terms of the related-party lease are at least as favorable
as the terms that could have been obtained from an unaffiliated third party in a
similar transaction.
Cancellation of Debt By SCC and A Director and Executive Officer
In connection with the Beesmark Agreement, SCC and the Company entered into a
collateral agreement whereby SCC agreed that it would cancel principal debt of
$135,368 and accrued interest of $19,298 owed by the Company to SCC in
connection with a promissory note executed by PTI and assumed by the Company at
the time of the merger of PTI with and into a subsidiary of the Company. In
another collateral agreement, the Company and a director and executive officer
of the Company, agreed that the Company would cancel principal debt of $286,493
and accrued interest of $65,715 due to the director and executive officer under
a promissory note initially made by PTI and assumed by the Company at the time
of the merger of PTI with and into a subsidiary of the Company.
Beesmark Investments, L.C.
On October 23, 1995, the Company, Beesmark and a director entered into the
Beesmark Agreement. The director did not occupy such position when the Beesmark
Agreement was negotiated and executed. The director also is a co-manager of and
has an indirect pecuniary interest in a portion of Beesmark's assets. Pursuant
to the Beesmark Agreement, Beesmark agreed to provide a total of $6,050,000 of
funding to the Company over a period of approximately 11 months, provided that
during that time the Company was able to timely meet, to Beesmark's
satisfaction, specified developmental milestones. In return for the funding
provided to Beesmark, the Company agreed to issue 11,562,500 shares of common
stock at a price of $.48 per share and a $500,000 Series A Convertible
Subordinated Debenture that is convertible into either 166,667 shares of Series
A Preferred Stock or 166,667 shares of the Company's common stock. During the
year ended December 31, 1996, Beesmark paid all installments payable by Beesmark
under the Beesmark Agreement, and the Company issued, in the increments
specified, all of the securities issuable to Beesmark under the Beesmark
Agreement.
K.L.S. Enviro Resources, Inc. and SMD, L.L.C.
Between May 1996 and August 1996, as part of the Company's short-term cash
management policy, the Company entered into a series of loan transactions with
KLSE, an entity which then was unaffiliated with the Company. The Company was
introduced to KLSE by an unaffiliated third party. As of August 12, 1996, the
Company had loaned to KLSE a total of $1,900,000, which loans were due upon
demand, bore interest at the rate of 12% per annum, required the payment of
certain loan origination fees, and were secured by substantially all of the
assets of KLSE, except its real property. The first of the loans from the
Company in the amount of $710,000 was made on May 16, 1996 and the last advance
prior to August 12, 1996, in the amount of $590,000, was made on July 16, 1996.
Pursuant to the terms of the promissory note representing the $710,000 advanced
by the Company to KLSE in May 1996, all or part of the balance due under that
note was convertible at the option of the holder of the note to 2,366,667 shares
of the restricted common
F-23
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock of KLSE at the rate of $.30 per share. Similarly, the remaining $1,190,000
owed to the Company, represented by four separate promissory notes, was
convertible into a total of 2,975,000 shares of KLSE restricted Common Stock at
the rate of $.40 per share. KLSE also entered into a registration rights
agreement with the Company. In connection with that course of financing, a
director and executive officer of the Company assumed a position on KLSE's board
of directors, effective July 10, 1996.
On September 30, 1996, SMD, L.L.C., a company owned by directors and officers of
the Company, advanced debt financing (the "SMD Loan") to KLSE in the amount of
$1,673,730. The SMD Loan was due on demand, bore interest at the rate of 12%
per annum and was secured by the assets of KLSE, except its real property. The
proceeds of the SMD Loan enabled KLSE to pay the Company $1,673,700 in
satisfaction of all then-outstanding balances due the Company except a balance
of $272,156 due and owing under the first promissory note from KLSE to the
Company in the amount of $710,000. In return for the provision of the SMD Loan
to KLSE, SMD acquired warrants to purchase 6,600,000 shares of KLSE restricted
Common Stock at the exercise price of $.40 per share. Such warrants have never
been exercised and no gain has been realized thereon by SMD.
Based upon certain changed circumstances at KLSE, on October 29, 1996, the
Company made an additional loan of $200,000 to KLSE. That additional advance
was repaid in full, with accrued interest, by KLSE on December 24, 1996. Also,
on December 31, 1996 the Company sold for cash and assigned $270,000 of the
balance due under the $710,000 promissory note to Ballard Investment Company, a
Utah limited partnership unaffiliated with the Company. Also, on December 31,
1996, KLSE paid the Company the balance of approximately $10,500 due and owing
under the $710,000 promissory note. Thus, as of December 31, 1996, KLSE was not
indebted to the Company in any amount nor did the Company have any beneficial
interest in KLSE.
SMD
From September 4, 1997, through October 15, 1997 and again on December 31, 1997,
the Company borrowed funds from SMD pursuant to a revolving, unsecured
promissory note, bearing interest at the rate of 12% per annum. The aggregate
of all amounts loaned under the note was $2,000,000 and the highest outstanding
balance at any one time was $1,550,000. All amounts have been repaid, together
with $5,542.14 in interest. The loan and its terms were approved by the
independent members of the board of directors of the Company.
On March 19, 1998, the Company granted an aggregate of 450,000 stock options to
the three executive officers who also own SMD. These options have a ten-year
life and an exercise price of $5.16 per share.
Synergetics
A director and the chief operating officer of the Company, is also one of seven
directors of Synergetics. In addition, three executive officers and directors
of the Company own shares of the common stock of Synergetics, although such
share ownership in the aggregate constitutes less than 5% of the total shares of
Synergetics common stock issued and outstanding (see Note 9).
VIA
A director and executive officer of the Company is also the founder and
president of Voice Information Associates, Inc. ("VIA"), a consulting group
providing strategic technical, market evaluation, product development and
corporate information to the speech recognition industry. During 1997, the
Company paid approximately $110,000 in consulting fees to VIA for services
provided to the Company.
Other Transactions
During 1996, 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 1995 exercise of 3,700,000 warrants by a
company owned by the officers. The total amount authorized to be reimbursed was
$1,150,000 in 1997 and $1,350,000 in 1996. As of December 31, 1997, the Company
had paid $2,159,484 of the authorized reimbursements. The balance of the
liability is included in accrued expenses-related party in the accompanying 1997
consolidated balance sheet.
9. RESEARCH AND DEVELOPMENT
In October 1993, the Company entered into an agreement with Synergetics,
Inc.(the "Synergetics Agreement"), a research and development entity, whereby
Synergetics was to develop certain technologies related to the Company's
F-24
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 percent 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 was 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 percent of gross revenues from sales of its ASRT (the "Royalty").
As of December 31, 1997, the Company had not yet licensed or sold its
technologies, and consequently, had not made any royalty payments. Under the
terms of the Synergetics Agreement, the Company paid to Synergetics $2,819,427,
$4,758,012, and $2,704,165 in 1997, 1996 and 1995, respectively, for research
and development efforts.
Until March 1997, Synergetics had compensated its engineers, employees, members
of its development team, and other financial backers (collectively, the
"Developers"), 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 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 signed a Memorandum of
Understanding (the "MOU") which manifested their agreement in principle that the
Royalty should be canceled in exchange for the offering and issuance by the
Company of warrants to purchase up to 4,800,000 shares of the Company's common
stock. Certain of the employees and independent contractors then engaged by
Synergetics became full-time employees or independent contractors of the
Company. The majority shareholder and president of Synergetics, became a full-
time consultant to the Company. Commencing on March 14, 1997, the Company has
been conducting research and development of the ASRT at its own research
facility staffed by its own employees, including some Developers who have been
employees of the Company since March 14, 1997.
On April 6, 1998, the Company and Synergetics entered into the Royalty
Modification Agreement, which provides for the Company to make an offer of
exchange of the Company's warrants to purchase common stock with a $10 per share
exercise price for the project shares at a rate of one warrant to purchase 800
common shares for each project share. The warrants are not exercisable until
the earlier of (1) the date the Company's common stock is trading for a period
of 15 consecutive trading days at a minimum of $37.50 per share or (2)
September 30, 2000. The offer of the warrants cannot be made by the Company
until a registration statement covering the total number of warrants issuable
upon the exercise of the warrants has been declared effective by the U.S.
Securities and Exchange Commission. Upon the tender to the Company of any
Project Shares the related Royalty commitment will be canceled.
10. INCOME TAXES
At December 31, 1997 and 1996, net deferred income tax assets, before
considering the valuation allowance, totaled $15,746,597 and $7,830,697,
respectively. The amount of and ultimate realization of the benefits from the
deferred income tax assets is dependent, in part, upon the tax laws in effect,
the Company's future earnings, and other future events, the effects of which
cannot be determined. The Company has established a valuation allowance for all
deferred income tax assets not offset by deferred income tax liabilities due to
the uncertainty of their realization. Accordingly, there is no provision for
income taxes in the accompanying consolidated statements of operations. The net
change in the valuation allowance was an increase of $7,844,007 for the year
ended December 31, 1997.
F-25
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has available at December 31, 1997, unused federal net operating
loss carryforwards of approximately $ 41,227,000 and unused state net operating
loss carryforwards of approximately $41,606,000, which may be applied against
future taxable income, if any, and which expire in various years from 2008
through 2012. The Internal Revenue Code contains provisions which could reduce
or limit the availability and utilization of these net operating loss
carryforwards. For example, limitations are imposed on the utilization of net
operating loss carryforwards if certain ownership changes have taken place or
will take place.
The temporary differences and carryforwards which give rise to the deferred
income tax assets (liabilities) as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
DEFERRED INCOME TAX ASSETS:
Net operating loss carryforwards
Federal $ 14,030,670 $ 5,737,199
State 1,312,988 884,388
Research and development credits 275,927 551,980
Payables to cash-basis related parties - 153,580
Accrued bonus liabilities 127,012 503,550
------------ -----------
Total deferred income tax assets before valuation allowance 15,746,597 7,830,697
Valuation allowance (15,646,783) (7,802,776)
------------ -----------
Net deferred income tax assets 99,814 27,921
------------ -----------
DEFERRED INCOME TAX LIABILITIES:
Depreciation (99,514) (27,621)
Intangibles (300) (300)
------------ -----------
Total deferred income tax liabilities (99,814) (27,921)
------------ -----------
$ - $ -
============ ===========
</TABLE>
A reconciliation of income taxes at the federal statutory rate to the Company's
effective rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State and local income tax rate,
net of federal benefit 3.3 3.3 3.3
Valuation allowance (37.3) (37.3) (37.3)
----- ----- -----
Effective income tax rate -% -% -%
===== ===== =====
</TABLE>
F-26
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS - On November 1, 1996, the Company entered into employment
contracts with three executive officers which expire on December 31, 2001. The
minimum salary payments required on these contracts are as follows:
Years ending December 31,
-------------------------
1998 $1,024,750
1999 1,337,500
2000 1,750,000
2001 1,875,250
----------
Total $5,987,500
==========
Additionally, each executive officer is entitled to annual performance-based
incentive compensation payable on or before December 31 of each calendar year
during the contract term. During the first three years of the contract term,
the performance-based incentive compensation is determined in relation to the
market price of the Company's common stock, adjusted for stock dividends and
splits. If the price of the Company's common stock maintains an average price
equal to or greater than the level set forth below over a period of any three
consecutive months during the calendar year, the performance-based incentive
compensation will be paid in the corresponding percentage amount of annual base
salary for each year as follows:
Quarterly Average Stock Price Percentage Bonus
----------------------------- ----------------
$10.00 30%
$12.50 35%
$15.00 40%
$20.00 45%
$25.00+ 50%
In the event that, during the contract term, both a change of control occurs,
and within six months after such change in control occurs, the executive's
employment is terminated by the Company for any reason other than cause, death,
or retirement, the executive shall be entitled to receive an amount in cash
equal to all base salary then and thereafter payable within thirty days of
termination.
LITIGATION - The Company is involved in various lawsuits, claims and actions
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters will
not materially affect the consolidated financial position or results of
operations of the Company (see Note 13).
F-27
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING LEASE AGREEMENT - In October 1996, the Company entered into a long-
term non-cancelable operating lease agreement for its research facility with an
unrelated party. Future aggregate minimum obligations under this operating
lease are as follows:
Years ending December 31,
-------------------------
1998 $ 340,672
1999 340,672
2000 340,672
2001 340,672
2002 340,672
Thereafter 617,877
----------
Total $2,321,237
==========
The Company incurred rental expense of $416,798 and $103,139 during 1997 and
1996, respectively, related to this lease.
CAPITAL LEASE OBLIGATION - Future minimum lease payments for equipment held
under a capital lease arrangement as of December 31, 1997 are as follows:
Years ending December 31,
-------------------------
1998 $ 61,374
1999 56,260
--------
Total future minimum lease payments 117,634
Less amount representing interest (16,084)
--------
Present value of future minimum lease payments 101,550
Less current portion (49,325)
--------
$ 52,225
========
Total assets held under the capital lease arrangement were $150,208 with
accumulated depreciation of $29,067 as of December 31, 1997.
12. EMPLOYEE PROFIT SHARING PLAN
The Company has a 401 (k) profit sharing plan covering essentially all of its
full-time employees. Under the plan, employees may reduce their salaries, in
amounts allowed by law, and contribute the salary reduction amount to the plan
on a pretax basis. The plan also allows the Company to make matching and profit
sharing contributions as determined by the board of directors. To date, no
matching or profit sharing contributions have been made by the Company.
13. SUBSEQUENT EVENTS
EMPLOYMENT AGREEMENTS - In January 1998, the Company entered into employment
contracts with two executives which expire in January 2001. The minimum annual
salary payments required by these contracts total $405,000. In connection with
these agreements, these individuals were granted options to purchase 355,000
shares of the Company's
F-28
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock at $3.34 per share. These options have a ten-year life and 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. One-third of the
options are vested on the date of grant. In the event that, during the contract
term, both a change of control occurs, and within six months after such change
in control occurs, the executive's employment is terminated by the Company for
any reason other than cause, death or retirement, the executive shall be
entitled to receive an amount in cash equal to all base salary then and
thereafter payable within thirty days of termination.
SIEMENS STATEMENT OF WORK - On February 11, 1998, the Company entered into its
first Statement of Work agreement with Siemens Semiconductor Group of Siemens
Aktiengesellschaft ("Siemens") pursuant to which the Company and Siemens will
jointly pursue the development of Siemens integrated circuits incorporating the
Company's technologies for use in certain telecommunications applications. The
Company has received $2,691,066 from Siemens. Of this amount: (1) $1,291,712
was paid to the Company as a non-refundable payment to license certain
automatic speech recognition technologies for which the Company has no further
obligation; (2) $322,928 was paid to purchase warrants to acquire 1,000,000
shares of fonix restricted common stock at an average exercise price of $20 per
share with expiration dates ranging from December 31, 1998 to December 31, 1999;
and (3) $1,076,426 was paid to the Company to acquire shares of the Company's
restricted common stock (the "Shares") at any time prior to March 12, 1998. The
exercise period was subsequently extended to April 30, 1998. If Siemens elects
not to acquire all or a part of the Shares on or prior to April 30, 1998, the
$1,076,426 or any portion thereof not used to purchase all or a portion of the
Shares will be a nonrefundable royalty payment. The purchase price of the
Shares shall be the closing price of the stock on the day preceding the day on
which Siemens notifies the Company of its election to purchase the Shares.
ISSUANCE OF STOCK - On March 11, 1998, the Company completed a private placement
(the "Offering") of 6,666,666 shares of its restricted common stock to seven
separate investment funds. The total purchase price to be paid by the investors
pursuant to the Offering is $30,000,000. Of that amount, $15,000,000 was
received by the Company on March 12, 1998, in return for which the Company
issued a total of 3,333,333 shares of restricted stock. Finders' fees in the
amount of $850,000 were paid in connection with the $15,000,000 received. The
remainder of the purchase price is to be paid by the investors 60 days after the
effectiveness of a registration statement that the Company will prepare and file
with the Securities and Exchange Commission covering all of the restricted
common stock to be issued in connection with the Offering, provided that, as of
such date, certain conditions are satisfied. Specifically, such conditions
include the following: (i) the registration statement covering all of the common
stock to be issued is effective as of such date, (ii) the representation and
warranties of the Company as set forth in the documents underlying the Offering
shall be correct in all material respects, (iii) the market price of the
Company's common stock shall exceed $4.50 per share, (iv) the dollar volume of
trading in the Company's common stock for the 10-trading day period preceding
such date shall equal or exceed $1,000,000, (v) there shall be at least 18
market makers for the Company's common stock, and (vi) there shall be no
material adverse change in the Company's business or financial condition.
Additionally, the investors in the Offering will have certain "reset" rights
pursuant to which the investors will receive additional shares of restricted
common stock if the average market price of the Company's common stock for the
60-day periods following the initial closing date and the second funding date
does not equal or exceed $5.40 per share. The number of additional shares that
will be issued pursuant to such reset provisions will be determined by dividing
(x), the product of (A) the amount by which such 60-day average price is less
than $5.40 and (B) the number of shares of common stock issued to the investor
by, (y) the 60-day average price. The investors in the Offering also have
certain first rights of refusal and other rights if the Company conducts other
offerings in the near future with other investors and the terms of such other
offerings are more advantageous to such other investors than the terms of the
Offering.
LITIGATION - On March 11, 1998, an action (the "J&L Action") was filed against
the Company in the Supreme Court of the State of New York for the County of New
York by Jesup & Lamont Securities Corporation. The J&L Action alleges that the
Company is obligated to pay a fee in excess of $1,200,000 plus 30,000 shares of
the Company's restricted common stock in connection with the Offering. The
Company has not yet filed an answer or other pleading in response
F-29
<PAGE>
FONIX/(TM)/ CORPORATION
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to the claims set forth in the J&L Action. Management and legal counsel of the
Company believe that the J&L Action is without merit, and the Company intends to
vigorously defend the action. There can be no assurance that the Company will
prevail in the J&L Action, or that the pendency of the lawsuit will not
adversely affect the Company's operations. As the outcome of this matter cannot
be reasonable determined, the Company has not accrued any potential losses.
ACQUISITION - The Company created a wholly owned subsidiary for the purpose of
acquiring AcuVoice, Inc., a California corporation, in March 1998, which changed
its name to AcuVoice, Inc. subsequent to the acquisition. AcuVoice, Inc.
develops and markets text-to-speech or speech synthesis technologies and
products directly to end-users, systems integrators and original equipment
manufacturers for use in the telecommunications, multi-media, education and
assistive technology markets. On March 13, 1998, the Company acquired 100
percent of the outstanding common stock of AcuVoice, Inc. for the issuance of
2,692,218 shares the Company's restricted common stock (having a market value of
$16,995,972 on that date)and a cash payment of approximately $8,000,000. This
acquisition will be accounted for as a purchase.
ISSUANCE OF STOCK OPTIONS - On March 19, 1998, the Company granted an aggregate
of 450,000 stock options to three individuals who are executive officers and
directors of the Company and who each beneficially own more than 10 percent of
the Company's common stock. These options have a ten-year life and an exercise
price of $5.16 per share.
F-30
<PAGE>
RESTATED MASTER AGREEMENT FOR JOINT COLLABORATION
This Restated Master Agreement for Joint Collaboration (hereinafter
"Agreement") made and entered into as of its Effective Date as defined below, by
and between Siemens Aktiengesellschaft (hereinafter referred to as "Siemens" or
"Party"), of Berlin and Munchen Federal Republic of Germany, and fonix
corporation (hereinafter "fonix" or "Party"), of Salt Lake City, Utah, U.S.A.
Siemens and fonix are collectively referred to herein as "Parties".
BACKGROUND AND PURPOSE OF THE AGREEMENT
A. fonix is engaged in the business of developing next generation human
computer interface technologies and systems. Specifically, fonix has developed
and is developing certain technologies, including: automatic speech recognition
("ASR") technology for enabling human speech to be used with computers and
computer-aided machines to command, control and transmit information based on
user independent, natural language recognition at continuous speaking rates and
in various languages; compression technology for reducing the number of
parameters required to represent speech, data, graphics and/or video in digital
format; synthesis technology used in creating human quality speech from text;
verification technology used in the recognition of an individual's unique
patterns of speech (e.g., voice print); and neural network technology used in
artificial intelligence processing of data. fonix is the owner of certain
intellectual property rights relating to the foregoing technologies, and is
desirous of licensing and/or otherwise making its technology available for use
by other companies that are well positioned in the marketplace to use the fonix
technologies in new or improved products.
B. Siemens' semiconductor group is interested in evaluating the possibility
of incorporating certain off the fonix technologies into its manufacturing and
design technology so as to enable Siemens to develop new integrated circuits for
communications products and applications.
C. Under the terms of a Non-Disclosure and Restricted Use Agreement (a copy
of which is attached at Exhibit A, and hereinafter referred to as the Non-
Disclosure Agreement") previously entered between them, the Parties have
heretofore engaged in confidential discussions relating to the fonix
technologies. As a result of those discussions, the Parties have determined that
they have a mutual interest in collaborating on various research and development
projects with the aim of developing such new integrated circuits, and to that
end they desire to establish a strategic alliance with one another in accordance
with the terms and conditions of this Agreement.
THEREFORE, the Parties hereby enter into the following terms and conditions
of this Agreement:
SECTION 1: DEFINITIONS
1.1 Object Code shall mean machine-readable instructions for execution on
any computer processor.
<PAGE>
1.2 Source Code shall mean human-readable programming instructions for use
in preparing any Object Code.
1.3 Program Code shall mean computer programming code, and shall include
both Object Code and Source Code.
1.4 Program Documentation shall mean instruction manuals and any other
written materials that relate to the explanation, use or development of any
Program Code, including by way of example and not limitation, logic manuals,
flow charts, drawings or diagrams.
1.5 Software shall mean Program Code and any Program Documentation.
1.6 Hardware shall mean any electronic circuit, computer processor,
electronic system or computer equipment of any nature or kind that runs or
operates in conjunction with Program Code.
1.7 Hardware Documentation shall mean instruction manuals and any other
written materials that relate to the operation, explanation, use, assembly,
maintenance or development of any Hardware, including by way of example and not
limitation, written manuals, circuit diagrams, logic diagrams, flow charts or
drawings.
1.8 Core Technology shall mean: automatic speech recognition ("ASR"))
technology for enabling human speech to be used to command, control and transmit
information based on user independent, natural language recognition at
continuous speaking rates and in various languages; compression technology for
reducing the number of parameters required to represent speech, data, graphics
and/or video in digital format; synthesis technology used in creating human
quality speech from text; verification technology used in the recognition of an
individual' s unique patterns of speech (e.g., voice print); and neural network
technology used in artificial intelligence processing of data.
1.9 Technology shall mean the Core Technology and any technical information
or data of any kind relating to the Core Technology, including but not limited
to Software, Hardware and/or Hardware Documentation.
1.10 Invention shall mean any idea, improvement or discovery relating to
the Technology, whether or not patentable, that is conceived or reduced to
practice by any Party, its employees, consultants or agents pursuant to the
terms of any respective Statement of Work entered under this Agreement.
1.11 Patents shall mean any patent or patent application that contains any
claim covering all or any part of any Technology or any Invention.
1.12 Intellectual Property or Intellectual Property Rights shall mean any
Patent, copyright, application for copyright registration or trade secret that
covers all or any part of any Technology or any Invention.
<PAGE>
1.13 Background Technology shall mean any Technology that, prior to the
date of this Agreement, is owned by a Party, as evidenced by written
documentation or other tangible things in existence prior to the date of this
Agreement, or that is licensed by a Party under any Intellectual Property Rights
of a third party prior to the date of this Agreement, provided such license
rights do not require that Party to pay any remuneration in order to disclose,
use or sublicense such rights.
1.14 Foreground Technology shall mean any Technology which, during the term
of this Agreement, is acquired by a Party, either by way of ownership or by way
of rights licensed from a third party, provided such license rights do not
require that Party to pay any remuneration in order to disclose, use or
sublicense such rights, and which does not result from the performance by that
Party of any respective Statement of Work entered under this Agreement.
1.15 Subsidiary shall mean any company of which Siemens owns, directly or
indirectly, more than fifty percent (50%) of such company's voting capital.
1.16 Subsidiary shall mean any company of which fonix owns, directly or
indirectly, more than fifty percent (50%) of such company's voting capital, and
as used in this Agreement, reference to "fonix" shall include such subsidiaries.
SECTION 2: RESEARCH AND DEVELOPMENT EFFORTS OF THE PARTIES
2.1 The Parties shall in good faith negotiate the terms of one or more
Statements of Work and a corresponding Master Plan as soon as reasonably
possible following entry of this Agreement. The Master Plan shall be in writing
and shall identify each Statement of Work in progress as well as those to be
begun during the coming calendar year and shall be updated at the beginning of
each calendar year. Each Statement of Work shall include a written instrument
signed and dated by duly authorized representatives of both Parties, shall be
clearly identified as such, and shall contain at least the following
information:
a. a statement of the intended commercial application and commercial
product or products which are the objective of the research and development
to be undertaken;
b. a detailed written description and/or functional specification of
the work to be performed for a given research project that is to be
undertaken, including a description of the work to be performed by each
Party, and benchmarks defining each stage, if any, of the work to be
completed;
c. a time schedule by which the work to be performed is contemplated
to be completed, including time for completion of the benchmarks for each
stage of the work if any;
<PAGE>
d. performance criteria, if any, for determining completion of each
stage of the work;
e. the name, address and telephone number of a technical coordinator
for each Party;
f. detailing the time and manner by which progress reports shall be
provided either orally or in writing by the technical coordinator of each
Party to the other;
g. provisions defining the respective rights of the Parties in
Inventions developed during performance of the work done by the Parties,
the manner by which each Party may acquire Patents for such Inventions, and
provisions defining preferred rights, if any, granted by each Party to the
other to acquire rights of exclusivity under any Invention, Intellectual
Property or Background Technology owned by the other and relating to the
commercial products developed under the Statement of Work; and
h. any other terms and conditions as mutually agreeable between the
Parties.
2.2 The Parties agree to reasonably cooperate with one another to disclose
in good faith to each other, as far as legally possible and without payment to a
third party, and provided that such disclosure is determined by the Party making
the disclosure to be reasonably necessary to the other Party's performance under
any Statement of Work, any Background Technology, any Foreground Technology, or
any Inventions in their custody or control. Disclosure will be effected without
charges to the other Party, and may be submitted in writing or orally. All such
disclosures will be made and will be used by the receiving Party only for the
purpose of performing the development work under any Statement of Work. No
license will be granted under any such disclosed Background Technology,
Foreground Technology or Inventions unless otherwise explicitly provided for in
any Statement of Work.
2.3 The Parties shall endeavor in good faith to perform in accordance with
the specific terms of each Statement of Work, and each shall make a faithful
effort to arrive at a successful completion thereof The technical coordinators
of each Party designated for a particular Statement of Work shall administer the
technical and performance matters, including but not limited to, transmission,
receipt and dissemination of technical and/or Confidential Information between
the Parties, reporting as provided in the Statement of Work, coordinating and
arranging for site visits by the technical and scientific personnel of the
Parties to the facilities of one another, and any other matters reasonably
required in carrying out the respective duties of the Parties under the
applicable Statement of Work.
2.4 Changes in any Statement of Work shall become effective only when a
written change request is executed by authorized representatives of both
Parties.
2.5 Each Party agrees to promptly notify the other of any factor,
occurrence, or event of which it becomes aware that may or is believed to affect
that Party's ability to timely meet any of its performance obligations under any
Statement of Work then in effect, or that is likely or is believed to occasion
any material delay in completing such Statement of Work. The Parties shall
<PAGE>
<PAGE>
then review the situation and mutually agree on changes with respect to the
further conduct and performance of the development work under the relevant
Statement of Work.
2.6 When required under any Statement of Work or other provision of this
Agreement, each Party shall submit invoices for payment of work or materials in
accordance with the following:
a. invoices shall be net thirty (30) days, shall be addressed to the
technical coordinator of the other Party, and shaft be submitted no more
frequently than monthly for charges due or accruing in each calendar month;
and
b. each Party shall maintain complete and accurate records in
accordance with sound accounting practices to substantiate any invoices
submitted to the other.
2.7 Except as expressly provided in any Statement of Work or any provisions
of this Agreement, each Party shall bear all of its own expenses arising from
its performance under this Agreement or any Statement of Work, including without
limitation, expenses for facilities, work space, utilities, management, clerical
and reproduction services, supplies and the like.
2.8 A Party forwarding, without charge, to the other Party parts,
components, software and other articles for the purposes of the performance of
any Statement of Work shalt remain the proprietor of such articles. The
forwarding Party, furthermore, shall not be responsible for damages caused by
such articles and the Party receiving such articles shall hold the forwarding
Party harmless from any claims of third parties, including without limitation,
from claims of the receiving Party s employees.
2.9 Each Statement of Work shall be deemed to have been completed when
written notice to that effect is signed by the technical coordinators of both
Parties and sent to each Party.
SECTION 3: PAYMENTS BY SIEMENS AND GRANT OF STOCK AND OPTIONS BY FONIX
3.1 Upon execution of the first Statement of Work by the Parties. Siemens
shaft pay fonix 5,000,000.00 DM.
3.2 600,000.00 DM of the amount specified in paragraph 3.1 shall be
allocated to the purchase of certain warrants for the acquisition of shares of
fonix stock as set forth in Exhibit B hereto, which is incorporated herein by
reference. 2,400,000.00 DM of the specified amount shall be treated as a non-
refundable (except as provided in paragraph 7.5 of this Agreement), royalty.
The remaining 2,000,000.00 DM of the specified amount shall be allocated to the
purchase of fonix common stock, which may be purchased at any time within ninety
(90) days from the date of this Agreement. Such purchase shall be made by
Siemens by providing written notice to fonix and the purchase price shall be the
closing price, as quoted by NASDAQ and as reported by Reuters or Bloomberg News
Wire, for the day preceding the date on which such written notice was sent by
Siemens to fonix. Fonix common stock purchased by Siemens pursuant to this
subparagraph, will have the same registration rights, and will be registered at
the same time as Warrant Shares in accordance with paragraph 6 of Exhibit "B".
At the time of the execution of the first Statement of
<PAGE>
Work and License Agreement, the parties will agree to the form and the detailed
terms and conditions of the Common Stock Purchase Agreement and such other
documentation to be signed by the parties as required by applicable securities
and other laws. The form of Common Stock Purchase Agreement agreed to by the
parties will be attached to the first Statement of Work. In the event Siemens
fails to send such written notice to apply the 2,000,000.00 DM or any portion
thereof to the purchase of fonix common stock at least one (1) day prior to the
end of the ninety (90) day period, the 2,000,000.00 DM or unused portion thereof
shall automatically become part of the non-refundable royalty provided under
this paragraph.
SECTION 4: PROTECTION OF CONFIDENTIAL INFORMATION
4.1 Confidential Information shall mean any information or data relating to
the Technology of either Party, irrespective of the medium in which such
information or data is embodied. When in tangible form, such information or data
shall be clearly marked as "confidential" or with other similar legends by the
disclosing Party prior to disclosure. When disclosed orally or visually, prior
to disclosure the disclosing Party shall clearly notify the other Party as to
the confidential nature of the information or technology about to be orally or
visually disclosed. Confidential Information that is the subject of only oral or
visual disclosure shall be summarized in writing in a reasonably complete
manner, marked as set forth above, and sent to the receiving Party within thirty
(30) days after the disclosure; provided, however, that failure of the
disclosing Party to specifically describe in such written summary any
information designated as confidential in the manner provided herein, shall not
release the receiving Party from its duty of confidentiality with respect to
such information. Confidential Information shall include any copies, abstracts
or notes, as well as any documents or things from which such are prepared.
4.2 Each Party agrees to reasonably and in good faith protect the other
Party's Confidential Information. Without limiting the generality of this
obligation, each Party specifically agrees that the Confidential Information it
receives:
a. shall not be disclosed to others except its or its Subsidiaries
employees, agents or consultants who reasonably have a need to know such
Confidential Information to permit a Party to carry out its obligations
under any Statement of Work, provided that such employees, agents or
consultants are bound to confidentiality by employment agreements or
otherwise that are consistent with the duties of confidentiality imposed
under the terms of this Agreement;
b. shall be treated with the same degree of care to avoid disclosure
and unauthorized use as is used with respect to the receiving Party's own
confidential information; and
c. shall be deposited for safe keeping with the technical coordinator
of one or more Statements of Work of each receiving party, who shall be
responsible for
<PAGE>
maintaining accurate records of (i) all other persons to whom such
Confidential Information is disclosed for any corresponding Statement of
Work, and (ii) any copies or extracts that are made for use in connection
with any corresponding Statement of Work.
4.3 The obligations of paragraph 4.2 shall not apply to any information
which the receiving Party can demonstrate:
a. at any time and without any breach of any duty of confidentiality
owed to the disclosing Party, is known to the trade by way of written
publication or other public dissemination of such information so as to make
the information in question reasonably publicly accessible to members of
the relevant trade;
b. was in the receiving Party's possession prior to receipt from the
disclosing Party as proven by its written records;
c. is approved in advance for release from the obligations of
paragraph 4.2 by written agreement of the disclosing Party;
d. is required to be disclosed by law or under the rules of any
governmental organization, provided that the disclosing Party will be given
as much advance notice of any such disclosure that is believed to be
required under such law or by such governmental agency as is reasonably
possible, in order to permit the disclosing Party to have a reasonable
opportunity to contest any such required disclosure; or
e. is independently developed without reference to any Confidential
Information received from the disclosing Party, and is evidenced by written
records.
4.4 All Confidential Information shall upon request of the disclosing Party
either be returned to the disclosing Party or be destroyed by the receiving
Party after termination of this Agreement. Such request shall be made in writing
within ninety (90) days after termination of this Agreement. In case of
destruction, the receiving Party shall confirm in writing such destruction to
the disclosing Party.
4.5 Failure to comply with the provisions of this section 4 shall permit a
Party seeking to enforce any of the provisions of this section 4 to obtain
immediate injunctive relief in any court of competent jurisdiction without the
necessity of posting bond. Such injunctive relief shall be cumulative and not in
lieu of any other remedies at law or in equity available to the Party seeking
such enforcement.
4.6 In the event of termination of this Agreement for any reason, the
provisions of this Section 4 shall survive such termination for a period of
three (3) years.
SECTION 5: OWNERSHIP OF INTELLECTUAL PROPERTY
<PAGE>
5.1 No license or right of any kind is granted by either Party to the other
under the terms of this Agreement for Intellectual Property covering any
Background Technology or covering any Foreground Technology. Any such license or
right to any such Intellectual Property may only be acquired under the terms of
a separately negotiated agreement which is concluded as a part of a Statement of
Work.
5.2 Except as otherwise provided in any Statement of Work, Siemens shall
separately own any Invention that is conceived and reduced to practice solely by
Siemens' employees, consultants or agents. fonix shall separately own any
Invention that is conceived and reduced to practice solely by fonix' employees,
consultants or agents.
5.3 Inventions that are conceived and reduced to practice jointly by
employees, consultants or agents of both Parties, and in the event such
Inventions are patentable but cannot be made the subject of separate patent
applications, shall be owned by a Party only in accordance with the provisions
set forth in the applicable Statement of Work giving rise to such Inventions.
5.4 No license or right of any kind is granted by either Party to the other
under any of the terms of this Agreement for any Intellectual Property that is
owned or acquired by a Party pursuant to the terms of this Agreement. Any such
license or right to such Intellectual Property may only be acquired under the
terms of a separately negotiated agreement which is concluded either as a part
of a Statement of Work or as a result of the exercise of any preferred rights as
granted in any applicable Statement of Work.
5.5 Each Party shall have the right to acquire Patents for Inventions which
it owns by filing applications for patent in its own behalf and at its own
expense, at any time; provided, however, that prior to any such filing a Party
shall provide at least two (2) weeks written notice to the other of its
intention to file any such application. Patents for Inventions arising under
paragraph 5.3 shall only be obtained pursuant to terms set forth in the
applicable Statement of Work under which such Inventions are developed. Each
Party agrees to assist the other in its efforts to acquire any Patents for any
Inventions to which it is entitled pursuant to the provisions of this Agreement
or any applicable Statement of Work and each Party agrees to assist the other in
its efforts to perfect title to such Patents, including by way of example and
not limitation, rendering any assistance required or requested by the other
Party in the good faith exercise of its judgment in the preparation, filing and
prosecution of any applications for patent in any country, or in the signing of
any documentation required to perfect the other Party's title in any Patents.
Each Party agrees to fully reimburse the other for any expenses incurred by it
in carrying out its obligations under this paragraph 5.5.
5.6 In the event of termination of this Agreement for any reason, any
rights or obligations arising under any of the provisions of this Section 5
shall remain in effect and shall survive such termination.
SECTION 6: GRANT OF PREFERRED RIGHTS TO ONE ANOTHER
<PAGE>
6.1 With respect to each Statement of Work Siemens shall have a right to
acquire exclusive rights as provided therein, under all Intellectual Property
for Inventions and for fonix Background and Foreground Technology as necessary
to the contemplated exclusive rights. fonix shall have a right to acquire rights
as provided in each Statement of Work under all Intellectual Property for
Inventions and for Siemens Background and Foreground Technology necessary to the
contemplated rights.
6.2 Any agreement conferring any rights, exclusive or otherwise, which is
concluded prior to termination of this Agreement for any reason shall survive
such termination and shall remain in full force and effect between the parties
in accordance with the separate terms and conditions of such agreement.
SECTION 7: PROVISIONS RELATING TO COMMENCEMENT AND TERMINATION OF THE AGREEMENT
7.1 This Agreement shall be effective as of the date of the last signature
as written below (the "Effective Date").
7.2 This Agreement shall have a term (hereinafter "Initial Term") of five
(5) years from its Effective Date. Thereafter, the Agreement may be renewed for
successive terms (hereinafter "Renewal Terms" of three (3) years each or for
shorter terms as mutually agreed by the Parties. Any such renewal shall only
become effective upon acceptance of a written instrument clearly designated as a
"Renewal of the Master Agreement for Joint Collaboration" which is signed and
dated by both Parties.
7.3 This Agreement shall automatically terminate without further notice
from either Party to the other at the end of the Initial Term, or at the end of
any Renewal Term, unless renewed in the manner set forth in paragraph 7.2 at
least thirty (30) days prior to the end of such Initial or Renewal Term, as
applicable.
7.4 In the event of any material breach of any terms or conditions of this
Agreement it may be terminated for cause during the Initial Term or any Renewal
Term by providing ninety (90) days written notice to the other. Any such notice
shall clearly state the provision or provisions of the Agreement which are
believed to have been breached, and the factual circumstances giving rise to
such breach. Thereafter, this Agreement shall automatically terminate unless
prior to the expiration of such ninety (90) day notice period the Party in
breach shall have cured the breach to the good faith satisfaction of the other.
7.5 Except for a tender offer or hostile takeover which exceeds 50% of the
outstanding common shares, if a third party acquires or enters into any
agreement to acquire fifty percent (50%) or more of the common stock of fonix,
fonix and its Board of Directors shall not approve any such transaction unless
such agreement provides that such third party shall refund to Siemens any
royalties defined as non-refundable pursuant to paragraph 3.2 in the event
Siemens terminates this Agreement under provisions of this paragraph. In the
event of such an agreement, fonix shall immediately notify Siemens thereof in
writing. For a period of thirty (30) days after receipt of such notice Siemens
shall have the right to terminate this Agreement. In the event of termination
of this Agreement pursuant to the provisions of this paragraph 7.5, fonix shall
refund to Siemens any royalties which were nonrefundable pursuant to paragraph
3.2.
<PAGE>
7.6 This Agreement shall automatically terminate without notice from either
Party to the other in the event of any of the following:
a. any rejection or termination of the Agreement or any proposal to
do so under Title 11 of the United States Code, or any other bankruptcy or
similar laws (hereinafter collectively "Bankruptcy Code") of any other
competent jurisdiction of the any Party;
b. failure of a trustee, including any Party as a debtor in
possession, in any bankruptcy proceeding filed by or against such Party to
(i) assume this Agreement and any Statement of Work or other agreement
conferring rights as part of a Statement of Work within fifteen (15) days
after the filing of the initial bankruptcy petition, or to (ii) perform the
duties required under this Agreement, any such Statement of Work or other
agreement, within the meaning of any applicable section of such Bankruptcy
Code, including but not limited to Section 365(a)(4)(i) of Title 11,
U.S.C.; or
c. any liquidation of a Party, or any sale, assignment, or
foreclosure of or upon assets that are necessary for the performance of a
Party of its responsibilities under this Agreement, including any Statement
of Work.
7.7 Termination of this Agreement shall not affect or terminate any
Statement of Work or other agreement conferring any rights, exclusive or
otherwise, as a result of any Statement of Work and shall not terminate any
provisions stated elsewhere herein to expressly survive termination of this
Agreement.
SECTION 8: ARBITRATION
8.1 Any dispute arising out of or in connection with this Agreement or any
Statement of Work entered by the Parties under this Agreement shall be resolved
by binding arbitration. The dispute shall be submitted to a panel of three (3)
arbitrators, of which one (1) shall be appointed by each of the Parties, with
the third member of the panel being appointed by the other two. The arbitration
shall be conducted in London, England. The arbitration proceedings shall be
conducted in English under the Rules of Arbitration of the International Chamber
of Commerce, Paris ("Rules") The procedural law of the place of arbitration
shall apply where the Rules are silent. The panel shall have discretion to award
damages, costs of arbitration and reasonable attorneys' fees to either Party,
provided that any such damages shall not include any penalty or enhanced
damages, and shall, as far as legally possible, be limited to only those actual
compensatory damages that are reasonably related to and foreseeable in respect
of any breach of this Agreement giving rise to such damages. The panel shall
make written findings of fact and conclusions of law, and the decision of the
panel shall be final and binding upon the Parties.
8.2 The Parties agree that it is their intent that the terms of this
Agreement be construed so as to render the foregoing terms as enforceable as may
be permitted under the
<PAGE>
applicable law as set forth above in paragraph 8.1. Consistent with this intent,
the Parties declare that the provisions of the Agreement are severable. In the
event of a determination that any particular provision of this Agreement is
invalid or unenforceable, the other provisions shall continue in full force and
effect, as far as possible, and the Parties agree that the remaining provisions
may be enforced to the extent possible, or as if the invalidated or
unenforceable provision had not been made a part of the Agreement.
8.3 No delay or omission by either Party to exercise any right or power
occurring upon any noncompliance or default by the other under this Agreement or
any Statement of Work shall impair any such right or power or be construed to be
a waiver thereof. A waiver by either of the Parties of any of the covenants or
conditions to be performed by the other under this Agreement or any Statement of
Work must be in writing and signed by the Party asserted to have waived such
covenants or conditions, and any such waiver shall not be construed to be a
waiver of any succeeding breach.
8.4 Unless otherwise provided in this Agreement, all remedies provided for
in this Agreement shall be cumulating and in addition to and not in lieu of any
other remedies available to either party under the applicable law governing this
Agreement.
8.5 Either Party shall be excused from delays in performing or form any
failure to perform any of its duties under this Agreement or any Statement of
Work to the extent such delays or failures result from causes beyond the
reasonable control of such Party; provided, however, that in order to be excused
from any such delay or failure, such Party must diligently act to mitigate to
the extent reasonably possible any such delay or failure.
8.6 In the event of termination of this Agreement for any reason, the
provisions of this Section 8 shall survive such termination.
SECTION 9: LIMITATION OF LIABILITIES
9.1 A Party shall not be liable towards the other in the case that any
Statement of Work cannot be successfully completed, provided that there has not
been any material breach by that Party of its duties under the Statement of
Work.
9.2 The sole obligation of each Party with respect to its obligations under
any Statement of Work shall to be to perform its obligations in good faith,
including the obligation to disclose Technology as set forth in paragraph 2.2,
and to correct errors that might have occurred in disclosing such Technology
without undue delay after such error become known to the Party which forwarded
the information to the other. Neither Party makes any representation or
warranty, express or implied, that any Technology disclosed or provided by it to
the other can be used without infringing statutory or other rights of third
parties.
9.3 Each party hereby releases and holds the other harmless from any claim
arising in tort, contract or otherwise with respect to any injury or the acts of
their own employees, agents or consultants in the performance of their duties
under this Agreement and any Statement of Work.
<PAGE>
Neither Party shall be obliged to compensate for death or personal injury
or loss of or damage to property of the other Party to the extent such death,
injury, loss or damage is covered by insurance(s) of the affected Party and such
affected Party shall not be entitled to recover same from the first Party.
9.4 Neither Party shall be liable for any indirect or consequential damages
of the other, including loss of profit or interest, under any legal cause
whatsoever and on account of whatsoever reason, except where such liability is
mandatory by applicable law.
9.5 Nothing in this Agreement shall obligate either Party to apply for,
take out, maintain or acquire any statutory protection in any country.
9.6 In the event of termination of this Agreement for any reason, the
provisions of this Section 9 shall survive such termination.
SECTION 10: MISCELLANEOUS PROVISIONS
10.1 Notice under this Agreement, including any notice of any change in the
address to which such notices are to be sent, may be given by certified mail,
postage prepaid, or by DHL or Federal Express with return receipt, and the date
of delivery of such mailing, as evidenced by return receipt, shall be deemed the
date of notice for all purposes. Such notice shall be given to the Parties at
their respective address as set forth below:
In the case of Siemens: In the case of fonix
Mrs. Elsbeth Lucier Thomas A. Murdock Pres. & COO
Siemens AG HL S CO 1225 Eagle Gate Tower
St.-Martin-Str. 53 60 East South Temple St.
D-81541 Munich Salt Lake City, Utah 84111
GERMANY U.S.A.
10.2 No part of this Agreement may be altered or modified except by a
writing describing the specific alteration or modification, and which is signed
by both Parties.
10.3 This Agreement supersedes all prior agreements (including the
agreement of Exhibit A), understandings, representations and statements, whether
written or oral, between the parties relating to the subject matter of this
Agreement. No agreement, statement, or promise not contained in this Agreement,
with respect to the subject matter of this Agreement, shall be valid or binding.
10.4 Neither Party shall assign or transfer to any third party any rights
or obligations that it may have under this Agreement without the prior written
authorization of the other, and any attempt to make such assignment or transfer
without such consent shall be null and void; provided, however, that such
consent shall not be unreasonably withheld.
<PAGE>
10.5 This Agreement may be executed simultaneously in one or more
counterparts each of which shall be deemed to be an original.
10.6 Headings and titles in this Agreement are for reference purposes only
and shall not form a part of the terms and conditions of this Agreement.
10.7 In the event of any conflict between the terms of this Agreement and
any Statement of Work, the terms and conditions of the Statement of Work shall
govern.
10.8 Each Party represents and warrants that it has full right, power and
authority to enter this Agreement, and that they are under no obligation or
restriction, nor will they assume any such obligation or restriction that does
or would in any way interfere or conflict with their obligation to carry out
their respective duties under this Agreement.
10.9 Nothing under this Agreement or any Statement of Work shall be
construed as granting to the other any right to act on behalf of or as the agent
of the other, and each of the Parties hereby acknowledge that they are acting
independently of the other in carrying out any duties or obligations under this
Agreement or any Statement of Work.
10.10 This Agreement and any Statement of Work signed between the Parties
hereunder shall be governed by and construed in accordance with the law in force
in England without reference to its conflicts of law provisions.
10.11 If a bona fide third party that is unrelated to either of the
Parties offers to acquire or enter into any agreement to acquire fifty percent
(50%) or more of the common stock of fonix on terms that are deemed by fonix in
the exercise of its sole discretion to be potentially acceptable to fonix, fonix
shall, to the extent legally permitted, promptly notify Siemens thereof in
writing.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
by their duly authorized representatives on the dates specified below:
SIEMENS AKTIENGESELLSCHAFT FONIX CORPORATION
Date _________________________ Date_____________________
By____________________________ By ______________________
Title ________________________ Title ___________________
By ___________________________
Title_________________________
<PAGE>
Exhibit "B" to Master Agreement for Joint Collaboration
STATEMENT OF STOCK PURCHASE RIGHTS
1. PURCHASE PRICE, EXERCISE PRICE AND AMOUNT OF SHARES. As set forth in the
Master Agreement for Joint Collaboration ('Master Agreement"), and in
consideration of 600,000 DM ("Consideration") paid in connection with the first
Statement of Work and License Agreement, fonix will grant to Siemens warrants to
purchase up to One Million (1,000,000) shares ("Warrant Shares") of fonix
restricted Common Stock, par value $.0001, at the following exercise prices:
Expiration Dates
200,000 Shares @ $10.00 US per Share December 31, 1998
200,000 Shares @ $15.00 US per share March 31, 1999
200,000 Shares @ $20.00 US per share June 30, 1999
200,000 Shares @ $25.00 US per share September 30, 1999
200,000 Shares @ $30.00 US per share December 31, 1999
2. CERTAIN ADJUSTMENTS. The parties agree that certain adjustments shall be made
to the exercise price under terms and conditions to be mutually agreed to in the
Warrant, however the parties agree that such adjustments to the exercise price
shall include as a minimum the following. If, at any time prior to the purchase
of Warrant Shares, fonix shall subdivide its outstanding shares of Common Stock
into a larger number of shares or combine outstanding shares of Common Stock
into a smaller number of shares, the exercise price for Warrant Shares which
have not been purchased shall be adjusted as follows: 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
<PAGE>
made pursuant to this Section shall become effective immediately after the
effective date of such subdivision or combination, and shall apply to successive
subdivisions and combinations. Further, in the case of any reclassification,
merger, sale, transfer or share exchange, Siemens shall be entitled to receive
securities or property equal to the amount of Warrant Shares Siemens would have
been entitled to had Siemens exercised the Warrant(s) immediately prior to such
reclassification, merger, sale transfer or share exchange.
3. Exercise Period. The warrant exercise period shall begin on the date of
payment of the Consideration and end at 5:00 P.M. Mountain Time (U.S.) on the
expiration date indicated opposite each exercise price listed above. The
warrants will be exercisable at any time in multiples of 25,000 shares during
the exercise period. The warrants are not transferable except in compliance with
applicable securities laws and to an entity which is at least 50% owned directly
or indirectly, by Siemens. The shares issued pursuant to the warrants will be
transferable only upon compliance with applicable securities and other laws.
4. Exercise of Warrants. The warrants may be exercised by delivering to the
Treasurer of fonix an Irrevocable Notice of Exercise of Warrants in the form
attached hereto as "Attachment B-1", together with payment of the full exercise
price in US dollars. Upon receipt of the Irrevocable Notice of Exercise of
Warrants and the purchase price, and subject to the Company obtaining from
Siemens customary documentation as required by law noted in paragraph 5 below,
the Company will deliver to Siemens properly executed certificates representing
the Warrant Shares purchased.
5. Documentation. At the time of the execution of the first Statement of Work
and License Agreement, the parties will agree to the form and the detailed terms
and conditions of the Warrant and such other documentation to be signed by the
parties as required by applicable securities and other laws and such Warrant
will be issued by fonix to Siemens.
6. Registration Rights. At the time of execution of the Master Agreement,
Siemens acknowledges that neither the warrants nor the Warrant Shares have been
registered under the Securities Act of 1933 (the "Act"), or under any state
securities laws. Until the warrants or the Warrant Shares have been registered,
the warrants and Warrant Shares issued by fonix will be restricted and bear a
restrictive legend reasonably satisfactory to fonix securities counsel. If and
when fonix undertakes a public offering of its Common Stock, par value $.001,
and subject to the approval of the underwriter, fonix will include in the
registration statement for the public offering the shares issuable, pursuant to
the warrants granted under the Master Agreement. In the alternative, fonix will
file a Form S-3 (or such other form as is available to fonix for the
registration of the Warrant Shares for their resale in the market) with the U.S.
Securities and Exchange Commission within 30 days of the earlier of (i) the
purchase by Siemens of the first 200,000 Warrant Shares or (ii) four months from
the execution by the parties of the first Statement of Work. Siemens will
cooperate with fonix in supplying information necessary to assist fonix in the
filing of a registration statement or taking any other action necessary to
effect such registration.
<PAGE>
7. ACKNOWLEDGMENTS. Siemens has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of
acquiring the Warrants and underlying shares (collectively the "Securities").
Siemens has acquired or will acquire the Securities for its own account, for
investment, and not with a view to resale of the Securities. Siemens has access
to and, and in its discretion, has reviewed, the most recent annual, quarterly
and periodic reports of fonix filed with the SEC, and any and all other material
books and records of fonix which Siemens has requested.
Siemens acknowledges that the Warrants bear, and the underlying Shares shall
bear, the following legend: THE SECURITIES REPRESENTED BY THIS EXHIBIT [OR
CERTIFICATE] HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT, OR AN OPINION OF COUNSEL TO THE EFFECT
THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE THEREUNDER.
<PAGE>
Attachment B-1
--------------
fonix corporation
IRREVOCABLE NOTICE OF EXERCISE OF WARRANT
Siemens, A.G., hereby exercises its right to purchase __________ Shares of the
$.0001 par value restricted Common Stock (the "Warrant Shares") of fonix
corporation (the "Company").
Siemens understands that this Irrevocable Notice of Exercise of Warrant is
irrevocable and pays to the Company the full amount of the Exercise Price for
the Warrant Shares being purchased.
Siemens understands that the Company has no obligation to issue the Warrant
Shares unless and until, in the opinion of the Company, any applicable
registration requirements or exemptions therefrom of the Securities Act of 1933,
as amended, any applicable listing requirements of any securities exchange on
which stock of the same class is then listed, and any other requirements of law
or any regulatory bodies having jurisdiction over such issuance and delivery,
shall have been fully complied with.
The number of Warrant Shares specified above are to be issued in the name of:
Siemens Aktiengesellschaft
Date:
By:
Signature
Printed Name and Title
<PAGE>
MASTER TECHNOLOGY DEVELOPMENT AGREEMENT
This Master Technology Development Agreement is entered into as of the 14
day of October, 1997, by and between fonix corporation, a corporation of the
State of Delaware having its principal place of business located at 1225 Eagle
Gate Tower, 60 East South Temple Street, Salt Lake City, Utah 84111 ("fonix"),
and Oregon Graduate Institute of Science and Technology, a non-profit
corporation and educational institution duly organized and existing under the
laws of the State of Oregon, with its principal place of business located at
20000 N.W. Walker Road, Beaverton, Oregon 97291-1000 ("OGI"), acting through
its Oregon Graduate Institute of Science and Technology, Center for Spoken
Language Understanding ("CSLU").
1. Purpose and Scope of Agreement
fonix is engaged in research and development of automatic speech
recognition technologies, which technologies employ a proprietary phonetic
speech modeling engine and a linguistic and contextual process based on a
proprietary neural network system. CSLU is a center at OGI which has a
professional staff and graduate students with special training and research
skills in spoken language disciplines and which is also engaged in research and
development of automatic speech recognition technologies. fonix desires OGI to
perform certain development activities in order to develop and improve advanced
technologies in key areas of spoken language systems, which may include: (a)
robust speech recognition; (b) natural language understanding; (c) dialog
modeling; (d) text-to-speech synthesis; (e) multi-modal input/output; and (f)
advanced neural net architectures.
Therefore, from time to time fonix agrees to sponsor OGI, acting through
its CSLU, to perform work regarding certain concepts concerning the design and
implementation of spoken language computer systems and OGI agrees to provide the
results to fonix in accordance with the terms and conditions of this Agreement.
2. Organization
This Agreement contains terms and conditions for all work transactions
between fonix and OGI involving OGI's CSLU that are within the scope of this
Agreement. fonix and OGI intend that all individual work transactions that are
within the scope of this Agreement will be implemented through the individual
Statements of Work to be attached hereto as Exhibit A-1, A-2, A-3 and so on, as
they are mutually agreed to by the parties. As the parties identify future
development projects, they will execute Statements of Work, consecutively
numbered and attached to this Agreement.
Each of the parties agrees to appoint one individual to coordinate
development activities under this Agreement. fonix and OGI designate the
following individuals as their initial Coordinators under this Agreement. Each
party will advise the other in writing of any changes regarding its Coordinator.
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The OGI Coordinator is: The fonix Coordinator is:
Dr. Ronald A. Cole Lynn Shepherd
Oregon Graduate Institute 1225 Eagle Gate Tower
of Science & Technology 60 East South Temple Street
20000 N.W. Walker Road Salt Lake City, Utah 84111
Beaverton, Oregon 97291-1000 tel #: 801-328-0161
tel #: 503-690-1085 fax #: 801-328-8778
fax #: 503-690-1306
3. Control of Work
Control of the work will rest jointly with fonix and OGI. However, it is
agreed that fonix through its Coordinator, will have principal responsibility
and will maintain continuing communication with the OGI Coordinator. The
frequency and nature of these communications will be mutually defined by the
fonix and OGI Coordinators. Unless otherwise expressly agreed to in a Statement
of Work, the fonix Coordinator and/or fonix Project Manager shall have day-to-
day management responsibility for all fonix employees, contractors and agents
performing work under said Statement of Work. Similarly, the OGI Coordinator
and/or OGI Project Manager shall have day-to-day management responsibility for
all OGI staff members performing work under a Statement of Work.
4. Administration of a Statement of Work
Each Statement of Work shall be deemed to incorporate by reference all of
the provisions of this Agreement and, in the case of any inconsistency, this
Agreement shall be the controlling document.
4.1 Procedure for Entering into a Statement of Work. An individual
Statement of Work shall only become effective upon execution by
authorized representatives of both parties, duly authorized according
to institutional policy and procedure.
4.2 Identification of an Individual Statement of Work. Each individual
Statement of Work will be identified by a numerical or alphanumerical
sequence, as determined by the parties, its title and effective date,
such as, for example, "Statement of Work No. A-1 for ABC Research
Effective on 1/1/98".
4.3 OGI Key Personnel. During the Term, OGI shall make available and
assign Ronald A. Cole and Yonghong Yan, as its primary professional
staff members for work on Statements of Work. OGI shall also assign
such additional professional staff members and graduate students as
are reasonably necessary to complete each Statement of Work pursuant
to its terms. The Coordinators at fonix and OGI shall advise
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individual staff members and graduate students at fonix and OGI of
their respective assignments and provide them with copies of the
proposed Statement of Work, as appropriate.
4.4 Required Contents of Each Statement of Work. Each Statement of Work
shall contain (or incorporate as attachments or by reference):
4.4.1 A reference to this Agreement by name and date of execution.
This reference shall act to incorporate the terms of this
Agreement into the Statement of Work unless the Statement of
Work explicitly states otherwise.
4.4.2 A title identifying the Statement of Work, an effective date
upon which the Statement of Work becomes effective between the
parties, dates for completion of "milestones" and the date of
completion and transfer of Deliverables.
4.4.3 A brief description of the scope of work of the Statement of
Work.
4.4.4 A list of all Intellectual Property Rights of fonix and/or OGI
which may be the subject of the development or other work to be
performed pursuant to the Statement of Work.
4.4.5 Description of fonix's responsibilities, including work or
services to be performed, staff members assigned and schedules
for any development or delivery.
4.4.6 Description of OGI's responsibilities, including work or
services to be performed, staff members assigned and schedules
for any development or delivery.
4.4.7 Description or specification of any Deliverables.
4.5 Optional Contents of Each Statement of Work. In addition, a Statement
of Work may contain (or incorporate as attachments or by reference):
4.5.1 Provision for progress reports by the Project Manager(s).
4.5.2 Additional specifications, such as acceptance criteria,
documentation specifications and standards, quality standards,
performance specifications, or usability and architecture
requirements.
4.5.3 Resource requirements, such as training or assignment of key
personnel.
4.5.4 Special term or termination provisions.
4.5.5 A list of some or all of the Confidential Information to be
disclosed by fonix and/or OGI in connection with the Statement
of Work.
4.5.6 Other appropriate terms.
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4.6 Project Managers. Unless otherwise specified in a Statement of Work,
each party's Project Manager shall be responsible for managing that
party's performance under the Statement of Work and for all necessary
coordination with the other party's Project Manager. Each party's
Project Manager will provide periodic progress reports to the other
party's Project Manager and will promptly respond to reasonable
requests of the other party for reports. Each party will advise the
other in writing of any change regarding its Project Manager.
5. Definitions
As used in this Agreement, the following terms shall have the following
respective meanings:
5.1 "Affiliate" shall mean a party that controls, is controlled by, or is
under common control with a party, including but not limited to
subsidiaries, parents and sister corporations.
5.2 "Code" shall mean computer programming code. Unless specifically
agreed otherwise, Code shall include Executable Code, Object Code and
Source Code.
5.3 "Source Code" shall mean the human-readable form of the Code and
related system documentation, including all comments and any
procedural language.
5.4 "Object Code" shall mean the Code that results when Source Code is
processed by a software compiler, but is not Executable Code.
5.5 "Executable Code" shall mean Code that loads and executes without
further processing by a software compiler or linker.
5.6 "Confidential Information" shall mean that information which a
disclosing party desires to protect against unrestricted disclosure or
use by the receiving party (the "Recipient"). Confidential Information
shall not include any information that is (i) already in the
possession of the Recipient without obligation of confidence; or (ii)
independently developed by the Recipient, as evidenced by written
records; or (iii) becomes available to the general public without
breach of this agreement; or (iv) rightfully received by the Recipient
from a third party without obligation of confidence; or (v) released
for disclosure by the disclosing party with its prior written consent.
5.7 "Deliverables" shall mean any work product or material procured or
prepared by OGI and required to be delivered to fonix by virtue of
their description or specification as a Deliverable in a Statement of
Work. Whether or not actually delivered, Deliverables shall in all
cases include all programming, documentation, media and other objects
identified as Deliverables in the Statement of Work.
5.8 "Derivative Work" shall mean a work which is based on one or more pre-
existing works (such as a revision, enhancement, modification,
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translation, abridgement, condensation, expansion, or any other form
in which such pre-existing work may be recast, transformed, or
adapted) and which, if prepared without authorization of the copyright
owner of such pre-existing work, would constitute copyright
infringement under U.S. law.
5.9 "Intellectual Property Rights" shall mean (i) all rights, title and
interests in all letters of patent and application for letters of
patent including any reissue, division, continuation or continuation-
in-part applications throughout the world now or hereafter, (ii) all
rights, title and interest in all trade secrets, and all trade secret
rights and equivalent rights arising under the common law, state law,
federal law and laws of the foreign countries; (iii) all rights, title
and interests in all mask works, copyrights and copyrighted interests,
and all mask work, rights, copyright rights and other literary
property or authors rights, whether or not protectable by copyright or
as a mask work; and (iv) all rights, title and interests in any and
all know-how and show-how, whether or not patentable, copyrightable or
protectable by trade secret.
5.10 "Invention" shall mean any idea, design, concept, technique,
invention, discovery or improvement whether or not patentable, that is
conceived and reduced to practice by one or more of the inventing
party's employees.
5.11 "Joint Invention" shall mean any idea, design, concept, technique,
invention, discovery or improvement, whether or not patentable, that
is conceived and reduced to practice by employees, independent
contractors or agents of both parties and which arises out of the
performance of a Statement of Work under this Agreement.
5.12 "Residuals" means generalized information which may be retained in
non-tangible form by persons who have worked on a Statement of Work or
have had access to Confidential Information, including without
limitation general ideas, concepts, know-how or techniques contained
therein.
5.13 "Technology" shall mean the Intellectual Property Rights pertaining to
Deliverables. "Technology" shall not include any fonix Confidential
Information, and shall not incorporate fonix Confidential Information
in either an explicit or inherent manner.
6. Term and Termination
Each Statement of Work shall be deemed to incorporate by reference this
Section 6 unless the Statement of Work explicitly states otherwise.
6.1 Term of Agreement. This Agreement shall be effective upon the date
specified at the beginning of this Agreement, and shall remain in
force for a period of twelve (12) months, unless otherwise terminated
as provided in Section 6.3. Such term may be extended upon written
agreement of both parties.
6.2 Statement of Work.
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6.2.1 Term of a Statement of Work. Each Statement of Work shall
become effective upon its full execution and shall continue in
effect for the term specified in the Statement of Work unless
earlier extended, terminated by mutual written agreement of the
parties, terminated in accordance with its provisions, or
terminated for cause in accordance with Section 6.3 below. In
the event that a Statement of Work fails to contain a term, the
Statement of Work shall be deemed to have a term of one (1)
year.
6.2.2 Earlier Termination of the Agreement. A termination of the
Agreement shall have no effect upon a Statement of Work that is
itself still in effect.
6.3 Termination for Cause. Either party may terminate this Agreement or a
Statement of Work for the substantial breach by the other party of a
material term. The terminating party shall first give the other party
written notice of the alleged breach and a period of sixty (60) days
in which to cure the alleged breach.
6.4 Survival of Terms. In the event of a termination of the Agreement or a
Statement of Work, all obligations of confidentiality (including those
specified in Section 7) shall continue in effect in accordance with
their terms. In addition, the terms of Section 8 (Ownership and
Licensing), Section 10 (Warranty), Section 11 (Limitation of
Liability) and Section 12 (Product Liability and General
Indemnification) shall continue in effect in accordance with their
terms.
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7. Confidentiality and Information Exchange
It is the intention of OGI and fonix to transfer and/or exchange
information, including Confidential Information, as may be necessary under the
Statements of Work. Such information may be disclosed in oral, visual, or
written form (including magnetic media).
7.1 The Recipient of Confidential Information under a Statement of Work
shall make use of the Confidential Information only for the purposes
of that Statement of Work and for no other purpose.
7.2 The Recipient shall protect the disclosed Confidential Information by
using the same degree of care, but no less than a reasonable degree of
care, to prevent the unauthorized use, dissemination, or publication
of the Confidential Information as the Recipient uses to protect its
own Confidential Information of a like nature. Such protection shall
include, at a minimum, that all fonix and OGI individuals working on
any Statement of Work shall execute and deliver to the other party a
blanket non-disclosure agreement in the form attached hereto as
Exhibit B. Such non-disclosure agreement shall require OGI and fonix
personnel not to disclose information relating to, concerning or in
any fashion resulting from the Statement of Work to a third party
without the prior written approval of fonix.
7.3 Except as set forth in Section 7.4 below, the Recipient's obligations
shall only extend to Confidential Information that is marked as
confidential at or before the time of disclosure or that is unmarked
(e.g., orally disclosed) but is treated as confidential at the time of
disclosure and is designated as confidential in a written memorandum
sent to the Recipient's Project Manager within thirty (30) days of
disclosure, summarizing the Confidential Information sufficiently for
identification.
7.4 Without written notice of confidentiality at any time subsequent
hereto, OGI agrees to treat all Code and related system documentation
received under a Statement of Work (or developed from Source Code
received under a Statement of Work) as confidential information for
the purposes of this Section 7. OGI agrees not to reverse engineer the
binary code of fonix to discover the Source Code.
7.5 The parties hereby acknowledge that a party's unauthorized disclosure
or use of Confidential Information belonging to the other party will
cause substantial and irreparable injury to the other party, and that
each party is therefore entitled to, in addition to any other
available remedies, injunctive and other equitable relief for any
actual or threatened improper disclosure or use of its Confidential
Information.
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8. Ownership and Licensing
8.1 Ownership. Subject to this Section 8, all rights, title and interests
in Intellectual Property Rights in the Technology and any Joint
Inventions, Inventions and patents arising from the development and
other work (including any research) conducted under this Agreement,
are and shall remain jointly owned by OGI and fonix. Each party shall
have full and unrestricted rights (i) with respect to Deliverables in
the form of Code, to use, execute, perform, reproduce, prepare or have
prepared Derivative Works based upon, display, market and distribute
copies by sale, license or lease, or otherwise transfer possession or
ownership of copies of such Deliverables and Derivative Works of such
Deliverables, and distribute internally and/or externally, sell,
license, lease, or otherwise transfer any such Deliverables of
Derivative Works thereof; and (ii) with respect to Deliverables not in
the form of Code, to reproduce, modify, market, distribute and use
such Deliverables as such party's product or service, or in the
development, duplication, distribution and/or marketing of any product
or service, whether such product or service is made available directly
or indirectly. The foregoing includes, without limitation, copyrights
in and to pictorial, graphic or audio/visual works, including icons,
screens, music and characters created as a result of execution of Code
or any Derivative Works thereof; and all Inventions, patents and
patent applications arising out of the Technology. Each party may
retain all proceeds and profits arising out of its activities
described above, with no duty to account for such proceeds or to share
them with the other party.
8.2 Derivative Works of OGI. Notwithstanding any other provision of this
Agreement, if any Invention or other Intellectual Property Right
developed pursuant to this Agreement is a Derivative Work of software
programs, technology, Confidential Information or other materials
owned by OGI, OGI shall have sole ownership of such Derivative Work
and all patent, copyright and other intellectual property rights with
respect thereto. fonix shall assign to OGI all of its right, title and
interest in and to such Derivative Works and shall execute any
documents reasonably requested by OGI to evidence or perfect such
assignment. OGI grants to fonix a nonexclusive, worldwide, royalty-
free, fully-paid and irrevocable license under copyrights and patents
arising out of such Derivative Works to use internally and/or
externally, sell, license, lease or otherwise transfer such Derivative
Works. OGI shall also solely own all right, title and interest in and
to all Derivative Works of the Technology prepared, developed or
created by OGI or pursuant to its direction, without substantial
participation of fonix.
8.3 Derivative Works of fonix. Notwithstanding any other provision of this
Agreement, if any Invention or other Intellectual Property Right
developed pursuant to this Agreement is a Derivative Work of software
programs, technology, Confidential Information or other materials
owned by fonix, fonix shall have sole ownership of such Derivative
Work and all patent, copyright and other intellectual property rights
with respect thereto. OGI shall assign to fonix all of its right,
title and interest in and to such Derivative Works and
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shall execute any documents reasonably requested by fonix to evidence
or perfect such assignment. fonix grants to OGI a nonexclusive,
worldwide, royalty-free, fully-paid, irrevocable and nontransferable
license under copyrights and patents arising out of such Derivative
Works to use such in its Toolkit, as more fully described in Section
8.5. fonix shall also solely own all right, title and interest in and
to all Derivative Works of the Technology prepared, developed or
created by fonix or pursuant to its direction, without substantial
participation of OGI.
8.4 Patent Immunity. Subject to Section 8, each party grants to the other
party, and recipients of Deliverables leased, licensed, sold or
otherwise transferred (either directly or indirectly) by such other
party or any of its sublicenses, an immunity from suit under patents
arising out of the Technology or otherwise out of this Agreement.
8.5 CSLU Toolkit. CSLU has developed a software program known as the "CSLU
Toolkit" which it has and does make available to its members for use
in designing and developing spoken language products. In addition to
use of Intellectual Property Rights in the Technology and Joint
Inventions (which may be freely used by either party, as stated in
Section 8.1 above), CSLU may incorporate Derivative Works of fonix (as
described in the first sentence of Section 8.3 hereof) into its
Toolkit only for non-commercial use and application. In that regard,
CSLU shall take such steps as are necessary and to the reasonable
satisfaction of fonix to prevent any CSLU member from gaining access
to or otherwise using any Derivative Works of fonix for commercial
purposes.
8.6 Freedom of Use. Notwithstanding anything to the contrary set forth in
this Agreement (but expressly excluding the limitations and
restrictions set forth in Section 8.3 hereof), either party shall be
free to use for any purposes the Residuals resulting from access to or
work with Confidential Information. However, the foregoing does not
give either party the right to disclose the financial, statistical, or
personnel information or the business plans of the other party, and
the foregoing shall not be deemed to grant to either party a license
under the other party's copyrights or patents. Neither party shall
have any obligation to limit or restrict the assignment or
reassignment of personnel.
8.7 Survival. This Section 8 and related definitions shall survive the
termination of this Agreement for any reason whatsoever.
9. Consideration.
In consideration of the services provided by OGI to fonix under the initial
Statements of Work, fonix agrees to pay to OGI the amount of one hundred
thousand dollars ($100,000). Such amount shall be payable in quarterly
increments of twenty-five thousand dollars ($25,000), with the initial payment
due within one (1) week of the execution of this Agreement, and each subsequent
payment due and payable three (3) months thereafter. Payments are to be made
and delivered to: Oregon Graduate Institute of Science & Technology, Center for
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Spoken Language Understanding, 20000 N.W. Walker Road, Beaverton, Oregon 97291-
1000.
10. Limited Warranty
10.1 OGI represents and warrants that it either is the owner of all rights,
title and interests, including Intellectual Property Rights, in the
Technology, or that it has the right to use and sublicense the use of
the Technology in accordance with the terms and conditions set forth
in this Agreement. OGI makes no representation that the duplication,
use, lease, sale, license or sublicense of the Technology by fonix
will not infringe a copyright or patent granted to others. However,
OGI does represent and warrant that it shall take reasonable and
necessary steps to avoid contamination of the Technology with the
intellectual property rights of third parties by requiring each
participating Project Manger to complete in good faith an Intellectual
Property Rights Questionnaire in the form attached hereto as Exhibit
C, for delivery to fonix at the completion of the research identified
in the Statements of Work.
10.2 fonix represents and warrants that, to the best of its knowledge, it
either is the owner of all rights, title and interests including
Intellectual Property Rights in any technology which it may provide to
OGI under this Agreement, or that it has the right to use and
sublicense the use of such technology in accordance with the terms and
conditions set forth in this Agreement. fonix makes no representation
that the duplication, use, lease, sale, license or sublicense of the
Technology by OGI will not infringe a copyright or patent granted to
others.
10.3 THE WARRANTIES AND REPRESENTATIONS SET FORTH IN SECTION 10 AND 11 OF
THIS AGREEMENT ARE EXPRESSLY IN LIEU OF ALL OTHER UNDERSTANDINGS,
AGREEMENTS, REPRESENTATIONS OR WARRANTIES NOT EXPRESSLY SET FORTH IN
THIS AGREEMENT, WHETHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED
TO THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
11. Limitation of Liability
Under no circumstances shall either party be liable to the other for any
indirect or consequential damages whatsoever, including, but not limited to,
loss of profits or for any claim or demand made by a third party against either
party arising out of the performance of this Agreement, except as specifically
set forth in Section 12. No action, regardless of form, arising out of the
performance of this Agreement, may be brought by either party more than four (4)
years after the cause of action is discovered.
12. Product Liability and General Indemnification.
12.1 OGI does not warrant the Technology and the parties to this Agreement
agree and understand that OGI shall have no liability to an end user
or otherwise. fonix, therefore, agrees to hold OGI harmless and
indemnify OGI, its trustees, officers, employees and agents from and
against any and all litigation, claims, damages or actions (including
reasonable attorney's fees) that may be
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instituted against OGI arising out of fonix's marketing, distribution,
sale, production, manufacture, lease, consumption or advertisement of
the Technology including, but not limited to, claims resulting from
any alleged type of defect in the Technology or damages allegedly
caused by any breach of contract by fonix and its affiliates or the
use or misuse of the Technology, notwithstanding any third-party
allegation that their claims, injuries or damages were proximately
caused in part or wholly by OGI's negligence. In such event, fonix
agrees to defend OGI at fonix's sole expense in such action. Should
any award or decree be made against OGI, it shall be the obligation of
fonix to (a) appeal the decision and pay if the appeal is lost or (b)
pay such award or make any settlement as may be warranted before or
after the decision on appeal. OGI may, at its own option, conduct its
own defense in such actions at its own expense.
12.2 fonix does not warrant the technology, services or materials provided
to OGI pursuant to this Agreement. OGI, therefore, agrees to hold
fonix harmless and indemnify fonix, its trustees, officers, employees
and agents from and against any and all litigation, claims, damages or
actions (including reasonable attorney's fees) that may be instituted
against fonix arising out of OGI's use, marketing, distribution, sale,
production or licensing (non-commercial or otherwise) of the
Technology including, but not limited to, claims resulting from any
alleged type of defect in the Technology or damages allegedly caused
by any breach of contract by OGI or the use or misuse of the
Technology, notwithstanding any third-party allegation that their
claims, injuries or damages were proximately caused in part or wholly
by fonix's negligence. In such event, OGI agrees to defend fonix at
OGI's sole expense in such action. Should any award or decree be made
against fonix, it shall be the obligation of OGI to (a) appeal the
decision and pay if the appeal is lost or (b) pay such award or make
any settlement as may be warranted before or after the decision on
appeal. fonix may, at its option, conduct its own defense in such
actions at its own expense.
12.3 Each party's indemnification obligations are subject to (a) receipt of
prompt notice such that the indemnifying party will not be unduly
prejudiced by any delay, and (b) the good faith cooperation of the
party to be indemnified. Each party shall immediately notify the other
of any litigation in which it, its officers or its directors, agents
or employees may be involved if there is a reasonable possibility that
this Agreement or the other party will be affected. The parties agree
to cooperate with each other and keep each other fully informed with
respect to all proceedings.
13. Delivery of Technology
OGI shall fully disclose and deliver to fonix all Technology arising out of
the work, development, research and experimentation conducted by OGI under this
Agreement, as implemented in Statements of Work. The Technology delivered to
fonix under this Agreement shall be in such forms as shall be necessary for
fonix to make, install, operate, modify, correct, enhance and extend the
Technology.
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14. Disclosure of this Agreement
Neither party shall refer to or use the name of the other party in any
publication, news release or promotion without the prior consent of the other
party. Each party shall use best efforts not to disclose to any third party the
terms and conditions of this Agreement during its Term, except as required by
law, or by order of a court of competent jurisdiction, or as may be required to
establish or assert its rights hereunder. Notwithstanding the above, fonix
hereby grants the right and encourages OGI to refer to fonix in OGI's
publications as a sponsor of the work conducted under this Agreement.
15. Independent Development
Nothing contained in this Agreement shall prevent fonix from entering into
research projects with third parties which are similar to the development or
other work which is the subject of this Agreement, or from independently
developing (either through third parties or through the use of its own
personnel), or from acquiring from third parties, technologies or products which
are similar to and competitive with Technology. Nothing herein shall be
construed to grant OGI any rights in any such technologies or products so
developed or acquired, or any rights to the revenues or any portion thereof
derived by fonix from the use, sale, lease, license or other disposal of any
such technologies or products. Furthermore, nothing herein shall preclude fonix
from transferring any such technologies or product to others.
Neither OGI nor any person working on the Statement of Work as an employee,
contractor or agent of OGI shall enter into any projects with any third
parties, excepting federal, state or local governmental units or agencies, the
results of which may reasonably be anticipated to have a material harmful effect
upon the Inventions, Intellectual Property Rights and/or business prospects of
fonix, during the term hereof or for eighteen (18) months thereafter. In the
event that OGI desires to engage in a project which may violate the covenant set
forth in the previous sentence, OGI shall promptly give notice thereof to fonix
in detail sufficient for fonix to analyze the basis whereby OGI believes that
said research project may have a material harmful effect upon fonix. fonix
shall promptly review the notice and all accompanying material supplied by OGI.
OGI covenants and agrees that it will not enter into the proposed research
project if fonix determines that the proposed research project would violate the
covenant set forth in the first sentence of this section. fonix shall not
unreasonably withhold its approval of any proposed third party project.
16. Taxes
OGI shall pay all taxes, if any, arising from the consideration paid by
fonix to OGI. Each party shall otherwise be responsible for and shall pay all
other taxes arising solely from its performance under this Agreement.
17. Personal Services
17.1 By OGI Coordinator. During the Term, OGI shall cause the OGI
Coordinator to render personal services (a) in various industry
programs, seminars and similar events annually to be scheduled
mutually with fonix. The OGI Coordinator will appear as a
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representative of CSLU and/or fonix, as mutually agreed by OGI and
fonix, for the purpose of promoting, discussing and/or endorsing the
Technology; and (b) at various presentations of papers or articles
concerning the Technology prepared by (either individually or with
others) the OGI Coordinator, as mutually agreed by the OGI Coordinator
and fonix. In each case, the presentation, paper or article to be
delivered shall be approved by fonix in advance. For such appearances,
OGI shall be paid $500.00 per day by fonix.
17.2 By OGI Professional Staff. During the Term, OGI shall cause members of
its professional staff to be available to fonix pursuant to the terms
of individual consulting agreements. Messrs. Cole and Yan shall be
available at least two (2) days per month on terms mutually agreeable
to those parties.
18. DARPA Competition. CSLU is preparing an entry for the November, 1997 "HUB4
Broadcast News" Evaluation sponsored by the Defense Advanced Research Project
Agency ("DARPA Competition"). CSLU will use its best efforts to complete its
entry for and actively participate in the DARPA Competition. At the option of
fonix, the entry of CSLU in the DARPA Competition shall be credited jointly to
CSLU and fonix.
19. fonix Center Membership to CSLU. fonix or an Affiliate shall make a
supplemental Center Membership payment of $200,000 corresponding to the fonix
annual membership period May 16, 1997 through May 15, 1998. The supplemental
payment shall be paid in two (2) equal installments of $100,000, with the first
payment due on the last day of the calendar quarter after the date of execution
of this Agreement and the second payment due six (6) months thereafter.
20. Construction.
20.1 Order of Precedence. In the event of any conflict between this
Agreement and a Statement of Work, the terms of the Agreement shall
control. In the event of any conflict between this Agreement or a
Statement of Work and any purchase order or acknowledgment, this
Agreement or the Statement of Work shall take precedence over any
written or typed instructions in an written or electronic purchase
order or acknowledgment.
20.2 Headings & Gender. The headings in this Agreement and in a Statement
of Work are provided for reference only and shall not be used as a
guide to interpretation. When used in this Agreement or in a Statement
of Work, the singular includes the plural and the plural includes the
singular, and gender related pronouns include the feminine, masculine
and neuter.
20.3 References. References to a specific Section of this Agreement or in a
Statement of Work shall be deemed to include within the scope of the
reference all subsections depending therefrom. By way of example, a
reference to Section 5 shall be deemed to include a reference to
Section 5.1.
20.4 Severability. If any provision of this Agreement or a Statement of
Work is held in arbitration or by a court of competent jurisdiction to
be invalid, illegal or unenforceable, the remaining provisions
13
<PAGE>
shall remain in full force and effect and shall be interpreted, to the
extent possible, to achieve the purpose of this Agreement and any
affected Statements of Work as originally expressed.
20.5 Conflict Resolution. The parties agree that with respect to any
controversy or claim arising out of or relating to this Agreement or
the breach of this Agreement they shall attempt in good faith to
resolve such claim or controversy by negotiations between the parties.
In the event that either party believes that the negotiation
discussions are not likely to lead to settlement, the parties must
participate in good faith in at least one mediation session with a
professional mediator knowledgeable in the industry mutually selected
by the parties, the expense of which shall be paid fifty percent (50%)
by each party. With respect to disputes concerning ownership issues or
improper disclosure or use of Confidential Information which are not
resolved in mediation, the dispute will be resolved in a court of
appropriate jurisdiction. After one or more mediation sessions
involving any other issue, either party may elect to resolve the
dispute through final and binding arbitration in Salt Lake City, Utah.
In such case, each party shall appoint an arbitrator and a third
arbitrator shall be appointed by mutual agreement of the two chosen
arbitrators. All arbitrators must be knowledgeable in the software
industry. Otherwise, the procedure governing the arbitration process
shall be in accordance with the Rules of the American Arbitration
Association or such other process as is mutually agreeable to the
parties and reduced to writing. This Agreement shall be enforceable by
law and the judgment or any award made by the arbitrators may be
entered in any court having appropriate jurisdiction. The prevailing
party in any arbitration or judicial action shall be entitled to its
reasonable costs and attorneys' fees from the non-prevailing party.
20.6 Entire Agreement. This Agreement, including the Statements of Work
agreed to by both parties, sets forth the entire agreement and
understanding between the parties as to its specific subject matter
and merges all prior discussions between them with regard to such
specific subject matter. Neither of the parties shall be bound by any
conditions, definitions, warranties, understandings, agreements, or
representations, whether written or oral, with respect to such
specific subject matter other than as expressly provided herein or in
a Statement of Work or as duly set forth on or subsequent to its
effective date, in a written document that is signed by a duly
authorized representative of each party.
20.7 Governing Law. The validity, construction, and performance of this
Agreement and the Statements of Work will be governed by the
substantive law of the State of Utah without regard to any choice of
law provisions. Each party shall, at its own expense, comply with any
governmental law, statute, ordinance, administrative order, rule or
regulation relating to its duties, obligations or performance under
this Agreement and the Statements of Work.
21. Independent Contractors
Each party is and shall remain an independent contractor with respect to
all performance under this Agreement and the Statements of Work. No employee of
either party shall be considered an employee or agent of the other party for any
purpose. Each party assumes sole responsibility for the supervision, daily
14
<PAGE>
direction and control, payment of salary (including withholding of income taxes
and social security), worker's compensation, disability benefits and the like of
its employees or agents.
22. Export of Technical Data
Neither party will knowingly export or re-export or cause to be exported or
re-exported, directly or indirectly, any materials or any items licensed or
developed under a Statement of Work or technical information or direct product
thereof received from the other party to any country for which the United States
government, or any agency thereof, requires an export license or other
government approval at the time of such export without first obtaining any
required license or approval. Each party will reasonably cooperate with the
other party in obtaining such licenses or approvals.
23. Notices
All notices to a party under this Agreement or a Statement of Work shall be
delivered to that party's Coordinator at the address stated in Section 2 above.
All notices required or permitted to be given under this Agreement or a
Statement of Work shall be in writing. A notice shall be validly given upon the
earlier of confirmed receipt by the recipient's Coordinator or seven (7) days
after deposit, postage prepaid, with the U.S. Postal Service as first class
mail. Notices may be delivered by telefax or by courier and shall be validly
given upon confirmed receipt by the recipient's Coordinator or Project Manager,
as stated above.
A copy of all notices shall be sent to the following or their designees:
15
<PAGE>
OGI: fonix corporation:
Dr. Ronald A. Cole Thomas A. Murdock, President
Professor and Center Director fonix corporation
Oregon Graduate Institute 1225 Eagle Gate Tower
of Science & Technology 60 East South Temple Street
20000 N.W. Walker Road Salt Lake City, Utah 84111
Beaverton, Oregon 97291-1000 tel #: 801-328-0161
tel #: 503 690-1085 fax #: 801-328-8778
fax #: 503 690-1306
With A Copy To:
Durham, Evans, Jones & Pinegar
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
Attn: Jeffrey M. Jones
tel #: 801-538-2424
fax #: 801-538-2425
IN WITNESS WHEREOF, the parties hereto have as of the effective date first
above written duly executed this Master Technology Development Agreement in
duplicate by their respective duly authorized representatives.
Oregon Graduate Institute of Science fonix corporation
and Technology
Signature /s/ Joanne M. Coville Signature /s/ Roger Dudley
Print Name Joanne M. Coville Print Name Roger Dudley
Title Executive Vice President Title Executive Vice President
Date 10/22/97 Date 14 October 1997
16
<PAGE>
Common Stock Purchase Agreement
COMMON STOCK PURCHASE AGREEMENT ("Agreement") 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") (collectively JNC and DSF are referred to
herein as "Purchaser"), dated as of March 9, 1998.
Recitals
A. Purchaser desires to purchase, and the Company desires to sell
2,222,222 shares of the Company's restricted common stock on the terms and
conditions as are set forth below.
B. The parties intend that the issuance of the Securities as
anticipated by this Agreement shall be accomplished without registration under
the U.S. Securities Act of 1933, as amended (the "Securities Act"), and without
registration or qualification under the securities laws of any state or other
jurisdiction in reliance on exemptions from the registration requirements of the
Securities Act, including without limitation Regulation D under the Securities
Act and Section 4(2) of the Securities Act, provided, however that nothing in
this Agreement shall act or be construed as a limitation on Purchaser's right to
sell any of the securities to be acquired pursuant to this Agreement pursuant to
the Registration Statement contemplated by the Registration Rights Agreement, or
other provisions of the Registration Rights Agreement or in accordance with
applicable laws.
THEREFORE, in consideration of the mutual promises and covenants set
forth below and for other good and valuable consideration, the receipt and
sufficiency of which the parties acknowledge by their signatures below, the
parties agree as follows:
Agreement
1. Purchase of Common Stock. Subject to the terms and conditions of
this Agreement, the Company agrees to issue and sell, and Purchaser agrees,
severally not jointly, to acquire, Two Million Two Hundred Twenty-two Thousand
Two Hundred Twenty-two (2,222,222) fully paid and non-assessable shares (the
"Shares") of the Company's common stock, par value $.0001 per share (the "Common
Stock"). The purchase price (the "Purchase Price") payable by Purchaser for the
Shares shall be Four and 50/100 Dollars ($4.50) U.S. per share.
2. Closing.
2.1 Initial Closing. Upon execution of this Agreement (the
"Initial Closing") and on the date set forth above (the "Initial Closing Date")
Purchaser shall pay pro rata according to Schedule 2 Five Million Dollars
($5,000,000) of the Purchase Price by wire transfer to the Company's account of
presently available funds according to the following instructions:
First Security Bank of Utah
79 South Main Street, Salt Lake City, Utah 84111
ABA No. 124000012
Account No. 1820000865 (fonix corporation)
In return for such payment at the Initial Closing, the Company shall deliver
at the Closing certificates representing One Million One Hundred Eleven
Thousand, One Hundred Eleven (1,111,111) of the Shares (the "First Tranche
Shares") to the Purchaser, which First Tranche Shares shall be delivered to
each Purchaser and in each amount as shall be set forth in Schedule 2. At the
Initial Closing the parties shall execute and deliver the Registration Rights
Agreement in the form attached to this Agreement as Exhibit "A", and
<PAGE>
incorporated herein by reference.
2.2 Second Closing. On that date which shall be the next business
day following that date which shall be the sixtieth (60th) day following the
"Effectiveness Date," as that term is defined in the Registration Rights
Agreement (the "Second Closing Date"), each Purchaser shall pay to the Company
its pro rata share (as shall be determined by reference to Schedule 2) of Five
Million Dollars ($5,000,000) in return for which the Company shall deliver One
Million One Hundred Eleven Thousand, One Hundred Eleven (1,111,111) of the
Shares (the "Second Tranche Shares") to the Purchaser plus such additional
shares of Common Stock as shall be determined in accordance with Section 2.3(a)
(which events shall constitute the "Second Closing"), provided that Purchaser's
obligation to perform at the Second Closing is subject to the satisfaction or
waiver by Purchaser at or before the Second Closing, of the following
conditions:
(1) The Registration Statement required to be filed under the
Registration Rights Agreement shall continue to be in effect;
(2) The representations and warranties of the Company
contained in Section 4 hereof shall be true and correct in all material respects
(and the Company's issuance of the Second Tranche Shares shall at the Second
Closing constitute the Company's making each such representation and warranty as
of such date);
(3) The Market Price of the Common Stock (as defined below)
for the five (5) trading days immediately preceding the Second Closing Date
shall exceed $4.50 per share;
(4) The Dollar volume for trading for the Common Stock as
reported by the Nasdaq Stock Market or any securities exchange or quotation
service on which the Common Stock is then listed or quoted for each of the ten
(10) trading days preceding the Second Closing Date shall have equaled or
exceeded $1,000,000, and there shall be on such date at least eighteen (18)
market makers of the Common Stock, as reported by Bloomberg, LP or other similar
source; and
(5) There shall have been no change in the business or
financial condition of the Company that individually, or in the aggregate,
constitutes a Material Adverse Effect, as that term is defined in Section 4.5
from the Closing Date through and including the Second Closing Date (and the
Company's issuance of the Second Tranche Shares shall constitute the Company's
making such representation and warranty as of such date).
(6) The Term "Market price of the Common Stock" means, the
closing bid price of the Common stock as reported, at the option of the
Purchaser, by Bloomberg, LP or the National Association of Securities Dealers.
(7) The Company shall have timely complied with all of its
obligations under this Agreement as of such date.
2.3 Reset. (1) First Tranche Reset. At the Second Closing, in
addition to delivery of the Second Tranche Shares, the Company shall deliver
additional shares of Common Stock for no additional consideration (the "Reset
Shares") to the extent and as follows:
(a) If the average Closing Bid Price of the Common Stock
for the sixty calendar day period between the Effectiveness Date and the Second
Closing Date (the "60-day Average") is less than $5.40 per share, the Company
shall issue Reset Shares in such number as shall be determined by dividing (i)
the product of (A) the amount by which the 60-day Average is less than $5.40 and
(B) 1,111,111 by (ii) the 60-day Average.
(2) Second Tranche Reset. On that date which shall be the
<PAGE>
next following business day after the sixtieth (60th) day after the Second
Closing (the "Second Tranche Reset Date"), the Company shall issue additional
Reset Shares as provided in Section 2.3(1)(a), provided that the period for
determining the 60-day Average shall be the sixty (60) day period commencing on
the Second Closing Date.
(3) Issuance of Reset Shares. The Reset Shares, if any,
issued by the Company Pursuant to Section 2.3, shall be issued to each Purchaser
pro rata according to the percentage of the Purchase Price paid by each
Purchaser. The Shares and the Reset Shares shall be collectively referred to
herein as the "Securities."
(4) Reset Share Adjustment. If, at any time prior to or on
the Sixtieth (60th) day following the Second Tranche Reset Date, the Company
shall sell, or enter into an agreement to sell, Common Stock or securities
convertible into Common Stock at a discount of sixteen and two thirds percent
(16.66%) or greater from the Closing Bid Price of such Common Stock at time of
such sale or conversion, or the date of any such agreement (the "Discount
Percentage"), whichever is less, the Company shall issue additional Reset
Shares to each Purchaser, and such number shall be calculated as follows:
Securities actually issued x Adjusted Yield
--------------
.20
Where "Adjusted Yield" is equal to:
Discount Percentage
-------------------
1-Discount Percentage
(5) Short Sales. Purchaser covenants that it will engage in
no short sales of Common Stock during any period during which a 60-day Average
is being calculated.
2.4 Size of Offering. Purchaser and the Company agree that, in
addition to Purchaser's investment as contemplated by this Agreement, the
Company may offer and sell additional Securities to other investors as part of
the same offering, provided that the any additional investment shall be on the
same material terms and conditions as are herein set forth, and do not exceed,
in the aggregate $20,000,000.
3. Representations and Warranties of Purchaser. To induce the Company's
acceptance of this Agreement, each of Purchaser hereby severally certifies,
represents and warrants to the Company and its agents and attorneys as follows,
which representations and warranties are solely for the benefit of the Company
and may be waived in whole or in part at any time prior to Closing by the
Company:
3.1 Intent. Purchaser will be acquiring the Securities for its own
account, and Purchaser has no present arrangement (whether or not legally
binding) to sell any of such securities to or through any person or entity;
provided, however, that by making the representations herein, Purchaser does not
agree to hold any of the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
U.S. federal and state securities laws applicable to such disposition and any
restrictions imposed on such transfer by this Agreement or the instruments and
documents executed in connection with this Agreement. Purchaser understands that
the Securities must be held indefinitely unless such securities are subsequently
registered under the Securities Act or an exemption from registration is
available. Purchaser has been advised or is aware of the provisions of Rule 144
promulgated under the Securities Act.
<PAGE>
3.2 Sophisticated Investor. Purchaser is a "sophisticated
investor" (as described in Rule 506(b)(2)(ii) of Regulation D) and an
"accredited investor" (as defined in Rule 501(a) of Regulation D), and Purchaser
has such knowledge and experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in the Company's
securities.
3.3 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.
3.4 Authority. This Agreement has been duly authorized and validly
executed and delivered by each Purchaser and (assuming due authorization and
valid execution by the Company) is a legal, valid and binding agreement of
Purchaser enforceable against Purchaser in accordance with its terms, subject to
general principles of equity and to bankruptcy, insolvency or similar laws
relating to, or affecting generally the enforcement of creditors' rights and
remedies or by other equitable principles of general application. The person or
persons executing this Agreement and all exhibits to this Agreement and
documents or instruments executed in connection with this Agreement have all
requisite authority to do so on behalf of Purchaser.
3.5 Brokers, Finders. Neither Purchaser has signed any agreement
which would give rise to any claim by any person for brokerage commission,
finder's fees or similar payments by the Company relating to this Agreement or
the transactions contemplated hereby. See Section 4.14.
3.6 Organization; Authority. Each 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 this Agreement and to
carry out its obligations thereunder. The acquisition of the Securities 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. This Agreement
has been duly executed by such Purchaser and, when delivered by such Purchaser
in accordance with the terms hereof, 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.
3.7 Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument executed in connection herewith
(collectively, the "Transaction Documents"), and the consummation of the
transactions contemplated by this Agreement and such other documents and
instruments, and compliance with the requirements thereof, will not violate any
law, rule, regulation, order, writ, judgment, injunction, decree or award
binding on such Purchaser, or the provision of any indenture, instrument or
agreement to which such Purchaser is a party or is subject, or by which such
Purchaser or any of its assets is bound, or conflict with or constitute a
material default thereunder, or require the approval of any third-party pursuant
to any material contract, agreement, instrument, relationship or legal
obligation to which such Purchaser is subject or to which any of its assets,
operations or management may be subject.
3.8 Disclosure; Access to Information. Each Purchaser has received
copies of or has had access to all documents, records, books and other
information pertaining to such Purchaser's investment in the Company and the
Securities that have been requested by such Purchaser. Each Purchaser has been
afforded the opportunity to ask questions of the Company and its
<PAGE>
management. Such Purchaser further acknowledges that it understands that the
Company is subject to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and such Purchaser has
reviewed or received copies of any such reports that have been requested by it.
Such Purchaser further acknowledges that it has been provided with copies of the
Company's certificate of incorporation, as amended (the "Certificate"), and the
Company's by-laws (the "By-Laws").
3.9 Manner of Sale. At no time was Purchaser presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising with
respect to the Securities.
3.10 Accuracy of Other Materials. To the extent Purchaser has
received from the Company documents or other materials which constitute
summaries, projections, forecasts or estimates, Purchaser acknowledges the
following with respect to such documents or other materials. Such documents or
other materials are intended to illustrate projected financial and other results
based upon a set of assumptions (in some cases based on information obtained by
the Company from outside sources) the Company views as reasonable and
obtainable. All such summaries, projections, forecasts or estimates pertaining
to revenue growth, profitability and other similar financial or market data are
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. No representations or warranties of future performance by or market
trends for the Company are intended, and such are expressly disclaimed.
3.11 Accuracy of Representations and Information. All
representations made by Purchaser in this Agreement are correct and complete in
all material respects as of the date hereof.
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser as follows, which representations and
warranties are solely for the benefit of Purchaser and may be waived in whole or
in part by Purchaser at any time prior to Closing:
4.1 Company Status. The Company has registered its Common Stock
pursuant to Section 12(g) of the Exchange Act, is in full compliance with all
reporting requirements of the Exchange Act, and the Company has maintained all
requirements for the continued listing of its Common Stock, and such Common
Stock is currently listed on the Nasdaq SmallCap Market.
4.2 Current Public Information. The Company has furnished or made
available to Purchaser true and correct copies of all registration statements,
reports and documents, including proxy statements (other than preliminary proxy
statements), filed with the Securities and Exchange Commission (the "SEC") by or
with respect to the Company since December 31, 1996 and prior to the date of
this Agreement, pursuant to the Securities Act or the Exchange Act
(collectively, the "SEC Documents"). The SEC Documents are the only filings made
by or with respect to the Company since December 31, 1996 pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act or pursuant to the Securities
Act. The Company has filed all reports, schedules, forms, statements and other
documents required to be filed under Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act since January 1, 1996 and prior to the date of this Agreement. The
Company meets the "Registrant Requirement" for eligibility to use Form S-3 under
the Securities Act in order to register the Company's Common Stock for resales.
4.3 No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
<PAGE>
the Securities.
4.4 Regulation D Offering. Assuming the accuracy of the
representations and warranties of the Purchaser contained in Sections 3.1, 3.2,
3.3, 3.8 and 3.9 hereof, the offer, issuance and sale of the Securities to the
Purchaser as contemplated hereunder are exempt from the registration
requirements of the Securities Act.
4.5 Nonpublic Information. The Company confirms that it has not
provided to Purchaser or any of its representatives, agents or counsel any
information that constitutes or might constitute material nonpublic information.
4.6 Valid Issuance of Common Stock. The Company has an authorized
capitalization consisting 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. As of the date of this Agreement, the Company has issued and outstanding
45,149,952 shares of Common Stock. 12,880,000 shares of Common Stock are subject
to issuance upon the conversion or exercise of presently issued and outstanding
warrants and options of the Company. 13,800,000 shares of Common Stock are
reserved for issuance under the Company's existing stock option plans. 166,667
shares of the Company's Series A Preferred Stock have been issued and 166,667
shares are outstanding, which shares of Series A Preferred Stock are convertible
into 166,667 shares of Common Stock. 125,000 shares of the Company's Series B
Convertible Preferred Stock have been issued and no shares are outstanding.
187,500 shares of the Company's Series C Convertible Preferred Stock have been
issued and no shares are outstanding. All of the shares of Common Stock and
preferred stock of the Company issued to date have been duly and validly
authorized and issued and are fully paid and non-assessable. Except as set forth
above or as disclosed in Schedule 4.4, as of the date of this Agreement, (i)
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of it subsidiaries is or may become bound to redeem or issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities and (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the Securities Act. Except as
disclosed in Schedule 4.4, there are no securities or instruments containing any
anti-dilution, right of first refusal, preemptive rights or similar provisions
that will be triggered by the issuance of the Securities as described in this
Agreement. Upon issuance of the Securities, such securities will be duly and
validly issued, fully paid and non-assessable.
4.7 Organization and Qualification. The Company is a corporation
duly incorporated and existing in good standing under the laws of the State of
Delaware and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company does not have any
subsidiaries, except for those listed on Schedule 4.5 attached to this Agreement
(the "Subsidiaries"). The Subsidiaries are duly incorporated and existing in
good standing under the laws of the jurisdiction of their incorporation. The
Company and each of the Subsidiaries is duly qualified as a foreign corporation
to do business and is in good standing in every jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any effect on the
business, operations, properties,
<PAGE>
prospects, or financial condition of the entity or entities with respect to
which such term is used and which is material and adverse to such entity or to
other entities controlling or controlled by such entity, and/or any condition or
situation which would prohibit or otherwise interfere with the ability of the
entity or entities with respect to which said term is used to enter into and
perform its obligations under the Transaction Documents.
4.8 Authorization: Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform under the Transaction
Documents and to issue the Securities in accordance with the terms of the
Transaction Documents, (ii) the execution, issuance and delivery of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated by the Transaction Documents have been duly authorized
by all necessary corporate action, and no further consent or authorization of
the Company or its board of directors or stockholders is required, (iii) the
Transaction Documents have been duly executed and delivered by the Company, and
(iv) the Transaction Documents (assuming due authorization and valid and legal
execution Purchaser) constitute legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
4.9 Corporate Documents. The Company has furnished or made
available to Purchaser true and correct copies of the Certificate and the
Bylaws.
4.10 No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Securities, do not and will not (i) result in a violation of the Company's
Certificate or Bylaws, or (ii) conflict with, or result in a breach of or
forfeiture of any rights (or result in an event which with notice or lapse of
time or both would become a breach of or forfeiture of any rights) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of the Subsidiaries is a party, or (iii) result in a violation of
any federal or state law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the Company or
any of the Subsidiaries or by which any property or asset of the Company or any
of the Subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Securities in accordance with the terms of this
Agreement (other than any SEC, NASD or state securities filings which may be
required to be made by the Company subsequent to any Closing, and any
registration statement which may be filed in furtherance of this Agreement);
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of Purchaser herein. Neither the Company nor any
of the Subsidiaries is in violation of any material term of or in material
default under its Certificate, Certificate of Designation, Preferences and
Rights of any outstanding series of preferred stock or By-laws or their
organizational charter or by-laws, respectively, or any material contract,
agreement, mortgage, indebtedness, indenture,
<PAGE>
instrument, judgment, decree of order or any statute, rule or regulation
applicable to the Company or is subsidiaries, which has not been duly waived as
of the date of this Agreement.
4.11 SEC Documents. The Company has not provided to Purchaser any
information which according to applicable law, rule or regulation, should have
been disclosed publicly prior to the date hereof by the Company but which has
not been so disclosed. As of their respective dates, the SEC Documents complied,
and all similar documents filed with the SEC prior to the Closing Date will
comply, in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained, nor will any similar document filed with the SEC prior to the Closing
Date contain, 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, as of the dates thereof, complied, and all similar documents filed
with the SEC prior to the Closing Date will comply, as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC and other applicable rules and regulations with respect
thereto. Such financial statements were prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto or (ii) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed or summary statements
as permitted by Form 10-Q of the SEC) and fairly present in all material
respects the financial position of the Company and its consolidated subsidiaries
as of the dates thereof and the consolidated results of operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).
4.12 No Undisclosed Liabilities. Except to the extent described in
Schedule 4.10, the Company and the Subsidiaries have no liabilities or
obligations of a financial nature (whether accrued, absolute, contingent or
otherwise), which are material, individually or in the aggregate, and are not
disclosed in the SEC Documents, other than those incurred in the ordinary course
of the Company's or the Subsidiaries' respective businesses consistent with past
practice since December 31, 1996, and which, individually or in the aggregate,
do not or would not have a Material Adverse Effect on the Company.
4.13 Litigation and Other Proceedings. Except as may be set forth
in the SEC Documents or otherwise disclosed in writing to the Purchaser, there
are no lawsuits or proceedings pending or to the best knowledge of the Company
threatened, against the Company, nor has the Company received any written or
oral notice of any such action, suit, proceeding or investigation, which might
have a Material Adverse Effect on the Company or which might materially
adversely affect the transactions contemplated by this Agreement. Except as set
forth in the SEC Documents no judgment, order, writ, injunction or decree or
award has been issued by or, to the best knowledge of the Company, requested of
any court, arbitrator or governmental agency which might result in a Material
Adverse Effect or which might materially adversely affect the transactions
contemplated by this Agreement.
4.14 Other Documents or Materials. With respect to any document or
other materials received by Purchaser from the Company or its representatives
other than the Transaction Documents and the SEC Documents, (i) the Company has
no reason to believe any of such documents and materials or any projections
contained therein, as of the date of such other documents or materials,
contained errors or misstatements or do not adequately describe the status of
the development of the Company's technologies or its business as
<PAGE>
of such date, and (ii) such documents, materials and projections were prepared
by the Company and its management in good faith.
4.15 Nature of Company. The Company is not an open ended
investment company or a unit investment trust, registered or required to be
registered, or a closed end investment company required to be registered, but
not registered, under the Investment Company Act of 1940.
4.16 Brokers, Finders. Two entities have acted as brokers and/or
finders in connection with the transactions contemplated by this Agreement.
Payment of fees to such brokers and/or finders shall be the sole responsibility
of the Company. The Company has taken no action which would give rise to any
claim by any person for brokerage commission, finder's fees or similar payments
by Purchaser relating to this Agreement or the transactions contemplated hereby.
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 4.14 that may be due in connection with the transactions
contemplated hereby. The Company shall indemnify and hold harmless each of
Purchaser, their 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. See Section 3.5.
4.17 Absence of Certain Changes. Since December 31, 1996, no
Material Adverse Effect has been suffered by, and no material adverse
development has occurred in the business, properties, operations, financial
condition, results of operations or prospects of, the Company or the
Subsidiaries. The Company has not taken any steps, and does not currently expect
to take any steps, to seek protection pursuant to any bankruptcy law nor does
the Company or any of the Subsidiaries have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings.
4.18 Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. None of the Company's trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, government authorizations,
trade secrets or other intellectual property rights have expired or terminated,
or are expected to expire or terminate in the near future. The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or its
subsidiaries of trademarks, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secrets or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, there is no claim, action or proceeding being made or brought
against, or to the best knowledge of the Company, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patent, patent
rights, invention, copyright, license, service name, service mark, service mark
registration, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company and its subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of all of
their intellectual properties.
4.19 Internal Accounting Controls. The Company is aware of no
respect in which its system of internal accounting controls is not sufficient to
provide reasonable assurance that (i) transactions are executed in
<PAGE>
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
4.20 Tax Status. The Company and the Subsidiaries have made or
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject and has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports, declarations,
except those being contested in good faith and has set aside on its books
provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports, or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
4.21 Certain Transactions. Except as set forth in the SEC
Documents and except for arm's length transactions pursuant to which the Company
makes payments in the ordinary course of business upon terms no less favorable
than the Company could obtain from third parties and other than the grant of
stock options, none of the officers, directors, or employees of the Company (or
any spouse or relative of any such person) is presently a party to any
transaction with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
4.22 Dilution. The number of shares of Common Stock issuable as
Reset Shares may increase substantially in certain circumstances, including, but
not necessarily limited to, the circumstance wherein the trading price of the
Common Stock declines during the sixty day period between the Effectiveness Date
and the Second Closing Date. The Company's executive officers and directors have
studied and fully understand the nature of the transactions contemplated by this
Agreement and recognize that they have a potential dilutive effect. The board of
directors of the Company has concluded, in its good faith business judgment,
that such issuance is in the best interests of the Company. The Company
specifically acknowledges that its obligation to issue the Reset Shares is
binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Company.
4.23 Nasdaq Listing. The Company's Common Stock is presently
quoted on the Nasdaq SmallCap Stock Market under the symbol "FONX". The Company
is not in receipt of any written or oral 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 stock exchange, market or
trading facility or that the Common Stock will be delisted from such stock
exchange, market or trading facility. The Company is in compliance with such
listing and maintenance requirements.
5. Use and Disposition of Proceeds. The Company intends to use the
gross proceeds from the Shares for working capital, for acquisition activities,
to fund its ongoing research and development activities, and for
<PAGE>
the payment of general and administrative expenses. Purchaser acknowledges and
agrees that the Company shall have immediate access to the funds paid by
Purchaser pursuant to this Agreement according to the discretion of management
of the Company.
6. Company Reliance on Purchaser's Representations. Purchaser
understands that the Company is relying on the truth and accuracy of the
representations and warranties made herein by Purchaser in offering the
Securities for sale and in relying upon applicable exemptions available under
the Act and applicable state securities laws.
7. Restricted Shares. Purchaser understands and acknowledges that the
Securities have not been, and will not as of the time issued, registered under
the Securities Act and that they will be issued in reliance upon exemptions from
the registration requirements of the Securities Act, and thus cannot be resold
unless they are included in an effective registration statement filed under the
Securities Act or unless an exemption from registration is available for such
resale. With regard to the restrictions on resales of the Securities, Purchaser
is aware (a) that the Company will issue stop transfer orders to its stock
transfer agent in the event of attempts to improperly transfer any such
securities; and (b) that a restrictive legend will be placed on certificates
representing the Securities, which legend will read substantially as follows:
THESE SECURITIES ARE NOT REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND REGULATIONS
PROMULGATED UNDER THE ACT, INCLUDING EXEMPTIONS UNDER SECTIONS 3(b) AND 4(2) OF
THE ACT AND THE PROVISIONS OF REGULATION D UNDER SUCH ACT, AND SIMILAR
EXEMPTIONS UNDER STATE LAW. ACCORDINGLY, THESE SECURITIES MAY NOT BE RESOLD,
TRANSFERRED, PLEDGED, ASSIGNED OR HYPOTHECATED UNLESS SUCH SECURITIES ARE
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE ACT OR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENT IS AVAILABLE AND THE COMPANY HAS
RECEIVED AN OPINION OF SECURITIES COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
THAT SUCH EXEMPTION IS AVAILABLE.
The legend set forth above shall be removed, and the Company shall issue a
certificate without such legend to the holder of any such Securities upon which
such legend is stamped promptly and, in the case of clauses (i) or (ii) below,
no later than the Delivery Date, as such term is defined below, if, unless
otherwise required by state securities laws, (i) such Securities are registered
for resale under the Securities Act, (ii) in connection with a sale transaction,
such holder provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that a public sale, assignment or transfer of
such Securities may be made without registration under the Securities Act, or
(iii) such holder provides the Company with reasonable assurances that such
Securities can be sold pursuant to Rule 144 promulgated under the Securities Act
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold. Notwithstanding the removal
of the legend set forth above in the event the Securities are registered for
resale on an effective registration statement, the Company reserves the right to
affix a legend on certificates representing such Securities that any selling
shareholder must comply with the prospectus delivery requirements of the
Securities Act in connection with any resale. The Company shall bear the cost of
the removal of any legend as anticipated by this Section 7.
8. Other Covenants of the Parties.
8.1 Furnishing of Information. As long as Purchaser owns
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
<PAGE>
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 Securities 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 Purchaser) 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.
8.2 Listing of Securities. The Company shall (a) in accordance
with applicable Nasdaq rules but in any event not later than the Effectiveness
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 the
Securities, (b) take all steps necessary to cause such Securities 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
Purchaser evidence of such listing, and the Company shall maintain the listing
of its Common Stock on such exchange or market.
8.3 First Right. The Company shall not, directly or
indirectly, without the prior written consent of Purchaser, 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 Common Stock
or securities convertible into Common Stock at a price that is less than
eighty percent (80%) of the market price of the Common Stock at the time of
issuance of such security or investment (a "Subsequent Financing") for a
period of ninety (90) days after the Second 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 or options and upon
conversion of any currently outstanding convertible preferred stock or payment
of dividends thereon, in each case disclosed in Section 4.4 or Schedule 4.4,
(iii) securities issued in connection with the capitalization or creation of a
joint venture with a strategic partner, (iv) 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 (iv), shall not include an individual or group of
individuals) and (v) shares issued in a bona fide public offering by the
Company of its securities, unless (A) the Company delivers to Purchaser 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 effected, and attached to which shall be a term
sheet or similar document relating thereto and (B) Purchaser 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 all or any of the Purchaser 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
Purchaser shall fail to notify the Company of its intention to enter into such
<PAGE>
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 Purchaser with a second Subsequent Financing Notice, and
Purchaser shall again have the right of first refusal set forth above in this
subsection 8.4, if the Subsequent Financing subject to the initial Subsequent
Financing Notice shall not have been consummated for any reason on the terms
set forth in such Subsequent Financing Notice within 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.
Purchaser's rights under this Section 8.3 are subject to the rights of Thomson
Kernaghan & Co., as agent for certain other entities ("Thomson") as described
in that certain Common Stock Purchase Agreement between Thomson and the
Company and dated as of even date herewith.
8.4 Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield the number of shares of Common Stock issuable
as may be required to issue the Reset Shares.
8.5 Stockholder Meeting. The Company shall, not later than
August 1, 1998, hold a regular or special meeting of stockholders. At such
meeting of stockholders, the board of directors of the Company shall recommend
that the stockholders approve the transactions contemplated hereby, which
might result in the issuance of more than 20% of the Company's outstanding
Common Stock in accordance with NASDAQ Rule 4310(c)(25)(H)(i)(d)(2). Thomas
A. Murdock, as trustee of a voting trust (the "Voting Trust") pursuant to that
certain Voting Trust Agreement dated the 10th day of December, 1993 and as
amended to date, by and among the Company, Stephen M. Studdert, Thomas A.
Murdock, Roger D. Dudley, Beesmark Investments, L.C., a Utah limited liability
company, and Studdert Companies Corporation, a Utah corporation, and Thomas A.
Murdock, as Trustee, warrants and represents by his signature below:
(1) That the Voting Trust owns of record in excess of 56% of the
Common Stock of the Company issued and outstanding as of the date of this
Agreement; and
(2) That he will affirmatively vote such shares of Common Stock
in favor of such resolution.
8.6 Redemption by the Company. At any time prior to the
ninetieth (90th) day following the Second Closing Date, the Company may redeem
all or any of the Securities then outstanding and which have not been sold or
contracted to be sold by Purchaser by payment to the holder of the Securities
to be redeemed of $5.40 per share.
9. Transfer Agent Instructions.
9.1 Irrevocable Instructions. The Company will irrevocably
instruct its transfer agent to issue securities from time to time in such
amounts as shall be specified from time to time by the Company to the transfer
agent, bearing the restrictive legend specified in Section 7 of this Agreement
prior to registration of the Securities under the Securities Act, registered
in the name of the Purchaser or its nominee and in such denominations to be
specified by the Purchaser in connection with each Closing. The Company
warrants that no instruction other than such instructions referred to in this
Section 9 and stop transfer instructions to give effect to Section 7 hereof
prior to registration and sale of the Securities under the Securities Act will
be given by the Company to the transfer agent and that the securities shall
otherwise be freely transferable on the books and records of the Company as
and to the extent provided in this Agreement, the Registration Rights
Agreement, and applicable law. Nothing in this Section 9 shall affect in any
way the Purchaser's obligations and agreement to comply with all applicable
<PAGE>
securities laws upon resale of the Securities.
9.2 Transmission of Certificates. The Company will transmit the
certificates representing the unlegended Securities to be issued to the
Purchaser (i) as Reset Shares pursuant to any of the provisions of Section 2.3
hereof and/or (ii) as contemplated by Section 7 hereof. The term "Delivery
Date" means (w) the Second Closing Date, with respect to Reset Shares
contemplated by Section 2.3(1) hereof, (x) the Second Tranche Reset Date, with
respect to Reset Shares contemplated by Section 2.3(2) hereof, (y) the third
(3rd) business day after receipt by the Company of the certificate(s)
representing the legended Common Stock, as contemplated by Section 7 hereof.
9.3 Delay. The Company understands that a delay in the issuance
of the Securities beyond the Delivery Date could result in economic loss to
the Purchaser. As compensation to the Purchaser for such loss, the Company
agrees to pay late payments to the Purchaser for late issuance of unlegended
securities in accordance with the following schedule (where "No. Days Late"
is defined as the number of days beyond five (5) business days from Delivery
Date):
Late Payment For Each
No. Days Late $10,000 of Common Stock
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
Greater than 10 $1,000 +$200 for each Business
Day Late beyond 10 days
The Company shall pay any payments incurred under this Section 9.4 in
immediately available funds upon demand. Nothing herein shall limit the
Purchaser's right to pursue actual damages for the Company's failure to issue
and deliver the unlegended securities to the Purchaser.
9.4 Cover. If, by the relevant Delivery Date, the Company fails
for any reason to deliver the unlegended Shares to be issued pursuant to
Section 9.2 and after such Delivery Date, the holder of the securities (a
"Holder") purchases, in an open market transaction or otherwise, shares of
Common Stock (the "Covering Shares") in order to make delivery in satisfaction
of a sale of Common Stock by the Holder (the "Sold Shares"), which delivery
such Holder anticipated to make using the Shares to be issued upon such
conversion (a "Buy-In"), the Company shall pay to the Holder, in addition to
all other amounts contemplated in other provisions of the Transaction
Agreements, and not in lieu thereof, the Buy-In Adjustment Amount (as defined
below). The "Buy-In Adjustment Amount" is the amount equal to the excess, if
any, of (x) the Holder's total purchase price (including brokerage
commissions, if any) for the Covering Shares over (y) the net proceeds (after
brokerage commissions, if any) received by the Holder from the sale of the
Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the
Company in immediately available funds immediately upon demand by the Holder.
By way of illustration and not in limitation of the foregoing, if the Holder
purchases shares of Common Stock having a total purchase price (including
brokerage commissions) of $11,000 to cover a Buy-In with respect to shares of
Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount
which Company will be required to pay to the Holder will be $1,000.
<PAGE>
9.5 Electronic Transfer. In lieu of delivering physical
certificates representing the unlegended securities issuable upon conversion,
provided the Company's transfer agent is participating in the Depository Trust
Company ("DTC") Fast Automated Securities Transfer program, upon request of
the Purchaser and its compliance with the provisions contained in this
paragraph, so long as the certificates therefor do not bear a legend and the
Purchaser thereof is not obligated to return such certificate for the
placement of a legend thereon, the Company shall use its best efforts to cause
its transfer agent to electronically transmit the Common Stock issuable upon
conversion to the Purchaser by crediting the account of Purchaser's Prime
Broker with DTC through its Deposit Withdrawal Agent Commission system.
10. General Provisions.
10.1 Assignment. Neither this Agreement nor any rights of
Purchaser hereunder may be assigned by either party to any other person
without the prior written consent of the Company, provided that Purchaser may
assign its rights hereunder to another Purchaser or to any affiliate of the
Purchaser.
10.2 Attorneys' Fees. In the event any dispute arises under
this Agreement or the documents or instruments executed and delivered in
connection with this Agreement, and the parties hereto resort to litigation to
resolve such dispute, the prevailing party in any such litigation, in addition
to all other remedies at law or in equity, shall be entitled to an award of
costs and fees from the other party, which costs and fees shall include,
without limitation, reasonable attorneys' fees and legal costs.
10.3 Choice of Law; Venue. This Agreement will be construed and
enforced in accordance with and governed by the laws of the State of Delaware
and the federal law of the United States without reference to principles of
conflicts of law. The parties agree that, in the event of any dispute arising
out this Agreement or the transactions contemplated thereby, venue for such
dispute shall be in the state or federal courts located in Delaware, and that
each party hereto waives any objection to such venue based on forum non
conveniens.
10.4 Costs and Expenses. The parties shall be responsible for
and shall pay their own costs and expenses, including without limitation
attorneys' fees and accountants' fees and expenses, in connection with the
conduct of the due diligence inquiry, negotiation, execution and delivery of
this Agreement and the instruments, documents and agreements executed in
connection with this Agreement.
10.5 Counterparts/Facsimile Signatures. This Agreement may be
executed in one or more counterparts, each of which when so signed shall be
deemed to be an original, and such counterparts together shall constitute one
and the same instrument. In lieu of the original, a facsimile transmission or
copy of the original shall be as effective and enforceable as the original.
10.6 Entire Agreement: Amendment. This Agreement, together with
the exhibits to this Agreement and the other instruments and documents
delivered in connection with this Agreement constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party
in any manner by any warranties, representations or covenants except as
specifically set forth in this Agreement or therein. Except as expressly
provided in this Agreement, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
10.7 Headings. The headings of the sections and paragraphs of
this
<PAGE>
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
10.8 Notices. All notices or other communications provided for
under this Agreement shall be in writing, and mailed, telecopied or delivered
by hand delivery or by overnight courier service, as follows:
If to the Company:
fonix™ corporation
1225 Eagle Gate Tower
60 East South Temple
Salt Lake City, Utah 84111
Attn: Jeffrey N. Clayton, Esq.
Facsimile: (801) 328-8778
With a copy to:
DURHAM, EVANS, JONES & PINEGAR, P.C.
Key Bank Tower, Suite 850
50 South Main Street
Salt Lake City, Utah 84144
Attn: Jeffrey M. Jones, Esq.
Facsimile: (801) 538-2425
If to Purchaser:
To Purchaser at the addresses set forth in Schedule 2.
All notices and communications shall be effective as follows: When mailed,
upon three (3) business days after deposit in the mail (postage prepaid); when
telecopied, upon confirmed transmission of the telecopied notice; when hand
delivered, upon delivery; and when sent by overnight courier, the next
business day after deposit of the notice with the overnight courier.
10.9 Publicity. Purchaser shall not issue any press release or
otherwise make any public statement about the transactions contemplated by
this Agreement without the Company's prior written consent. The Company
agrees that it shall give Purchaser written notice of any press release or
other public statement with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, the Company shall not publicly disclose the
name of Purchaser without the prior written consent of such Purchaser, except
to the extent required by law. Purchaser acknowledges that this Agreement and
all or part of the Transaction Documents may be deemed to be "material
contracts" as that term is defined by Item 601(b)(10) of Regulation S-K, and
that the Company may therefore be required to file such documents as exhibits
to reports or registration statements filed under the Securities Act or the
Exchange Act. Purchaser further agrees that the status of such documents and
materials as material contracts shall be determined solely by the Company, in
consultation with its counsel.
10.10 Severability. Should any one or more of the provisions of
this Agreement be determined to be illegal or unenforceable, all other
provisions of this Agreement shall be given effect separately from the
provision or provisions determined to be illegal or unenforceable and shall
not be affected thereby.
10.11 Survival. All warranties, representations, indemnities
and agreements made in this Agreement by a party hereto shall survive the date
of this Agreement, the Closing Dates, and the issuance by the Company of the
Securities.
<PAGE>
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
IN WITNESS WHEREOF, the parties named below have caused this Agreement to
be executed, as of the date first above written.
PURCHASER:
JNC OPPORTUNITY FUND LTD.
By: /s/ Neil E. Chau
----------------------------------------
Its:
--------------------------------
DIVERSIFIED STRATEGIES FUND, L.P.
By: /s/ Neil E. Chau
----------------------------------------
Its:
--------------------------------
THE COMPANY:
fonix corporation
By: /s/ Thomas A. Murdock
-----------------------------------------
Thomas A. Murdock, President
/s/ Thomas A. Murdock
------------------------------------------
Thomas A. Murdock, Trustee of Voting Trust
Solely as to Section 8.5
SCHEDULE 2
JNC Opportunity Fund Ltd. $4,500,000
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
Diversified Strategies Fund, L.P. $500,000
c/o Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
<PAGE>
Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
Notices to Purchaser may be sent to the addressed listed above. Copies of any
notice to either Purchaser shall be provided as follows:
Encore Capital Management, L.L.C.
1207 Sunrise Valley Drive
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, Esq.
SCHEDULE 4.4
CAPITALIZATION
1. Schedule 6(a) to the Registration Rights Agreement is incorporated herein by
reference and made part hereof as if it were set out below in its entirety.
2. AcuVoice, Inc. Merger. The Company has entered into a definitive agreement
whereby AcuVoice, Inc., a California corporation, will be merged with and into
a wholly-owned subsidiary of the Company, fonix Acquisition Corporation. The
Company anticipates issuing between 2,500,000 and 3,000,000 shares of its
restricted Common Stock to the shareholders of AcuVoice when the merger
closes.
3. In addition to Purchaser, the Company has agreed to offer and sell shares of
Common Stock to investors that shall hereafter be identified by Southridge
Capital, which offers and sales will be on terms substantially similar to the
terms as set forth in this Agreement and will close according to the same
closing schedule set forth in this Agreement.
First Refusal, Preemptive Rights or Similar Provisions
None.
SCHEDULE 4.5
SUBSIDIARIES
1. fonix systems corporation, a Utah corporation, wholly owned by the Company.
2. fonix Acquisition Corporation, a Utah corporation, wholly owned by the
Company
<PAGE>
SCHEDULE 4.10
UNDISCLOSED FINANCIAL LIABILITIES
None.
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of March 9, 1998, 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
collectively the "Purchasers").
This Agreement is made pursuant to the Common 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.
"Initial Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.0001
per share.
"Effectiveness Date" means the first to occur of (i) the 90th day
following the Initial Closing Date or (ii) the fifth (5th) trading day
following receipt by the Company of notice, orally or in writing, that the
Commission either will not review the Registration Statement or will allow the
Registration Statement to become effective.
"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 30th day following the Initial Closing Date.
<PAGE>
"Holder" or "Holders" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
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 Securities; provided, however
that in order to account for the fact that the number of shares of Reset
Shares that are or will be issuable at the Second Closing will be determined
in part upon the market price of the Common Stock between the Initial Closing
Date and the Effective Date, Registrable Securities contemplated by this
definition shall be deemed to include not less than the number of shares of
Common Stock issuable at the Second Closing assuming that the 60-day Average
is $3.25. The Registration Statement shall cover at least such number of
shares of Common Stock as equals the sum of the number of Shares plus the
amount of Reset Shares assuming the 60-day Average set forth in the
immediately preceding sentence. To the extent that an additional Registration
Statement is required at any time to include the full amount of the Securities
as then are issued and outstanding, the Company covenants to file such
additional Registration Statement within ten (10) business days after notice
from Purchasers that such additional Registration Statement is required.
"Registration Statement" means the registration statement
contemplated by Section 2(a), including 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.
<PAGE>
"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.
"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.
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. Such Registration Statement shall state that in
accordance with Rules 416 and 457 under the Securities Act, it also covers
such indeterminate shares of Common Stock as may be issuable as Reset Shares.
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). 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 two 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"). In the event that (i)
the Registration Statement shall not have become effective by the
Effectiveness Date or (ii) the Registration Statement shall have become
effective by the Effectiveness Date, but shall thereafter cease to be
effective for two 20-day trading day periods during any 12-month period during
the Effectiveness Period, then the Company shall pay to the Purchasers, pro
rata, and as liquidated damages and not as a penalty, cash payment in the
amount of 2% of the Purchase Price paid by Purchasers to date, in the case of
clause (i) above, for each month after the Effectiveness Date or, in the case
of clause (ii) above, for each additional 20-day period during which the
Registration Statement shall not be effective. 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
<PAGE>
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 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 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 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
<PAGE>
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 Company 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 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
<PAGE>
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 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
<PAGE>
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, 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.
<PAGE>
(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.
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 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)
<PAGE>
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, (v) Securities Act
liability insurance, if the Company so desires such insurance, (vi) fees and
expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement, and (vii)
actual fees and expenses of Special Counsel to the Holders in an amount not to
exceed, in the aggregate for any Registration Statement, three thousand five
hundred dollars ($3,500). 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 (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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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,
<PAGE>
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 80% 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, 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 Purchasers:
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: Director
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
<PAGE>
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
-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
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
<PAGE>
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 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]
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
PURCHASER:
JNC OPPORTUNITY FUND LTD.
By: /s/ Neil E. Chau
----------------------------------------
Its:
--------------------------------
DIVERSIFIED STRATEGIES FUND, L.P.
By: /s/ Neil E. Chau
----------------------------------------
Its:
--------------------------------
THE COMPANY:
fonix corporation
By: /s/ Thomas A. Murdock
-----------------------------------------
Thomas A. Murdock, President
<PAGE>
Schedule 6(a)
Other Registration Rights
1. Siemens Aktiengesellschaft. On November 17, 1997, the Company entered into
a strategic collaborative agreement (the "Master Agreement") with Siemens
Semiconductor Group of Siemens Aktiengesellschaft ("Siemens") pursuant to
which the Company and Siemens will jointly pursue the development and
commercialization of products incorporating the Company's technologies into
Siemens integrated circuits ("ICs") for use in telecommunications products.
The Master Agreement anticipates multiple product-specific collaborative
efforts between the Company and Siemens for a variety of telecommunications
applications as described in multiple to-be-negotiated sub-agreements
("Statements of Work").
On February 11, 1998, the Company and Siemens executed the first Statement of
Work pursuant to the Master Agreement. In connection with the execution of
the Statement of Work, and as anticipated by the Master Agreement, on February
13, 1998, Siemens paid to the Company a total of 5,000,000 deutsche marks
("DM"). Of that amount, 600,000 DM was paid as the purchase price for
warrants ("Warrants") to purchase up to 1,000,000 shares of fonix restricted
common stock on or before the following dates and at the following exercise
prices:
No. of Shares Exercise Price Expiration Date
200,000 U.S. $10.00 December 31, 1998
200,000 U.S. $15.00 March 31, 1999
200,000 U.S. $20.00 June 30, 1999
200,000 U.S. $25.00 September 30, 1999
200,000 U.S. $30.00 December 31, 1999
Further, 2,000,000 DM was paid to acquire shares of the Company's restricted
Common Stock at any time prior to March 12, 1998. If Siemens elects not to
acquire all or a part of the Shares on or prior to March 12, 1998, the
2,000,000 DM (or any lesser portion thereof not used to purchase the Common
Stock) shall be accounted for as an additional advance royalty payment. The
purchase price of the Common Stock, if Siemens elects to purchase, shall be
the closing price of Common Stock as quoted by the Nasdaq SmallCap Market on
the day preceding the day on which Siemens notifies the Company of its
election to purchase the Common Stock.
The Common Stock, if any, issued to Siemens as a result either of Siemens
purchase of Common Stock or its exercise of the Warrants will be restricted
stock. The Company has agreed to register such shares of Common Stock within
30 days of the earlier of (i) the exercise by Siemens of Warrants to purchase
the first 200,000 shares of stock underlying the Warrants, or (ii) April 23,
1998. Siemens also has "piggyback" registration rights with respect to the
Shares and the common stock underlying the Warrants.
2. Synergetics, Inc.. Synergetics, Inc., is a Utah corporation that entered
into a Product Development and Assignment Agreement (the "Development
Agreement") with Phonic Technologies, Inc., a Utah corporation and the
Company's predecessor in interest ("PTI") on October 16, 1993. Under the
Development Agreement, Synergetics agreed to perform research and development
activities in connection with the development and commercialization of the
Company's voice recognition technologies and to irrevocably transfer and
assign to PTI any and all right, title and interest in and to the technology,
in return for which PTI agreed to fund the research and development activities
of Synergetics on an as-needed basis and to pay to Synergetics a royalty of
10% of net sales of any products incorporating the technology or from any
<PAGE>
Common Stock Purchase Agreement
COMMON STOCK PURCHASE AGREEMENT ("Agreement") by and among fonix
corporation, a Delaware corporation (the "Company"), Thomson Kernaghan &
Co., as agent for the investors listed in Schedule 2 (collectively
"Purchaser"), dated as of March 9, 1998.
Recitals
A. Purchaser desires to purchase, and the Company desires to sell
4,444,444 shares of the Company's restricted common stock on the terms and
conditions as are set forth below.
B. The parties intend that the issuance of the securities as
anticipated by this Agreement shall be accomplished without registration
under the U.S. Securities Act of 1933, as amended (the "Securities Act"),
and without registration or qualification under the securities laws of any
state or other jurisdiction in reliance on exemptions from the registration
requirements of the Securities Act, including without limitation Regulation
D under the Securities Act and Section 4(2) of the Securities Act,
provided, however that nothing in this Agreement shall act or be construed
as a limitation on Purchaser's right to sell any of the securities to be
acquired pursuant to this Agreement pursuant to the Registration Statement
contemplated by the Registration Rights Agreement, or other provisions of
the Registration Rights Agreement or in accordance with applicable laws.
THEREFORE, in consideration of the mutual promises and covenants set
forth below and for other good and valuable consideration, the receipt and
sufficiency of which the parties acknowledge by their signatures below, the
parties agree as follows:
Agreement
1. Purchase of Common Stock. Subject to the terms and conditions
of this Agreement, the Company agrees to issue and sell, and Purchaser
agrees to acquire, Four Million Four Hundred Forty-four Thousand Four
Hundred Forty-four (4,444,444) fully paid and non-assessable shares (the
"Shares") of the Company's common stock, par value $.0001 per share (the
"Common Stock"). The purchase price (the "Purchase Price") payable by
Purchaser for the Shares shall be Four and 50/100 Dollars ($4.50) U.S. per
share.
2. Closing.
2.1 Initial Closing. Upon execution of this Agreement (the "Initial
Closing") and on the date set forth above (the "Initial Closing Date") Purchaser
shall pay Ten Million Dollars ($10,000,000) of the Purchase Price by wire
transfer to the Company's account of presently available funds according to the
following instructions:
First Security Bank of Utah
79 South Main Street, Salt Lake City, Utah 84111
ABA No. 124000012
Account No. 1820000865 (fonix corporation)
In return for such payment at the Initial Closing, the Company shall
deliver at the Closing certificates representing Two Million Two Hundred
Twenty-two Thousand, Two Hundred twenty-two (2,222,222) of the Shares (the
"First Tranche Shares") to the Purchaser, which First Tranche Shares shall
be delivered to each Purchaser and in each amount as shall be set forth in
Schedule 2. At the Initial Closing the parties shall execute and deliver
the Registration Rights Agreement in the form attached to this Agreement as
Exhibit "A", and incorporated herein by reference.
<PAGE>
2.2 Second Closing. (1) On that date which shall be the next business day
following that date which shall be the sixtieth (60th) day following the
"Effectiveness Date," as that term is defined in the Registration Rights
Agreement (the "First Tranche Reset Date"), Purchaser shall pay to the Company
Ten Million Dollars ($10,000,000) in return for which the Company shall deliver
Two Million Two Hundred Twenty-two Thousand, Two Hundred twenty-two (2,222,222)
of the Shares (the "Second Tranche Shares") to the Purchaser plus such
additional shares of Common Stock as shall be determined in accordance with
Section 2.3(a) (which events shall constitute the "Second Closing"), provided
that Purchaser's obligation to perform at the Second Closing is subject to the
satisfaction or waiver by Purchaser at or before the Second Closing, of the
following conditions:
(a) The Registration Statement required to be filed under the Registration
Rights Agreement shall continue to be in effect;
(b) The representations and warranties of the Company contained in Section
4 hereof shall be true and correct in all material respects (and the Company's
issuance of the Second Tranche Shares shall at the Second Closing constitute the
Company's making each such representation and warranty as of such date);
(c) The Market Price of the Common Stock (as defined below) for the five
(5) trading days immediately preceding the Second Closing Date shall exceed
$4.50 per share;
(d) The Dollar volume for trading for the Common Stock as reported by the
Nasdaq Stock Market or any securities exchange or quotation service on which the
Common Stock is then listed or quoted for each of the ten (10) trading days
preceding the Second Closing Date shall have equaled or exceeded $400,000; and
(e) There shall have been no change in the business or financial condition
of the Company that individually, or in the aggregate, constitutes a Material
Adverse Effect, as that term is defined in Section 4.5 from the Closing Date
through and including the Second Closing Date (and the Company's issuance of the
Second Tranche Shares shall constitute the Company's making such representation
and warranty as of such date).
(f) The Term "Market price of the Common Stock" means, the closing bid
price of the Common stock as reported, at the option of the Purchaser, by
Bloomberg, LP or the National Association of Securities Dealers.
(2) If the Second Closing does not occur on the First Tranche Reset Date
because one or more of the foregoing conditions is not satisfied as of that
date, Purchaser shall have an additional sixty (60) calendar day period after
such First Tranche Reset Date during which it may, at its option, purchase the
Second Tranche Shares subject to the satisfaction by the Company of the
conditions set forth in Section 2.2(1) or the waiver of such conditions by
Purchaser. Regardless of whether the Second Closing occurs on the First Tranche
Reset Date or is postponed as set forth in this Section 2.2(2), the actual date
of the Second Closing shall be referred to herein as the "Second Closing Date."
2.3 Reset. (1) First Tranche Reset. On the First Tranche Reset Date, the
Company shall deliver additional shares of Common Stock for no additional
consideration (the "Reset Shares") to the extent and as follows:
<PAGE>
(a) If the average Closing Bid Price of the Common Stock for the sixty
calendar day period between the Effectiveness Date and the First Tranche Reset
Date (the "60-day Average") is less than $5.40 per share, the Company shall
issue Reset Shares in such number as shall be determined by dividing (i) the
product of (A) the amount by which the 60-day Average is less than $5.40 and (B)
2,222,222 by (ii) the 60-day Average.
(2) Second Tranche Reset. On that date which shall be the next following
business day after the sixtieth (60th) day after the Second Closing (the "Second
Tranche Reset Date"), the Company shall issue additional Reset Shares as
provided in Section 2.3(1)(a), provided that the period for determining the 60-
day Average shall be the sixty (60) day period commencing on the Second Closing
Date.
(3) Issuance of Reset Shares. The Reset Shares, if any, issued by the
Company Pursuant to Section 2.3, shall be issued to each Purchaser pro rata
according to the percentage of the Purchase Price paid by each Purchaser. The
Shares and the Reset Shares shall be collectively referred to herein as the
"Securities."
(4) Reset Share Adjustment. If, at any time prior to or on the Sixtieth
(60th) day following the Second Tranche Reset Date, the Company shall sell, or
enter into an agreement to sell, Common Stock or securities convertible into
Common Stock at a discount of sixteen and two thirds percent (16.66%) or greater
from the Closing Bid Price of such Common Stock at time of such sale or
conversion, or the date of any such agreement (the "Discount Percentage"),
whichever is less, the Company shall issue additional Reset Shares to each
Purchaser, and such number shall be calculated as follows:
Securities actually issued x Adjusted Yield
------------------------------------------
.20
Where "Adjusted Yield" is equal to:
Discount Percentage
-------------------
1-Discount Percentage
(5) Short Sales. Purchaser covenants that it will engage in no short
sales of Common Stock during any period during which a 60-day Average is being
calculated.
2.4 Regulation S. The Company covenants that, in the event that, as of
the Second Closing Date, the Registration Statement shall not have been declared
effective, the Company will solely with respect to non-U.S. persons cause the
Second Tranche Shares and any Reset Shares issuable in respect of the First
Tranche Shares to be issued pursuant to Regulation S under the Securities Act,
provided that the Company, in consultation with its securities counsel, has
determined that Regulation S would be available for the transactions
contemplated by this Section 2.4, and further provided that each Purchaser to
receive shares of Common Stock issued pursuant to Regulation S shall provide to
the Company such additional documentation or certification as the Company may
reasonably request to assure its compliance with the terms and conditions of
Regulation S.
2.5 Size of Offering. Purchaser and the Company agree that, in addition
to Purchaser's investment as contemplated by this Agreement, the Company may
offer and sell additional Securities to other investors as part of the same
offering, provided that the any additional investment
<PAGE>
shall be on the same material terms and conditions as are herein set forth, and
do not exceed, in the aggregate $10,000,000, and further provided that no more
than $5,000,000 of such additional investment shall be paid, and Securities
issued therefor at the First Closing.
3. Representations and Warranties of Purchaser. To induce the Company's
acceptance of this Agreement, each of Purchaser hereby severally certifies,
represents and warrants to the Company and its agents and attorneys as follows,
which representations and warranties are solely for the benefit of the Company
and may be waived in whole or in part at any time prior to Closing by the
Company:
3.1 Intent. Purchaser will be acquiring the Securities for its own
account, and Purchaser has no present arrangement (whether or not legally
binding) to sell any of such securities to or through any person or entity;
provided, however, that by making the representations herein, Purchaser does not
agree to hold any of the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
U.S. federal and state securities laws applicable to such disposition and any
restrictions imposed on such transfer by this Agreement or the instruments and
documents executed in connection with this Agreement. Purchaser understands that
the Securities must be held indefinitely unless such securities are subsequently
registered under the Securities Act or an exemption from registration is
available. Purchaser has been advised or is aware of the provisions of Rule 144
promulgated under the Securities Act.
3.2 Sophisticated Investor. Purchaser is a "sophisticated investor" (as
described in Rule 506(b)(2)(ii) of Regulation D) and an "accredited investor"
(as defined in Rule 501(a) of Regulation D), and Purchaser has such knowledge
and experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in the Company's securities.
3.3 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.
3.4 Authority. This Agreement has been duly authorized and validly
executed and delivered by each Purchaser and (assuming due authorization and
valid execution by the Company) is a legal, valid and binding agreement of
Purchaser enforceable against Purchaser in accordance with its terms, subject to
general principles of equity and to bankruptcy, insolvency or similar laws
relating to, or affecting generally the enforcement of creditors' rights and
remedies or by other equitable principles of general application. The person or
persons executing this Agreement and all exhibits to this Agreement and
documents or instruments executed in connection with this Agreement have all
requisite authority to do so on behalf of Purchaser.
3.5 Brokers, Finders. Each Purchaser has taken no action which would give
rise to any claim by any person for brokerage commission, finder's fees or
similar payments by the Company relating to this Agreement or the transactions
contemplated hereby. The Company 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 3.5 that may be due in connection
with the transactions contemplated hereby. Purchaser shall indemnify and hold
harmless the Company, 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
<PAGE>
fees) and expenses suffered in respect of any such claimed or existing fees, as
and when incurred. See Section 4.14.
3.6 Organization; Authority. Each 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 this Agreement and to carry out its
obligations thereunder. The acquisition of the Securities 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. This Agreement has been duly
executed by such Purchaser and, when delivered by such Purchaser in accordance
with the terms hereof, 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.
3.7 Absence of Conflicts. The execution and delivery of this Agreement
and any other document or instrument executed in connection herewith
(collectively, the "Transaction Documents"), and the consummation of the
transactions contemplated by this Agreement and such other documents and
instruments, and compliance with the requirements thereof, will not violate any
law, rule, regulation, order, writ, judgment, injunction, decree or award
binding on such Purchaser, or the provision of any indenture, instrument or
agreement to which such Purchaser is a party or is subject, or by which such
Purchaser or any of its assets is bound, or conflict with or constitute a
material default thereunder, or require the approval of any third-party pursuant
to any material contract, agreement, instrument, relationship or legal
obligation to which such Purchaser is subject or to which any of its assets,
operations or management may be subject.
3.8 Disclosure; Access to Information. Each Purchaser has received copies
of or has had access to all documents, records, books and other information
pertaining to such Purchaser's investment in the Company and the Securities that
have been requested by such Purchaser. Each Purchaser has been afforded the
opportunity to ask questions of the Company and its management. Such Purchaser
further acknowledges that it understands that the Company is subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such Purchaser has reviewed or received copies
of any such reports that have been requested by it. Such Purchaser further
acknowledges that it has been provided with copies of the Company's certificate
of incorporation, as amended (the "Certificate"), and the Company's by-laws (the
"By-Laws").
3.9 Manner of Sale. At no time was Purchaser presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising with respect to the
Securities.
3.10 Accuracy of Other Materials. To the extent Purchaser has received
from the Company documents or other materials which constitute summaries,
projections, forecasts or estimates, Purchaser acknowledges the following with
respect to such documents or other materials. Such documents or other materials
are intended to illustrate projected financial and other results based upon a
set of assumptions (in some cases based on information obtained by the Company
from outside sources) the Company views as reasonable and obtainable. All such
summaries, projections, forecasts or estimates pertaining to revenue growth,
profitability and other similar financial or market data are forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual
<PAGE>
results to differ materially from those projected. No representations or
warranties of future performance by or market trends for the Company are
intended, and such are expressly disclaimed.
3.11 Accuracy of Representations and Information. All representations
made by Purchaser in this Agreement and all documents and instruments related to
this Agreement, and all information provided by Purchaser to the Company
concerning Purchaser are correct and complete in all material respects as of the
date hereof.
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to Purchaser as follows, which representations and
warranties are solely for the benefit of Purchaser and may be waived in whole or
in part by Purchaser at any time prior to Closing:
4.1 Company Status. The Company has registered its Common Stock pursuant
to Section 12(g) of the Exchange Act, is in full compliance with all reporting
requirements of the Exchange Act, and the Company has maintained all
requirements for the continued listing of its Common Stock, and such Common
Stock is currently listed on the Nasdaq SmallCap Market.
4.2 Current Public Information. The Company has furnished or made
available to Purchaser true and correct copies of all registration statements,
reports and documents, including proxy statements (other than preliminary proxy
statements), filed with the Securities and Exchange Commission (the "SEC") by or
with respect to the Company since December 31, 1996 and prior to the date of
this Agreement, pursuant to the Securities Act or the Exchange Act
(collectively, the "SEC Documents"). The SEC Documents are the only filings made
by or with respect to the Company since December 31, 1996 pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act or pursuant to the Securities
Act. The Company has filed all reports, schedules, forms, statements and other
documents required to be filed under Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act since January 1, 1996 and prior to the date of this Agreement. The
Company meets the "Registrant Requirement" for eligibility to use Form S-3 under
the Securities Act in order to register the Company's Common Stock for resales.
4.3 No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
the Securities.
4.4 Regulation D Offering. Assuming the accuracy of the representations
and warranties of the Purchaser contained herein, the offering, issuance or sale
of the Securities as contemplated hereunder are exempt from the registration
requirements of the Securities Act.
4.5 Nonpublic Information. The Company confirms that it has not provided
to Purchaser or any of its representatives, agents or counsel any information
that constitutes or might constitute material nonpublic information.
4.6 Valid Issuance of Common Stock. The Company has an authorized
capitalization consisting 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. As of the date of this Agreement, the Company has issued and outstanding
45,149,952 shares of Common Stock. 12,880,000 shares of Common Stock are subject
to issuance upon the conversion or exercise of presently issued and outstanding
warrants and options of the Company. 13,800,000 shares of Common Stock are
reserved for issuance under the Company's existing stock option plans. 166,667
shares of the Company's
<PAGE>
Series A Preferred Stock have been issued and 166,667 shares are outstanding,
which shares of Series A Preferred Stock are convertible into 166,667 shares of
Common Stock. 125,000 shares of the Company's Series B Convertible Preferred
Stock have been issued and no shares are outstanding. 187,500 shares of the
Company's Series C Convertible Preferred Stock have been issued and no shares
are outstanding. All of the shares of Common Stock and preferred stock of the
Company issued to date have been duly and validly authorized and issued and are
fully paid and non-assessable. Except as set forth above or as disclosed in
Schedule 4.4, as of the date of this Agreement, (i) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of it
subsidiaries is or may become bound to redeem or issue additional shares of
capital stock of the Company or any of its subsidiaries or options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company or any of its subsidiaries, (ii) there are no outstanding
debt securities and (iii) there are no agreements or arrangements under which
the Company or any of its subsidiaries is obligated to register the sale of any
of their securities under the Securities Act. Except as disclosed in Schedule
4.4, there are no securities or instruments containing any anti-dilution, right
of first refusal, preemptive rights or similar provisions that will be triggered
by the issuance of the Securities as described in this Agreement. Upon issuance
of the Securities, such securities will be duly and validly issued, fully paid
and non-assessable.
4.7 Organization and Qualification. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of
Delaware and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company does not have any
subsidiaries, except for those listed on Schedule 4.5 attached to this Agreement
(the "Subsidiaries"). The Subsidiaries are duly incorporated and existing in
good standing under the laws of the jurisdiction of their incorporation. The
Company and each of the Subsidiaries is duly qualified as a foreign corporation
to do business and is in good standing in every jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any effect on the
business, operations, properties, prospects, or financial condition of the
entity or entities with respect to which such term is used and which is material
and adverse to such entity or to other entities controlling or controlled by
such entity, and/or any condition or situation which would prohibit or otherwise
interfere with the ability of the entity or entities with respect to which said
term is used to enter into and perform its obligations under the Transaction
Documents.
4.8 Authorization: Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform under the Transaction
Documents and to issue the Securities in accordance with the terms of the
Transaction Documents, (ii) the execution, issuance and delivery of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated by the Transaction Documents have been duly authorized
by all necessary corporate action, and no further consent or authorization of
the Company or its board of directors or stockholders is required, (iii) the
Transaction Documents have been duly executed and delivered by the Company, and
(iv) the Transaction Documents (assuming due authorization and valid and legal
execution Purchaser) constitute legal, valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such
<PAGE>
enforceability may be limited by applicable bankruptcy, insolvency, or
similar laws relating to, or affecting generally the enforcement of, creditors'
rights and remedies or by other equitable principles of general application.
4.9 Corporate Documents. The Company has furnished or made available to
Purchaser true and correct copies of the Certificate and the Bylaws.
4.10 No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Securities, do not and will not (i) result in a violation of the Company's
Certificate or Bylaws, or (ii) conflict with, or result in a breach of or
forfeiture of any rights (or result in an event which with notice or lapse of
time or both would become a breach of or forfeiture of any rights) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of the Subsidiaries is a party, or (iii) result in a violation of
any federal or state law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the Company or
any of the Subsidiaries or by which any property or asset of the Company or any
of the Subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Securities in accordance with the terms of this
Agreement (other than any SEC, NASD or state securities filings which may be
required to be made by the Company subsequent to any Closing, and any
registration statement which may be filed in furtherance of this Agreement);
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of Purchaser herein. Neither the Company nor any
of the Subsidiaries is in violation of any material term of or in material
default under its Certificate, Certificate of Designation, Preferences and
Rights of any outstanding series of preferred stock or By-laws or their
organizational charter or by-laws, respectively, or any material contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree of
order or any statute, rule or regulation applicable to the Company or is
subsidiaries, which has not been duly waived as of the date of this Agreement.
4.11 SEC Documents. The Company has not provided to Purchaser any
information which according to applicable law, rule or regulation, should have
been disclosed publicly prior to the date hereof by the Company but which has
not been so disclosed. As of their respective dates, the SEC Documents complied,
and all similar documents filed with the SEC prior to the Closing Date will
comply, in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained, nor will any similar document filed with the SEC prior to the Closing
Date contain, 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,
<PAGE>
in light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Documents, as of the
dates thereof, complied, and all similar documents filed with the SEC prior to
the Closing Date will comply, as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC and other applicable rules and regulations with respect thereto. Such
financial statements were prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed or summary statements as
permitted by Form 10-Q of the SEC) and fairly present in all material respects
the financial position of the Company and its consolidated subsidiaries as of
the dates thereof and the consolidated results of operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
4.12 No Undisclosed Liabilities. Except to the extent described in
Schedule 4.10, the Company and the Subsidiaries have no liabilities or
obligations of a financial nature (whether accrued, absolute, contingent or
otherwise), which are material, individually or in the aggregate, and are not
disclosed in the SEC Documents, other than those incurred in the ordinary course
of the Company's or the Subsidiaries' respective businesses consistent with past
practice since December 31, 1996, and which, individually or in the aggregate,
do not or would not have a Material Adverse Effect on the Company.
4.13 Litigation and Other Proceedings. Except as may be set forth in the
SEC Documents or otherwise disclosed in writing to the Purchaser, there are no
lawsuits or proceedings pending or to the best knowledge of the Company
threatened, against the Company, nor has the Company received any written or
oral notice of any such action, suit, proceeding or investigation, which might
have a Material Adverse Effect on the Company or which might materially
adversely affect the transactions contemplated by this Agreement. Except as set
forth in the SEC Documents no judgment, order, writ, injunction or decree or
award has been issued by or, to the best knowledge of the Company, requested of
any court, arbitrator or governmental agency which might result in a Material
Adverse Effect or which might materially adversely affect the transactions
contemplated by this Agreement.
4.14 Other Documents or Materials. With respect to any document or other
materials received by Purchaser from the Company or its representatives other
than the Transaction Documents and the SEC Documents, (i) the Company has no
reason to believe any of such documents and materials or any projections
contained therein, as of the date of such other documents or materials,
contained errors or misstatements or do not adequately describe the status of
the development of the Company's technologies or its business as of such date,
and (ii) such documents, materials and projections were prepared by the Company
and its management in good faith.
4.15 Nature of Company. The Company is not an open ended investment
company or a unit investment trust, registered or required to be registered, or
a closed end investment company required to be registered, but not registered,
under the Investment Company Act of 1940.
4.16 Brokers, Finders. Two entities have acted as brokers and/or finders
in connection with the transactions contemplated by this Agreement. Payment of
fees to such brokers and/or finders shall be the sole responsibility of the
Company. The Company has taken no action which would give rise to any claim by
any person for brokerage commission,
<PAGE>
finder's fees or similar payments by Purchaser relating to this Agreement or the
transactions contemplated hereby. 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 4.14 that may be due in
connection with the transactions contemplated hereby. The Company shall
indemnify and hold harmless each of Purchaser, their 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. See Section 3.5.
4.17 Absence of Certain Changes. Since December 31, 1996, no Material
Adverse Effect has been suffered by, and no material adverse development has
occurred in the business, properties, operations, financial condition, results
of operations or prospects of, the Company or the Subsidiaries. The Company has
not taken any steps, and does not currently expect to take any steps, to seek
protection pursuant to any bankruptcy law nor does the Company or any of the
Subsidiaries have any knowledge or reason to believe that its creditors intend
to initiate involuntary bankruptcy proceedings.
4.18 Intellectual Property Rights. The Company and its subsidiaries own
or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. None of the Company's trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, government authorizations,
trade secrets or other intellectual property rights have expired or terminated,
or are expected to expire or terminate in the near future. The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or its
subsidiaries of trademarks, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secrets or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, there is no claim, action or proceeding being made or brought
against, or to the best knowledge of the Company, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patent, patent
rights, invention, copyright, license, service name, service mark, service mark
registration, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company and its subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of all of
their intellectual properties.
4.19 Internal Accounting Controls. The Company is aware of no respect in
which its system of internal accounting controls is not sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with managements's
general or specific authorization and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
4.20 Tax Status. The Company and the Subsidiaries have made or filed all
federal and state income and all other tax returns, reports
<PAGE>
and declarations required by any jurisdiction to which it is subject and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports, declarations,
except those being contested in good faith and has set aside on its books
provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports, or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
4.21 Certain Transactions. Except as set forth in the SEC Documents and
except for arm's length transactions pursuant to which the Company makes
payments in the ordinary course of business upon terms no less favorable than
the Company could obtain from third parties and other than the grant of stock
options, none of the officers, directors, or employees of the Company (or any
spouse or relative of any such person) is presently a party to any transaction
with the Company (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
4.22 Dilution. The number of shares of Common Stock issuable as Reset
Shares may increase substantially in certain circumstances, including, but not
necessarily limited to, the circumstance wherein the trading price of the Common
Stock declines during the sixty day reset periods incident to the First and
Second Tranche Reset Dates. The Company's executive officers and directors have
studied and fully understand the nature of the transactions contemplated by this
Agreement and recognize that they have a potential dilutive effect. The board of
directors of the Company has concluded, in its good faith business judgment,
that such issuance is in the best interests of the Company. The Company
specifically acknowledges that its obligation to issue the Reset Shares is
binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Company.
4.23 Nasdaq Listing. The Company's Common Stock is presently quoted on
the Nasdaq SmallCap Stock Market under the symbol "FONX". The Company is not in
receipt of any written or oral 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 stock exchange, market or trading
facility or that the Common Stock will be delisted from such stock exchange,
market or trading facility.
5. Use and Disposition of Proceeds. The Company intends to use the gross
proceeds from the Shares for working capital, for acquisition activities, to
fund its ongoing research and development activities, and for the payment of
general and administrative expenses. Purchaser acknowledges and agrees that the
Company shall have immediate access to the funds paid by Purchaser pursuant to
this Agreement according to the discretion of management of the Company.
6. Company Reliance on Purchaser's Representations. Purchaser understands
that the Company is relying on the truth and accuracy of the representations and
warranties made herein by Purchaser in offering the Securities for sale and in
relying upon applicable exemptions available under the Act and applicable state
securities laws.
<PAGE>
7. Restricted Shares. Purchaser understands and acknowledges that the
Securities have not been, and will not as of the time issued, registered under
the Securities Act and that they will be issued in reliance upon exemptions from
the registration requirements of the Securities Act, and thus cannot be resold
unless they are included in an effective registration statement filed under the
Securities Act or unless an exemption from registration is available for such
resale. With regard to the restrictions on resales of the Securities, Purchaser
is aware (a) that the Company will issue stop transfer orders to its stock
transfer agent in the event of attempts to improperly transfer any such
securities; and (b) that a restrictive legend will be placed on certificates
representing the Securities, which legend will read substantially as follows:
THESE SECURITIES ARE NOT REGISTERED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT AND REGULATIONS PROMULGATED UNDER
THE ACT, INCLUDING EXEMPTIONS UNDER SECTIONS 3(b) AND 4(2) OF
THE ACT AND THE PROVISIONS OF REGULATION D UNDER SUCH ACT, AND
SIMILAR EXEMPTIONS UNDER SATE LAW. ACCORDINGLY, THESE
SECURITIES MAY NOT BE RESOLD, TRANSFERRED, PLEDGED, ASSIGNED OR
HYPOTHECATED UNLESS SUCH SECURITIES ARE COVERED BY AN EFFECTIVE
REGISTRATION STATEMENT FILED UNDER THE ACT OR AN EXEMPTION
FROM SUCH REGISTRATION REQUIREMENT IS AVAILABLE AND THE COMPANY
HAS RECEIVED AN OPINION OF SECURITIES COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH EXEMPTION IS AVAILABLE.
The legend set forth above shall be removed, and the Company shall issue a
certificate without such legend to the holder of any such Securities upon
which such legend is stamped promptly and, in the case of clauses (i) or
(ii) below, no later than the Delivery Date, as such term is defined below,
if, unless otherwise required by state securities laws, (i) such Securities
are registered for resale under the Securities Act and Purchaser notifies
the Company of a sale of all or a portion of such Securities after such
registration is declared effective, (ii) in connection with a sale
transaction, such holder provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale,
assignment or transfer of such Securities may be made without registration
under the Securities Act, or (iii) such holder provides the Company with
reasonable assurances that such Securities can be sold pursuant to Rule 144
promulgated under the Securities Act without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold. Notwithstanding the removal of the legend set forth
above in the event the Securities are registered for resale on an effective
registration statement, the Company reserves the right to affix a legend on
certificates representing such Securities that any selling shareholder must
comply with the prospectus delivery requirements of the Securities Act in
connection with any resale. The Company shall bear the cost of the removal
of any legend as anticipated by this Section 7.
8. Other Covenants of the Parties.
8.1 Furnishing of Information. As long as Purchaser owns 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 Securities 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 Purchaser)
<PAGE>
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.
8.2 Listing of Securities. The Company shall (a) not later than the
Effective 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
the Securities, (b) take all steps necessary to cause such Securities 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
Purchaser evidence of such listing, and the Company shall maintain the listing
of its Common Stock on such exchange or market.
8.3 First Right. The Company shall not, directly or indirectly, without
the prior written consent of Purchaser, 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 Common Stock or securities
convertible into Common Stock at a price that is less than eighty percent (80%)
of the market price of the Common Stock at the time of issuance of such security
or investment (a "Subsequent Financing") for a period of ninety (90) days after
the Second 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 or options and upon conversion of any currently outstanding
convertible preferred stock or payment of dividends thereon, in each case
disclosed in Section 4.4 or Schedule 4.4, (iii) securities issued in connection
with the capitalization or creation of a joint venture with a strategic partner,
(iv) 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 (iv), shall not
include an individual or group of individuals) and (v) shares issued in a bona
fide public offering by the Company of its securities, unless (A) the Company
delivers to Purchaser a written notice (the "Subsequent Financing Notice") of
its intention to effect such Subsequent Financing, which Subsequent Financing
Notice shall describe in reasonable detail the proposed terms of such Subsequent
Financing, the amount of proceeds intended to be raised thereunder, the Person
with whom such Subsequent Financing shall be effected, and attached to which
shall be a term sheet or similar document relating thereto and (B) Purchaser
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 all or any of the Purchaser 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
Purchaser 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
<PAGE>
Subsequent Financing Notice; provided, that the Company shall provide Purchaser
with a second Subsequent Financing Notice, and Purchaser shall again have the
right of first refusal set forth above in this subsection 8.4, if the Subsequent
Financing subject to the initial Subsequent Financing Notice shall not have been
consummated for any reason on the terms set forth in such Subsequent Financing
Notice within 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.
8.4 Available Shares. The Company shall have at all times authorized and
reserved for issuance, free from preemptive rights, shares of Common Stock
sufficient to yield the number of shares of Common Stock issuable as may be
required to issue the Reset Shares.
8.5 Stockholder Meeting. The Company shall, not later than August 1,
1998, hold a regular or special meeting of stockholders. At such meeting of
stockholders, the board of directors of the Company shall recommend that the
stockholders approve the transactions contemplated hereby, which might result in
the issuance of more than 20% of the Company's outstanding Common Stock in
accordance with NASDAQ Rule 4310(c)(25)(H)(i)(d)(2). Thomas A. Murdock, as
trustee of a voting trust (the "Voting Trust") pursuant to that certain Voting
Trust Agreement dated the 10th day of December, 1993 and as amended to date, by
and among the Company, Stephen M. Studdert, Thomas A. Murdock, Roger D. Dudley,
Beesmark Investments, L.C., a Utah limited liability company, and Studdert
Companies Corporation, a Utah corporation, and Thomas A. Murdock, as Trustee,
warrants and represents by his signature below:
(1) That the Voting Trust owns of record in excess of
56% of the Common Stock of the Company issued and outstanding as of
the date of this Agreement; and
(2) That he will affirmatively vote such shares
of Common Stock in favor of such resolution.
8.6 Redemption by the Company. At any time prior to the ninetieth (90th)
day following the Second Closing Date, the Company may redeem all or any of the
Securities then outstanding and which have not been sold or contracted to be
sold by Purchaser by payment to the holder of the Securities to be redeemed of
$5.40 per share.
9. Transfer Agent Instructions.
9.1 Irrevocable Instructions. The Company will irrevocably instruct its
transfer agent to issue securities from time to time in such amounts as shall be
specified from time to time by the Company to the transfer agent, bearing the
restrictive legend specified in Section 7 of this Agreement prior to
registration of the Securities under the Securities Act, registered in the name
of the Purchaser or its nominee and in such denominations to be specified by the
Purchaser in connection with each Closing. The Company warrants that no
instruction other than such instructions referred to in this Section 9 and stop
transfer instructions to give effect to Section 7 hereof prior to registration
and sale of the Securities under the Securities Act will be given by the Company
to the transfer agent and that the securities shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement, the Registration Rights Agreement, and applicable
law. Nothing in this Section 9 shall affect in any way the Purchaser's
obligations and agreement to comply with all applicable securities laws upon
resale of the Securities.
9.2 Regulation S. To the extent any of the Securities are
<PAGE>
issued pursuant to Regulation S under the Securities Act, and subject to
the completeness and accuracy of the Purchaser's representations and
warranties herein or in any document the Purchaser may hereafter provide to
the Company to facilitate the Company's compliance with Regulation S, and
following the expiration of any applicable Restricted Period (as those
terms are defined in Regulation S), the Company, shall, at its expense,
take all necessary action (including the issuance of an opinion of counsel)
to assure that the Company's transfer agent shall issue stock certificates
without restrictive legend or stop orders in the name of Purchaser (or its
nominee (being a non-U.S. Person) or such non-U.S. Persons as may be
designated by Purchaser) and in such denominations to be specified at
either Closing representing the number of shares of Securities issuable
upon at such Closings, as applicable. Nothing in this Section 9, however,
shall affect in any way any Purchaser's or such nominee's obligations and
agreement to comply with all applicable securities laws upon resale of the
Securities.
9.3 Transmission of Certificates. The Company will transmit
the certificates representing the unlegended Securities to be issued to the
Purchaser (i) as Reset Shares pursuant to any of the provisions of Section
2.3 hereof, (ii) as contemplated by Section 7 hereof, and/or (iii) pursuant
to Section 9.2 hereof via express courier, by electronic transfer or
otherwise by the Delivery Date. The term "Delivery Date" means (w) the
Second Closing Date, with respect to Reset Shares contemplated by Section
2.3(1) hereof, (x) the Second Tranche Reset Date, with respect to Reset
Shares contemplated by Section 2.3(2) hereof, (y) the third (3rd) business
day after receipt by the Company of the certificate(s) representing the
legended Common Stock, as contemplated by Section 7 or by Section 9.2
hereof.
9.4 Delay. The Company understands that a delay in the issuance of the
Securities beyond the Delivery Date could result in economic loss to the
Purchaser. As compensation to the Purchaser for such loss, the Company agrees to
pay late payments to the Purchaser for late issuance of unlegended securities in
accordance with the following schedule (where "No. Days Late" is defined as the
number of days beyond five (5) business days from Delivery Date):
Late Payment For Each
No. Days Late $10,000 of Common Stock
------------- -----------------------
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
greater than 10 $1,000 +$200 for each
Business Day Late beyond
10 days
The Company shall pay any payments incurred under this Section 9.4 in
immediately available funds upon demand. Nothing herein shall limit the
Purchaser's right to pursue actual damages for the Company's failure to
issue and deliver the unlegended securities to the Purchaser.
9.5 Cover. If, by the relevant Delivery Date, the Company fails for any
reason to deliver the unlegended Shares to be issued pursuant to Section 9.2 and
after such Delivery Date, the holder of the securities
<PAGE>
(a "Holder") purchases, in an open market transaction or otherwise, shares of
Common Stock (the "Covering Shares") in order to make delivery in satisfaction
of a sale of Common Stock by the Holder (the "Sold Shares"), which delivery such
Holder anticipated to make using the Shares to be issued upon such conversion (a
"Buy-In"), the Company shall pay to the Holder, in addition to all other amounts
contemplated in other provisions of the Transaction Agreements, and not in lieu
thereof, the Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment
Amount" is the amount equal to the excess, if any, of (x) the Holder's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received by the
Holder from the sale of the Sold Shares. The Company shall pay the Buy-In
Adjustment Amount to the Company in immediately available funds immediately upon
demand by the Holder. By way of illustration and not in limitation of the
foregoing, if the Holder purchases shares of Common Stock having a total
purchase price (including brokerage commissions) of $11,000 to cover a Buy-In
with respect to shares of Common Stock it sold for net proceeds of $10,000, the
Buy-In Adjustment Amount which Company will be required to pay to the Holder
will be $1,000.
9.6 Electronic Transfer. In lieu of delivering physical certificates
representing the unlegended securities issuable upon conversion, provided the
Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, upon request of the
Purchaser and its compliance with the provisions contained in this paragraph, so
long as the certificates therefor do not bear a legend and the Purchaser thereof
is not obligated to return such certificate for the placement of a legend
thereon, the Company shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion to the
Purchaser by crediting the account of Purchaser's Prime Broker with DTC through
its Deposit Withdrawal Agent Commission system.
10. General Provisions.
10.1 Assignment. Neither this Agreement nor any rights of Purchaser
hereunder may be assigned by either party to any other person without the prior
written consent of the Company, provided that Purchaser may assign this
Agreement or its rights hereunder to another of Purchaser or its affiliates or
the affiliates of another Purchaser without first obtaining the written consent
of the Company.
10.2 Attorneys' Fees. In the event any dispute arises under this
Agreement or the documents or instruments executed and delivered in connection
with this Agreement, and the parties hereto resort to litigation to resolve such
dispute, the prevailing party in any such litigation, in addition to all other
remedies at law or in equity, shall be entitled to an award of costs and fees
from the other party, which costs and fees shall include, without limitation,
reasonable attorneys' fees and legal costs.
10.3 Choice of Law; Venue. This Agreement will be construed and enforced
in accordance with and governed by the laws of the State of Delaware and the
federal law of the United States without reference to principles of conflicts of
law. The parties agree that, in the event of any dispute arising out this
Agreement or the transactions contemplated thereby, venue for such dispute shall
be in the state or federal courts located in Delaware, and that each party
hereto waives any objection to such venue based on forum non conveniens.
10.4 Costs and Expenses. The parties shall be responsible for and shall
pay their own costs and expenses, including without limitation attorneys' fees
and accountants' fees and expenses, in connection with the conduct of the due
diligence inquiry, negotiation, execution and delivery
<PAGE>
of this Agreement and the instruments, documents and agreements executed in
connection with this Agreement.
10.5 Counterparts/Facsimile Signatures. This Agreement may be executed in
one or more counterparts, each of which when so signed shall be deemed to be an
original, and such counterparts together shall constitute one and the same
instrument. In lieu of the original, a facsimile transmission or copy of the
original shall be as effective and enforceable as the original.
10.6 Entire Agreement: Amendment. This Agreement, together with the
exhibits to this Agreement and the other instruments and documents delivered in
connection with this Agreement constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth in
this Agreement or therein. Except as expressly provided in this Agreement,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
10.7 Headings. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
10.8 Notices. All notices or other communications provided for under this
Agreement shall be in writing, and mailed, telecopied or delivered by hand
delivery or by overnight courier service, as follows:
If to the Company:
fonix corporation
1225 Eagle Gate Tower
60 East South Temple
Salt Lake City, Utah 84111
Attn: Jeffrey N. Clayton, Esq.
Facsimile: (801) 328-8778
With a copy to:
DURHAM, EVANS, JONES & PINEGAR, P.C.
Key Bank Tower, Suite 850
50 South Main Street
Salt Lake City, Utah 84144
Attn: Jeffrey M. Jones, Esq.
Facsimile: (801) 538-2425
If to Purchaser:
To Purchaser at the addresses set forth in Schedule 2.
All notices and communications shall be effective as follows: When mailed,
upon three (3) business days after deposit in the mail (postage prepaid);
when telecopied, upon confirmed transmission of the telecopied notice; when
hand delivered, upon delivery; and when sent by overnight courier, the next
business day after deposit of the notice with the overnight courier.
10.9 Publicity. Purchaser shall not issue any press release or otherwise
make any public statement about the transactions contemplated by this Agreement
without the Company's prior written consent. The Company agrees that it shall
give Purchaser written notice of any press release or
<PAGE>
other public statement with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of Purchaser without the prior written consent of such Purchaser, except to the
extent required by law. Purchaser acknowledges that this Agreement and all or
part of the Transaction Documents may be deemed to be "material contracts" as
that term is defined by Item 601(b)(10) of Regulation S-K, and that the Company
may therefore be required to file such documents as exhibits to reports or
registration statements filed under the Securities Act or the Exchange Act.
Purchaser further agrees that the status of such documents and materials as
material contracts shall be determined solely by the Company, in consultation
with its counsel.
10.10 Severability. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions of
this Agreement shall be given effect separately from the provision or provisions
determined to be illegal or unenforceable and shall not be affected thereby.
10.11 Survival. All warranties, representations, indemnities and
agreements made in this Agreement by a party hereto shall survive the date of
this Agreement, the Closing Dates, and the issuance by the Company of the
Securities. Each of the parties agrees to indemnify, defend and hold harmless
the other party from, against and in respect of all damages resulting from the
breach by such party or the inaccuracy of any representation or warranty
contained in this Agreement or the breach or non-fulfillment of any covenant or
agreement on the part of such party under this Agreement, whether or not such
breach, inaccuracy, or non-fulfillment was or should have been known by the
other party.
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
IN WITNESS WHEREOF, the parties named below have caused this
Agreement to be executed, as of the date first above written.
PURCHASER:
THOMSON KERNAGHAN & CO., AGENT
By: /s/ M. Valentine
---------------------------------------
Its: Agent
THE COMPANY:
fonix corporation
By: /s/ Thomas A. Murdock
--------------------------------------
Thomas A. Murdock, President
Thomas A. Murdock, Trustee of Voting Trust
<PAGE>
Solely as to Section 8.5
/s/ Thomas A. Murdock
------------------------------------------
THOMAS A. MURDOCK
SCHEDULE 2
PURCHASERS AND NUMBER OF SHARES PURCHASED
Thomson Kernaghan & Co., corporation, shall receive all Securities to
be issued under the Agreement, as the agent for the investors listed below:
DOMINION CAPITAL FUND, LTD $4,250,000
SOVEREIGN PARTNERS, LP $3,000,000
EXCALIBUR LIMITED PARTNERSHIP $700,000
CANADIAN ADVANTAGE LIMITED PARTNERSHIP $750,000
ENDEAVOUR CAPITAL FUND, S.A. $1,300,000
All notices to be provided to the investors under the Agreement shall
be sent to:
Thomson Kernaghan & Co.
365 Bay Street
Toronto, Canada
Fax (416) 860-3610
Attention: Mark Valentine
With copies to:
Krieger & Prager
319 5th Avenue
New York, New York 10016
Fax: (212) 213-2077
Attn. Samuel M. Krieger, Esq.
SCHEDULE 4.4
CAPITALIZATION
1. Schedule 6(a) to the Registration Rights Agreement is incorporated
herein by reference and made part hereof as if it were set out below
in its entirety.
2. AcuVoice, Inc. Merger. The Company has entered into a definitive
agreement whereby AcuVoice, Inc., a California corporation, will be
merged with and into a wholly-owned subsidiary of the Company, fonix
Acquisition Corporation. The Company anticipates issuing between
2,500,000 and 3,000,000 shares of its restricted Common Stock to the
shareholders of AcuVoice when the merger closes.
3. In addition to Purchaser, the Company has agreed to offer and sell
shares of Common Stock to investors that shall hereafter be
identified by Encore Capital Management, L.L.C., which offers and
sales will be on terms substantially identical to the terms as set
forth in this Agreement and will close according to the same closing
schedule set forth in this Agreement, provided that such additional
sales shall not exceed, in the aggregate, $10,000,000, only
$5,000,000 of which amount may be paid at the First Closing.
<PAGE>
First Refusal, Preemptive Rights or Similar Provisions
None.
SCHEDULE 4.5
SUBSIDIARIES
1. fonix systems corporation, a Utah corporation, wholly owned by the
Company.
2. fonix Acquisition Corporation, a Utah corporation, wholly owned by
the Company
SCHEDULE 4.10
UNDISCLOSED FINANCIAL LIABILITIES
None.
<PAGE>
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of March 9, 1998, by and among fonix corporation, a Delaware
corporation (the "Company"), and Thomson Kernaghan & Co., as agent for the
investors listed in Schedule 2 to the Purchase Agreement (each a "Purchaser" and
collectively the "Purchasers").
This Agreement is made pursuant to the Common 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.
"Initial Closing Date" shall have the meaning set forth in the
Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value $.0001 per
share.
"Effectiveness Date" means the first to occur of (i) the 90th day
following the Initial Closing Date or (ii) the fifth (5th) trading day following
receipt by the Company of notice, orally or in writing, that the Commission
either will not review the Registration Statement or will allow the Registration
Statement to become effective.
"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 30th day following the Initial Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may be,
from time to time of Registrable Securities.
<PAGE>
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial 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 Securities; provided, however that
in order to account for the fact that the number of shares of Reset Shares that
are or will be issuable at the Second Closing will be determined in part upon
the market price of the Common Stock between the Initial Closing Date and the
Effective Date, Registrable Securities contemplated by this definition shall be
deemed to include not less than the number of shares of Common Stock issuable at
the Second Closing assuming that the 60-day Average is $3.25. The Registration
Statement shall cover at least such number of shares of Common Stock as equals
the sum of the number of Shares plus the amount of Reset Shares assuming the 60-
day Average set forth in the immediately preceding sentence. To the extent that
an additional Registration Statement is required at any time to include the full
amount of the Securities as then are issued and outstanding, the Company
covenants to file such additional Registration Statement within (10) business
days after notice from Purchasers that such additional Registration Statement is
required.
"Registration Statement" means the registration statement contemplated
by Section 2(a), including 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.
<PAGE>
"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.
"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.
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. Such Registration Statement shall state that in accordance with
Rules 416 and 457 under the Securities Act, it also covers such indeterminate
shares of Common Stock as may be issuable as Reset Shares. 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).
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 two 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"). In
the event that (i) the Registration Statement shall not have become effective by
the Effectiveness Date or (ii) the Registration Statement shall have become
effective by the Effectiveness date, but shall thereafter cease to be effective
for two 20-day trading day periods during any 12-month period during the
Effectiveness Period, then the Company shall pay to the Purchasers, pro rata,
and as liquidated damages and not as a penalty, cash payment in the amount of 2%
of the Purchase Price paid by Purchasers to date, in the case of clause (i)
above, for each month after the Effectiveness Date or, in the case of clause
(ii) above, for each additional 20-day period during which the Registration
Statement shall not be effective. 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
<PAGE>
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 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 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 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)
<PAGE>
whenever the Company receives (or representatives of the Company 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 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
<PAGE>
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 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
<PAGE>
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, 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
<PAGE>
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.
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 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
<PAGE>
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, (v) Securities Act liability
insurance, if the Company so desires such insurance, (vi) fees and expenses of
all other Persons retained by the Company in connection with the consummation of
the transactions contemplated by this Agreement, and (vii) actual fees and
expenses of Special Counsel to the Holders in an amount not to exceed, in the
aggregate for any Registration Statement, three thousand five hundred dollars
($3,500). 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
(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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
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 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
<PAGE>
may not be given, unless the same shall be in writing and signed by the
Company and the Holders of at least 80% 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, 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 Purchasers:
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.
<PAGE>
(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
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 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.
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
PURCHASER:
By:______________________________________
Its:__________________________________
THE COMPANY:
fonix corporation
By:____________________________________
Thomas A. Murdock, President
Schedule 6(a)
Other Registration Rights
1. Siemens Aktiengesellschaft. On November 17, 1997, the Company entered into
a strategic collaborative agreement (the "Master Agreement") with Siemens
Semiconductor Group of Siemens Aktiengesellschaft ("Siemens") pursuant to
which the Company and Siemens will jointly pursue the development and
commercialization of products incorporating the Company's technologies into
Siemens integrated circuits ("ICs") for use in telecommunications products.
The Master Agreement anticipates multiple product-specific collaborative
efforts between the Company and Siemens for a variety of telecommunications
applications as described in multiple to-be-negotiated sub-agreements
("Statements of Work").
On February 11, 1998, the Company and Siemens executed the first Statement of
Work pursuant to the Master Agreement. In connection with the execution of
the Statement of Work, and as anticipated by the Master Agreement, on February
13, 1998, Siemens paid to the Company a total of 5,000,000 deutsche marks
("DM"). Of that amount, 600,000 DM was paid as the purchase price for
warrants ("Warrants") to purchase up to 1,000,000 shares of fonix restricted
common stock on or before the following dates and at the following exercise
prices:
No. of Shares Exercise Price Expiration Date
200,000 U.S. $10.00 December 31, 1998
200,000 U.S. $15.00 March 31, 1999
200,000 U.S. $20.00 June 30, 1999
200,000 U.S. $25.00 September 30, 1999
200,000 U.S. $30.00 December 31, 1999
Further, 2,000,000 DM was paid to acquire shares of the Company's restricted
Common Stock at any time prior to March 12, 1998. If Siemens elects not to
acquire all or a part of the Shares on or prior to March 12, 1998, the
2,000,000 DM (or any lesser portion thereof not used to purchase the Common
Stock) shall be accounted for as an additional advance royalty payment. The
purchase price of the Common Stock, if Siemens elects to purchase, shall be
the closing price of Common Stock as quoted by the Nasdaq SmallCap Market on
<PAGE>
the day preceding the day on which Siemens notifies the Company of its
election to purchase the Common Stock.
The Common Stock, if any, issued to Siemens as a result either of Siemens
purchase of Common Stock or its exercise of the Warrants will be restricted
stock. The Company has agreed to register such shares of Common Stock within
30 days of the earlier of (i) the exercise by Siemens of Warrants to purchase
the first 200,000 shares of stock underlying the Warrants, or (ii) April 23,
1998. Siemens also has "piggyback" registration rights with respect to the
Shares and the common stock underlying the Warrants.
2. Synergetics, Inc.. Synergetics, Inc., is a Utah corporation that entered
into a Product Development and Assignment Agreement (the "Development
Agreement") with Phonic Technologies, Inc., a Utah corporation and the
Company's predecessor in interest ("PTI") on October 16, 1993. Under the
Development Agreement, Synergetics agreed to perform research and development
activities in connection with the development and commercialization of the
Company's voice recognition technologies and to irrevocably transfer and
assign to PTI any and all right, title and interest in and to the technology,
in return for which PTI agreed to fund the research and development activities
of Synergetics on an as-needed basis and to pay to Synergetics a royalty of
10% of net sales of any products incorporating the technology or from any
revenues from licensing the technology (the "Royalty").
Effective June 16, 1994, PTI was merged with and into the Company. The
Company succeeded to the rights of PTI under the Development Agreement. In
connection with its research and development activities performed under the
Development Agreement, Synergetics engaged software development engineers,
linguists, computer scientists and other professional and administrative
personnel (collectively "Developers") to work on the technology. Some of the
Developers were paid cash consideration for their services; others were issued
(by Synergetics), either in addition to or in lieu of cash compensation, certifi
cates representing fractional interests in the Royalty payments to be received
by Synergetics from the Company (each such right a "Project Share"). The
Project Shares issued to the Developers each represent one sixtieth (1/60th)
of one percent (1%) of the total Royalty payments payable by the Company under
the Development Agreements, provided, that the amounts payable to Project
Share holders is limited to a maximum of $30,000 for each Project Share held,
upon payment of which maximum amount the Project Shares terminate and have no
further force or effect.
On March 13, 1997, the Company and Synergetics signed a Memorandum of
Understanding (the "MOU") which manifested their agreement in principle that
the Royalty should be canceled in exchange for the offering and issuance by
the Company of warrants to purchase up to 4,800,000 shares of the Company's
Common Stock. The MOU specified that the warrants would have an exercise
price of $10.00 per share, but would not be exercisable until the market price
of the Common Stock reaches $37.50 per share for a specified period of time.
In recognition of the issuance by Synergetics of the Project Shares, the MOU
further anticipated that the Company would issue a pro rata portion of the
warrants in exchange for cancellation of the Royalty to any Developers who
desired to tender their Project Shares for such warrants.
The definitive agreements anticipated by the MOU have not been finally
negotiated or executed. Nevertheless, the Company anticipates that in order
to accomplish any offering of warrants in exchange for Project Shares, it will
have to file a registration statement covering both the warrants and the
underlying Common Stock.
3. In addition to the foregoing, the Company presently has 2 effective S-3
registration statements covering resales of Common Stock underlying
convertible preferred stock and warrants issued in connection with the
preferred stock. The Company does not presently anticipate filing additional
<PAGE>
registration statements with respect to those preferred stock transactions.
4. In addition to Purchaser, the Company has agreed to offer and sell shares of
Common Stock to investors that shall hereafter be identified by Encore Capital
Management, L.L.C., which offers and sales will be on terms substantially
identical to the terms as set forth in this Agreement and will close according
to the same closing schedule set forth in this Agreement, provided that such
additional sales shall not exceed, in the aggregate, $10,000,000, only
$5,000,000 of which amount may be paid at the First Closing.
<PAGE>
ROYALTY MODIFICATION AGREEMENT
ROYALTY MODIFICATION AGREEMENT (the "Agreement"), by and between fonix
corporation, a Delaware corporation having its principal place of business at
1225 Eagle Gate Tower, 60 East South Temple Street, Salt Lake City, Utah 84111
(the "Company" or "fonix"), and SYNERGETICS, INC., a Utah corporation having its
principal place of business at 286 South 600 East, Suite C, Provo, Utah 84606
("Synergetics"), dated as of the date hereof.
RECITALS
1. On October 16, 1993, Synergetics entered into that certain Product
Development and Assignment Agreement (the "Initial Agreement") with Phonic
Technologies, Inc., a Utah corporation and fonix's predecessor in interest
("PTI"), pursuant to which Synergetics agreed to perform research and
development activities in connection with the development and commercialization
of certain computer human voice recognition technologies then known as the
"VoiceBox" project and now known as "Automatic Speech Recognition Technologies"
("ASRT") (collectively all of the technology related to VoiceBox and ASRT will
be referred to in this Agreement as the "Technology"), and to irrevocably
transfer and assign to PTI any and all right, title and interest in and to the
Technology, in return for which PTI agreed to fund the research and development
activities of Synergetics on an as-needed basis and to pay to Synergetics a
royalty of ten percent (10%) of "Net Sales" (as that term is defined in the
Initial Agreement) of any products incorporating the Technology or from any
revenues from licensing the Technology (the "Royalty").
2. Effective June 16, 1994, PTI was merged with and into the Company,
with the Company being the surviving entity. In connection with the merger, the
Company succeeded to the rights of PTI under the Initial Agreement. On March
30, 1995, the Company and Synergetics entered into a Re-Stated Product
Development and Assignment Agreement (the "Re-Stated Agreement") (the Initial
and Re-Stated Agreements are referred to collectively in this Agreement as the
"Development Agreements") pursuant to which the arrangement existing under the
Initial Agreement was ratified and certain other changes were made. After the
date of the Re-Stated Agreement and until March 13, 1997, Synergetics continued
to perform research and development activities related to the Technology, and
the Company continued to finance such activities in return for Synergetics's
assignment of the resulting Technology, although no Royalty was ever paid
because the Company received no revenue from sales or licensing during that
period.
3. In connection with its research and development activities performed
under the Initial Agreement, Synergetics engaged software development engineers,
linguists, computer scientists and other professional and administrative
personnel (collectively "Developers") to work on the Technology. Some of the
Developers were paid cash consideration for their services; others were issued,
either in addition to or in lieu of cash compensation, certificates representing
fractional interests in the Royalty payments to be received by Synergetics from
the Company in the event of revenues from sales of products incorporating or
licensing of the Technology (each such right a "Project Share" and collectively
"Project Shares"). The Project Shares issued to the Developers each represent
one sixtieth (1/60th) of one percent (1%) of the total Royalty payments payable
by the Company under the Development Agreements, provided,
<PAGE>
however, that the amounts payable to Project Share holders is limited to a
maximum of $30,000 for each Project Share held, upon payment of which maximum
amount the Project Shares terminate and have no further force or effect. In
addition to the Developers described above, Synergetics has granted Project
Shares to certain other individuals and entities that have provided equipment,
supplies, support services or capital to Synergetics, which such persons are,
for purposes of this Agreement, referred to as Developers.
4. On March 13, 1997, the Company and Synergetics signed a Memorandum of
Understanding (the "MOU") which manifested their agreement in principle that the
Royalty should be canceled in exchange for the offering and issuance by the
Company of warrants to purchase up to 4,800,000 shares of the Company's common
stock, par value $.0001 per share ("Common Stock"). In recognition of the
issuance by Synergetics of the Project Shares, the MOU further anticipated that
the Company would issue a pro rata portion of the warrants in exchange for
cancellation of the Royalty to any Developers who desired to tender their
Project Shares for such warrants. fonix and Synergetics acknowledge that the
Project Shares currently have and the warrants, when issued, will have no
present market value. The MOU further provided that certain of the employees
and independent contractors then engaged by Synergetics would become full-time
employees or independent contractors of the Company, and C. Hal Hansen
("Hansen"), the majority shareholder and President of Synergetics, or
Synergetics would become a consultant to the Company.
5. After the execution of the MOU, certain of the Developers and other
employees and independent contractors of Synergetics became employees and/or
independent contractors of the Company. Commencing on March 14, 1997, the
Company has been conducting the research and development of the Technology at
its own research facility staffed by its own employees, including some persons
who were Developers prior to March 14, 1997. Furthermore, since March 14, 1997,
the Company has engaged Synergetics and Hansen as development consultants to the
Company.
6. The Company and Synergetics now desire to enter into this Agreement,
which is agreed by them to constitute the definitive agreement contemplated by
the MOU, and which shall specify the terms and conditions on and the extent to
which the Royalty shall be exchanged and canceled and the Re-Stated Development
Agreement modified or terminated.
In consideration of the foregoing recitals and the mutual covenants and
agreements set forth below and for other good and valuable consideration, the
receipt and adequacy of which the parties acknowledge, the parties agree as
follows:
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<PAGE>
AGREEMENT
Section 1.
Covenants
1.1 Offer of Warrants. The Company agrees to offer warrants (the
"Warrants") to purchase up to a total of four million eight hundred thousand
(4,800,000) shares of Common Stock, pro rata, to Synergetics and to the holders
of Project Shares who desire to tender their Project Shares to the Company in
exchange for the issuance of Warrants and who comply with the instructions for
tendering such Project Shares to the Company as shall be set forth in the
offering documents to be delivered in connection with the Company's offering of
the Warrants. The exercise price of the Warrants shall be ten dollars ($10.00)
(the "Exercise Price") per share of Common Stock issuable upon such exercise,
and the Warrants shall be exercisable at any time after the date of issuance
thereof, provided, that the Warrants shall not be exercisable until the first to
occur of (i) that date that the per share closing bid price of the Common Stock
as quoted on the Nasdaq SmallCap Market or other exchange or quotation system on
which the Common Stock is then traded or listed shall have been equal to or
greater than thirty-seven and 50/100 dollars ($37.50) (the "Effective Price")
for a period of fifteen (15) consecutive Trading Days, or (ii) September 30,
2000 (the first to occur being the "Exercise Date"), provided further, that the
Warrants shall be immediately exercisable up to and including the Exercise Date
in the event of any merger to which the Company is a party but is not the
surviving entity or the sale of substantially all of the Company's assets.
"Trading Day" means 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 is
listed or is traded. The Warrants shall be nontransferable by the holders
thereof except pursuant to a transfer upon the death of any holder according to
the laws of testate or intestate succession. The Exercise Price and the
Effective Price shall be adjustable in the event of a stock split, stock
dividend or reorganization The Warrants shall be offered and issued in the form
attached hereto as Exhibit "A".
(a) Consideration. The only consideration the Company shall accept
for the issuance of the Warrants shall be the tender of Project Shares, together
with executed copies of any documentation incident to the tender of Project
Shares as shall be requested by the Company at the time of any offer of the
Warrants, provided that Synergetics shall have the right to reasonably object to
the form of any such additional documentation. For each Project Share tendered,
the Company shall issue Warrants to purchase eight hundred (800) shares of
Common Stock. Exchanges of Project Shares in amounts less than the total number
of Project Shares then owned by any Project Share holder shall not be accepted
by the Company, and single Project Shares shall not be partially exchangeable
for Warrants to purchase less than eight hundred (800) shares of Common Stock,
provided, however, that if any Project Share holder or Synergetics shall present
to the Company a written instrument in form and content reasonably acceptable to
the Company to the effect that Synergetics and such Project Share holder have
agreed between them that the Warrants otherwise issuable upon exchange of any
Project Shares should be issued in part to the Project Share holder and in part
to Synergetics or some other party, which adjustment shall be made as a
consequence of any transaction between Synergetics and such Project Share
holder, including without limitation "Advances" as that term is defined in the
-3-
<PAGE>
MOU, the Company shall comply with the instructions set forth in such writing
with respect to the exchange of Project Shares and the issuance of Warrants
therefor.
(b) Registration of Warrants and Common Stock Underlying Warrants. No
offer to exchange or any actual exchange of Warrants for Project Shares shall be
made or allowed, and no Common Stock shall be issued upon any exercise of the
Warrants, unless and until such time as the Company has filed with the U.S.
Securities and Exchange Commission (the "Commission") a registration statement
covering the total number of Warrants issuable upon tender of all of the Project
Shares and the total number of shares of Common Stock issuable upon exercise of
the Warrants (the "Registration Statement") on Form S-3 or such other
registration form as shall then be available to the Company, and such
Registration Statement has become effective such that offers and sales of the
Warrants, and subject to the terms and conditions of the Warrants, the Common
Stock issuable upon exercise of the Warrants, covered thereby can be made by the
Company. The Registration Statement shall be prepared and filed by the Company
promptly after the date of this Agreement (the "Effective Date"), but in no
event later than that date forty-five (45) calendar days after the Effective
Date (the "Filing Date"). After the filing of the Registration Statement, the
Company shall use its best efforts to cause the Registration Statement to become
effective. If and when the Registration Statement becomes effective, the
Company shall use its best efforts to maintain the effectiveness of the
Registration Statement until the earlier of (i) that date all of the Warrants
have been exercised or (ii) that date upon which the last of the Warrants shall
have expired by their terms. Offers and exchanges of the Warrants for Project
Shares shall be made and accepted by the Company for a period of ninety (90)
days following the date the Registration Statement becomes effective, or such
longer period as the Company may elect in its sole discretion (the "Warrant
Offer Period"). After the termination of the Warrant Offer Period, the Company
shall have no obligation to continue the effectiveness of the Registration
Statement or to offer additional Warrants in exchange for Project Shares not
tendered during such period. If the Registration Statement is not declared
effective by the Commission, the Company and Synergetics agree to promptly
determine another means to offer the Warrants and Common Stock issuable upon
exercise of the Warrants to holders of Project Shares. Promptly upon
determination and implementation of such an alternative means, the Company shall
use its best efforts to comply with each time period and other obligation set
forth with respect to the offer of Warrants for Project Shares. The parties
agree that the holders of the Project Shares shall be intended third party
beneficiaries of the covenants of this Section 1.1(b) pertaining to the
registration of the shares of Common Stock underlying the Warrants.
1.2 Cancellation of Royalty. In consideration of the Company's agreement
to offer the Warrants as described in Section 1.1, the parties agree that upon
the tender to the Company of any Project Share by any party, together with any
other documents or instruments required to be executed by Project Share holders,
and the Company's issuance of a Warrant to such Project Share holder upon such
tender, without any further action by any party, the Royalty shall be canceled
at the rate of one sixtieth (1/60th) of one percent (1%) of the total amount of
the Royalty for each such Project Share tendered (each such fractional interest
a "Royalty Portion"), and the Company shall have no further obligation of any
kind with respect to such canceled Royalty Portion. Notwithstanding the
generality of the foregoing, and without diminishing in
-4-
<PAGE>
any way the legal effect of the tender of Project Shares and the issuance of
Warrants therefor, Synergetics covenants that at any time after the Effective
Time, and from time to time as the Company may reasonably request, whether
pursuant to a request from its auditors or otherwise, Synergetics shall promptly
execute an additional writing or writings indicating, as of the date thereof,
what percentage of the Royalty has been canceled pursuant to this Agreement.
(a) If any holder of any Project Share or Project Shares declines the
Company's offer to exchange Warrants for such Project Shares and continues to
decline such exchange until the end of the Warrant Offer Period, a corresponding
portion of the Royalty shall not be canceled and shall remain a valid, legal and
binding obligation of the Company, payable to Synergetics in accordance with the
terms of the Re-Stated Development Agreement, provided, that any Royalty Portion
not canceled as described in this Agreement shall remain an outstanding
obligation of the Company only to the extent of the monetary limitation set
forth in the certificate or certificates representing such Project Shares, and
upon the payment by the Company to Synergetics of Royalty payments sufficient to
pay such Project Share holder the entire amount required to be paid under the
Project Share certificate, the Royalty Portion associated with such Project
Shares shall be canceled immediately and without any action by any party, and
the Company shall have no further obligation with respect to such canceled
Royalty Portion. The Company expressly reserves the right to make any
payment(s) with respect to any uncanceled Project Share when and as due directly
to the holder of such Project Share (copies of such payments to be provided to
Synergetics), and Synergetics agrees to provide the Company with the information
necessary to complete such payment(s). Any payment(s) made directly to any
Project Share holder pursuant to this Section 1.2(a) shall satisfy and
extinguish a corresponding amount of the Royalty payable by the Company to
Synergetics.
1.3 Technology Assignment. Synergetics hereby specifically ratifies all
assignments and conveyances of the Technology and of Existing Technology, New
Technology, Existing Intellectual Property and New Intellectual Property, as
each of those terms are defined in the Re-Stated Development Agreement
(collectively, the "Assigned Technology") previously made to the Company and
agrees that it shall continue to be bound by the obligation to assign such
technology and intellectual property pursuant to the terms of the Re-Stated
Development Agreement. Synergetics and the Company acknowledge and agree that
it is their intent that such assignment of Assigned Technology include within
its scope (i) all neural net technology relating to ASRT that has been or will
be developed by Synergetics, including without limitation all technology
comprising the "MULTCONS" project and (ii) the rights and obligations of
Synergetics to Eldon Lytle and LTI, which obligations, if any, the Company
hereby assumes and agrees to discharge as and when due.
1.4 Release of Development Obligations. The Company hereby acknowledges
that no further work is required of Synergetics and hereby releases Synergetics
from all research and development activities in connection with the Technology
that may still exist under the Development Agreements or otherwise, provided,
however, that all of Synergetics's agreements and obligations relating to
covenants not to compete, confidentiality, assignment of intellectual property
rights and rights of first refusal shall continue in full force and effect,
pursuant to the terms of the Re-Stated Development Agreement. Except to the
extent specifically modified by
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this Agreement, the Development Agreements, as amended prior to the date of this
Agreement, shall remain in full force and effect.
1.5 Cooperation; Best Efforts. Synergetics agrees to cooperate with all
reasonable requests of the Company in consummating the transactions contemplated
by this Agreement. Such cooperative efforts shall include, without limitation,
(i) providing written information to the Company as shall be required and
reasonably requested in connection with the preparation of the Registration
Statement, (ii) providing information about the status of currently outstanding
Project Shares and the names and addresses of the holders of such outstanding
Project Shares, (iii) on or after the filing of the Registration Statement,
conveying to the Project Share holders, or authorizing the Company to convey to
the Project Share holders a writing indicating the unanimous approval of the
board of directors and a majority approval of the shareholders of Synergetics of
the transactions contemplated by this Agreement, and (iv) when and if the
Company is able to commence the offering of the Warrants contemplated by Section
1.1 pursuant to the filing and effectiveness of the Registration Statement,
promptly exchanging all Project Shares then issued or deemed to be issued to
Synergetics to the Company in exchange for Warrants.
1.6 Project Share Issuance. Synergetics agrees that, as of the Effective
Date, Synergetics shall have granted a total of six thousand (6,000) Project
Shares, which number of Project Shares shall be deemed and agreed to be the
maximum number of Project Shares issuable by Synergetics and shall be deemed to
represent one hundred percent (100%) of the Royalty due Synergetics from the
Company at any future time or times. In the event that, as of the Effective
Date, Synergetics shall not have granted the maximum number of Project Shares to
Developers, any residual number of ungranted Project Shares shall be deemed to
be issued to Synergetics and Synergetics shall be deemed to have the ability to
tender such residual number of Project Shares to the Company upon the offering
of Warrants anticipated by Section 1.1. In such event, any Project Shares
deemed to be granted to Synergetics shall be deemed to be subject to the same
terms and conditions as are applicable to the other Project Shares. Synergetics
further agrees that it shall offer no more than the maximum number of Project
Shares as described in this Section 1.6 and that it shall grant no Project
Shares after the Effective Date. Synergetics further agrees that, to the
fullest extent legally permitted, it will cause any Project Shares or Project
Share certificates which Synergetics may be holding as collateral or security
for any obligation, regardless of the nature of such obligation, or as to which
Synergetics otherwise has any security interest, to be tendered to the Company
in exchange for Warrants if and when the Company offers the Warrants, subject to
the filing and effectiveness of the Registration Statement, and in the event
Synergetics legally may not tender such Project Shares or certificates,
Synergetics will use its best efforts to cause the holder or holders of such
Project Shares to tender them (or consent to the tender thereof) in exchange for
Warrants. Synergetics shall deliver to the Company on or prior to the Effective
Date a complete and accurate list of all Project Shares outstanding as of the
Effective Date, together with the names and last-known addresses of all Project
Share holders and the number of Project Shares held by them, together with true
and correct copies of all Project Share certificates granted and related
instruments or agreements as of the Effective Date.
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1.7 Assignment of Development and Assignment Agreements. Synergetics
hereby assigns to the Company all of its right, title and interest in, and
rights under, any contract or arrangement with any employee, independent
contractor or other person arising out of or related to Synergetics's research
and development activities related to the Technology, including without
limitation any employment, independent contractor, development, contribution,
confidentiality or non-compete agreement or provision. Synergetics additionally
covenants that it will provide on or prior to the Effective Date, a complete and
accurate list of all such agreements and the identity of all such employees,
independent contractors or other third persons, together with true and correct
copies of all writings manifesting such agreements. By this Section 1.7 the
Company does not assume any of the obligations or liabilities associated with
such agreements, which obligations and liabilities will continue to be the
responsibility of Synergetics.
Section 2.
Representations and Warranties
2.1 Representations and Warranties of Synergetics. Synergetics hereby
represents and warrants to the Company as follows:
(a) Organization and Qualification. Synergetics is a corporation,
duly incorporated, validly existing and in good standing under the laws of the
State of Utah, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
Synergetics has no subsidiaries. Synergetics 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,
adversely affect the legality, validity or enforceability of this Agreement, or
adversely impair Synergetics's ability to perform fully on a timely basis its
obligations under this Agreement (a "Material Adverse Effect").
(b) Authorization; Enforcement. Synergetics has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by this Agreement and otherwise to carry out its obligations
thereunder. The execution and delivery of this Agreement by Synergetics and the
consummation by it of the transactions contemplated thereby have been duly
authorized by all necessary action on the part of Synergetics. Without limiting
the generality of the foregoing sentence, the board of directors of Synergetics
has duly and unanimously and a majority of the shareholders of Synergetics has
duly approved the execution of this Agreement and the performance of
Synergetics's obligations thereunder. This Agreement has been duly executed by
Synergetics and when delivered in accordance with the terms hereof constitutes
the valid and binding obligation of Synergetics enforceable against Synergetics
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.
Synergetics is not in violation of any of the provisions of its articles of
incorporation, by-laws or other charter documents.
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(c) No Conflicts. The execution and delivery of and performance under
this Agreement by Synergetics and the consummation by Synergetics of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its articles of incorporation or bylaws (each as
amended through the date hereof), or (ii) subject to obtaining the consents
referred to in Section 2.1(d), 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 Synergetics is
a party, 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 Synergetics is subject (including Federal and state
securities laws and regulations), or by which any material property or asset of
Synergetics 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, provided, that the representation
and warranty as to clauses (ii) and (iii) above are limited to Synergetics best
knowledge. The business of Synergetics 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.
(d) Consents and Approvals. Except as specifically set forth in
Schedule 2.1(d), Synergetics is not required to obtain any consent, waiver,
authorization or order of, or make any filing or registration with, any court or
other Federal, state, local or other governmental authority or other person in
connection with the execution, delivery and performance by Synergetics of this
Agreement other than 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.
(e) Litigation; Proceedings. There is no action, suit, notice of
violation, proceeding or investigation pending or, to the best knowledge of
Synergetics, threatened against or affecting Synergetics or any of its
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 this
Agreement or (ii) could not, individually or in the aggregate, have or result in
a Material Adverse Effect.
(f) No Default or Violation. To the best knowledge of Synergetics, it
(i) is not 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 not in violation of any
order of any court, arbitrator or governmental body, and (iii) is not 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.
(g) Intellectual Property. The Assigned Technology is all of original
authorship by Synergetics and does not infringe any copyrights, patents,
trademarks, trade secrets or other personal or proprietary rights of any third
party. There are no existing, pending or, to
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the best knowledge of Synergetics, threatened claims of infringement,
misappropriation or disputed ownership by any third party relating to the
Assigned Technology, and, to Synergetics's best knowledge, there is no basis for
any such claim. To Synergetics's best knowledge, no third party is infringing or
has infringed the intellectual property rights with respect to the Assigned
Technology. There are no outstanding licenses or agreements of any kind relating
to the Assigned Technology or the intellectual property rights therein, except
for the Development Agreements. No licenses from or rights (including patent
rights) of any third party are necessary to market, license, sell, modify and/or
create derivative works of the Assigned Technology.
(h) No Breach By The Company. As of the date of this Agreement, the
Company has not breached in any respect or otherwise failed to fulfill its
obligations under the Development Agreements. As of the date of this Agreement,
Synergetics is aware of no claim of any type it may have against the Company or
any affiliate of the Company.
(i) Status of Assigned Technology; No Claims. Either prior to or
concurrently with the execution of this Agreement, Synergetics has completed the
assignment of all of the Assigned Technology. As to such Assigned Technology,
Synergetics has no right, interest or title, and has no claim of any kind which
could in any way hinder or delay the Company's further development,
commercialization and/or licensing of the Assigned Technology, and Synergetics
hereby releases any such claim it may presently have or it may have in the
future. Synergetics is aware of no right, title or interest of any third party
to or in any of the Assigned Technology except for such right, title or interest
as may have been fully assigned to the Company prior to or on the date of this
Agreement. As of the time of any assignment of any Assigned Technology,
Synergetics has and had good and marketable title to such Assigned Technology,
and such Assigned Technology was assigned to the Company free and clear of all
Liens and all conditions to and restrictions on transfer or assignment. "Liens"
shall mean liens, title defects and objections of any kind, security interests,
pledges, taxes, leases, licenses, liabilities, costs, charges and claims and
encumbrances of any kind, direct or indirect, whether accrued, absolute,
contingent or otherwise (including without limitation any agreement to give any
of the foregoing).
(j) Sale of Assets Related to Assigned Technology. Synergetics has, on
or prior to the date of this Agreement, assigned, delivered, conveyed or
returned to the Company any equipment, supplies, documentation or other property
or assets of any type used in connection with the development of the Assigned
Technology.
(k) Accuracy of Documents. To the best knowledge of Synergetics, all
documents and other materials provided to the Company by Synergetics whether in
writing or in electronic format pursuant to or in connection with this
Agreement, including without limitation due diligence materials and written
copies of Project Share certificates, are true, complete and accurate in all
material respects.
(l) Project Shares. On or prior to the Effective Date, Synergetics
has granted a total of six thousand (6,000) Project Shares, all of which are
outstanding as of the Effective Date. Each such Project Share has been granted
in compliance with all applicable laws, Federal
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and state (including securities laws), and, as of the date hereof is duly and
validly outstanding and is a legal obligation of Synergetics enforceable in
accordance with the terms set forth in the Project Share certificates and any
related documents or instruments. As of the date of this Agreement, Synergetics
has not breached any of the provisions of or otherwise failed to satisfy any of
its obligations under the Project Shares or any other agreement with the
Developers. All of the Project Shares granted by Synergetics are subject to
substantially identical terms and conditions.
(m) Tax Consequences; Professional Advice. Neither the Company nor
any of its representatives, employees or agents has made any representation to
Synergetics about the tax consequences of the transactions contemplated by this
Agreement. Synergetics has had the opportunity to seek such tax, legal and
accounting advice with respect to the consummation of the transactions
contemplated by this Agreement as it has deemed appropriate, and any decision
not to obtain such advice or to not obtain additional advice resulted from
Synergetics's determination that such advice, or additional advice, is not
necessary, and not as a result of any representation by the Company or its
employees and agents about the tax consequences, or lack thereof, of the
consummation of the transactions contemplated by this Agreement.
(n) Sale of Substantially All Assets. The execution of this Agreement
and the consummation of the transactions contemplated hereby constitutes a sale
of substantially all of the business assets of Synergetics relating to the
Assigned Technology.
2.2 Representations and Warranties of the Company. The Company hereby
represents and warrants to Synergetics 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 one subsidiary (the "Subsidiary"), which is duly
incorporated, validly existing and in good standing under the laws of the State
of Utah. The Company and the Subsidiary are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in which the
nature of the business conducted or property owned by them 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,
result in 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 this Agreement and otherwise to carry out its obligations
thereunder. The execution and delivery of this Agreement 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. This Agreement
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
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relating to, or affecting generally the enforcement of, creditor's rights and
remedies or by other equitable principles of general application. The Company is
not in violation of any of the provisions of its certificate of incorporation,
by-laws or other charter documents.
(c) No Conflicts. The execution and delivery of and performance under
this Agreement by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not, (i) conflict with or
violate any provision of its certificate of incorporation or bylaws (each as
amended through the date hereof) or (ii) subject to obtaining the consents
referred to in Section 2.2(d), 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) 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, provided, that the representation
and warranty as to clauses (ii) and (iii) above are limited to the Company's
best knowledge. To the Company's knowledge, 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.
(d) Consents and Approvals. Except as specifically set forth in
Schedule 2.2(d), the Company is not 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 this
Agreement other than (i) the filing of the Registration Statement with the
Commission, which shall be filed in the time periods set forth in this
Agreement, (ii) the applications for the listing of the shares of Common Stock
issuable upon the exercise of the Warrants with The Nasdaq Stock Market, Inc.
(and with any other national securities exchange or market on which the Common
Stock is then listed), (iii) the filing of any registration statements or other
documents and materials to effect the Company's compliance with the Blue Sky
laws of any state, and (iv) 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.
(e) Litigation; Proceedings. Except as specifically disclosed in the
reports and other materials on file with the Commission, which documents and
materials have been provided to or are otherwise available to Synergetics, or in
a writing to Synergetics, 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 its Subsidiary 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
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legality, validity or enforceability of this Agreement, or (ii) could not,
individually or in the aggregate, have or result in a Material Adverse Effect.
(f) No Default or Violation. To the Company's knowledge, neither the
Company nor the 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.
Section 3.
Conditions
3.1 Conditions Precedent to the Obligation of the Company to Offer and
Sell Warrants. The obligation of the Company to offer and sell the Warrants as
described in Section 1.1 and to release Synergetics from its obligations under
the Development Agreements is subject to the satisfaction or waiver by the
Company on or before the date of filing of the Registration Statement (the
"Filing Date") of each of the following conditions, which conditions are for the
sole benefit of the Company and may be waived by the Company in whole or in part
at any time and from time to time in its sole discretion. The failure by the
Company at any time to exercise any of the foregoing rights shall not be deemed
a waiver of any such right. The waiver of any such right with respect to
particular facts and circumstances shall not be deemed a waiver with respect to
any other facts and circumstances and each such right shall be deemed an ongoing
right that may be asserted at any time and from time to time.
(a) Effectiveness of Registration Statement. The Registration
Statement shall have been filed with and declared effective by the Commission.
(b) Accuracy of Synergetics's Representations and Warranties. The
representations and warranties of Synergetics shall be true and correct in all
material respects as of the date when made and as of each Filing Date, as though
made on and as of such dates.
(c) Performance by Synergetics. Synergetics shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by it at or prior to each Filing Date.
(d) No Prohibitions. The offering and sales of the Warrants (and upon
exercise thereof, the issuance of the underlying shares of Common Stock) as
described in Section 1.1: (i) shall not be prohibited or enjoined (temporarily
or permanently) by any applicable law or governmental regulation, and (ii) shall
not subject the Company to any penalty, or in its judgment, other onerous
condition under or pursuant to any applicable law or governmental regulation
that would materially reduce the benefits to the Company of the offering of the
Warrants and such underlying shares and the consummation of the transactions
contemplated by this Agreement.
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(e) No Pending Actions. There shall not be threatened, instituted or
pending by any person or governmental entity any suit, action or proceeding
challenging the offering and sales of the Warrants by the Company as
contemplated by this Agreement or seeking to restrain or prohibit the making or
consummation of offers and sales of the Warrants or the performance of any of
the other transactions contemplated by this Agreement, or seeking to obtain from
the Company any damages that are material in relation to the Company.
(f) 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.
(g) Opinion of Counsel. Synergetics shall have used its best efforts
to deliver to the Company on or prior to the Effective Date, an opinion of
counsel in the form attached hereto as Exhibit "B."
(h) Delivery of Documentation. Synergetics shall have delivered to
the Company the information and documents required to be delivered to the
Company pursuant to Sections 1.6 and 1.7.
3.2 Conditions Precedent to the Obligations of Synergetics. Synergetics's
obligations under this Agreement are subject to the satisfaction or waiver by
Synergetics, at or before the Effective Date, of each of the following
conditions, which conditions are for the sole benefit of Synergetics and may be
waived by Synergetics in whole or in part at any time and from time to time in
its sole discretion. The failure by Synergetics at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such right. The waiver
of any such right with respect to particular facts and circumstances shall not
be deemed a waiver with respect to any other facts and circumstances and each
such right shall be deemed an ongoing right that may be asserted at any time and
from time to time:
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company set forth in Section 2.2 shall be
true and correct in all material respects as of the date when made and as of the
Effective Date as though made on and as of such date.
(b) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Effective Date.
(c) 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 Effective Date.
(d) Consulting Agreement. The Company will enter into a consulting
agreement with C. Hal Hansen or a company designated by him and reasonably
acceptable to
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Company for consulting services concerning the development and application of
the Company's ASRT.
(e) Opinion of Counsel. The Company shall have used its best efforts
to deliver to Synergetics on or prior to the Effective Date, an opinion of
counsel in the form attached hereto as Exhibit "C".
Section 4.
Termination
4.1 Termination by Mutual Consent. This Agreement and the transactions
contemplated hereby may be terminated at any time prior to the date of filing of
the Registration Statement (the "Initial Filing Date") by the mutual consent of
the Company and Synergetics.
4.2 Termination by the Company or Synergetics. This Agreement and the
transactions contemplated hereby may be terminated prior to the Initial Filing
Date by either the Company or Synergetics, by giving written notice of such
termination to the other party, if there shall be in effect any statute, rule,
law or regulation that prohibits the consummation of the transactions
contemplated hereby or if the consummation of the transactions contemplated by
this Agreement would violate any non-appealable final judgment, order, decree,
ruling or injunction of any court of or governmental authority having competent
jurisdiction.
4.3 Termination by the Company. This Agreement and the transactions
contemplated hereby may be terminated prior to the Initial Filing Date by the
Company, by giving written notice of such termination to Synergetics, if
Synergetics has breached in any material respect any representation, warranty,
covenant or agreement contained in this Agreement and such breach is not cured
within thirty (30) business days following receipt by Synergetics of notice of
such breach.
4.4 Termination by Synergetics. This Agreement and the transactions
contemplated hereby may be terminated by Synergetics by giving written notice of
such termination to the Company, if the Company has breached in any material
respects any representation, warranty, covenant or agreement contained in this
Agreement and such breach is not cured within thirty (30) business days
following receipt by the Company of notice of such breach.
Section 5.
General Provisions
5.1 Survival of Representations, Warranties and Agreements. The
representations and warranties set forth in Section 2 shall survive the
execution of this Agreement and the consummation of the transactions
contemplated by this Agreement, and such provisions and the parties' respective
rights to rely on the accuracy of such provision shall be unaffected by any
investigation or due diligence review conducted by either party.
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5.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed), sent by overnight courier (providing proof of delivery) or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to the Company, to it at:
fonix corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
Facsimile: (801) 328-8778
Attn. Thomas A. Murdock, President
With a copy to:
DURHAM, EVANS, JONES & PINEGAR
Key Bank Tower, Suite 850
50 South Main Street
Salt Lake City, Utah 84144
Facsimile: (801) 538-2425
Attn. Jeffrey M. Jones, Esq.
If to Synergetics, to it at:
SYNERGETICS, INC.
286 South 600 East, Suite C
Provo, Utah 84606
Facsimile: (801) 377-3458
Attn. C. Hal Hansen, President and Robert L. Clarke
With a copy to:
FILLMORE, BELLISTON & ISRAELSEN
3549 North University Avenue, Suite 250
Provo, Utah 84604
Facsimile: (801) 371-9109
Attn: William L. Fillmore, Esq.
5.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or
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"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation".
5.4 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
5.5 Entire Agreement; Third Party Beneficiaries. This Agreement (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, including without limitation the Initial Agreement, the
Re-Stated Development Agreement, and the MOU, and (b) except as expressly may be
provided herein is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder. To the extent of any conflict between
this Agreement and the provisions of the MOU, the parties acknowledge and agree
that such conflict is the result of negotiations between the date of the MOU and
the date of this Agreement and that this Agreement shall supercede the MOU in
any such respect.
5.6 Amendment; Waiver. Except as otherwise expressly provided in this
Agreement, this Agreement may be modified or amended only by a writing signed by
duly authorized representatives of both parties. The waiver by either party of
any default or breach of this Agreement, or any obligation hereunder, shall be
ineffective unless in writing, and shall not constitute a waiver of any
subsequent breach or default. No failure to exercise any right or power under
this Agreement or to insist on strict compliance by the other party shall
constitute a waiver of the right in the future to exercise such right or power
or to insist on strict compliance.
5.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Utah without regard to any applicable
conflicts of law principles.
5.8 Publicity. Except as otherwise required by law, Synergetics shall not
issue or cause the publication of any press release or other public announcement
with respect to the transactions contemplated by this Agreement without the
consent of the Company, which consent shall not be unreasonably withheld. The
Company may disclose, by publication of any press release or public announcement
or otherwise, the transactions contemplated by this Agreement in its sole
discretion. Synergetics specifically agrees that it will not in any way
communicate with any of the Project Share holders about the terms of this
transaction until such time as the Registration Statement has been filed.
5.9 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by Synergetics (whether by operation
of law or otherwise) without the prior written consent of the Company. The
Company may assign its rights, interests or obligations under this Agreement in
its sole discretion. Subject to the preceding sentences, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
-16-
<PAGE>
5.10 Venue; Jurisdiction. Each of the parties hereto (i) consents to
submit such party to the personal jurisdiction of any Federal court located in
the State of Utah or any Utah state court in the event any dispute arises out of
this Agreement or any of the transactions contemplated hereby, (ii) agrees that
such party will not attempt to deny or defeat such personal jurisdiction by
motion or other request for leave from any such court, (iii) agrees that such
party will not bring any action relating to this Agreement or any of the
transactions contemplated hereby in any court other than a Federal court sitting
in the state of Utah or a Utah state court, and (iv) waives any right to trial
by jury with respect to any claim or proceeding related to or arising out of
this Agreement or any of the transactions contemplated hereby.
5.11 No Offering. This Agreement is not intended as and shall not be
construed to be an "offer" to "purchase" or "sell" "securities" as those terms
are defined in Section 2 of the Securities Act.
5.12 No Agency; No Assumed Liabilities. The parties are and have been
independent contractors, and this Agreement shall not be construed to create any
agency or partnership between them. Neither party has authority to bind the
other, to incur any liability or otherwise act on behalf of the other, or to
direct the other's employees. Except to the extent expressly provided in this
Agreement, neither party assumes hereby any debt, obligation or liability of the
other.
5.13 Expenses. The Company agrees to reimburse Synergetics for its
reasonable costs and expenses associated with the preparation, execution and
delivery of this Agreement. Subject to the foregoing sentence, each of the
parties agree to bear their respective costs associated with this Agreement and
the consummation of the transactions contemplated by this Agreement, including
without limitation, attorneys' fees and costs, accounting fees and expenses and
due diligence costs. The Company shall pay the expenses incurred in connection
with the preparation and filing of the Registration Statement, including all
legal and accounting fees and costs, costs for printing and engraving and filing
fees.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
-17-
<PAGE>
SIGNED as of the date first written above.
THE COMPANY
fonix corporation
By: /s/ Thomas A. Murdock
--------------------------
Thomas A. Murdock, President
SYNERGETICS
SYNERGETICS, INC.
By: /s/ C. Hal Hansen
---------------------------
C. Hal Hansen, President
-18-
<PAGE>
fonix/Oberteuffer
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT (the "Agreement") is by and between John A.
Oberteuffer, an individual residing at 14 Glen Road South, Lexington,
Massachusetts 02173 ("Oberteuffer"), and fonix corporation, a Delaware
corporation with its principal place of business at 1225 Eagle Gate Tower, 60
East South Temple Street, Salt Lake City, Utah 84111 ("fonix" or the "Company").
RECITALS:
--------
A. Oberteuffer has developed and invented an integrated system for voice
and pen input in the use of personal computers (the "Invention"). Oberteuffer
plans to disclose preferred embodiments of the Invention in United States patent
applications to be executed by Oberteuffer (with or without other persons named
as inventors thereon) and filed in the United States Patent and Trademark Office
(the "Patent Applications").
B. Pursuant to the terms of this Agreement, Oberteuffer wishes to
transfer to fonix all right, title and interest in and to the above-described
Invention, and fonix wishes to purchase the Invention from Oberteuffer.
AGREEMENTS:
----------
In consideration of the mutual covenants and agreements set forth herein, the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
1. Definitions.
-----------
1.1 "Documentation" shall mean (a) all existing technical, design,
development, installation and maintenance information describing the design and
development of the Invention, including source documentation, source listings
and annotations, test data and test results and (b) all existing educational
materials, reference manuals and support materials relating to the Invention.
1.2 The "Effective Date" shall be April 7, 1998.
1.3 The "Invention" shall mean that certain method and apparatus for
integrated voice and pen input for use in computer systems, as more fully
described in the Documentation and Patent Applications, including Related
Technology as defined herein.
1.4 "Patent Applications" shall have the meaning set forth in Recital A
above.
1.5 "Patents" shall mean any patents granted by the U.S. Patent and
Trademark Office (the "PTO") on the Patent Applications.
1.6 "Related Technology" means all existing technology acquired, authored,
developed, improved or produced by Oberteuffer and that is necessary to the
development of the Invention or to the performance by the Invention of its
intended functions or purposes, whether tangible or intangible, in any stage of
development, including without limitation existing enhancements, designs,
technology, improvements, inventions, works of authorship, trade secrets,
formulas, processes, routines, subroutines,
<PAGE>
techniques, concepts, methods, ideas, algorithms, source code, object code, flow
charts, diagrams, coding sheets, source code listings and annotations,
programmers' notes, research, architectural specifications, concepts, work
papers, and work product existing on the Effective Date, development tools and
associated documentation, and all rights of any kind in or to any of the
foregoing, including without limitation all proprietary rights and trade secrets
and all patents and copyrights (whether pending, applied for or issued) for the
Invention, regardless of whether any or all of the foregoing constitutes
copyrightable or patentable subject matter.
1.7 All other initially capitalized terms shall have the meanings assigned
to them in this Agreement.
2. Assignment.
----------
2.1 Assignment. Oberteuffer hereby assigns, sells and transfers to fonix,
----------
effective upon the Effective Date, all right, title and interest in and to the
Invention and Related Technology, including without limitation all copyrights,
trade secrets, patent rights (including, without limitation, Patent Applications
and Patents) and other intellectual property rights therein, free and clear of
all liens, security interests, licenses and encumbrances of any type, whether
accrued, absolute or contingent ("Liens"). At any time requested by fonix,
Oberteuffer shall execute Assignments with respect to the Patent Applications,
substantially in the form attached hereto as Exhibit A.
2.2 Further Assurances. Oberteuffer agrees to assist fonix and to execute
------------------
any additional documents, assignments or assurances reasonably requested by
fonix hereafter to further evidence or complete its ownership of the Invention,
to carry out the transactions contemplated by this Agreement and to assist fonix
to obtain, perfect and protect its interest in the Invention. In particular,
Oberteuffer shall, at fonix's expense, cooperate with fonix's reasonable
requests concerning and use his best efforts to assist fonix in the protection
or registration of the intellectual property elements in the Invention,
including the recordation of any assignment or notice of assignment for Patents,
trademarks or copyrights within the scope of this Section 2.
3. Consideration. In consideration of the assignment and transfer of the
-------------
Invention and other covenants, warranties and commitments made by Oberteuffer in
this Agreement, fonix agrees as follows:
3.1 Grant of Warrants. Upon the Effective Date, fonix shall grant to
-----------------
Oberteuffer warrants (the "Warrants") to purchase up to 500,000 shares of
fonix's restricted common stock, $.0001 par value per share ("Common Stock"), at
an exercise price of $5.12. 250,000 of the Warrants shall vest immediately at
the time of grant. The remaining 250,000 Warrants shall vest concurrent with
the issuance of the first Patent for or relating to the Invention.
3.2 Warrant Agreement. All Warrants to be granted to Oberteuffer under
-----------------
this Agreement shall be granted pursuant to the terms and conditions of a Common
Stock Purchase Warrant, substantially in the form attached hereto as Exhibit B,
to be executed prior to issuance of the Warrants to Oberteuffer.
3.3 Employment Status of Oberteuffer. The parties acknowledge that fonix
--------------------------------
has recently hired Oberteuffer as an executive employee. No management role of
Oberteuffer with fonix or its affiliated companies shall reduce Oberteuffer's
rights to or interest in the Warrants. Similarly, all subsequent work performed
or undertaken by Oberteuffer concerning the Invention and all improvements,
modifications and/or derivations thereof shall not entitle Oberteuffer to any
additional or extra compensation, it being understood and agreed by the parties
that such work is performed in the scope and course of Oberteuffer's employment
as executive officer of fonix. Notwithstanding anything set forth above,
Oberteuffer shall be entitled to receive awards or grants of options pursuant to
the fonix employee stock option plan.
2
<PAGE>
3.4 Oberteuffer's Right to Redeem Invention. If at any time fonix
---------------------------------------
determines that it wishes to proceed no further with commercializing the
Invention, Oberteuffer shall have the right to redeem and repurchase ownership
of the Invention and Related Technology subject to such licenses and/or Liens
which may exist at the time of repurchase by Oberteuffer. The purchase price to
fonix from Oberteuffer shall be: (i) return of all unexercised Warrants; (ii)
assignment free and clear of all Liens of all shares of Common Stock obtained by
Oberteuffer in connection with the exercise of all or part of the Warrants
and/or (iii) an amount equal to the net proceeds to Oberteuffer from the sale of
any shares of Common Stock obtained by Oberteuffer in connection with the
exercise of all or part of the Warrants. For purposes of this Section 3.4, "net
proceeds" shall mean the difference between the aggregate gross proceeds to
Oberteuffer from the sale of any shares of Common Stock obtained by Oberteuffer
in connection with the exercise of all or part of the Warrants and the aggregate
exercise price paid by Oberteuffer to fonix upon exercise of Warrants, where the
underlying shares of Common Stock were sold by Oberteuffer. Oberteuffer shall
notify fonix in writing if he believes that fonix is no longer pursuing
commercialization of the Invention and he desires to exercise his repurchase
right. fonix shall have thirty (30) days in which to respond to such notice by
either agreeing to a repurchase date and terms with Oberteuffer or providing to
Oberteuffer reasonable evidence that fonix has not abandoned commercialization
of the Invention. Nothing in this Section shall be construed to prevent or
hinder fonix from selling or licensing its rights in the Invention and Related
Technology to a third party, related or unrelated, in which case this repurchase
right shall become null and void; provided, however, that any such assignment or
license shall (a) be for good and valid consideration and (b) be for a valid
business purpose.
4. Delivery. As soon as practicable after the Effective Date, Oberteuffer
--------
shall deliver to fonix all software, work product, documents, and other tangible
materials constituting the Invention (including Documentation and Related
Technology).
5. Oberteuffer Warranties.
----------------------
5.1 Power to Agree, Etc. Oberteuffer hereby represents, warrants, and
--------------------
covenants to fonix that (a) Oberteuffer has all necessary right and power to
enter into and perform according to the terms and conditions of this Agreement;
(b) the terms of this Agreement do not violate or conflict with any other
agreement or obligation of Oberteuffer; and (d) this Agreement is a valid and
binding agreement on Oberteuffer, enforceable in accordance with its terms.
5.2 Title. Oberteuffer warrants that to the best of his knowledge he has
-----
good and marketable title to the Invention, which is transferred to fonix free
and clear of any Liens or restrictions on or conditions to transfer or
assignment; provided, however, that William Kania ("Kania"), Loken Kim ("Kim")
and John Wilbanks ("Wilbanks") have been engaged by fonix to assist in the
development of the Invention at Oberteuffer's direction and control. All work
performed by Kim and Kania concerning the Invention has been performed on a
"work for hire" basis and such work is owned and assignable by Oberteuffer. To
the extent that Kania claims separate ownership of any part or component of the
Invention, fonix shall obtain such rights by way of a separate agreement with
Kania. Except as may be disclosed in writing to fonix, there are no outstanding
licenses or agreements of any kind relating to the Invention or the intellectual
property rights therein. No licenses from or rights (including patent rights)
of any third party are necessary to market, license, sell, modify and/or create
derivative works of the Invention. Oberteuffer has used diligent efforts to
obtain and maintain his ownership of the Invention and intellectual property
rights therein, as well as the confidentiality of any trade secret or source
code portions thereof, and no material portion of the Invention is or has become
part of the public domain.
5.3 Litigation. There is no action, suit, investigation, or other
----------
proceeding pending or, to Oberteuffer's knowledge, threatened against or
materially adversely affecting the Invention, the Patent or
3
<PAGE>
Oberteuffer's right and ability to consummate the transactions contemplated by
this Agreement; nor does Oberteuffer know or have reason to know of any basis
for the same.
5.4 Infringement. Oberteuffer warrants that, to his best knowledge, the
------------
Invention and elements thereof are solely owned by Oberteuffer (except with
respect to such elements thereof as may already be owned by fonix) and do not
violate any copyright, trade secret, trademark, patent or other personal or
proprietary rights of any third party, and that he has not received any notice
of such a claim. There are no existing, pending or, to Oberteuffer's knowledge,
threatened claims of infringement, misappropriation or disputed ownership by any
third party relating to the Invention and elements thereof and, to Oberteuffer's
knowledge, there is no basis for any such claim. To Oberteuffer's best
knowledge, no third party is infringing or has infringed the intellectual
property rights with respect to the Invention.
5.5 Software. With respect to all portions of the Invention which
--------
constitute software, Oberteuffer maintains properly documented source code and
source code listings, sufficient to enable reasonably competent programmers
familiar with the language in which such code is written to maintain and modify
the software, and, in each case, except as otherwise disclosed to fonix in
writing, the software program operates substantially in accordance with the
product specifications and Documentation therefor without material operating
defects. Oberteuffer is not aware of any essential element necessary for the
commercial exploitation of the Invention that (a) is not included in the
deliverables assigned to fonix or (b) is not otherwise commercially available to
fonix via a license or otherwise.
5.6 Intent. Oberteuffer will be acquiring the Warrants and Common Stock
------
issuable upon exercise thereof for his own account, and Oberteuffer has no
present arrangement (whether or not legally binding) to sell any of such
securities to or through any person or entity; provided, however, that by making
the representations herein, Oberteuffer does not agree to hold the Warrants and
Common Stock issuable upon exercise thereof for any minimum or other specific
term and reserves the right to dispose of the Warrants and Common Stock issuable
upon exercise thereof at any time in accordance with U.S. federal and state
securities laws applicable to such disposition and any restrictions imposed on
such transfer by the Common Stock Purchase Warrant or the instruments and
documents executed in connection with this Agreement. Oberteuffer understands
that the Warrants and Common Stock issuable upon exercise thereof must be held
indefinitely unless such securities are subsequently registered under the
Securities Act of 1933, as amended (the "Securities Act") or an exemption from
registration is available. Oberteuffer has been advised or is aware of the
provisions of Rule 144 promulgated under the Securities Act.
5.7 Sophisticated Investor. Oberteuffer is a "sophisticated investor" (as
----------------------
described in Rule 506(b)(2)(ii) of Regulation D), an "accredited investor" (as
defined in Rule 501(a) of Regulation D), and a director of the Company and
Holder has such knowledge and experience in business and financial matters that
it is capable of evaluating the merits and risks of an investment in the
Company's securities.
5.8 Ability of Holder to Bear Risk of Investment. Oberteuffer
--------------------------------------------
acknowledges that the Warrants and Common Stock issuable upon exercise thereof
are speculative investments and involve a high degree of risk and Oberteuffer is
able to bear the economic risk of an investment in the Warrants and Common Stock
issuable upon exercise thereof, and, at the present time, is able to afford a
complete loss of such investment.
5.9 Disclosure; Access to Information. Oberteuffer has received copies of
---------------------------------
or has had access to all documents, records, books and other information
pertaining to the Company, the Common Stock Purchase Warrant and the Common
Stock issuable upon exercise of any such Warrants that have been requested by
Oberteuffer. Oberteuffer has been afforded the opportunity to ask questions of
the Company and its management. Oberteuffer further acknowledges that it
understands that the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, and Oberteuffer has reviewed
or received copies of any such reports that have been requested by him.
4
<PAGE>
5.10 Indemnification. Oberteuffer shall indemnify and hold fonix harmless
---------------
from any and all claims, demands, costs, liabilities, losses, expenses and
damages (including attorneys' fees) arising out of or in connection with the
breach of any warranty made by Oberteuffer in this Section 5, including defense
of any third party claim that, if true, would constitute such a breach of
warranty; provided, however, that Oberteuffer's liability to fonix shall not in
any event exceed the aggregate value of the Warrants, Common Stock issuable upon
exercise thereof and the gross proceeds obtained by Oberteuffer from the sale of
all or any part of the shares of Common Stock obtained by Oberteuffer in
connection with the exercise of all or part of the Warrants. fonix shall give
Oberteuffer prompt notice of any claim to which the foregoing indemnity relates.
Notwithstanding anything herein to the contrary, Oberteuffer's obligations
pursuant to this Section shall not apply to any claims related to any
modifications to the Invention made by fonix, but only to the extent that such
claims would not have arisen but for the modifications made by fonix.
5.11 LIMITATION OF LIABILITY AND DAMAGES. OTHER THAN AS SET FORTH IN THIS
-----------------------------------
SECTION 5, EACH PARTY EXPRESSLY EXCLUDES AND DISCLAIMS ALL WARRANTIES, WHETHER
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE. IN NOV EVENT SHALL EITHER PARTY BE LIABLE
TO THE OTHER OR ANY THIRD PARTY FOR ANY INDIRECT, PUNITIVE, SPECIAL OR
CONSEQUENTIAL DAMAGES IN CONNECTION WITH THIS AGREEMENT.
5.12 Survival. The representations, warranties and covenants contained in
--------
or made pursuant to this Agreement shall survive execution and any termination
of this Agreement.
6. Confidentiality. Oberteuffer agrees to treat as highly confidential, and
---------------
never to use, copy or disclose to any third party, except as required by law,
the source code of the Invention and any other information concerning the
Invention which should reasonably be understood to be confidential.
7. Breach of Agreement; Remedies. If either party believes that the other has
-----------------------------
materially breached any provision of this Agreement, the party alleging the
breach shall deliver notice to the other party, specifying the nature of the
alleged breach. The party alleged to be in breach shall have sixty (60) days
from the date of mailing of such notice in which to attempt to cure the alleged
breach. During such sixty (60) day period, either party may request a personal
meeting between the parties in which to negotiate in good faith to attempt to
resolve the dispute. If such negotiations are unsuccessful and the alleged
breach has not been cured by the end of such sixty (60) day period, the party
alleging the breach may pursue any and all rights and remedies that it has under
this Agreement, at law or in equity.
8. Rights Reserved. fonix shall have the right to market the Invention in any
---------------
manner and under any name fonix chooses. Nothing in this Agreement shall impair
fonix's right to acquire, license, independently develop for itself or have
others independently develop for it similar products performing the same or
similar functions as the Software.
9. Miscellaneous.
-------------
9.1 Notice. All notices between the parties shall be in writing and shall
-------
be sent by certified or registered mail or commercial overnight delivery
service, with provisions for a receipt, or by confirmed facsimile transmission,
to the address of the other party listed above (or to such other address as a
party may furnish to the other in writing).
9.2 Entire Agreement; Amendment; Waiver. This Agreement, together with
------------------------------------
the Exhibits hereto, which are incorporated herein by reference, and any
additional documents required to be delivered at
5
<PAGE>
the Closing pursuant hereto, constitutes the complete agreement between the
parties and supersedes all previous representations, written or oral, with
respect to the Invention or other subject matter of this Agreement. Except as
otherwise expressly provided herein, this Agreement may be modified or amended
only by a writing signed by duly authorized representatives of both parties. The
waiver by either party of any default or breach of this Agreement, or any
obligation hereunder, shall be ineffective unless in writing, and shall not
constitute a waiver of any subsequent breach or default. No failure to exercise
any right or power under this Agreement or to insist on strict compliance by the
other party shall constitute a waiver of the right in the future to exercise
such right or power or to insist on strict compliance.
9.3 Governing Law and Jurisdiction. This Agreement shall be governed by
-------------------------------
and construed in accordance with the internal laws of the state of Utah and
applicable federal laws. The parties consent to the exclusive jurisdiction and
venue of Utah state and federal courts in any action arising out of this
Agreement.
9.4 Attorneys' Fees. In the event of any default under this Agreement,
---------------
the defaulting party shall pay all costs incurred by the other party by reason
of the default, including court costs and reasonable attorneys' fees (whether or
not the attorney is a salaried employee of the non-defaulting party), and also
including such expenses incurred before legal action or bankruptcy proceeding,
during the pendency thereof, and continuing to all such expenses in connection
with appeals to higher courts. If the attorney is a salaried employee of the
non-defaulting party, a reasonable attorney's fee shall be an amount charged by
similarly qualified attorneys in private practice for similar services. If a
party is accused of default by the other, but there is a final decision by a
court of law, not overturned on appeal, that the party did not default as
alleged, the party wrongly accused of default shall be entitled to an award of
its costs and reasonable attorneys' fees as described above.
9.5 Cumulative Remedies. All rights and remedies provided in this
--------------------
Agreement, at law or in equity are cumulative.
9.6 Severability. If any term of this Agreement is held invalid or
-------------
unenforceable by a court or arbitrator of competent jurisdiction, such terms
shall be reduced or otherwise modified by such court or arbitrator to the
minimum extent necessary to make it valid and enforceable. If such term cannot
be so modified, it shall be severed and the remaining terms of this Agreement
shall be interpreted in such a way as to give maximum validity and
enforceability to this Agreement.
9.7 Binding Effect; Assignment. This Agreement is binding upon the
---------------------------
parties and their respective successors, representatives and assigns; however,
Oberteuffer may not assign or transfer this Agreement or any of his rights or
duties hereunder without prior written consent of fonix, which shall not be
unreasonably withheld.
9.8 Language. The language used in this Agreement shall be deemed to be
--------
the language chosen by the parties to express their mutual intent, and no rule
of strict construction shall be applied against either party.
9.9 Force Majeure. Neither party shall be liable for any failure or delay
-------------
in performing hereunder, if such failure or delay is due to war, strike,
government requirements, acts of nature, acts or omissions of carriers, or other
cause(s) beyond its reasonable control.
9.10 Counterparts. This Agreement may be executed in counterparts, and all
------------
counterparts shall be deemed to be one and the same agreement.
9.11 No Agency. The parties are independent contractors, and this
----------
Agreement shall not be construed to create any agency or partnership between
them. Neither party has authority to bind the other, to incur any liability or
act on behalf of the other, or to direct the others' employees.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.
fonix corporation
By:
- ------------------------- ------------------------------------
John A. Oberteuffer
Print Name:
----------------------------
Date:
--------------------
Title:
---------------------------------
Date:
----------------------------------
7
<PAGE>
EXHIBIT A
Form of Patent Application Assignment
ASSIGNMENT
----------
WHEREAS, I, John A. Oberteuffer, a citizen of the United States, residing
at 14 Glen Road South, Lexington, Massachusetts 02173 (hereinafter referred to
as "ASSIGNOR"), have invented an integrated system for voice and pen input for
use in computer systems, hereinafter called the "invention".
WHEREAS, preferred embodiments of the invention are disclosed in United
States patent applications executed by me [and ________________________] and
filed in the United States Patent and Trademark Office as Serial No. ___________
on [date].
WHEREAS, fonix corporation, a corporation duly organized and existing under
the laws of the State of Delaware (hereinafter referred to as "ASSIGNEE"),
having a principal place of business at 1225 Eagle Gate Tower, 60 East South
Temple Street, Salt Lake City, Utah 84111, desires to acquire the entire right,
title, and interest in the invention.
NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) and other
good and valuable consideration paid to me by the ASSIGNEE, the receipt and
sufficiency of which is hereby acknowledged, I, said ASSIGNOR, HEREBY ASSIGN,
SELL, AND TRANSFER AND SET OVER UNTO THE ASSIGNEE, its successors, legal
representatives and assigns:
My entire right, title, and interest in, to and under said invention,
and said United States applications and all divisions, renewals, continuations,
provisionals, and continuations-in-part thereof, and all Patents of the United
States which may be granted thereon and all reissues, reexaminations and
extensions thereof; and all applications for intellectual and/or industrial
property protection, including, without limitation, all applications for
patents, utility models, and designs which may hereafter be filed for said
invention in any country or countries foreign to the United States, together
with the right to file such applications in its own name and the right to claim
for the same the priority rights derived from said United States application
under the Patent Laws of the United States, the International Convention for the
Protection of Industrial Property, or any other international agreement or the
domestic laws of the country in which any such application is filed, as may be
applicable; and all forms of intellectual and/or industrial property protection,
including, without limitation, patents, utility models and designs which may be
granted for said invention in any country or countries foreign to the United
States and all extensions, renewals, reexaminations and reissues thereof.
ASSIGNOR HEREBY authorizes and requests the Commissioner of Patents and
Trademarks of the United States, and any Official of any country or countries
foreign to the United States, whose duty it is to issue patents or other
evidence or forms of intellectual and/or industrial property protection on
applications as aforesaid, to issue the same to said ASSIGNEE, its successors,
legal representatives and assigns, in accordance with the terms of this
instrument.
ASSIGNOR HEREBY grants the firm of Durham, Evans, Jones & Pinegar the power
to insert in this Assignment any further identification or information which may
be necessary or desirable in order to comply with the rules of the United States
Patent and Trademark Office for recordation of this document.
8
<PAGE>
ASSIGNOR HEREBY covenants and agrees that he has full right to convey the
entire interest herein assigned, and that he has not executed, and will not
execute, any agreement in conflict herewith.
ASSIGNOR HEREBY further covenants and agrees that he will communicate to
said ASSIGNEE, its successors, legal representatives and assigns, any facts
known to him respecting said invention, and testify in any legal proceeding,
promptly sign all lawful papers, execute all divisional, continuing, reissue,
reexamination and foreign applications, make all rightful oaths, and generally
do everything possible to aid said ASSIGNEE, its successors, legal
representatives and assigns, to obtain and enforce proper protection for said
invention in all countries.
Dated: ______________, 1998
----------------------------------
John A. Oberteuffer
STATE OF UTAH )
) SS:
COUNTY OF _________ )
On this _____ day of ____________, 1998, John A. Oberteuffer personally appeared
before me, who is personally known to me or proved to me on the basis of
satisfactory evidence to be the person whose name is subscribed to on this
Assignment, and acknowledged that he executed the same.
-------------------------------
Notary Public
-------------------------------
My Commission Expires
9
<PAGE>
EXHIBIT B
Form of Common Stock Purchase Warrant
10
<PAGE>
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN AND WILL NOT BE, AS OF THE TIME OF ISSUANCE, REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY COMPARABLE STATE
LAW, AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT AND SUCH SHARES
MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN
THIS WARRANT.
fonix corporation
COMMON STOCK PURCHASE WARRANT
Expiring April 7, 2001
No. ______ April 7, 1998
fonix corporation, a Delaware corporation (the "Company"), for value
received, hereby certifies that JOHN A. OBERTEUFFER, or his approved and
registered assigns, is entitled to purchase from the Company at any time from
time to time prior to 5:00 p.m., Salt Lake City, Utah time, on April 7, 2001,
500,000 duly authorized shares of the Company's common stock, par value $.0001
per share (the "Warrant Stock") at a purchase price per share of $______, all
subject to the terms and conditions set forth below.
1. Exercise of Warrant.
1.1 Manner of Exercise. The holder of this Warrant may exercise
it, in whole or in part, during normal business hours on any business day by
surrendering this Warrant to the Company at the Company's principal office,
accompanied by an executed subscription agreement in substantially the form
annexed hereto as Exhibit A and by payment, in cash or by certified or official
bank check payable to the order of the Company, or by any combination of such
methods, in the amount obtained by multiplying (a) the number of shares of
Warrant Stock designated in such subscription by (b) $5.12, whereupon such
holder shall be entitled to receive the number of duly authorized, validly
issued, fully paid and nonassessable shares of Warrant Stock as is indicated on
the subscription; provided, however, that holder may exercise this Warrant only
as to 250,000 shares of Warrant Stock until the U.S. Patent and Trademark Office
has issued at least one (1) patent for an Invention or Related Technology
pursuant to the terms of the fonix/Oberteuffer Purchase Agreement dated April 1,
1998 (the "Agreement"). Thereafter, holder may exercise this Warrant as to the
remaining 250,000 shares of Warrant Stock.
11
<PAGE>
1.2 When Exercise Effective. Each exercise of this Warrant shall
be deemed to have been effected immediately prior to the close of business on
the business day on which this Warrant shall have been surrendered to the
Company as provided in Section 1.1, and at such time the person or persons in
whose name or names any certificate or certificates for shares of Warrant Stock
shall be issued upon such exercise shall be deemed for all corporate purposes to
have become the holder of record thereof.
1.3 Delivery of Stock Certificates. As soon as practicable after
each exercise of this Warrant, and in any event within five business days
thereafter, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the holder hereof or to the person or entity such holder may direct (and upon
payment by such holder of any applicable transfer taxes), a certificate or
certificates for the number of duly authorized, validly issued, fully paid and
nonassessable shares of Warrant Stock to which the holder or its designee shall
be entitled upon such exercise.
1.4 Partial Exercise.
1.4.1 Fractional Shares. In the event of any partial
exercise of this Warrant, the Company will not issue certificates for any
fractional shares of the Warrant Stock to which the holder otherwise may be
entitled, and the Company shall not be obligated to refund an amount of cash
comprising the market value of any fractional share of Warrant Stock for which
the Company will not issue a certificate.
1.4.2 Replacement Warrant. In the event of any partial
exercise of this Warrant, upon tender of this Warrant to the Company, the
Company shall issue a new Warrant containing the same terms and conditions as
this Warrant but calling on the face thereof for the number of shares of Warrant
Stock equal to the number of shares called for on the face of this Warrant minus
the number of shares of Warrant Stock issued upon the partial exercise of this
Warrant.
2. Adjustment of Warrant Stock Issuable Upon Exercise. If the Company at
any time or from time to time after the date of this Warrant but before
expiration effects a split or subdivision of the outstanding shares of its then
outstanding common stock into a greater number of shares of common stock, or if
the Company effects a reverse split of the outstanding shares of its common
stock into a lesser number of shares of common stock, (by reclassification or
otherwise than by payment of a dividend in common stock), then, and in each such
case, the number of shares called for on the face of this Warrant (or the face
of any replacement Warrant issued upon partial exercise) shall be adjusted
proportionally, and the exercise price with respect to such adjusted number of
shares also shall be adjusted proportionally.
3. Restrictions on Transfer.
3.1 Restrictive Legends. Each replacement Warrant issued upon
partial exercise or the transfer of any Warrant shall contain a legend in
substantially the following form:
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<PAGE>
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT.
THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE
WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.
Each certificate for Common Stock issued upon the exercise of any Warrant, and
each certificate issued upon the transfer of any such Common Stock, shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF REGISTRATION,
OR THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION, UNDER THE
SECURITIES ACT OF 1933 AND APPROPRIATE STATE SECURITIES LAWS.
FURTHERMORE, NO OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS TO
TAKE PLACE UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL AT
SHAREHOLDER'S EXPENSE, AND SATISFACTORY TO IT, THAT AN EXEMPTION FROM
REGISTRATION IS AVAILABLE.
3.2 Notice of Proposed Transfer; Opinions of Counsel. Prior to the
transfer of any shares of Common Stock issued upon the exercise of this Warrant
and during any period during which such shares of Common Stock are not
registered by the Company under an effective registration statement filed
pursuant to the Securities Act of 1933, the holder thereof shall give written
notice to the Company, which notice shall (a) state such holder's intention to
transfer such restricted shares and to comply in all other respects with the
transfer requirements of this Warrant; (b) describe the circumstances of the
proposed transfer in sufficient detail to enable counsel to render the opinions
referred to below, and (c) designate counsel for the holder giving such notice.
The holder giving such notice shall submit a copy thereof to the counsel
designated in such notice and the Company will promptly submit a copy thereof to
its counsel. The following provisions shall then apply:
3.2.1 If (a) in the opinion of counsel for the holder
designated in the notice the proposed transfer may be effected without
registration of such shares of Common Stock under the Securities Act of
1933 and any applicable state securities laws, and (b)
13
<PAGE>
counsel for the Company shall not have rendered an opinion within 15 days
after receipt by the Company of such written notice that such registration
is required, such holder shall thereupon be entitled to transfer such
shares of Common Stock in accordance with the terms of the notice delivered
by such holder to the Company. Each Warrant or certificate, if any, issued
upon or in connection with such transfer shall bear the appropriate
restrictive legend set forth in Section 4.1, unless in the opinion of each
such counsel such legend is no longer required to insure compliance with
the Securities Act. If for any reason counsel for the Company (after having
been furnished with the information required to be furnished by clause (a)
of this Section 4.2) shall fail to deliver an opinion to the Company as
aforesaid, then for all purposes of this Warrant the opinion of counsel for
the Company shall be deemed to be the same as the opinion of counsel for
such holder.
3.2.2 If in the opinion of either or both of such counsel the
proposed transfer may not legally be effected without registration of such
shares of Common Stock under the Securities Act of 1933 or applicable state
securities laws (such opinion or opinions to state the basis of the legal
conclusions reached therein), the Company will promptly so notify the
holder thereof and thereafter such holder shall not be entitled to transfer
such shares of Common Stock until receipt of a further notice from the
holder under Section 4.2.1 above or until registration of such shares of
Common Stock under the Securities Act or applicable state law has become
effective.
4. Reservation of Shares. The Company will at all times reserve and
keep available, solely for issuance and delivery upon the exercise of the
Warrants, the number of shares of Warrant Stock that would be issuable upon the
exercise of all Warrants at the time outstanding. All such shares shall be duly
authorized and, when issued upon such exercise, shall be validly issued, fully
paid and nonassessable with no liability on the part of the holders thereof.
5. Ownership, Transfer and Substitution of Warrants.
5.1 Ownership of Warrants. The Company may treat the person in
whose name any Warrant is registered on the Company's records as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary.
Nevertheless, when a Warrant is properly assigned in blank pursuant to Section
5.2 below, the holder thereof may exercise the Warrant without first having a
new Warrant issued.
5.2 Transfer and Exchange of Warrants. John A. Oberteuffer may
transfer and assign the Warrant only with the written consent of the Company,
which consent shall not be unreasonably withheld. Upon such consent and the
surrender of any Warrant, properly endorsed, for registration of transfer of
exchange at the principal office of the Company, the Company will execute and
(upon payment by such holder of any applicable transfer taxes) deliver to any
person specified by the holder of the Warrant a new Warrant or Warrants of like
tenor, calling in the aggregate on the face or faces of such replacement
Warrants for the number of shares of Warrant Stock called for on the face or
faces of the Warrant or Warrants so surrendered.
14
<PAGE>
5.3 Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft of destruction of any Warrant,
upon delivery of indemnity reasonably satisfactory to the Company in form and
amount or, in the case of any such mutilation, upon surrender of such the
Company at its expense will execute and deliver, in lieu thereof, a new Warrant
of like tenor.
6. No Rights or Liabilities as Stockholder. Nothing herein shall give
or shall be construed to give the holder of this Warrant any of the rights of a
shareholder of the Company including, without limitation, the right to vote on
matters requiring the vote of shareholders, the right to receive any dividend
declared and payable to the holders of common stock, and the right to a pro-rata
distribution upon the Company's dissolution.
7. Notices. All notices and other communications provided for herein
shall be delivered or mailed by first class mail, postage prepaid, addressed (a)
if to the holders of any Warrant, at the registered address of such holder as
set forth in the register kept at the principal office of the Company, or (b) if
to the Company, at its principal office, 1225 Eagle Gate Plaza, 60 East South
Temple, Salt Lake City, Utah 84111, or at the address of such other principal
office of the Company as the Company shall have furnished to each holder of any
Warrants in writing, provided that the exercise of any Warrants shall be
--------
effective only in the manner provided in Section 1.
8. Piggyback Registration. During the term of this Warrant the Company
may not file any registration statement with the Securities and Exchange
Commission (the "SEC") in connection with a public offering of its Common Stock
unless the Company provides the holder with not less than ten (10) business
days' notice of its intention to file such registration statement and provides
the holder the option to include any or all of the applicable Warrant Stock
therein. At the written request of holder given within ten (10) calendar days
after the receipt of such notice by holder (which request shall specify the
number of shares such holder requests to be included in such registration), the
Company will use its best efforts to cause all shares of Warrant Stock as to
which registration has been requested by holder to be included in such
registration statement for sale or disposition in accordance with the method
described in the initial notice given to holder and subject to the same terms
and conditions as the other shares of Common Stock being sold, and thereafter
shall cause such registration statement to be filed and become effective;
provided, however, that the Company shall be permitted to (a) withdraw the
registration statement for any reason in its sole and exclusive discretion and
upon the written notice of such decision to holder shall be relieved of all of
its obligations under this Section 8 with respect to that particular
registration; or (b) exclude all or any portion of the shares of Warrant Stock
sought to be registered by holder from such registration statement, but in the
case of (a) or (b) only if the offering of the shares of Warrant Stock is an
underwritten offering and to the extent that, in the reasonable judgment of the
managing underwriter of the offering, the inclusion of such shares of Warrant
Stock would be materially detrimental to the offering of the remaining shares of
Common Stock, or such delay is necessary in light of market conditions. Any
shares of Warrant Stock sought to be registered by holder so excluded from a
registration statement shall be excluded pro rata based on the total number of
shares of Common Stock being sold by all selling security holders (other than
the Company). The piggyback registration rights granted to the holder pursuant
to this Section 8 shall continue until all of the holder's Warrant
15
<PAGE>
Stock has 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. This Section 8 shall have no application if
any of the Warrant Stock is already covered by an effective registration
statement.
9. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be governed by the laws of the State of Utah.
The headings of this Warrant are inserted for convenience only and shall not be
deemed to constitute a part hereof.
10. Expiration. The right to exercise this Warrant shall expire at 5:00
p.m., Salt Lake City, Utah time, on April 7, 1998.
fonix corporation
By:
-----------------------------
Thomas A. Murdock, President
16
<PAGE>
Exhibit A
SUBSCRIPTION
------------
(To be executed by the holder of the Warrant to exercise the right to
purchase common stock evidenced by the Warrant)
To: fonix corporation
1225 Eagle Gate Plaza
60 East South Temple
Salt Lake City, Utah 84111
The undersigned hereby irrevocably subscribes for ________ shares of the
Common Stock, par value $.0001 per share, of fonix corporation, a Delaware
corporation, pursuant to and in accordance with the terms and conditions of a
Warrant dated April 7, 1998 (the "Warrant"), and tenders with the Warrant and
this Subscription Agreement payment of $_____________ as payment for the shares,
and requests that a certificate for such shares be issued in the name of the
undersigned and be delivered to the undersigned at the address stated below.
--------------------------------------------------
NAME
--------------------------------------------------
ADDRESS
--------------------------------------------------
--------------------------------------------------
SOCIAL SECURITY NUMBER
--------------------------------------------------
Signed
--------------------------------------------------
Dated
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") effective as of the 26/th/ day
of January, 1998 (the "Effective Date"), is made by and between fonix
corporation, a Delaware corporation having its principal place of business in
Salt Lake City, Utah (the "Company"), and JOHN A. OBERTEUFFER, a resident of
Massachusetts (the "Executive").
RECITALS
1. The Company desires to retain the services of the Executive, presently
a director of and consultant to the Company, and the Executive desires to render
such services, upon the terms and conditions contained herein.
2. The Board of Directors of the Company (the "Board"), by appropriate
resolutions, has authorized the employment of the Executive as provided for in
this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants contained herein, the
above recitals and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DUTIES
1.1 Duties. The Company hereby employs the Executive, and the Executive
------
hereby accepts employment, as the Company's Vice President Technology upon the
terms and conditions contained herein. The Executive shall exercise the
authority and assume the responsibilities: (i) specified in the Company's
Bylaws; (ii) of a Vice President of a corporation of the size and nature of the
Company; (iii) under the general direction of the Company's Chief Operating
Officer; and (iv) prescribed by the Board from time to time.
1.2 Other Business. During the Contract Term, and excluding any periods
--------------
of vacation, sick leave or disability to which the Executive is entitled, the
Executive agrees to devote at least four (4) days per week to the business and
affairs of the Company and to use the Executive's best efforts to perform
faithfully and efficiently such duties. Notwithstanding the foregoing, but
subject to the provisions of Article VI hereof, the Executive shall be entitled
to (i) continue as the President and a member of the Board of Directors of Voice
Information Associates, Inc. ("VIA"), including supervision and direction of its
regular business activities and (ii) to serve on boards of directors, executive
committees and other similar governing bodies of automatic speech recognition
industry groups and associations (e.g., AVIOS).
<PAGE>
ARTICLE II
TERM OF AGREEMENT
The term of this Agreement shall commence on the Effective Date and shall
terminate at 11:59 p.m. Mountain Standard Time on January 31, 2001 (the
"Contract Term") unless sooner terminated hereunder.
ARTICLE III
COMPENSATION
During the Contract Term, the Company shall pay, or cause to be paid to the
Executive in cash in accordance with the normal payroll practices of the Company
for senior executive officers (including deductions, withholdings and
collections as required by law), the following:
3.1 Annual Base Salary. In installments not less frequently than monthly,
------------------
an annual base salary ("Annual Base Salary") equal to Two Hundred Twenty-Five
Thousand Dollars ($225,000).
3.2 Annual Performance Review. On a basis not less frequently than
-------------------------
annually during the Contract Term, the Board shall review Executive's
performance of his duties as described in Article I hereof. Based upon such
review, the Board may, in its sole discretion, determine to increase the Annual
Base Salary for the next twelve (12) month period of the Contract Term. The
Board may not thereafter reduce the Annual Base Salary without the express
consent of the Executive.
ARTICLE IV
OTHER BENEFITS
4.1 Incentive and Retirement Plans. The Executive shall be entitled to
--------------------------------
participate, during the Contract Term, in all incentive (including annual and
long-term incentives), savings and retirement plans, practices, policies and
programs available to other senior executives of the Company.
4.2 Welfare Benefits. Immediately upon the Effective Date and throughout
----------------
the Contract Term, the Executive and/or the Executive's family, as the case may
be, shall be entitled to participate in, and shall receive all benefits under,
all welfare benefit plans, practices, policies and programs provided by the
Company (including without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, dependent life,
accidental death and travel accident insurance plans and programs) at a level
that is equal to other senior executives of the Company. Should such benefits be
unavailable to the Executive and/or the Executive's family because his primary
residence is in the State of Massachusetts or for other similar reasons, the
Company shall provide the Executive with the cash equivalent of such benefits
paid no less frequently then bi-annually.
2
<PAGE>
4.3 Fringe Benefits. Immediately upon the Effective Date and throughout
---------------
the Contract Term, the Executive shall be entitled to participate in all fringe
benefit programs provided by the Company to its senior executives.
4.4 Expenses. During the Contract Term, the Executive shall be entitled
--------
to receive prompt reimbursement for all reasonable employment-related expenses
which are tax deductible by the Company as business expenses and incurred by the
Executive. The Executive shall be reimbursed upon the Company's receipt of
accountings in accordance with practices, policies and procedures applicable to
senior executives of the Company.
4.5 Office and Support Staff. During the Contract Term, the Executive
------------------------
shall be entitled to an office, furnishings, other appointments and secretarial
assistance in Lexington, Massachusetts commensurate with the position of Vice
President Technology of the Company, all of which shall be adequate for the
performance of the Executive's duties.
4.6 Vacation. The Executive shall be entitled to twenty (20) paid
--------
vacation days per year. Such paid vacation days shall accrue without
cancellation, expiration or forfeiture.
4.7 Living Accommodations. Commuting and/or Relocation Costs. In view of
--------------------------------------------------------
the fact that the Executive's primary residence is not within the vicinity of
the Company's headquarters, the Company shall during the Contract Term reimburse
the Executive for (i) the reasonable costs of commuting from his current
residence to the Company's headquarters and (ii) the reasonable costs of
securing and maintaining temporary, secondary living accommodations near the
Company's headquarters. During the Contract Term, should the Executive
determine to relocate his primary residence to within 50 miles of the Company's
headquarters, the Company shall reimburse the Executive for reasonable
relocation expenses.
4.8 Stock Options. As a member of the Board during 1997, the Executive
-------------
was granted options to purchase 200,000 shares of the Company's common voting
stock, par value $.0001 per share (the "Common Stock"), at an exercise price per
share of $_________, subject to the terms of the Company's 1997 Stock Option and
Incentive Plan (the "Plan"). The Plan prohibits a person who is both an
employee of the Company and a member of the Board from receiving stock options
or other benefits under the Plan as both an employee and member of the Board.
Therefore, the parties hereby agree that the Executive may elect at any time
prior to that date which is six (6) months after the date hereof to be treated
under the Plan as either an employee or member of the Board. If the Executive
elects to be treated under the Plan as an employee, for the period that the
Executive shall continue to be a member of the Board, he shall receive stock
options in an annual amount not less than the amount received annually by
members of the Board.
ARTICLE v
CHANGE OF CONTROL
5.1 Definitions. The following terms shall have the meaning set forth
-----------
below:
3
<PAGE>
(1) The term "Continuing Directors" shall mean those members of the
Board at any relevant time (i) who were directors on the Effective Date or (ii)
who subsequently were approved for nomination, election or appointment to the
Board by at least two-thirds of the Continuing Directors on the Board at the
time of such approval (the directors described in subsection (ii) are referred
to herein as the "Approved Directors").
(2) The term "Change in Control" shall mean a change in control of
beneficial ownership of the Company's voting securities of a nature that would
be required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
or any similar item on a successor or revised form; provided, however, that a
Change in Control shall be deemed to have occurred when:
(1) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
representing thirty percent (30%) or more of the combined voting power of the
Company's then outstanding voting securities; or
(2) During any period of two (2) consecutive years, the
individuals who at the beginning of such period constituted the Board, together
with any Approved Directors elected during such period, cease for any reason to
constitute at least a majority of the Board; provided, however, that if a Change
in Control under this clause (b)(ii) has not occurred, the Continuing Directors
(by a vote of at least two-thirds of the Continuing Directors then on the Board)
may: (1) approve in advance an acquisition resulting in a change of beneficial
ownership as described in clause (b)(i), in which case it shall not constitute a
Change in Control; or (2) if at any time after such an acquisition as described
in clause (b)(i), no person beneficially owns securities of the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities, declare that a Change in Control has ceased, in which
case the provisions of this Article V shall not apply from that time forward,
unless another Change in Control occurs; or
(3) The shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
(3) The term "Good Reason," in connection with the termination by the
Executive of his employment with the Company subsequent to a Change of Control,
shall mean:
(1) A diminution in the responsibilities, title or office of the
Executive such that he does not serve as Vice President of the Company (which
diminution was not for "Cause" (as defined below) or the result of the
Executive's disability), or the assignment (without the Executive's express
written consent) by the Company to the Executive of any significant duties that
are inconsistent with the Executive's position, duties, responsibilities and
status as Vice President of the Company;
(2) Any reduction by the Company in the Executive's Annual Base
Salary as the same may be increased from time to time in accordance with this
Agreement;
4
<PAGE>
(3) The Company's transfer or assignment of the Executive,
without the Executive's prior express written consent, to any location other
than the Company's place of business in Lexington, Massachusetts, except for
required travel on Company business, including, but not limited to, travel to
the various technology and other facilities of the Company located in Draper,
Utah; San Jose, California; and other additional and/or successor locations, to
an extent that does not constitute a substantial abrupt departure from the
Executive's normal business travel obligations; or
(4) The failure by the Company to continue in effect any
material benefit or compensation plan, life insurance plan, health and medical
benefit plan, disability plan or any other benefit plan in which the Executive
is a participant, or the taking of any action by the Company that would
adversely affect the Executive's right to participate in, or materially reduce
the Executive's benefits under, any of such plans or benefits, or deprive the
Executive of any material fringe benefit enjoyed by the Executive.
(4) The terms "Parachute Payments" and "Excess Parachute Payments"
shall each have the meanings attributed to them under Section 280G of the Code,
or any successor section, and any regulations which may be promulgated in
connection with said section.
5.2 Severance Payments. In the event that, during the Contract Term,
------------------
both (a) a Change of Control occurs, and (b) within six (6) months after such
Change in Control occurs, the Executive's employment is terminated either (1) by
the Company for any reason other than (A) for Cause (as defined below), (B) as a
result of the Executive's death or disability or (C) as a result of the
Executive's retirement in accordance with the Company's general retirement
policies, or (2) by the Executive for Good Reason, then:
(1) the Executive shall be paid, within thirty (30) days after
such termination, an amount in cash equal to all Annual Base Salary then and
thereafter payable hereunder;
(2) the Company shall maintain in full force and effect for the
shorter of the Contract Term or one (1) year after termination, all employee
health and medical benefit plans and programs including, without limitation, the
Executive's 401(k) Plan, in which the Executive, his family, or both, were
participants immediately prior to termination; provided that such continued
participation is possible under the general terms and provisions of such plans
and programs; provided, however, that if the Executive becomes eligible to
participate in a health and medical benefit plan or program of another employer
which confers substantially similar benefits, the Executive shall cease to
receive benefits under this subparagraph in respect of such plan or program; and
(3) all of the stock options, warrants and other similar rights
granted by the Company to the Executive, if any, shall immediately and entirely
be vested and shall be immediately delivered to the Executive without
restriction or limitation of any kind (except for normal transfer restrictions).
5
<PAGE>
Any obligation owed or amount payable pursuant to this Section together
with any compensation pursuant to Article III that is payable for services
rendered through the effective date of termination, shall constitute the sole
obligation of the Company payable with respect to the termination of the
Executive as provided in this Section.
5.3 Parachute Payment Limitation. Notwithstanding any other provision of
----------------------------
this Agreement, if the severance payments under Section 5.02 of this Agreement,
together with any other Parachute Payments made by the Company to the Executive,
if any, are characterized as Excess Parachute Payments, then the following rules
shall apply:
(1) The Company shall compute the net value to the Executive of all
such severance payments after reduction for the excise taxes imposed by Section
4999, of the Code and for any normal income taxes that would be imposed on the
Executive if such severance payments constituted the Executive's sole taxable
income;
(2) The Company shall next compute the maximum amount of severance
payments that can be provided without any such payments being characterized as
Excess Parachute Payments, and reduce the result by the amount of any normal
income taxes that would be imposed on the Executive if such reduced severance
benefits constituted the Executive's sole taxable income;
(3) If the amount derived in Section 5.03(a) is greater than the
amount derived in Section 5.03(b), then the Company shall pay the Executive the
full amount of severance payments without reduction. If the amount derived in
Section 5.03(a) is not greater than the amount derived in Section 5.03(b), then
the Company shall pay the Executive the maximum amount of severance payments
that can be provided without any such payments being characterized as Excess
Parachute Payments.
5.4 No Mitigation. The Executive shall not be required to mitigate the
-------------
amount of any payment provided for in Section 5.02 by seeking other employment
or otherwise, nor shall the amount of any payment provided for in Section 5.02
be reduced by any compensation earned by the Executive as a result of employment
by another company, self-employment or otherwise.
ARTICLE XI
RESTRICTIVE COVENANTS
6.1 Trade Secrets. Confidential and Proprietary Business Information.
----------------------------------------------------------------
(1) The Company has advised the Executive and the Executive has
acknowledged that it is the policy of the Company to maintain as secret and
confidential all Protected Information (as defined below), and that Protected
Information has been and will be developed at substantial cost and effort to the
Company. "Protected Information" means trade secrets, confidential and
proprietary business information of the Company, any information of the Company
other than information which has entered the public domain (unless such
information entered the public domain through
6
<PAGE>
effects of or on account of the Executive), and all valuable and unique
information and techniques acquired, developed or used by the Company relating
to its business, operations, employees, customers and suppliers, which give the
Company a competitive advantage over those who do not know the information and
techniques and which are protected by the Company from unauthorized disclosure,
including but not limited to, customer lists (including potential customers),
sources of supply, processes, plans, materials, pricing information, internal
memoranda, marketing plans, internal policies, software, software documentation,
computer programs, code, technology, hardware, test results, intellectual
property, and products and services which may be developed from time to time by
the Company and its agent or employees.
(2) The Executive acknowledges that the Executive has acquired
Protected Information as a result of his services previously rendered to the
Company as a member of the Board and consultant to the Company and that the
Executive will acquire additional Protected Information with respect to the
Company and its successors in interest, which information is a valuable, special
and unique asset of the Company's business and operations and that disclosure of
such Protected Information would cause irreparable damage to the Company. All
such Protected Information previously acquired or received by the Executive was
delivered by the Company in consideration of the execution and delivery by the
Executive of a Confidentiality and Non-Disclosure Agreement dated March 10, 1997
(the "First NDA"). Any and all agreements of the Executive to refrain from
disclosure or other communication of Protected Information set forth in this
Section 6.01 are in addition and not substitution of those agreements and
covenants set forth in the First NDA, which agreements and covenants the
Executive hereby ratifies and confirms in their entirety.
(3) Either during or after termination of employment by the Company,
the Executive shall not, directly or indirectly, divulge, furnish or make
accessible to any person, firm, corporation, association or other entity
(otherwise than as may be required in the regular course of the Executive's
employment) nor use in any manner, any Protected Information, or cause any such
information of the Company to enter the public domain.
6.2 Non-Competition
---------------
(1) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of eighteen (18)
months after the termination of this Agreement, directly or indirectly, in any
capacity (including through his ownership and control of VIA), engage or
participate in, or become employed by or render advisory or consulting or other
services in connection with any Prohibited Business as defined in Section
6.02(c); provided, however, that the foregoing Covenant shall be null and void
if (i) (1) the Company becomes insolvent or generally fails to pay, or admits in
writing its inability or unwillingness to pay, debts as they become due; (2) the
Company applies for the appointment of a trustee, receiver, sequestrator or
other custodian for any substantial portion of the Company's property, or makes
a general assignment for the benefit of creditors; (3) the Company permits or
suffers to exist the appointment of a trustee, receiver, sequestrator or other
custodian for a substantial part of the Company's property, and such trustee,
receiver, sequestrator or other custodian shall not be discharged within one
hundred twenty (120) days; or (4) the Company affects or participates in, or
permits or suffers to exist the commencement of any bankruptcy, reorganization,
debt arrangement or other case or
7
<PAGE>
proceeding under any bankruptcy or insolvency law, or any dissolution, winding
up or liquidation proceeding that results in the entry of an order for relief or
remains for one hundred twenty (120) days undismissed; and (ii) the Executive is
no longer an employee of the Company or member of the Board.
(2) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of eighteen (18)
months after the termination of this Agreement, make any financial investment,
whether in the form of equity or debt, or own any interest, directly or
indirectly, in any Prohibited Business. Nothing in this Section 6.02(b) shall,
however, restrict the Executive from making any investment in any company whose
stock is listed on a national securities exchange; provided that (i) such
investment does not give the Executive the right or ability to control or
influence the policy decisions of any Prohibited Business, and (ii) such
investment does not create a conflict of interest between the Executive's duties
hereunder and the Executive's interest in such investment.
(3) For purposes of this Section 6.02, "Prohibited Business" shall be
defined as any business and any branch, office or operation thereof, which is a
competitor of the Company and which has established or seeks to establish
contact, in whatever form (including, but not limited to solicitation of sales,
or the receipt or submission of bids), with any entity who is at any time a
client, customer or supplier of the Company (including but not limited to all
subdivisions of the federal government); provided, however, that "Prohibited
Business" shall not include Executive's ownership, control and operation of VIA
so long as VIA's activities and business do not directly or indirectly compete
with the activities and business of the Company.
6.3 Non-Solicitation. From the date hereof until two (2) years after the
----------------
Executive's termination of employment with the Company, the Executive shall not,
directly or indirectly (a) encourage any employee or supplier of the Company or
its successors in interest to leave his or her employment with the Company or
its successors in interest, (b) employ, hire, solicit or cause to be employed,
hired or solicited (other than by the Company or its successors in interest), or
encourage others to employ or hire any person who within two (2) years prior
thereto was employed by the Company or its successors in interest, or (c)
establish a business with, or encourage others to establish a business with, any
person who within two (2) years prior thereto was an employee or supplier of the
Company or its successors in interest.
6.4 Disclosure of Employee-Created Trade Secrets Confidential and
-------------------------------------------------------------
Proprietary Business Information. The Executive agrees to promptly disclose to
- --------------------------------
the Company all Protected Information developed in whole or in part by the
Executive during the Executive's employment with the Company and which relates
to the Company's business. Such Protected Information is, and shall remain, the
exclusive property of the Company. All writings created during the Executive's
employment with the Company (excluding writings (i) related to Pen/Voice
technology development; (ii) related to Executive's ownership, control or
operation of VIA; or (iii) unrelated to the Company's business) are considered
to be "works-for-hire" for the benefit of the Company and the Company shall own
all rights in such writings.
6.5 Survival of Undertakings and Injunctive Relief.
-----------------------------------------------
8
<PAGE>
(1) The provisions of Sections 6.01, 6.02, 6.03 and 6.04 shall survive
the termination of the Executive's employment with the Company irrespective of
the reasons therefor.
(2) The Executive acknowledges and agrees that the restrictions
imposed upon the Executive by Sections 6.01, 6.02, 6.03 and 6.04 and the purpose
of such restrictions are reasonable and are designed to protect the Protected
Information and the continued success of the Company without unduly restricting
the Executive's future employment by others. Furthermore, the Executive
acknowledges that, in view of the Protected Information which the Executive has
or will acquire or has or will have access to and in view of the necessity of
the restrictions contained in Sections 6.01, 6.02, 6.03 and 6.04, any violation
of any provision of Sections 6.01, 6.02, 6.03 and 6.04 hereof would cause
irreparable injury to the Company and its successors in interest with respect to
the resulting disruption in their operations. By reason of the foregoing the
Executive consents and agrees that if the Executive violates any of the
provisions of Sections 6.01, 6.02, 6.03 or 6.04 of this Agreement, the Company
and its successors in interest as the case may be, shall be entitled, in
addition to any other remedies that they may have, including money damages, to
an injunction to be issued by a court of competent jurisdiction, restraining the
Executive from committing or continuing any violation of such Sections of this
Agreement.
In the event of any such violation of Sections 6.01, 6.02, 6.03 and 6.04 of
this Agreement, the Executive further agrees that the time periods set forth in
such Sections shall be extended by the period of such violation.
ARTICLE VII
TERMINATION
7.1 Termination of Employment. The Executive's employment may be
-------------------------
terminated at any time during the Contract Term by mutual agreement of the
parties, or as otherwise provided in this Article.
7.2 Termination for Cause. The Company may terminate the Executive's
---------------------
employment for Cause without prior written notice of such termination. For
purposes of this Agreement, "Cause" for termination shall mean
(1) the Executive's willful failure or refusal to carry out the
reasonable directions of the Board, which directions are consistent with the
Executive's duties as set forth under this Agreement, other than a failure
resulting from the Executive's complete or partial incapacity due to physical or
mental illness or impairment;
(2) the Executive's conviction for a violation of a state or
federal criminal law involving the commission of a felony;
(3) a willful act by the Executive that constitutes gross
negligence in the performance of the Executive's duties under this Agreement. No
act, or failure to act, by the
9
<PAGE>
Executive shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the Company's best
interest;
(4) a material breach of the terms of this Agreement by the
Executive, which breach has not been cured by the Executive within fifteen (15)
days of written notice of said breach by the Company; or
(5) the Executive's unethical business practices in connection
with the Company's business.
Upon termination for Cause, the Executive shall not be entitled to payment of
any compensation other than salary and benefits under this Agreement earned up
to the date of such termination and any stock options, warrants or similar
rights which have vested at the date of such termination.
7.3 Termination Without Cause. Should the Executive's employment be
-------------------------
terminated for a reason other than as specifically set forth in Sections 7.01
and 7.02 or Article V above:
(1) all of the stock options, warrants and other similar rights,
if any, granted by the Company to the Executive which are vested at the date of
termination shall remain vested plus that number of the stock options, warrants
and other similar rights, if any, that would vest during the period immediately
following the date of termination set forth in the table below shall become
vested as of the date of termination and all such vested stock options, warrants
and other similar rights, if any, shall be immediately delivered to the
Executive without restriction or limitation of any kind (except for normal
transfer restrictions);
(2) all benefits provided to the Executive and/or the
Executive's family shall be continued for the relevant period specified in the
table below, and
(3) the Company shall continue to pay the Executive his Annual
Base Salary, in accordance with the Company's normal practices for other senior
executives, for the period specified in the table below:
- --------------------------------------------------------------------------------
Termination Period Number of Months
- --------------------------------------------------------------------------------
2/1/98 - 4/1/99 9
- --------------------------------------------------------------------------------
4/2/99 - 1/31/00 12
- --------------------------------------------------------------------------------
10
<PAGE>
ARTICLE VIII
MISCELLANEOUS
8.1 Publications. If, during the Contract Term and for a period of one
------------
(1) year thereafter, Oberteuffer writes a paper or article concerning automatic
speech recognition which he desires to publish in any professional or scientific
journal (excluding papers or articles written for or on behalf of VIA or
unrelated to the company's business), he shall submit a draft thereof to the
Company at least sixty (60) days in advance of the proposed publication date.
Within fifteen (15) days thereafter, the Company shall advise Oberteuffer if it
believes that any statement within the proposed article or paper contains any
Protected Information and Oberteuffer shall not publish the proposed article or
paper until the statement has been removed or modified to the reasonable
satisfaction of the Company. If the article or paper is subsequently published,
Oberteuffer shall use his best efforts to require the publisher to publish his
employment and/or other affiliation with the Company as part of any background
or biographical statement concerning Oberteuffer.
8.2 Assignment, Successors. This Agreement may not be assigned by either
----------------------
party hereto without the prior written consent of the other party. This
Agreement shall be binding upon and inure to the benefit of the Executive and
the Executive's estate and the Company and any assignee of or successor to the
Company.
8.3 Nonalienation of Benefits. Benefits payable under this Agreement
-------------------------
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, prior to actually being received by the
Executive, and any such attempt to dispose of any right to benefits payable
hereunder shall be void.
8.4 Severability. If all or any part of this Agreement is declared by any
------------
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.
8.5 Amendment and Waiver. This Agreement shall not be altered, amended or
--------------------
modified except by written instrument executed by the Company and the Executive.
A waiver of any term, covenant, agreement or condition contained in this
Agreement shall not be deemed a waiver of any other term, covenant, agreement or
condition and any waiver of any other term, covenant, agreement or condition,
and any waiver of any default in any such term, covenant, agreement or condition
shall not be deemed a waiver of any later default thereof or of any other term,
covenant, agreement or condition.
8.6 Notices. All notices and other communications hereunder shall be in
-------
writing and delivered by hand or by first class registered or certified mail,
return receipt requested, postage prepaid, addressed as follows:
11
<PAGE>
If to the Company: fonix corporation
Attn: Jeffrey N. Clayton, Vice President - Legal
60 East South Temple
1225 Eagle Gate Tower
Salt Lake City, Utah 84111
With a copy to: DURHAM, EVANS, JONES & PINEGAR
Attn: Jeffrey M. Jones, Esq.
50 South Main Street, Suite 850
Salt Lake City, Utah 84144
If to the Executive: John A. Oberteuffer
14 Glen Road South
Lexington, Massachusetts 02173
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective when
actually received by the addressee.
8.7 Counterpart Originals. This Agreement may be executed in
---------------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
8.8 Entire Agreement. This Agreement forms the entire agreement between
----------------
the parties hereto with respect to any severance payment and with respect to the
subject matter contained in the Agreement.
8.9 Applicable Law. The provisions of this Agreement shall be interpreted
--------------
and construed in accordance with the laws of the state of Utah, without regard
to its choice of law principles.
8.10 Attorneys Fees and Jurisdiction. In the event of any breach of this
-------------------------------
Agreement by either party, the non-breaching party shall be entitled to recover
its reasonable attorneys fees and other litigation costs, including attorneys
fees and costs incurred on appeal. Any litigation commenced by either party
with respect to this Agreement shall be filed in the state or federal courts
sitting in Salt Lake County, State of Utah. Oberteuffer hereby consents to the
jurisdiction of said courts over him with respect to any litigation with respect
to this Agreement.
8.11 Effect on Other Agreements. This Agreement shall supersede all prior
--------------------------
agreements, promises and representations regarding employment by the Company and
severance or other payments contingent upon termination of employment. Further,
the parties hereby terminate that certain Consulting Agreement between them
effective as of March 11, 1997; provided, however, that Sections 1.4 and 1.6
thereof shall survive said termination and continue to be enforceable by the
Company.
12
<PAGE>
8.12 Extension or Renegotiation. The parties hereto agree that at any time
--------------------------
prior to the expiration of this Agreement, they may extend or renegotiate this
Agreement upon mutually agreeable terms and conditions.
IN WITNESS WHEREOF the parties have executed this Employment Agreement on
the date first written above.
fonix corporation, a Delaware corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
JOHN A. OBERTEUFFER, an individual
-----------------------------
John A. Oberteuffer
13
<PAGE>
Amendment to the Master Agreement for Joint Collaboration Dated
November 14,1997
(hereinafter "Agreement")
between
fonix corporation. Salt Lake City. Utah, U.S.A. (hereinafter "fonix")
and
Siemens Aktiengesellschaft Berlin and Munchen, Germany (hereinafter "Siemens")
Pursuant to paragraph 3.2 of the Agreement, 2,000,000 DM of the 5,000,000 DM
which Siemens shall pay to fonix upon execution of the First Statement of Work
shall be allocated to the purchase of fonix common stock. The Parties hereby
agree to prolong the Period in which Siemens may purchase such fonix common
stock from ninety (90) days from the date of the Agreement to hundred and twenty
(120) days from the date of the Agreement.
Further the Parties agree, that either Siemens or Siemens Microelectronics Inc.,
Cupertino shall be entitled to exercise the warrants for the acquisition of
shares of fonix stock and/or to purchase fonix common stock as stipulated in
paragraph 3.2 of the Agreement
The other terms and conditions of the Agreement shall remain unchanged.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the dates specified below:
Date: 13 Feb 1998 Date: 5 Feb 1998
fonix corporation Siemens Aktiengesellschaft
/s/ Roger D. Dudley /s/ signature illegible
- -------------------------- ----------------------------------
Roger D. Dudley
<PAGE>
2/nd/ Amendment to the Master Agreement for Joint Collaboration dated
November 14, 1997
(hereinafter "Agreement")
between
fonix corporation. Salt Lake City, Utah, U.S.A.
(hereinafter "fonix")
and
Siemens Aktiengesellschaft, Berlin and Munchen, Germany
(hereinafter "Siemens")
Pursuant to paragraph 3.2 of the Agreement, as amended on Feb. 13, 1998,
2,000,000 DM of the 5,000,000 DM which Siemens shall pay to fonix upon execution
of the First Statement of Work shall be allocated to the purchase of fonix
common stock. The Parties hereby agree to prolong the period in which Siemens
may purchase such fonix common stock from one hundred and twenty (120) days from
the date of the Agreement to one hundred and thirty-five (135) days from the
date of the Agreement.
Further the Parties agree, that the ownership of the stock may subsequently to
the purchase be transferred from Siemens Aktiengesellschaft to a Subsidiary in
the U.S. or vice versa.
The other terms and conditions of the Agreement shall remain unchanged.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed
by their duly authorized representatives on the dates specified below:
Date: 13 March 1998 Date:
fonix corporation Siemens Aktiengesellschaft
/s/ Roger D. Dudley /s/
- -------------------------------
Roger D. Dudley
Executive V.P.
<PAGE>
Exhibit 22
Subsidiaries of the Registrant
The Company has two wholly owned subsidiaries:
AcuVoice, Inc., a Utah corporation
fonix Systems, Inc., a Utah corporation
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements Nos.
333-31425 and 333-40603 of fonix corporation on Form S-3 of our report dated
March 28, 1997, appearing in this Annual Report on Form 10-K of fonix
corporation for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
April 8, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated March 4,
1996 included in this Form 10-K of fonix corporation for the year ended December
31, 1997, into the Company's previously filed Registration Statements File Nos.
333-31425 and 333-40603.
/s/ Pritchett, Siler & Hardy P.C.
PRITCHETT, SILER & HARDY
Salt Lake City, Utah
April 13, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
fonix (TM) corporation on Form S-3 of our report dated March 28, 1997, appearing
in the Annual Report on Form 10-K of fonix (TM) corporation for the year ended
December 31, 1997 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
April 8, 1998
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<RECEIVABLES> 614,919
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