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SERIES E CONVERTIBLE PREFERRED STOCK EXCHANGE AND
PURCHASE AGREEMENT
AMONG
FONIX CORPORATION,
SOVEREIGN PARTNERS, LP
AND
DOMINION CAPITAL FUND, LTD
______________________________
SEPTEMBER 30, 1998
______________________________
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SERIES E CONVERTIBLE PREFERRED STOCK EXCHANGE AND PURCHASE AGREEMENT, dated
as of September 30, 1998 (this "Agreement"), between FONIX CORPORATION, a
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Delaware corporation (the "Company"), DOMINION CAPITAL FUND, LTD., a
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[__________] corporation ("Dominion"), and SOVEREIGN PARTNERS, LP, a
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[____________] corporation ("Sovereign") (Dominion and Sovereign are each
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referred to as a "Purchaser" and collectively as the "Purchasers").
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RECITALS
A. The Company, the Purchasers and certain other parties have entered
into that certain Series D Convertible Preferred Stock Purchase Agreement dated
as of August 31, 1998 (the "Series D Purchase Agreement") pursuant to which the
Purchasers acquired, in the aggregate, 237,500 shares of the Company's Series D
4% Convertible Preferred Stock ("Series D") according to the terms and
conditions set forth in the Series D Purchase Agreement.
B. The Purchasers each desire to exchange, 75,000 shares of the Series D
issued to them pursuant to the Series D Purchase Agreement, on a one-for-one
basis, for shares of the Company's newly issued Series E 4% Convertible
Preferred Stock, $.0001 par value per share ("Preferred Stock"), according to
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the terms and conditions set forth below. Furthermore, the Purchasers each
desire to purchase, and the Company desires to issue and sell to each of them
50,000 additional shares of Series E Preferred (or a total of 100,000 shares)
for an aggregate purchase price of $2,000,000, according to the terms and
conditions set forth below.
AGREEMENT
IN CONSIDERATION of the mutual covenants and agreements set forth
herein and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties agree as follows:
ARTICLE I.
CERTAIN DEFINITIONS
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Section 1. Certain Definitions. As used in this Agreement, unless the
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context requires a different meaning, the following terms have the meanings
indicated in this Section 1.1:
"Affiliate" means, with respect to any Person, any Person that,
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directly or indirectly, controls, is controlled by, or is under common control
with, such Person. For purposes of this definition, "control" (including, with
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correlative meanings, the terms "controlled by" and "under common control with")
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shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Agreement" shall have the meaning set forth in the recitals hereto.
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"Business Day" means any day except Saturday, Sunday and any day which
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shall be a Federal legal holiday or a day on which banking institutions in the
State of Delaware are authorized or required by law or other government actions
to close.
"Certificate of Designation" shall have the meaning set forth in
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Section 2.1(a).
"Closing" shall have the meaning set forth in Section 2.1(b).
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"Closing Date" shall have the meaning set forth in Section 2.1(b).
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"Commission" means the Securities and Exchange Commission.
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"Common Stock" means the Company's common stock, par value $.0001 per
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share.
"Company" shall have the meaning set forth in the recitals hereto.
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"Conversion Price" shall have the meaning set forth in the Certificate
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of Designation.
"Conversion Ratio" shall have the meaning set forth in the Certificate
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of Designation.
"Disclosure Materials" means, collectively, the SEC Documents and the
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Schedules to this Agreement and all other information furnished by or on behalf
of the Company relating to or concerning the Company and provided to the
Purchasers or their agents and counsel in connection with the transactions
contemplated by this Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Initial Reserve" shall have the meaning set forth in Section 3.1(d).
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"Intellectual Property Rights" shall have the meaning set forth in
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Section 3.1(q).
"Legal Opinion" means the legal opinion letter of Durham, Evans, Xxxxx
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& Xxxxxxx, P.C., outside counsel to the Company, addressed to the Purchasers,
dated the Closing Date and in form and substance acceptable to the Purchasers.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
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right of first refusal, charge, security interest or encumbrance of any kind in
or on such asset or the revenues or income thereon or therefrom.
"Material Adverse Effect" shall have the meaning set forth in Section
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3.1(b).
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"Original Issue Date" shall mean the first issuance of any Shares,
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regardless of the number of transfers of any particular Share and regardless of
the number of certificates which may be issued to evidence any particular Share.
"Per Share Market Value" shall have the meaning set forth in the
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Certificate of Designation.
"Person" means an individual or a corporation, partnership, trust,
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incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Preferred Stock" shall have the meaning set forth in the recitals
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hereto.
"Purchaser(s)" shall have the meaning set forth in the recitals
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hereto.
"Registration Rights Agreement" means the registration rights
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agreement, dated as of the date hereof, among the Company and the Purchasers, in
the form of Exhibit B, as the same may be amended, supplemented or otherwise
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modified in accordance with its terms.
"Required Approvals" shall have the meaning set forth in Section
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3.1(f).
"SEC Documents" shall have the meaning set forth in Section 3.1(c).
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"Securities" means, collectively, the Shares, the Underlying Shares
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and the Warrants.
"Securities Act" means the Securities Act of 1933, as amended.
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"Shares" means the shares of Preferred Stock to be purchased or issued
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pursuant to this Agreement.
"Stated Value" means $20.
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"Subsequent Financing" shall have the meaning set forth in Section
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4.9.
"Subsequent Financing Notice" shall have the meaning set forth in
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Section 4.9.
"Subsidiaries" shall have the meaning set forth in Section 3.1(a).
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"Trading Day" shall have the meaning set forth in the Certificate of
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Designation.
"Transaction Documents" means collectively, this Agreement, the
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Certificate of Designation, the Warrants and the Registration Rights Agreement.
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"Underlying Shares" means the shares of Common Stock issuable upon
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conversion of the Shares and as payment of dividends thereon in accordance with
the terms of the Certificate of Designation, and upon exercise of the Warrants
in accordance with the terms thereof.
"Underlying Securities Registration Statement" means a registration
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statement under the Securities Act prepared by the Company and filed with the
Commission in accordance with the Registration Rights Agreement, covering the
resale of the Underlying Shares and naming the holder or holders of such
Underlying Shares as "selling stockholders" thereunder.
"Warrants" means the Common Stock purchase warrants to be issued to
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the Purchasers pursuant to Section 4.15 of this Agreement.
ARTICLE II.
PURCHASE OF SHARES
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Section 2.1 Purchase and Exchange of Shares; Closing.
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(a) Subject to the terms and conditions set forth in this Agreement,
the Company shall issue and exchange for up to 75,000 shares of Series D
Preferred owned by each of the Purchaser, up to a total of 150,000 shares of
Series D Preferred, a corresponding number of Shares on a one-for-one basis,
provided that the Purchasers shall deliver to the Company the original
certificates representing the shares of Series D Preferred to be so exchanged.
(b) Subject to the terms and conditions set forth below, the Company
shall sell to the Purchasers, and the Purchasers shall purchase fifty thousand
(50,000) Shares each (or an aggregate of one hundred thousand (100,000) Shares)
for one million dollars ($1,000,000) each (for the aggregate purchase price of
two million dollars ($2,000,000)) (the "Purchase Price"). The Shares issued
pursuant to this Agreement, whether in exchange for Series D Preferred or for
the Purchase Price shall have the respective rights, preferences and privileges
set forth in Exhibit A (the "Certificate of Designation").
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(c) The closing of the purchase and sale of the Shares (the "Closing")
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shall take place at the offices of Durham, Evans, Xxxxx & Xxxxxxx, P.C., 00
Xxxxx Xxxx Xxxxxx, Xxxxx 000, Xxxx Xxxx Xxxx, Xxxx 00000. The date of the
Closing is hereinafter referred to as the "Closing Date."
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(d) At the Closing the parties shall deliver the following: (i) the
Company shall deliver or cause to be delivered (A) stock certificates
representing up to one hundred fifty thousand (150,000) Shares, to be exchanged
for such number of shares of Series D Preferred as shall be tendered for
exchange by the Purchasers and stock certificates representing one hundred
thousand (100,000) Shares, registered according to instructions to be provided
by the Purchasers at or before the Closing, (B) an executed Registration Rights
Agreement in the form attached hereto as Exhibit "B" and (C) a Legal Opinion
addressed to the Purchasers; (ii) the Purchasers shall deliver or cause to be
delivered (x) certificates representing such number of shares of Series
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D Preferred, properly endorsed for transfer, as each such Purchaser shall
determine up to a maximum of 150,000 shares, and (y) two million dollars
($2,000,000) in United States dollars in presently available funds according to
wire instructions to be provided by the Company at or before Closing; and (iii)
each party hereto shall deliver or cause to be delivered all other executed
instruments, agreements and certificates as are required to be delivered by or
on their behalf at the Closing.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
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Section 3.1 Representations and Warranties of the Company. The Company
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hereby represents and warrants to the Purchasers as follows:
(a) Organization and Qualification. The Company is a corporation,
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duly incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the requisite corporate power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. The Company has no subsidiaries other than as set forth
in Schedule 3.1(a) (collectively, the "Subsidiaries"). Each of the Subsidiaries
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is a corporation, duly incorporated, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, with the requisite corporate
power and authority to own and use its properties and assets and to carry on its
business as currently conducted. Each of the Company and the Subsidiaries is
duly qualified to do business and is in good standing as a foreign corporation
in each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not, individually or
in the aggregate, (x) adversely affect the legality, validity or enforceability
of the Shares, the Warrants or any Transaction Document, (y) have a material
adverse effect on the results of operations, assets, prospects, or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as a whole
or (z) adversely impair the Company's ability to perform fully on a timely basis
its obligations under any Transaction Document (a "Material Adverse Effect").
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(b) Authorization; Enforcement. The Company has the requisite
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corporate power and authority to enter into and to consummate the transactions
contemplated by the Transaction Documents and to otherwise carry out its
obligations thereunder. The execution and delivery of each Transaction Document
by the Company and the consummation by it of the transactions contemplated
thereby have been duly authorized by all necessary action on the part of the
Company. Each Transaction Document has been duly executed by the Company and,
when delivered in accordance with the terms hereof, each Transaction Document
shall constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. Neither the Company nor any
Subsidiary is in violation of any provision of its respective certificate or
articles of incorporation, bylaws or other charter documents.
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(c) Capitalization. The authorized, issued and outstanding capital
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stock of the Company is set forth in Schedule 3.1(c). No shares of Common Stock
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are entitled to preemptive or similar rights. Except as specifically disclosed
in Schedule 3.1(c), there are no outstanding options, warrants, rights to
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subscribe to, calls or commitments of any character whatsoever relating to, or,
except as a result of the purchase and sale of the Shares and the Warrants,
securities, rights or obligations convertible into or exchangeable for, or
giving any Person any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock or securities or rights convertible or exchangeable into shares of
Common Stock. To the knowledge of the Company, except as specifically disclosed
in the SEC Documents or Schedule 3.1(c), no Person or group of Persons
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beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the
Exchange Act) or has the right to acquire by agreement with or by obligation
binding upon the Company beneficial ownership of in excess of 5% of the Common
Stock.
(d) Issuance of Securities. The Shares and the Warrants are duly
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authorized and, when issued in accordance with the terms hereof, shall be
validly issued, fully paid and nonassessable, free and clear of all Liens.
Subject to Section 4.7, the Company has and at all times while any Shares or
Warrants are outstanding shall use its best efforts to maintain an adequate
reserve of duly authorized shares of Common Stock to enable it to perform its
conversion, exercise and other obligations under this Agreement, the Certificate
of Designation and the Warrants, which reserve, subject to Section 4.7, shall
be no less than the sum of (i) 200% of (A) the number of shares of Common Stock
as would be issuable upon conversion in full of the Shares, were such conversion
effected on the Original Issue Date or the Filing Date (as defined in the
Registration Rights Agreement), whichever yields a lower Conversion Price, and
(B) the number of shares of Common Stock as are issuable as payment of dividends
on the Shares (assuming such dividends are to be paid in Common Stock) and (ii)
the number of shares of Common Stock as are issuable upon the exercise in full
of the Warrants (such sum, the "Initial Reserve"). If at any time the sum of
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the number of shares of Common Stock issuable (a) upon conversion in full of the
then outstanding Shares, (b) as the payment of dividends on the Shares (assuming
all such dividends are to be paid in Common Stock) and (c) upon exercise in full
of the Warrants exceeds 85% of the Initial Reserve, then the Company shall use
its best efforts to duly reserve 200% of the number of shares of Common Stock
equal to such excess to fulfill such obligations. This obligation shall
similarly apply to successive excesses. When issued in accordance with the
Certificate of Designation and the Warrants, the Underlying Shares will be duly
authorized, validly issued, fully paid and nonassessable, and free and clear of
all Liens.
(e) No Conflicts. The execution, delivery and performance of the
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Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof), (ii) subject to
obtaining the consents referred to in Section 3.1(f), conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument (evidencing a Company debt or
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otherwise) to which the Company is a party or by which any property or asset of
the Company is bound or affected, or (iii) result in a violation of any law,
rule, regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company is subject (including
federal and state securities laws and regulations), or by which any property or
asset of the Company is bound or affected; except in the case of each of clauses
(ii) and (iii), as could not, individually or in the aggregate, have or result
in a Material Adverse Effect. The business of the Company is not being conducted
in violation of any law, ordinance or regulation of any governmental authority,
except for violations which, individually and in the aggregate, could not have
or result in a Material Adverse Effect.
(f) Consents and Approvals. Neither the Company nor any Subsidiary is
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required to obtain any consent, waiver, authorization or order of, or make any
filing or registration with, any court or other federal, state, local, foreign
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction Documents,
other than (i) the filing of the Certificate of Designation with the Secretary
of State of Delaware, (ii) the filing of one or more Underlying Securities
Registration Statements with the Commission and the making of applicable blue-
sky filings under state securities laws with respect to the Securities and the
transactions contemplated hereby, each as contemplated hereby and by the
Registration Rights Agreement, (iii) the application for the listing of the
Underlying Shares on the Nasdaq SmallCap Market (and on each other national
securities exchange, market or trading facility on which the Common Stock is
then listed), and (iv) other than, in all other cases, where the failure to
obtain such consent, waiver, authorization or order, or to give or make such
notice or filing, could not, individually or in the aggregate, have or result in
a Material Adverse Effect (the "Required Approvals").
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(g) Litigation; Proceedings. Except as specifically disclosed in the
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Disclosure Materials, there is no action, suit, notice of violation, proceeding
or investigation pending or, to the best knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries or any of their
respective properties before or by any court, governmental or administrative
agency or regulatory authority (federal, state, county, local or foreign) which
(i) adversely affects or challenges the legality, validity or enforceability of
any Transaction Document or the Securities or (ii) could, individually or in the
aggregate, have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
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(i) is in default under or in violation of (or has received notice of a claim
that it is in default under or that it is in violation of) any indenture, loan
or credit agreement or any other agreement or instrument to which it is a party
or by which it or any of its properties is bound, (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is in violation of
any statute, rule or regulation of any governmental authority, except as could
not, individually or in the aggregate, have or result in a Material Adverse
Effect or, except in the case of clause (i) above, as has not been waived
pursuant to an effective waiver.
(i) Private Offering. Assuming the accuracy of the representations
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and warranties of the Purchasers contained in Sections 3.2(b)-3.2(f), the
offering, issuance or sale of
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the Securities as contemplated hereunder are exempt from the registration
requirements of the Securities Act.
(j) Certain Fees. Except for finders fees, which fees will be paid by
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the Company, no fees or commissions will be payable by the Company to any
broker, financial advisor, finder, investment banker, placement agent, or bank
with respect to the transactions contemplated hereby. The Purchasers shall have
no obligation with respect to such fees or with respect to any claims made by or
on behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated hereby. The Company
shall indemnify and hold harmless Purchasers, 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.
(k) SEC Documents; Financial Statements; No Adverse Change. The
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Company has filed all reports required to be filed by it under the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the three years
preceding the date hereof (or such shorter period as the Company was required by
law to file such material) (the foregoing materials being collectively referred
to herein as the "SEC Documents") on a timely basis or has received a valid
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extension of such time of filing and has filed any such SEC Documents prior to
the expiration of any such extension. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC
Documents comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved, except as may be otherwise specified in such financial
statements or the notes thereto, and fairly present in all material respects the
financial position of the Company as of and for the dates thereof and the
results of operations, retained earnings and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal year-end audit
adjustments. Since the date of the financial statements included in the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998, as
amended to the date hereof, (a) there has been no event, occurrence or
development that has had or that could have or result in a Material Adverse
Effect, (b) there has been no material change in the Company's accounting
principles, practices or methods and (c) the Company has conducted its business
only in the ordinary course of such business. The Company last filed audited
financial statements with the Commission on April 15, 1998, and has not received
any comments from the Commission in respect thereof.
(l) Seniority. Except for the Company's Series A Preferred Stock, no
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class of equity securities of the Company is senior to the Shares in right of
payment, whether with respect to dividends or upon liquidation, dissolution or
otherwise.
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(m) Form S-3 Eligibility. The Company is, and at the Closing Date
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will be, eligible to register securities for resale with the Commission under
Form S-3 promulgated under the Securities Act.
(n) Investment Company. The Company is not, and is not an "Affiliate
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person" of, an "investment company" within the meaning of the Investment Company
Act of 1940, as amended.
(o) Listing and Maintenance Requirements Compliance. Other than as
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specifically disclosed in writing to the Purchasers, the Company has not in the
two years prior to the date hereof received written notice from any stock
exchange, market or trading facility on which the Common Stock is or has been
listed (or on which it is or has been quoted) to the effect that the Company is
not in compliance with the listing or maintenance requirements of such exchange,
market or trading facility. The Company has provided to the Purchasers true and
complete copies of all such notices contemplated by this Section. To the
Company's knowledge, it presently meets, and will continue to meet for the
foreseeable future (assuming no changes in the applicable listing requirements),
the currently applicable listing requirements of the Nasdaq Stock Market, Inc.,
relative to its continued listing on the Nasdaq SmallCap Market.
(p) Patents and Trademarks. The Company has, or has rights to use,
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all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses, trade secrets and other intellectual
property rights which are necessary for use in connection with its business or
which the failure to so have would have a Material Adverse Effect (collectively,
the "Intellectual Property Rights"). To the best knowledge of the Company, none
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of the Intellectual Property Rights infringe on any rights of any other Person,
and the Company either owns or has duly licensed or otherwise acquired all
necessary rights with respect to the Intellectual Property Rights. The Company
has not received any notice from any third party of any claim of infringement by
the Company of any of the Intellectual Property Rights, and has no reason to
believe there is any basis for any such claim. To the best knowledge of the
Company, there is no existing infringement by another Person on any of the
Intellectual Property Rights.
(q) Disclosure. All information relating to or concerning the Company
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set forth in the Transaction Documents or the Disclosure Materials (other than
the SEC Documents) is true and correct in all material respects and does not
fail to state any material fact necessary in order to make the statements herein
or therein, in light of the circumstances under which they were made, not
misleading. The Company confirms that it has not provided to the Purchasers or
any of their representatives, agents or counsel any information that constitutes
or might constitute material nonpublic information. The Company understands and
confirms that the Purchasers shall be relying on the foregoing representation in
effecting transactions in securities of the Company.
Section 3.2 Representations and Warranties of the Purchasers. The Purchasers
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hereby jointly and not severally represent and warrant to the Company as
follows:
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(a) Organization; Authority. Such Purchaser is an entity organized,
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validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents and to
carry out its obligations thereunder. The acquisition of the Securities to be
acquired hereunder and the payment of the purchase price therefor by such
Purchaser have been duly authorized by all necessary action on the part of such
Purchaser. Each of this Agreement and the Registration Rights 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.
(b) Investment Intent. Such Purchaser is acquiring the Securities to
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be acquired hereunder for its own account for investment purposes only and not
with a view to or for distributing or reselling such Securities or any part
thereof or interest therein, without prejudice, however, to such Purchaser's
right, subject to the provisions of this Agreement and the Registration Rights
Agreement, at all times to sell or otherwise dispose of all or any part of such
Securities pursuant to an effective registration statement under the Securities
Act and in compliance with applicable state securities laws or under an
exemption from such registration.
(c) Purchaser Status. At the time such Purchaser was offered the
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Securities to be acquired hereunder by such Purchaser, it was, at the date
hereof, it is, and at the Closing Date, it will be, an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. Such Purchaser, either alone or together
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with its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment.
(e) Ability of Purchaser to Bear Risk of Investment. Such Purchaser
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acknowledges that an investment in the Securities is speculative and involves a
high degree of risk. Such Purchaser is able to bear the economic risk of an
investment in the Securities to be acquired hereunder by such Purchaser, and, at
the present time, is able to afford a complete loss of such investment.
(f) Access to Information. Such Purchaser acknowledges receipt of the
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Disclosure Materials and further acknowledges that it has been afforded (i) the
opportunity to ask such questions as it has deemed necessary of, and to receive
answers from, representatives of the Company concerning the terms and conditions
of the offering of the Securities, and the merits and risks of investing in the
Securities, (ii) access to information about the Company and the Company's
financial condition, results of operations, business, properties, management and
prospects sufficient to enable it to evaluate its investment and (iii) the
opportunity to obtain such additional information which the Company possesses or
can acquire without unreasonable effort or expense that is necessary to make an
informed investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the
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Disclosure Materials. Neither such inquiries nor any other investigation
conducted by or on behalf of such Purchaser or its representatives, agents or
counsel shall modify, amend or affect such Purchaser's right to rely on the
truth, accuracy and completeness of the Disclosure Materials and the Company's
representations and warranties contained in the Transaction Documents.
(g) Reliance. Such Purchaser understands and acknowledges that (i)
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the Securities to be acquired by it hereunder are being offered and sold to it
without registration under the Securities Act in a private placement that is
exempt from the registration provisions of the Securities Act and (ii) the
availability of such exemption, depends in part on, and the Company will rely
upon the accuracy and truthfulness of, the foregoing representations and such
Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that Purchasers makes no
representations or warranties with respect to transactions contemplated hereby
other than those specifically set forth in this Section 3.2.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
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Section 4.1 Transfer Restrictions. (a) The Securities may only be disposed
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of pursuant to an effective registration statement under the Securities Act, to
the Company or pursuant to an available exemption from or in a transaction not
subject to the registration requirements thereof. In connection with any
transfer of any Securities other than pursuant to an effective registration
statement or to the Company, the Company may require the transferor thereof to
provide to the Company an opinion of counsel selected by the transferor, the
form and substance of which opinion shall be reasonably satisfactory to the
Company, to the effect that such transfer does not require registration under
the Securities Act. Notwithstanding the foregoing, the Company hereby consents
to and agrees to register (i) any transfer of Securities by the Purchasers to an
Affiliate of the Purchasers, or any transfers among any such Affiliates, and
(ii) any transfer by the Purchasers to any investment entity under common
management with the Purchasers, provided in each case of clauses (i) and (ii)
the transferee certifies to the Company that it is an "accredited investor" as
defined in Rule 501(a) under the Securities Act. Any such transferee shall have
the rights of the Purchasers under this Agreement and the Registration Rights
Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by
this Section 4.1(b), of the following legend (or such substantially similar
legend as is acceptable to the Purchasers and their counsel, the parties
agreeing that any unacceptable legended Securities shall be replaced promptly by
and at the Company's cost) on the Securities:
[FOR SHARES AND WARRANTS] NEITHER THESE SECURITIES NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
-11-
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
[ONLY FOR UNDERLYING SHARES TO THE EXTENT THE RESALE THEREOF IS NOT COVERED
BY AN EFFECTIVE REGISTRATION STATEMENT AT THE TIME OF CONVERSION, ISSUANCE
OR EXERCISE] THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above or any other
restrictive legend if the conversion of Shares, exercise of Warrants or other
issuances of Underlying Shares, as the case may be, occurs at any time while an
Underlying Securities Registration Statement is effective under the Securities
Act or, in the event there is not an effective Underlying Securities
Registration Statement at such time, if in the opinion of counsel to the Company
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission). The Company agrees that it will provide the Purchasers, upon
request, with a certificate or certificates representing Underlying Shares, free
from such legend at such time as such legend is no longer required hereunder.
The Company may not make any notation on its records or give instructions to any
transfer agent of the Company which enlarge the restrictions of transfer set
forth in this Section 4.1(b).
Section 4.2 Acknowledgment of Dilution. The Company acknowledges that the
--------------------------
issuance of Underlying Shares upon (i) conversion of the Shares and as payment
of dividends thereon and (ii) exercise of the Warrants may result in dilution of
the outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions. The Company further acknowledges that its obligation
to issue Underlying Shares in accordance with the Certificate of Designation and
the Warrants is unconditional and absolute regardless of the effect of any such
dilution.
Section 4.3 Furnishing of Information. As long as the Purchasers own
-------------------------
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to Section
13(a) or 15(d) of the Exchange Act. If at any time prior to the date on which
the Purchasers may resell all of their Underlying Shares without volume
restrictions pursuant to
-12-
Rule 144(k) promulgated under the Securities Act (as determined by counsel to
the Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent for the benefit of and enforceable by
the Purchasers) the Company is not required to file reports pursuant to such
sections, it will prepare and furnish to the Purchasers and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act in the time period that
such filings would have been required to have been made under the Exchange Act.
The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, all to the extent required from
time to time to enable such Person to sell Securities without registration under
the Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act, including the legal opinion referenced
above in this Section. Upon the request of any such Person, the Company shall
deliver to such Person a written certification of a duly authorized officer as
to whether it has complied with such requirements.
Section 4.4 Use of Disclosure Materials. The Company consents to the use of
---------------------------
the Disclosure Materials and any information provided by or on behalf of the
Company pursuant to Section 4.3, and any amendments and supplements thereto, by
the Purchasers in connection with resales of the Securities other than pursuant
to an effective registration statement.
Section 4.5 Blue Sky Laws. In accordance with the Registration Rights
-------------
Agreement, the Company shall qualify the Underlying Shares under the securities
or Blue Sky laws of such jurisdictions as the Purchasers may reasonably request
and shall continue such qualification at all times until the Purchasers notify
the Company in writing that they no longer own Securities; provided, however,
-------- -------
that neither the Company nor its Subsidiaries shall be required in connection
therewith to qualify as a foreign corporation where they are not now so
qualified or to take any action that would subject the Company to general
service of process in any such jurisdiction where it is not then so subject.
Section 4.6 Integration. The Company shall not and shall use its best
-----------
efforts to ensure that no Affiliate shall sell, offer for sale or solicit offers
to buy or otherwise negotiate in respect of any security (as defined in Section
2 of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the issue, offer or sale of the Securities to the Purchasers.
Section 4.7 Increase in Authorized Shares. At such time as the Company
-----------------------------
would be, if a notice of conversion or exercise (as the case may be) were to be
delivered on such date, precluded from (a) converting in full all of the Shares
or all of the then issued and outstanding shares of the Company's Series D
Preferred Stock that remain unconverted at such date (and paying any accrued but
unpaid dividends in respect thereof in shares of Common Stock) or (b) honoring
the exercise in full of the Warrants or any warrants issued in respect of the
Series D Preferred Stock, due to the unavailability of a sufficient number of
shares of authorized but unissued or re-acquired Common Stock, the Board of
Directors of the Company shall promptly (and in any case within 30 Business Days
from such date) prepare and mail to the shareholders of
-13-
the Company proxy materials requesting authorization to amend the Company's
certificate of incorporation to increase the number of shares of Common Stock
which the Company is authorized to issue to at least a number of shares equal to
the sum of (i) all shares of Common Stock then outstanding, (ii) the number of
shares of Common Stock issuable on account of all outstanding warrants, options
and convertible securities (other than the Preferred Stock and the Warrants) and
on account of all shares reserved under any stock option, stock purchase,
warrant or similar plan, (iii) 200% of the number of Underlying Shares as would
then be issuable upon a conversion in full of the then outstanding Shares and
shares of Series D Preferred Stock and as payment of all future dividends
thereon in shares of Common Stock in accordance with the terms of this Agreement
and the Certificate of Designation, and (iv) such number of Underlying Shares as
would then be issuable upon the exercise in full of the Warrants and any
warrants issued in respect of the Series D Preferred Stock. In connection
therewith, the Board of Directors shall (x) adopt proper resolutions authorizing
such increase, (y) recommend to and otherwise use its best efforts to promptly
and duly obtain shareholder approval to carry out such resolutions (and hold a
special meeting of the shareholders no later than the 60th day after delivery of
the proxy materials relating to such meeting) and (z) within 5 Business Days of
obtaining such shareholder authorization, file an appropriate amendment to the
Company's certificate of incorporation to evidence such increase. If the
shareholders fail to approve such increase, the Company does not receive
shareholder approval for such increase or the Company fails to file an
appropriate amendment in the time provided therefor by the immediately preceding
sentence, then the provisions of Section 5(a)(iii)(B) of the Certificate of
Designation shall apply.
Section 4.8 Right of First Refusal.
----------------------
(a) The Company shall not, directly or indirectly, without the prior
written consent of the Preferred Stock Investors, as that term is defined below,
offer, sell, grant any option to purchase, or otherwise dispose of (or announce
any offer, sale, grant or any option to purchase or other disposition) any of
its or its Affiliates' equity or equity-equivalent securities or any instrument
that permits the holder thereof to acquire shares of Common Stock at any time
over the life of the security or investment at a price that is less than the
market price of the Common Stock at the time of issuance of such security or
instrument (a "Subsequent Placement") for a period of seventy-five (75) days
after the Effectiveness Date (as defined in the Registration Rights Agreement),
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 in each case disclosed in Schedule 3.1(c), (iii) shares of Common Stock
issued upon conversion of the Shares or shares of the Series D Preferred Stock,
as payment of dividends in respect thereof, or upon exercise of the Warrants or
any warrants issued in respect of the Series D Preferred Stock, in accordance
with their respective terms, (iv) shares of Common Stock issued in connection
with the capitalization or creation of a joint venture with a strategic partner
(a Person whose business is primarily that of investing and selling of
securities shall not be deemed a strategic partner), (v) shares of Common Stock
issued to pay part or all of the purchase price for the acquisition by the
Company of a Person (which, for purposes of this clause (v), shall not include
an individual or group of individuals) and (vi) shares of Common Stock issued in
a bona fide public offering by the Company of its (and not of any of its
stockholders') securities, unless (A) the Company delivers
-14-
to each Preferred Stock Investor a written notice (the "Subsequent Placement
Notice") of its intention effect such Subsequent Placement, which Subsequent
Placement Notice shall describe in reasonable detail the proposed terms of such
Subsequent Placement, the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent Placement shall be affected (if known to
the Company), and attached to which shall be a term sheet or similar document
relating thereto and (B) no Preferred Stock Investor shall have notified the
Company by 5:00 p.m. (Salt Lake City time) on the third (3/rd/) Trading Day
after its receipt of the Subsequent Placement Notice of its willingness to
provide (or to cause its sole designee to provide), subject to completion of
mutually acceptable documentation, financing to the Company on substantially the
terms set forth in the Subsequent Placement Notice. If no Preferred Stock
Investor shall notify the Company of its intention to enter into such
negotiations within such time period, the Company may effect the Subsequent
Placement substantially upon the terms and to the Persons (or Affiliates of such
Persons) set forth in the Subsequent Placement Notice (if such Persons are set
forth in the Subsequent Placement Notice); provided, that the Company shall
provide each Preferred Stock Investor with a second Subsequent Placement Notice,
and the Preferred Stock Investors shall again have the right of first refusal
set forth above in this Section 4.8, if the Subsequent Placement subject to the
initial Subsequent Placement Notice shall not have been consummated for any
reason on the terms set forth in such Subsequent Placement Notice within thirty
(30) Trading Days after the date of the initial Subsequent Placement Notice with
the Person (or an Affiliate of such Person) (if any) identified in the
Subsequent Placement Notice. If the Preferred Stock Investors shall indicate a
willingness to provide financing in excess of the amount set forth in the
Subsequent Placement Notice, then each Preferred Stock Investor shall be
entitled to provide financing pursuant to such Subsequent Placement Notice up to
an amount equal to such Purchaser's pro rata portion of the total number of the
Series D Preferred Stock and the Shares purchased under this Agreement, but the
Company shall not be required to accept financing from the Preferred Stock
Investors in an amount in excess of the amount set forth in the Subsequent
Placement Notice.
(b) Except for Underlying Shares, and other "Registrable Securities"
(as such term is defined in the Registration Rights Agreement) to be registered
in accordance with the Registration Rights Agreement and except as set forth on
Schedule 6(c) to the Registration Rights Agreement, the Company shall not, for a
period of not less than 90 Trading Days after the date that the Underlying
Securities Registration Statement is declared effective by the Commission,
without the prior written consent of the Preferred Stock Investors, (i) issue or
sell any of its or any of its Affiliates' equity or equity-equivalent securities
pursuant to Regulation S promulgated under the Securities Act, or (ii) register
for resale any securities of the Company. Any days that a Preferred Stock
Investor is not permitted to sell Underlying Shares under the Underlying
Securities Registration Statement shall be added to such 90 Trading Day period
for the purposes of (i) and (ii) above.
(c) For purposes of this Section 4.8, "Preferred Stock Investor" shall
mean the holder of any then issued and outstanding shares of Series D Preferred
Stock or Shares, provided that to the extent of any conflict under this Section
--------
4.8, the holders of the Series D Preferred Stock shall have priority.
-15-
Section 4.9 Listing of Underlying Shares. The Company shall (a) not later
----------------------------
than the time prescribed by the rules and regulations of the Nasdaq SmallCap
Market, prepare and file with the Nasdaq SmallCap Market (as well as any other
national securities exchange, market or trading facility on which the Common
Stock is then listed) an additional shares listing application covering at least
the sum of (i) two times the number of Underlying Shares as would be issuable
upon a conversion in full of (and as payment of dividends in respect of) the
Shares, assuming such conversion occurred on the Original Issue Date or the
Filing Date (whichever yields a lower Conversion Price) and (ii) the Underlying
Shares issuable upon exercise in full of the Warrants, (b) take all steps
necessary to cause the such shares to be approved for listing on the Nasdaq
SmallCap Market (as well as on any other national securities exchange, market or
trading facility on which the Common Stock is then listed) as soon as possible
thereafter, and (c) provide to the Purchaser evidence of such listing, and the
Company shall maintain the listing of its Common Stock on such exchange or
market. In addition, if at any time the number of shares of Common Stock
issuable on conversion of all then outstanding Shares, on account of accrued and
unpaid dividends thereon and upon exercise in full of the Warrants is greater
than the number of shares of Common Stock theretofore listed with the Nasdaq
SmallCap Market (and any such other national securities exchange, market or
trading facility), the Company shall promptly take such action (including the
actions described in the preceding sentence) to file an additional shares
listing application with the Nasdaq SmallCap Market (and any such other national
securities exchange, market or trading facility) covering at least a number of
shares equal to the sum of (x) 200% of (A) the number of Underlying Shares as
would then be issuable upon a conversion in full of the Shares and (B) the
number of Underlying Shares as would be issuable as payment of dividends on the
Shares and (y) the number of Underlying Shares as would be issuable upon
exercise in full of the Warrants.
Section 4.10 Notice of Breaches. Each of the Company and the Purchasers
------------------
shall give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date hereof,
which would reasonably be likely to cause any representation or warranty or
other agreement of such party, as the case may be, contained in the Transaction
Document to be incorrect or breached as of such Closing Date. However, no
disclosure by either party pursuant to this Section shall be deemed to cure any
breach of any representation, warranty or other agreement contained in any
Transaction Document. Notwithstanding the generality of the foregoing, the
Company shall promptly notify the Purchasers of any notice or claim (written or
oral) that it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by the Transaction Documents
violates or would violate any written agreement or understanding between such
lender and the Company, and the Company shall promptly furnish by facsimile to
the Purchasers a copy of any written statement in support of or relating to such
claim or notice.
Section 4.11 Conversion procedures. Exhibit "C" sets forth all procedures,
---------------------
required information and instructions that are required to be followed in order
to permit holders of Shares to smoothly and expeditiously exercise their rights
to convert Shares and which are not specifically set forth in the Certificate of
Designation, including the form of legal opinion, if necessary, that shall be
rendered to the Company's transfer agent to effect the delivery of Underlying
Shares in compliance with the terms hereof and of the Certificate of
Designation. If
-16-
the Company changes its transfer agent at any time prior to the conversion of
all of the Shares held by the Purchasers, the Company shall deliver any transfer
agent instructions contained in Exhibit "C" to such replacement transfer agent
and cause such transfer agent to comply therewith.
Section 4.12 Conversion and Exercise Obligations of the Company. The
--------------------------------------------------
Company shall honor conversions of the Shares and exercises of the Warrants and
shall deliver Underlying Shares upon such conversions and exercises in
accordance with the respective terms and conditions and time periods set forth
in the Certificate of Designation and the Warrants.
Section 4.13 Use of Proceeds. The Company shall use the proceeds from the
---------------
sale of the Shares to the Purchasers as follows: $1,900,000 for working capital
to pay operating expenses and $100,000 for fees and expenses incurred on
connection with the offering of the Shares.
Section 4.14 Transfer of Intellectual Property Rights. Except in the
----------------------------------------
ordinary course of the Company's business consistent with past practice or in
connection with the sale of all or substantially all of the assets of the
Company, the Company shall not transfer, sell or otherwise dispose of, any
Intellectual Property Rights, or allow the Intellectual Property Rights to
become subject to any Liens, or fail to renew such Intellectual Property Rights
(if renewable and would otherwise expire).
Section 4.15 The Warrants. In connection with certain conversions of the
------------
Shares pursuant to Section 5(c)(i)(A) of the Certificate of Designation, the
Company shall deliver to the Purchasers (or their successors) Common Stock
purchase warrants, in the form of Exhibit D (the "Warrants"), pursuant to which
---------
the Purchasers shall have the right at any time and from time to time thereafter
through the third anniversary of the date of issuance thereof, to acquire, that
number shares of Common Stock as shall be calculated in accordance with Section
5(c)(i)(A) of the Certificate of Designation at an exercise price per share
equal to 120% of the Per Share Market Value (as that term is defined in Section
7 of the Certificate of Designation) on the date of exercise.
Section 4.16 Shareholder Approval. The Company shall call a special meeting
--------------------
of its stockholders and use its best efforts to obtain a Shareholder Approval
(as defined in section 5 (a)(iii) of the Certificate of Designation) and to
increase its authorized capital in an amount sufficient for it to satisfy all of
its obligations hereunder, but in all events at least 150,000,000 shares of
Common Stock, no later than sixty (60) days following the Original Issue Date,
or at any special meeting of the Company's stockholders which may be held before
such date.
Section 4.17 Cross-Default. Any breach or violation of any representation,
-------------
warranty or covenant of the Company in respect of the Purchasers as set forth in
the Series D Purchase Agreement shall constitute a default hereunder, and any
breach of violation of any representation, warranty or covenant of the Company
in respect of the Purchasers as set forth in this Agreement shall constitute a
default under the Series D Purchase Agreement. The holders of the Series D
(other than the Purchasers) are intended third party beneficiaries of this
Section 4.17.
-17-
ARTICLE V.
CONDITIONS; TERMINATION
Section 5.1 Conditions Precedent.
--------------------
(a) Conditions Precedent to the Obligation of the Company to Sell the
-----------------------------------------------------------------
Shares and Warrants. The obligation of the Company to sell the Shares and the
-------------------
Warrants hereunder to a Purchaser is subject to the satisfaction or waiver by
the Company, at or before the Closing, of each of the following conditions:
(1) Accuracy of the Purchasers' Representations and Warranties. The
----------------------------------------------------------
representations and warranties of the Purchasers shall be true and correct in
all material respects as of the date when made and as of the Closing Date, as
though made on and as of such date; and
(2) Performance by the Purchasers. The Purchasers shall have
-----------------------------
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by it at or prior to the Closing.
(b) Conditions Precedent to the Obligation of the Purchasers to Purchase
--------------------------------------------------------------------
the Shares and Warrants. The obligation of the Purchasers to acquire and pay
-----------------------
for the Shares and the Warrants to be acquired by it hereunder is subject to the
satisfaction or waiver by the Purchasers, at or before the Closing, of each of
the following conditions:
(1) Accuracy of the Company's Representations and Warranties. The
--------------------------------------------------------
representations and warranties of the Company set forth herein shall be true and
correct in all material respects as of the date when made and as of the Closing
Date as though made on and as of such date;
(2) Performance by the Company. The Company shall have performed,
--------------------------
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by the Company at or prior to the Closing;
(3) No Prohibitions. The purchase of and payment for the Shares to
---------------
be purchased by the Purchasers (and upon conversion thereof, the Underlying
Shares) hereunder (i) shall not be prohibited or enjoined (temporarily or
permanently) by any applicable law or governmental regulation and (ii) shall not
subject the Purchasers 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 Purchasers of the purchase of
the Shares or the Underlying Shares (provided, however, that such regulation,
-------- -------
law or onerous condition was not in effect in such form at the date of this
Agreement);
(4) Adverse Changes. No event or series of events which,
---------------
individually or in the aggregate, could have or result in a Material Adverse
Effect shall have occurred between the date of execution hereof and the Closing;
-18-
(5) No Suspensions of Trading in Common Stock. Trading in the Common
-----------------------------------------
Stock shall not have been suspended from trading on the Nasdaq SmallCap Market
at any time between the date hereof and the Closing;
(6) Listing of Common Stock. The Common Stock shall have at all
-----------------------
times between the date hereof and the Closing Date been listed for trading on
the Nasdaq SmallCap Market;
(7) Voting Agreement. The Company will have entered into and
----------------
delivered to the Purchasers copies of a Voting Agreement (the "Voting
Agreement') in the form attached hereto as Exhibit "E" and shall have caused
certain of its executive officers, directors and shareholders owning in excess
of 40% of the voting stock of the Company to have entered into and delivered to
the Purchasers copies of such Voting Agreement providing for the voting all of
the voting stock owned by such shareholders, executive officers and directors in
favor of the actions contemplated by the Shareholder Approval (as such term is
defined in the Certificate of Designation) pursuant to Section 5(a)(iii)(B) of
the Certificate of Designation;
(8) Required Approvals. All Required Approvals shall have been
------------------
obtained;
(9) Certificate of Designation. The Certificate of Designation shall
--------------------------
have been duly filed with the Secretary of State of Delaware, and the Company
shall have delivered a copy thereof to the Purchasers certified as filed by the
office of the Secretary of State of Delaware; and
(10) Waiver by JNC Opportunity Fund, Ltd., and Diversified
-----------------------------------------------------
Strategies Fund, L.P. The Purchasers shall have received the written consent and
---------------------
waiver of JNC Opportunity Fund, Ltd. and Diversified Strategies Fund, L.P., to
the transactions contemplated hereby, which shall be in form acceptable to the
Purchasers.
Section 5.2 Termination.
-----------
(a) Termination by Mutual Consent. This Agreement and the transactions
-----------------------------
contemplated hereby may be terminated at any time prior to Closing by the mutual
consent of the Company and the Purchasers.
(b) Termination by the Company or the Purchasers. This Agreement and the
--------------------------------------------
transactions contemplated hereby with respect to the Purchasers may be
terminated prior to Closing by either the Company or the Purchasers, by giving
written notice of such termination to the other party, if:
(1) there shall be in effect any statute, rule, law or regulation
that prohibits the consummation of the Closing or the transaction
contemplated by the Transaction Documents or if the consummation of the
Closing Documents would violate any non-appealable final judgment, order,
decree, ruling or injunction of any court of or governmental authority
having competent jurisdiction; or
-19-
(2) there shall have been an amendment to Regulation D
promulgated under the Securities Act or an interpretive release promulgated
or issued thereunder, which, in the judgment of the terminating party,
could have or result in a Material Adverse Effect.
(c) Termination by the Company. This Agreement and the transactions
--------------------------
contemplated hereby may be terminated prior to Closing as to the Purchasers by
the Company, by giving written notice of such termination to the Purchasers, if
the Purchasers have breached in any material respect any representation,
warranty, covenant or agreement contained in any Transaction Document and such
breach is not cured within one (1) Business Day following receipt by the
Purchasers of notice of such breach.
(d) Termination by the Purchasers. This Agreement and the
------------------------------
transactions contemplated hereby may be terminated as to the Purchasers prior to
Closing by the Purchasers, by giving written notice of such termination to the
Company, if:
(1) the Company has breached in any material respects any
representation, warranty, covenant or agreement contained in any
Transaction Document and such breach is not cured within one (1) Business
Day following receipt by the Company of notice of such breach;
(2) there has occurred an event or series of events which,
individually or in the aggregate, could have or result in a Material
Adverse Effect which is not disclosed fully in the Disclosure Materials;
(3) trading in the Common Stock has been suspended or the Common
Stock has failed to be listed for trading on the Nasdaq SmallCap Market; or
(4) the Closing has not occurred by September 30, 1998.
-20-
ARTICLE VI.
MISCELLANEOUS
-------------
Section 6.2 Fees and Expenses. Except as set forth in the Registration Rights
-----------------
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Shares pursuant hereto.
The Purchasers shall be responsible for their own respective tax liability that
may arise as a result of the investment hereunder or the transactions
contemplated by this Agreement.
Section 6.2 Entire Agreement; Amendments, Exhibits and Schedules. This
----------------------------------------------------
Agreement, together with the Exhibits and Schedules hereto, the Certificate of
Designation, the Warrants, the Registration Rights Agreement and the Voting
Agreement contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters. The Exhibits and Schedules to
this Agreement are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
Section 6.3 Notices. Any and all notices or other communications or
-------
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 5:00 p.m. (Salt
Lake City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number 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
00 Xxxx Xxxxx Xxxxxx Xxxxxx
Xxxxx 0000
Xxxx Xxxx Xxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxx X. Xxxxxx, Executive Vice President
With copies to: Durham, Evans, Xxxxx & Xxxxxxx, P.C.
Suite 850 Key Bank Tower
00 Xxxxx Xxxx Xxxxxx
Xxxx Xxxx Xxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxxxx X. Xxxxx, Esq.
If to Dominion
or Sovereign: Dominion Capital Fund, Ltd.
-21-
Sovereign Partners, LP
c/o Thomson Kernaghan & Co.
000 Xxx Xxxxxx
Xxxxxxx, Xxxxxx
Fax (000) 000-0000
Attention: Xxxx Xxxxxxxxx
With copies to: Xxxxxxx & Prager
000 0xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Fax: (000) 000-0000
Attn. Xxxxxx X. Xxxxxxx, Esq.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
Section 6.4 Amendments; Waivers. No provision of this Agreement may be waived
-------------------
or amended except in a written instrument signed, in the case of an amendment,
by both the Company and the Purchasers, or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought, provided however
that Sections 4.17, 6.7 and to the extent it affects such sections, this Section
6.4 may not be waived or amended without the prior written consent of any party
identified therein as a third party beneficiary. No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise
of any such right accruing to it thereafter.
Section 6.5 Headings. The headings herein are for convenience only, do not
--------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
Section 6.6 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties and their successors and permitted assigns,
including any Persons to whom the Purchasers transfer Shares or Warrants. The
assignment by a party of this Agreement or any rights hereunder shall not affect
the obligations of such party under this Agreement.
Section 6.7 No Third-Party Beneficiaries. Except to the extent specified in
----------------------------
Section 4.17 (which specifies that the holders of the Series D Preferred are
intended third party beneficiaries of the covenants contained in that Section
with the power to enforce that section although some of them may not be parties
to this Agreement), this Agreement is intended for the benefit of the parties
hereto and their respective permitted successors and assigns and, other than
with respect to permitted assignees under Section 6.6, is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.
Section 6.8 Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the internal laws of the State of Delaware
without regard to the principles of conflicts of law thereof.
-22-
Section 6.9 Survival. The representations, warranties, agreements and
--------
covenants contained in this Agreement shall survive the Closing and the and
conversion of the Shares and the exercise of the Warrants.
Section 6.10 Execution. This Agreement may be executed in two or more
---------
counterparts, all of which when taken together shall be considered one and the
same agreement, and shall become effective when counterparts have been signed by
each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
Section 6.11 Publicity. The Company and the Purchasers shall consult with each
---------
other in issuing any press releases or otherwise making public statements with
respect to the transactions contemplated hereby and no party shall issue any
such press release or otherwise make any such public statement without the prior
written consent of the other party, which consent shall not be unreasonably
withheld or delayed, except that no prior consent shall be required if such
disclosure is required by law, in which such case the disclosing party shall
provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of the Purchasers without the prior written consent of the Purchasers, except to
the extent required by law, in which case the Company shall provide the
Purchasers with prior written notice of such public disclosure.
Section 6.12 Severability. In case any one or more of the provisions of this
------------
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affected or impaired thereby and the parties will attempt to agree
upon a valid and enforceable provision which shall be a reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.
Section 6.13 Remedies. Each of the parties to this Agreement acknowledges and
--------
agrees that the other parties would be damaged irreparably in the event any of
the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the parties
hereto agrees that the other parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions of this
Agreement in any action instituted in any court of the United States of America
or any state thereof having jurisdiction over the parties to this Agreement and
the matter, in addition to any other remedy to which they may be entitled, at
law or in equity.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGES FOLLOW]
-23-
IN WITNESS WHEREOF, the parties hereto have caused this Series E
Convertible Preferred Stock Purchase Agreement to be duly executed as of the
date first indicated above.
fonix corporation
By: /s/ Xxxxx X. Xxxxxx
---------------------------------
Name: Xxxxx X. Xxxxxx
----------------------------
Title: Executive Vice President
---------------------------
DOMINION CAPITAL FUND, LTD
By: /s/ Xxxx Xxxxxxxxx
---------------------------------
Name: Xxxx Xxxxxxxxx
----------------------------
Title: Agent
---------------------------
SOVEREIGN PARTNERS, LP
By: /s/ Xxxx Xxxxxxxxx
---------------------------------
Name: Xxxx Xxxxxxxxx
----------------------------
Title: Agent
---------------------------
SCHEDULE 3.1(a)
---------------
SUBSIDIARIES
1. fonix systems corporation, a Utah corporation, wholly owned by the Company.
2. fonix/AcuVoice, Inc., a Utah corporation, wholly owned by the Company.
3. ASI Acquisition Corporation, a Utah corporation, wholly owned by the Company.
4. Papyrus Acquisition Corporation, a Utah corporation, wholly owned by the
Company.
SCHEDULE 3.1(c)
---------------
CAPITALIZATION
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 shares. As of the date hereof, the Company has
issued and outstanding 58,586,633 shares of Common Stock. 13,735,000 shares of
Common Stock are subject to issuance upon the conversion or exercise of
presently issued and outstanding warrants and options of the Company. 12,511,000
shares of Common Stock are reserved for issuance under the Company's existing
stock option plans. 166,667 shares of Series A Preferred Stock have been issued
and 166,667 shares are outstanding, which shares are convertible into 166,667
shares of Common Stock. 1,108,334 shares of Series D 4% Convertible Preferred
Stock are issued and outstanding, which are convertible into shares of Common
Stock according to a formula that is determined, in part, by reference to the
prevailing market price of the Series D Preferred Stock. Assuming that all of
the issued and outstanding shares of Series D Preferred were to be converted as
of September 30, 1998, the Company would issue a total of ____________________
shares of Common Stock. Except as set forth above, as of the date of this
Agreement, there are no outstanding options, warrants, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or, except as a
result of the purchase and sale of the Shares and the Warrants, securities,
rights or obligations convertible into or exchangeable for, or giving any Person
any right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock or
securities or rights convertible or exchangeable into shares of Common Stock,
except for the following:
1. Papyrus Transactions. On September 10, 1998, the Company entered into an
--------------------
Agreement and Plan of Merger among the Company, Papyrus Acquisition
Corporation, a Utah corporation and wholly-owned subsidiary of the Company,
and Papyrus Associates, Inc., a Pennsylvania corporation. In a related
transaction, on September 10, 1998, the Company entered into an Agreement and
Plan of Merger among the Company, Papyrus Acquisition Corporation and
Papyrus Development Corporation, a Massachusetts corporation. Pursuant to
the Papyrus Agreements, the Company will acquire by merger the Papyrus
entities, in return for which the Company will issue (in addition to the
payment of cash consideration as specified in the agreements), a total of
$3,640,000 in Common Stock, each share of which will be valued at the average
of the closing bid prices for the Common Stock for the 30 trading day periods
immediately preceding the closing dates for the Papyrus transactions. The
Company presently believes the Papyrus transactions will close in October
1998, although there can be no assurance that the closings will occur.
2. 3D Planet Transaction. On September 8, 1998, the Company entered into an
---------------------
Asset Purchase Agreement between the Company and 3D Planet, Inc., a Delaware
corporation. Pursuant to the 3D Planet Agreement, the Company will acquire
all of the assets of 3D Planet, in consideration for which the Company will
issue (in addition to the payment of cash consideration as specified in the
agreement), a total of $5,900,000 in Common Stock, each share of which will
be valued at the average of the averages of the closing bid prices for the 3
10-trading-day periods immediately preceding May 29, 1998, September 8, 1998
and the
closing date of the 3D Planet transaction. The Company presently believes the
3D Planet transaction will close in October 1998, although there can be no
assurance that the closing will occur.
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.
5% Beneficial Owners
--------------------
The Company is aware of the following persons or groups who beneficially own
more than 5% of the Company's issued and outstanding Common Stock:
Xxxxxxx X. Xxxxxxxx
Xxxxxx X. Xxxxxxx
Xxxxx X. Xxxxxx
Beesmark Investments, X.X.
Xxxxxxxx Companies Corp.
-27-
EXHIBIT A
---------
SERIES E TERMS
--------------
Section 1. Designation, Amount and Par Value. The series of preferred
---------------------------------
stock shall be designated as the 4% Series E Convertible Preferred Stock (the
---------------
"Preferred Stock"), and the number of shares so designated and authorized shall
be two hundred fifty thousand (250,000). Each share of Preferred Stock shall
have a par value of $.0001 per share and a stated value of $20 per share (the
"Stated Value").
------------
Section 2. Dividends.
---------
(a) Holders of Preferred Stock shall be entitled to receive, when and
as declared by the Board of Directors out of funds legally available therefor,
and the Company shall pay, annually in arrears on December 31 of each year,
commencing on the earlier of December 31, 1998, or any Conversion Date (as
defined below), cumulative dividends on the Preferred Stock at the rate per
share (as a percentage of the Stated Value per share) equal to four percent (4%)
per annum, payable in cash or shares of Common Stock (as defined in Section 7)
at the option of the Company. The number of shares of Common Stock issuable as
payment of dividends hereunder shall equal the aggregate dollar amount of
dividends then being paid, divided by the Conversion Price (as defined in
Section 5(c)(i)) then in effect. Dividends on the Preferred Stock shall be
calculated on the basis of a 360-day year, shall accrue daily commencing the
Original Issue Date (as defined in Section 7), and shall be deemed to accrue on
such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. The party that holds the Preferred Stock on an applicable record
date for any dividend payment will be entitled to receive such dividend payment
and any other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred Stock
subsequent to the applicable record date but prior to the applicable dividend
payment date. Except as otherwise provided herein, if at any time the Company
pays less than the total amount of dividends then accrued on account of the
Preferred Stock, such payment shall be distributed ratably among the Holders of
the Preferred Stock based upon the number of shares then held by each Holder in
proportion to the total number of shares of Preferred Stock then outstanding.
In order for the Company to exercise its right to pay dividends in cash, the
Company shall, no less than five (5) Trading Days after the last day of a
calendar year for which dividends are payable, provide the Holders of the
Preferred Stock written notice of its intention to pay dividends in cash. In
order for the Company to exercise its right to pay dividends in cash on any
Conversion Date, the Company must provide written notice to the holders of
Preferred Stock at any time prior to the Company's receipt of a Conversion
Notice, which notice will remain in effect for subsequent Conversion Notices
until rescinded by the Company in a written notice to such effect that is
addressed to the holders of the Preferred Stock.
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if: (i) the number
of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held as treasury stock, is either
insufficient to issue such dividends in shares of Common Stock or the Company
has not duly reserved for issuance in respect of such dividends a sufficient
number of shares of Common Stock, (ii) such shares are not registered for resale
pursuant to an effective Underlying Securities Registration Statement (as
defined in Section 7) and may not be sold without volume restrictions pursuant
to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), as determined by counsel to the Company pursuant to a written
--------------
opinion letter, addressed and acceptable to the Company's transfer agent or
other Person performing functions similar thereto, (iii such shares are not
listed for trading on the Nasdaq SmallCap Market, Nasdaq National Market, The
New York Stock Exchange ("NYSE") or the American Stock Exchange (the "AMEX")
---- ----
(and any other exchange, market or trading facility in which the Common Stock is
then listed for trading), (iv) the issuance of such shares would result in the
recipient thereof beneficially owning, determined in accordance with Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, more than
4.999% of the then issued and outstanding shares of Common Stock, or (v) the
Company shall have failed to timely satisfy its obligations pursuant to any
Conversion Notice.
Payment of dividends in shares of Common Stock is further subject to the
provisions of Section 5(a)(ii).
(c) So long as any shares of Preferred Stock remain outstanding,
neither the Company nor any subsidiary thereof shall, without the consent of the
holders of one hundred percent (100%) of the shares of Preferred Stock then
outstanding, redeem, repurchase or otherwise acquire directly or indirectly any
Junior Securities (as defined in Section 7), nor shall the Company directly or
indirectly pay or declare any dividend or make any distribution (other than a
dividend or distribution described in Section 5) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall any monies
be set aside for or applied to the purchase or redemption (through a sinking
fund or otherwise) of any Junior Securities.
Section 3. Voting Rights; Protective Provisions. Except as otherwise
------------------------------------
provided herein and as otherwise required by law, the Preferred Stock shall have
no voting rights. However, so long as any shares of Preferred Stock are
outstanding, the Company shall not and shall cause its subsidiaries not to,
without the affirmative vote of each of the holders of the Preferred Stock then
outstanding, (a) alter or change adversely the powers, preferences or rights
given to the Preferred Stock, (b) alter or amend this Certificate of
Designation, (c) authorize or create any class of stock ranking as to dividends
or distribution of assets upon a Liquidation (as defined in Section 4) or
otherwise senior to or pari passu with the Preferred Stock, (d) amend its
certificate of incorporation, bylaws or other charter documents so as to affect
adversely any rights of any holders of the Preferred Stock, (e) increase the
authorized or designated number of shares of Preferred Stock, (f) issue any
additional shares of Preferred Stock (including the reissuance of any shares of
Preferred Stock converted for Common Stock) or (g) enter into any agreement with
respect to the foregoing.
-2-
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of
-----------
the Company, whether voluntary or involuntary (a "Liquidation"), and subject to
-----------
the rights of the holders of the Company's Series A Convertible Preferred Stock
then outstanding, the holders of the Preferred Stock shall be entitled to
receive out of the assets of the Company, whether such assets are capital or
surplus, for each share of Preferred Stock an amount equal to the Stated Value
plus all accrued but unpaid dividends per share, whether declared or not, and
all other amounts in respect thereof (including liquidated damages, if any) then
due and payable before any distribution or payment shall be made to the holders
of any Junior Securities, and if the assets of the Company shall be insufficient
to pay in full such amounts, then the entire assets to be distributed to the
holders of Preferred Stock shall be distributed among the holders of Preferred
Stock ratably in accordance with the respective amounts that would be payable on
such shares if all amounts payable thereon were paid in full. A sale, conveyance
or disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related transactions
in which more than 50% of the voting power of the Company is disposed of, or a
consolidation or merger of the Company with or into any other company or
companies shall not be treated as a Liquidation, but instead shall be subject to
the provisions of Section 5. The Company shall mail written notice of any such
Liquidation, not less than 45 days prior to the payment date stated therein, to
each record holder of Preferred Stock.
Section 5. Conversion.
----------
(a)(i) Conversions at Option of Holder. Each share of Preferred Stock shall
-------------------------------
be convertible into shares of Common Stock (subject to the limitations set forth
in Section 5(a)(iii) hereof) at the Conversion Ratio (as defined in Section 7)
at the option of a Holder, at any time and from time to time, from and after the
Original Issue Date (the "Initial Conversion Date"). A Holder shall effect
conversions by surrendering the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with the form
of conversion notice attached hereto as Exhibit A (the "Conversion Notice").
--------- -----------------
Each Conversion Notice shall specify the number of shares of Preferred Stock to
be converted, the date on which such conversion is to be effected, which date
may not be prior to the date the holder delivers such Conversion Notice by
facsimile (the "Conversion Date") and the manner by which such holder elects to
---------------
have the Conversion Price determined as specified in Section 5(c)(i)(A) and (B)
hereof. If no Conversion Date is specified in a Conversion Notice, the
Conversion Date shall be the date that the Conversion Notice is deemed delivered
pursuant to Section 5(i). Subject to Sections 5(b) and 5(a)(ii) hereof, each
Conversion Notice, once given, shall be irrevocable. If the Holder is converting
less than all of the shares of Preferred Stock represented by the certificate or
certificates tendered by the holder with the Conversion Notice, or if a
conversion hereunder cannot be effected in full for any reason, the Company
shall promptly deliver to such holder (in the manner and within the time set
forth in Section 5(b)) a certificate for such number of shares as have not been
converted.
(ii) Automatic Conversion. Subject to the provisions in this paragraph, all
--------------------
outstanding shares of Preferred Stock for which conversion notices have not
previously been
-3-
received or for which redemption has not been made or required hereunder shall
be automatically converted on the third anniversary of the Original Issue Date
at the Conversion Price on such date. The conversion contemplated by this
paragraph shall not occur at such time as (a) (1) an Underlying Securities
Registration Statement is not then effective or (2) the Holder is not permitted
to resell Underlying Shares pursuant to Rule 144(k) promulgated under the
Securities Act, without volume restrictions, as evidenced by an opinion letter
of counsel acceptable to the Holder and the transfer agent for the Common Stock;
(b) there are not sufficient shares of Common Stock authorized and reserved for
issuance upon such conversion; or (c) the Company shall have defaulted on its
covenants and obligations hereunder or under the Purchase Agreement or
Registration Rights Agreement. Notwithstanding the foregoing, the three-year
period for conversion under this paragraph shall be extended (on a day-for-day
basis) for any Trading Days that the Purchaser is unable to resell Underlying
Shares under an Underlying Securities Registration Statement due to (i) the
Common Stock not being listed for trading on the Nasdaq SmallCap Market, (ii)
the failure of an Underlying Securities Registration Statement to be declared
effective by the Securities and Exchange Commission (the "Commission") by the
Filing Date (as defined in the Registration Rights Agreement), or (iii) if an
Underlying Securities Registration Statement shall have been declared effective
by the Commission, (x) the failure of such Underlying Securities Registration
Statement to remain effective during the Effectiveness Period (as defined in the
Registration Rights Agreement) as to all Underlying Shares, or (y) the
suspension of the Holder's ability to resell Underlying Shares thereunder.
(iii) Certain Conversion Restrictions.
-------------------------------
(A) In no event (except (i) with respect to an automatic conversion of
the Preferred Stock as provided in Section 5(a)(ii) hereof, (ii) if the Company
is in default of any of its obligations hereunder or any of the Transaction
Documents, as defined in Section 7, or (iii) except as otherwise set forth
herein) shall any Holder be entitled to convert any Preferred Stock to the
extent that, after such conversion, the sum of (1) number of shares of Common
Stock beneficially owned by such Holder and its affiliates (other than the
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the Preferred Stock), and (2) the number
of shares of Common Stock issuable upon the conversion of the Preferred Stock
with respect to which the determination of this proviso is being made, would
result in beneficial ownership by the Holder and its affiliates of more than
4.99% of the outstanding shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with section 13(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), except as otherwise provided in clause (1) of the
preceding sentence. To the extent that the limitation contained in this
paragraph applies, the determination of whether shares of Preferred Stock are
convertible (in relation to other securities owned by a Holder) and of which
shares of Preferred Stock are convertible shall be in the sole discretion of the
Holder, and the submission of shares of Preferred Stock for conversion shall be
deemed to be the Holder's determination of whether such shares of Preferred
Stock are convertible (in relation to other securities owned by the Holder) and
of which portion of such shares of Preferred Stock are
-4-
convertible, in each case subject to such aggregate percentage limitation, and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the right of
the Holder to convert shares of Preferred Stock at such time as such conversion
will not violate the provisions of this paragraph. The provisions of this
Section will not apply to any conversion pursuant to Section 5 (a)(ii) hereof,
and may be waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 75 days prior notice to the Company (in which case,
the Holder shall make such filings with the Commission, including under Rule 13D
or 13G, as are required by applicable law), and the provisions of this Section
shall continue to apply until such 75th day (or later, if stated in the notice
of waiver). Other Holders shall be unaffected by any such waiver.
(B) If on any Conversion Date (A) the Common Stock is listed for
trading on the Nasdaq SmallCap Market or the Nasdaq National Market, (B) the
Conversion Price then in effect is such that the aggregate number of shares of
Common Stock that would then be issuable upon conversion in full of all then
outstanding shares of Preferred Stock and as payment of dividends thereon in
shares of Common Stock, together with any shares of the Common Stock previously
issued upon conversion of shares of Preferred Stock and as payment of dividends
thereon, would equal or exceed twenty percent (20%) of the number of shares of
the Common Stock outstanding on the Original Issue Date (such number of shares
as would not equal or exceed such 20% limit, the "Issuable Maximum" and any such
Conversion Date, the "Record Date"), and (C) the Company shall not have
previously obtained the vote of shareholders (the "Shareholder Approval"), if
any, as may be required by the applicable rules and regulations of The Nasdaq
Stock Market (or any success entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum in a private placement
whereby shares of Common Stock are deemed to have been issued at a price that is
less than the greater of book or fair market value of the Common Stock, then the
Company shall issue to the Holder so requesting a conversion a number of shares
of Common Stock equal to the Issuable Maximum and, with respect to the remainder
of the aggregate Stated Value of the shares of Preferred Stock then held by such
Holder for which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of the Issuable Maximum (the
"Excess Stated Value"), the Company shall, within three (3) days of the Record
Date, provide the converting Holder with a notice (the "Notice") as to whether
or not it has elected to use its best efforts to obtain the Shareholder Approval
applicable to such issuance. If the Company shall either (i) fail to provide
the converting Holder with the Notice within three (3) days of the Record Date,
or (ii) indicate in the Notice that it does not intend to obtain the Shareholder
Approval applicable to such issuance, or (iii) fail to obtain the Shareholder
Approval applicable to such issuance prior to the 60th day following the Record
Date, the converting Holder shall have the option to require the Company to
either (1) if the Company has not prior thereto attempted or has attempted to
and has failed to obtain the Shareholder Approval in accordance with this
Section, use its best efforts to obtain the Shareholder Approval applicable to
such issuance as soon as is possible, but in any event not later than the 60th
day after such request, or (2)(i) issue and deliver to such Holder a number of
shares of Common Stock as equals (x) the Excess Stated Value, plus accrued
dividends on all shares of Preferred Stock being converted, divided by (y) the
closing sales price of the
-5-
Common Stock on the Original Issue Date, and (ii) cash in an amount equal to the
product of (x) the Per Share Market Value on the Conversion Date and (y) the
number of shares of Common Stock in excess of such Holder's pro rata portion of
the Issuable Maximum that would have otherwise been issuable to the Holder in
respect of such conversion but for the provisions of this Section (such amount
of cash being hereinafter referred to as the "Discount Equivalent"), or (3) pay
cash to the converting Holder in an amount equal to the Mandatory Redemption
Amount (as defined in Section 7) for the Excess Stated Value, provided, that the
--------
converting Holder may not select option (3) above unless the Company shall have
been requested by the converting Holder to obtain Shareholder Approval, and
shall have failed to (I) prepare and file with the Commission a proxy statement
on Schedule 14A within 15 days after such request, (II) respond to all comments
from the Staff of the Commission within five (5) business days after receipt
thereof, (III) engage a proxy solicitation service to assist the Company in
obtaining a sufficient number of proxies to facilitate Shareholder Approval, and
(IV) promptly enforce any voting rights agreement pertaining to Shareholder
Approval. If the Company fails to pay the Discount Equivalent or the Mandatory
Redemption Amount, as the case may be, in full pursuant to this Section within
seven (7) days after the date payable, the Company will pay interest thereon at
a rate of 18% per annum to the converting Holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid in
full.
(b) Not later than three (3) Trading Days after a Conversion Date, the
Company will deliver to the holder (i) a certificate or certificates which shall
be free of restrictive legends and trading restrictions (other than those
required by Section 4.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being issued upon the conversion of shares of Preferred
Stock (subject to reduction pursuant to Section 5(a)(ii) hereof), (ii) one or
more certificates representing the number of shares of Preferred Stock not
converted, (iii) a bank check in the amount of accrued and unpaid dividends (if
the Company has elected or is required to pay accrued and unpaid dividends in
cash) and (iv) if the Company has elected and is permitted hereunder to pay
accrued dividends in shares of Common Stock, certificates, which shall be free
of restrictive legends and trading restrictions (other than those required or
allowed by Section 4.1(b) of the Purchase Agreement), representing such number
of shares of Common Stock as are issuable on account of accrued dividends in
such number as determined in accordance with Section 2(a). Notwithstanding the
foregoing, the Company shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon conversion of any shares of Preferred
Stock until certificates evidencing such shares of Preferred Stock are either
delivered for conversion to the Company or any transfer agent for the Preferred
Stock or Common Stock, or the holder of such Preferred Stock notifies the
Company that such certificates have been lost, stolen or destroyed and provides
a bond (or other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith. The
Company shall, upon request of the holder, use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in the case
of any Conversion Notice such certificate or certificates, including for
purposes hereof, any shares of Common Stock to be issued on the
-6-
Conversion Date on account of accrued but unpaid dividends hereunder, are not
delivered to or as directed by the applicable holder by the third Trading Day
after the Conversion Date, the holder shall be entitled by written notice to the
Company at any time on or before its receipt of such certificate or
certificates, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the shares of Preferred Stock
tendered for conversion. If the Company fails to deliver to the holder such
certificate or certificates pursuant to this Section, including for purposes
hereof, any shares of Common Stock to be issued on the Conversion Date on
account of accrued but unpaid dividends hereunder, prior to the fifth (5th)
Trading Day after the Conversion Date, the Company shall pay to such holder, in
cash, as liquidated damages and not as a penalty, $2,500 for each day after such
fifth (5th) Trading Day until such certificates are delivered. If the Company
fails to deliver to the holder such certificate or certificates pursuant to this
Section prior to the twelfth (12th) day after the Conversion Date, the Company
shall, at the Holder's option (i) redeem, from funds legally available therefor
at the time of such redemption, such number of shares of Preferred Stock then
held by such Holder, as requested by such Holder, and (ii) pay all accrued but
unpaid dividends and all other amounts then owing on account of the Preferred
Stock for which the Company shall have failed to issue Common Stock certificates
hereunder, in cash. The redemption price for the shares of Preferred Stock to be
redeemed in accordance with this Section shall be the Redemption Price (as
defined in Section 7). If the holder has requested redemption pursuant to this
Section and the Company fails for any reason to pay the Redemption Price under
this Section within seven (7) days after such notice is given pursuant to
Section 5(i), the Company will pay interest on the unpaid portion of the
Redemption Price at a rate of 18% per annum, accruing from such seventh day
until the Redemption Price and any accrued interest thereon is paid in full.
Nothing herein shall limit a holder's right to pursue actual damages for the
Company's failure to deliver certificates representing shares of Common upon
conversion within the period specified herein (including, without limitation,
damages relating to any purchase of shares of Common Stock by such holder to
make delivery on a sale effected in anticipation of receiving certificates
representing shares of Common Stock upon conversion, such damages to be in an
amount equal to (A) the aggregate amount paid by such holder for the shares of
Common Stock so purchased minus (B) the aggregate amount of net proceeds, if
-----
any, received by such holder from the sale of the shares of Common Stock issued
by the Company pursuant to such conversion), and such holder shall have the
right to pursue all remedies available to it at law or in equity (including,
without limitation, a decree of specific performance and/or injunctive relief).
(c)(i) The conversion price for each share of Preferred Stock (the
"Conversion Price") on any Conversion Date shall be, at the option of the holder
-----------------
of the Preferred Stock to be converted, (x) three and 50/100 U.S. dollars
($3.50), or (y) the lesser of (A) one hundred ten percent (110%) of the average
Per Share Market Value for the fifteen (15) Trading Days immediately preceding
the Original Issue Date, or (B) ninety percent (90%) of the average of the three
(3) lowest Per Share Market Values during the twenty-two (22) Trading Days
immediately preceding the applicable Conversion Date, provided, however, that
--------
such twenty-two (22) Trading Day period shall be extended for the number of
Trading Days, if any, during such period in which (A) trading in the Common
Stock was suspended from the Nasdaq SmallCap Market or any other market or
trading
-7-
facility on which it is listed for trading prior to such suspension, or
(B) after the date declared effective by the Commission, the Underlying
Securities Registration Statement is not effective, or (C) after the date
declared effective by the Commission, the Prospectus included in the Underlying
Securities Registration Statement may not be used by the Holder for the resale
of Underlying Shares, further provided that (a) if an Underlying Securities
----------------
Registration Statement is not filed on or prior to the Filing Date (as such term
is defined in the Registration Rights Agreement), or (b) if the Company fails to
file with the Commission a request for acceleration in accordance with Rule 461
promulgated under the Securities Act within five (5) days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Securities Registration Statement will not be
"reviewed" or is not subject to further review or comment by the Commission, or
(c) if the Underlying Securities Registration Statement is not declared
effective by the Commission on or prior to the Effectiveness Date (as defined in
the Registration Rights Agreement), or (d) if such Underlying Securities
Registration Statement is filed with and declared effective by the Commission
but thereafter ceases to be effective as to all Registrable Securities (as such
term is defined in the Registration Rights Agreement) at any time prior to the
expiration of the Effectiveness Period (as such term as defined in the
Registration Rights Agreement), without being succeeded by a subsequent
Underlying Securities Registration Statement filed with and declared effective
by the Commission within ten (10) days, or (e) if trading in the Common Stock
shall be suspended, or if the Common Stock shall be delisted from trading, on
the Nasdaq SmallCap Market or on any other national securities market, exchange
or trading facility on which the Common Stock is then listed or quoted for
trading for any reason for more than three (3) Trading Days, or (f) if the
conversion rights of any holder of Preferred Stock are suspended for any reason
or if any holder is not permitted to resell Registrable Securities under the
Underlying Securities Registration Statement, or (g) if an amendment to the
Underlying Securities Registration Statement is not filed by the Company with
the Commission within ten (10) days after notification by the Commission that
such amendment is required in order for the Underlying Securities Registration
Statement to remain effective (any such failure being referred to as an "Event,"
-----
and for purposes of clauses (a), (c) and (f) the date on which such Event
occurs, or for purposes of clause (b) the date on which such five (5) days
period is exceeded, or for purposes of clauses (d) and (g) the date which such
ten (10) day period is exceeded, or for purposes of clause (e) the date on which
such three (3) Trading Day period is exceeded, being referred to as "Event
-----
Date"), the Company shall pay a fee of two percent (2%) of the Purchase Price
----
for each month, which payment shall be in cash as liquidated damages, and not as
a penalty on the first day of each monthly anniversary of the Event Date until
such time as the applicable Event, is cured. If the holder of the Preferred
Stock to be converted elects to calculate the Conversion Price pursuant to
clause (x) above, such holder shall receive, in addition to the number of shares
of Common Stock otherwise issuable upon such conversion, a Warrant to purchase
that number of shares of Common Stock which shall be the product of the
aggregate Stated Value of the Preferred Stock so converted multiplied by 0.04.
The Warrants shall have an exercise price that shall be one hundred twenty
percent (120%) of the Per Share Market Value on the date of issuance of such
Warrants, shall have a three (3) year term, and shall otherwise be in the form
attached as Exhibit "E" to the Purchase Agreement. In the event conversion of
the Preferred Stock results automatically on the third anniversary of the
Original Issue Date, as described in Section
-8-
5(a)(i) above, the Conversion Price shall be the lesser of the Conversion Prices
calculated pursuant to clauses (x) and (y) above.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, (a) shall pay a stock dividend or otherwise make a distribution
on account of or to holders of Junior Securities payable in shares of Common
Stock, (b) subdivide outstanding shares of Common Stock into a larger number of
shares, or (c) combine outstanding shares of Common Stock into a smaller number
of shares, then the Conversion Price shall be multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and the denominator of
which shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section 5(c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision or
combination.
(iii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall issue rights or warrants to all holders of Common
Stock entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Per Share Market Value of Common Stock at the
record date mentioned below, the Conversion Price shall be multiplied by a
fraction, the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and the numerator of which shall be the number of
shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would purchase
at such Per Share Market Value. Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon the expiration of any right or warrant to
purchase Common Stock the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 5(c)(iii), if any such right or
warrant shall expire and shall not have been exercised, the Conversion Price
shall immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Conversion Price made pursuant to the
provisions of this Section 5 after the issuance of such rights or warrants) had
the adjustment of the Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or purchase only
that number of shares of Common Stock actually purchased upon the exercise of
such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to holders
of Preferred Stock) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii) and (iii) above), then in each such case the Conversion
Price
-9-
at which each share of Preferred Stock shall thereafter be convertible
shall be determined by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
Per Share Market Value of Common Stock determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market Value
of the Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
the Board of Directors in good faith; provided, however, that in the event of a
-------- -------
distribution exceeding ten percent (10%) of the net assets of the Company, such
fair market value shall be determined by a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser") selected in
---------
good faith by the holders of a majority in interest of the shares of Preferred
Stock then outstanding; and provided, further, that the Company, after receipt
-------- -------
of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to the holders
of Preferred Stock of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another Person pursuant to
which the Company will not be the surviving entity, the sale or transfer of all
or substantially all of the assets of the Company or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property (collectively, a "Business Combination"), the holders of the
Preferred Stock then outstanding shall have the right thereafter to, at their
option, (A) convert such shares of Preferred Stock, together with all accrued
and unpaid dividends thereon, into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common
Stock following such reclassification, consolidation, merger, sale, transfer or
share exchange, and the holders of the Preferred Stock shall be entitled upon
such event to receive such amount of securities, cash or property as the shares
of the Common Stock of the Company into which such shares of Preferred Stock,
together with all accrued and unpaid dividends thereon could have been converted
immediately prior to such reclassification, consolidation, merger, sale,
transfer or share exchange would have been entitled, (B) require the Company to
redeem its shares of Preferred Stock then outstanding at the Redemption Price,
but only if the Business Combination was the voluntary act of the Company (i.e.
not a tender offer) or (C) to require that the Person with whom such
consolidation, merger, sale or transfer or share exchange takes place issue and
deliver to the holders of the Preferred Stock shares of convertible preferred
stock or convertible debentures of such Person which newly issued shares or
debentures (as the case may be) shall have terms substantially similar in all
material respects to the terms of the Preferred Stock (including with respect to
conversion) and shall be entitled to all of the rights and privileges of a
holder of Preferred Stock set forth herein, in the
-10-
Registration Rights Agreement and in the Purchase Agreement (including without
limitation, such rights as relates to the acquisition, transferability,
registration and listing of the stock or other securities issuable upon
conversion of such convertible preferred stock or convertible debentures). In
such case, the conversion price for such newly issued convertible securities
shall be based upon the amount of securities, cash or property that each share
of Common Stock would receive in the transaction giving rise to the obligation
to issue such securities, the Conversion Ratio immediately prior to the
effective or closing date for such transaction and the Conversion Price stated
herein. The terms of any such consolidation, merger, sale, transfer or share
exchange shall include such terms so as to continue to give to the holders of
Preferred Stock the right to receive the securities, cash or property set forth
in this Section upon any conversion following such consolidation, merger, sale,
transfer or share exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share exchanges.
If the holder has requested redemption pursuant to this Section and the Company
fails for any reason to pay the Redemption Price under this Section within seven
(7) days after such notice is given pursuant to Section 5(i), the Company will
pay interest on the unpaid portion of the Redemption Price at a rate of 18% per
annum, accruing from such seventh day until the Redemption Price and any accrued
interest thereon is paid in full.
(vi) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to Section
5(c)(ii), (iii), (iv) or (v) the Company shall promptly mail to each holder of
Preferred Stock, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(viii) If:
A. the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
B. the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
C. the Company shall authorize the granting to all holders of
the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of
any rights; or
D. the approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock of the Company, any consolidation or merger
to which the Company is a party, any sale or transfer of
all or substantially all of the assets of the
-11-
Company, or any compulsory share or exchange whereby the
Common Stock is converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the
Company;
then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of Preferred Stock, and shall cause to be mailed to
the holders of Preferred Stock at their last addresses as they shall appear upon
the stock books of the Company, at least 45 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however, that
-------- -------
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert shares of Preferred Stock
during the 30-day period commencing the date of such notice to the effective
date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that it intends
to enter into a Change of Control Transaction (as defined below) or (ii) any
Person or group of Persons (including the Company, but excluding a holder or any
affiliate of a holder) publicly announces a bona fide tender offer, exchange
offer or other transaction to purchase 50% or more of the Common Stock (such
announcement being referred to herein as a "Major Announcement" and the date on
------------------
which a Major Announcement is made, the "Announcement Date"), then, in the event
-----------------
that a holder of Preferred Stock seeks to convert shares of Preferred Stock on
or following the Announcement Date, the Conversion Price shall, effective upon
the Announcement Date and continuing through the earlier to occur of the
consummation of the proposed transaction or tender offer, exchange offer or
other transaction and the Abandonment Date (as defined below), be equal to the
lower of (x) the Conversion Price measured on the Announcement Date and (y) the
Conversion Price in effect on the Conversion Date for such Preferred Stock.
"Abandonment Date" means with respect to any proposed transaction or tender
-----------------
offer, exchange offer or other transaction for which a public announcement as
contemplated by this paragraph has been made, the date upon which the Company
(in the case of clause (i) above) or the person, group or entity (in the case of
clause (ii) above) publicly announces the termination or abandonment of the
proposed transaction or tender offer, exchange offer or another transaction
which caused this paragraph to become operative.
(d) If at any time conditions shall arise by reason of action taken by the
Company which in the opinion of the Board of Directors are not adequately
covered by the other provisions hereof and
-12-
which might materially and adversely affect the rights of the holders of
Preferred Stock (different than or distinguished from the effect generally on
rights of holders of any class of the Company's capital stock) or if at any time
any such conditions are expected to arise by reason of any action contemplated
by the Company, the Company shall mail a written notice briefly describing the
action contemplated and the material adverse effects of such action on the
rights of the holders of Preferred Stock at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the holders of
majority in interest of the Preferred Stock shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment as
to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
provided, however, that the Company, after receipt of the determination by such
-------- -------
Appraiser, shall have the right to select an additional Appraiser, in good
faith, in which case the adjustment shall be equal to the average of the
adjustments recommended by each such Appraiser. The Board of Directors shall
make the adjustment recommended forthwith upon the receipt of such opinion or
opinions or the taking of any such action contemplated, as the case may be;
provided, however, that no such adjustment of the Conversion Price shall be made
-------- -------
which in the opinion of the Appraiser(s) giving the aforesaid opinion or
opinions would result in an increase of the Conversion Price to more than the
Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock and payment of dividends on
Preferred Stock, each as herein provided, free from preemptive rights or any
other actual contingent purchase rights of persons other than the holders of
Preferred Stock, not less than such number of shares of Common Stock as shall
(subject to any additional requirements of the Company as to reservation of such
shares set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(c)) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder. The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid and
nonassessable.
(f) Upon a conversion hereunder the Company shall not be required to issue
stock certificates representing fractions of shares of Common Stock, but may if
otherwise permitted and unless waived by the holder of the Preferred Stock, make
a cash payment in respect of any final fraction of a share based on the Per
Share Market Value at such time. If the Company elects not, or is unable, to
make such a cash payment, the holder of a share of Preferred Stock shall be
entitled to receive, in lieu of the final fraction of a share, one whole share
of Common Stock.
(g) The issuance of certificates for shares of Common Stock on conversion
of Preferred Stock shall be made without charge to the holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
--------
to pay any tax that may be payable in respect of any transfer involved
-13-
in the issuance and delivery of any such certificate upon conversion in a name
other than that of the holder of such shares of Preferred Stock so converted and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
(h) Shares of Preferred Stock converted into Common Stock shall be
canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(i) Any and all notices or other communications or deliveries to be
provided by the holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the attention of
the Vice President, Legal, of the Company at the facsimile telephone number or
address of the principal place of business of the Company as set forth in the
Purchase Agreement. Any and all notices or other communications or deliveries
to be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
each holder of Preferred Stock at the facsimile telephone number or address of
such holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business of the
holder. Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:00 p.m. (Salt Lake City
time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:00 p.m. (Salt Lake City time) on any date
and earlier than 11:59 p.m. (Salt Lake City time) on such date, (iii) four days
after deposit in the United States mails, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given. For purposes of Section 5(c)(i), if a Conversion Notice is delivered by
facsimile prior to 5:00 p.m. (Salt Lake City time) on any date, then the day
prior to such date shall be the last Trading Day calculated to determine the
Conversion Price applicable to such Conversion Notice, and the date of such
delivery shall commence the counting of days for purposes of Section 5(b).
Section 6. Optional Redemption.
-------------------
(a) The Company shall have the right, exercisable at any time, to redeem
from funds legally available therefor all or any portion of the then outstanding
and unconverted shares of Preferred Stock at a price equal to the Redemption
Price. Any redemptions pursuant to this Section 6 shall be effected by the
delivery of a notice to each holder of Preferred Stock to be redeemed, which
notice shall indicate the number of shares of Preferred Stock of each holder to
be redeemed and the date that such redemption is to be effected, which shall be
the fifth (5/th/) Trading Day after
-14-
the date such notice is deemed delivered pursuant to Section 5(i) (the "Optional
--------
Redemption Date"). All redeemed shares of Preferred Stock shall cease to be
---------------
outstanding and shall have the status of authorized but undesignated stock, but
may not be reissued as Preferred Stock. The entire Redemption Price under this
Section shall be paid in cash by the Optional Redemption Date. The holders of
the Preferred Stock shall have the right to tender, and the Company shall honor,
Conversion Notices for shares of Preferred Stock, including shares subject to
the notice of redemption described in this Section, at any time through the
fourth (4/th/) Trading Day after receipt of such notice of redemption.
(b) If any portion of the Redemption Price under this section is not paid
by the Company on or prior to the Optional Redemption Date, interest shall
accrue thereon at the rate of 18% per annum thereafter until such Redemption
Price plus all such interest is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). In addition, if any portion of such
Redemption Price remains unpaid for more than five (5) calendar days after the
date due, each holder of the Preferred Stock subject to such redemption may
elect, by written notice to the Company, to either (i) demand conversion in
accordance with the formula and the time frame therefor set forth in Section 5
of all of the shares of Preferred Stock for which such Redemption Price has not
been paid in full (the "Unpaid Redemption Shares"), in which event the Per Share
------------------------
Market Price for such shares shall be the lower of the Per Share Market Price
calculated on the date such Redemption Price was originally due and the Per
Share Market Price as of the holder's written demand for conversion, or (ii)
invalidate ab initio such redemption, notwithstanding anything herein contained
---------
to the contrary. If a holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to such holder
the shares of Common Stock issuable upon conversion of the Unpaid Redemption
Shares subject to such holder conversion demand and otherwise perform its
obligations hereunder with respect thereto; or, if such holder elects option
(ii) above, the Company shall promptly, and in any event not later than three
(3) Trading Days from receipt of the holder's notice of such election, return to
the holder all of the Unpaid Redemption Shares.
Section 7. Definitions. For the purposes hereof, the following terms
-----------
shall have the following meanings:
"Applicable Percentage" means (i) one hundred twelve percent (112%)
---------------------
for any payment in full of the Redemption Price occurring within sixty (60) days
after the Original Issue Date; (ii) one hundred fifteen percent (115%) for any
payment in full of the Redemption Price occurring after the 61/st/ day but
before the one hundred twentieth (120/th/) day after the Original Issue Date;
(iii) one hundred twenty percent (120%) for any payment in full of the
Redemption Price occurring after the 121/st/ day but before the one hundred
eightieth (180/th/) day after the Original Issue Date; and (iv) one hundred
twenty-five percent (125%) for any payment in full of the Redemption Price
occurring after the 181/st/ day after the Original Issue Date.
"Average Daily Trading Volume" means for any period specified the
----------------------------
average of the daily sales volume of the Common Stock as reported by the Nasdaq
SmallCap Market or other
-15-
principal stock exchange or quotation system on which the Common Stock is then
listed or quoted, or if the Common Stock is not listed then on the Nasdaq
SmallCap Market or any stock exchange or quotation system, the daily trading
volume as in the over-the-counter market, as reported by the Nasdaq Stock Market
or in the National Quotation Bureau Incorporated or similar organization or
agency succeeding to its functions of reporting prices at the close of business
on such date.
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the State of
Delaware are authorized or required by law or other government action to close.
"Common Stock" means the common stock, $.0001 par value per share, of
------------
the Company, and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator of
----------------
which is Stated Value plus accrued but unpaid dividends to the extent to be paid
in shares of Common Stock and the denominator of which is the Conversion Price
at such time.
"Junior Securities" means the Common Stock and all other equity
-----------------
securities of the Company except for the Company's Series A Convertible
Preferred Stock and the Company's Series D 4% Convertible Preferred Stock.
"Mandatory Redemption Amount" for each share of Preferred Stock means
---------------------------
the sum of (i) the greater of (A) 125% of the Stated Value and all accrued and
unpaid dividends with respect to such share, and (B) the product of (a) the Per
Share Market Value on the Trading Day immediately preceding (x) the date of the
Triggering Event or the Conversion Date, as the case may be, or (y) the date of
payment in full by the Company of the applicable Redemption Price, whichever is
greater, and (b) the Conversion Ratio calculated on the date of the Triggering
Event, or the Conversion Date, as the case may be, and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock.
"Original Issue Date" means the date of the first issuance of any
-------------------
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
----------------------
bid price per share of the Common Stock on such date on the Nasdaq SmallCap
Market or other principal stock exchange or quotation system on which the Common
Stock is then listed or quoted or if there is no such price on such date, then
the closing bid price on such exchange or quotation system on the date nearest
preceding such date, or (b) if the Common Stock is not listed then on the Nasdaq
SmallCap Market or any stock exchange or quotation system, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by the
Nasdaq Stock Market or in the National
-16-
Quotation Bureau Incorporated or similar organization or agency succeeding to
its functions of reporting prices at the close of business on such date, or (c)
if the Common Stock is not then reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices, then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Appraiser selected in good faith by the holders
of a majority in interest of the shares of the Preferred Stock; provided,
however, that the Company, after receipt of the determination by such Appraiser,
shall have the right to select an additional Appraiser, in which case, the fair
market value shall be equal to the average of the determinations by each such
Appraiser.
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Purchase Agreement" means the Series E Convertible Preferred Stock
------------------
Exchange And Purchase Agreement, dated as of the Original Issue Date, between
the Company and the original holders of the Preferred Stock.
"Redemption Price" shall be equal to the sum of (i) the greater of (A)
----------------
one hundred twenty-five percent (125%) of the aggregate Stated Value of the
shares of Preferred Stock being redeemed and all accrued and unpaid dividends
with respect to such shares, and (B) the product of (a) the number of shares of
Preferred Stock to be redeemed multiplied by the Stated Value of such shares of
Preferred Stock and (b) the Applicable Percentage and (ii) all other amounts,
costs, expenses and liquidated damages due in respect of such shares of
Preferred Stock to be redeemed.
"Registration Rights Agreement" means the Registration Rights
-----------------------------
Agreement, dated the Original Issue Date, between the Company and the original
holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is traded on
-----------
the Nasdaq SmallCap Market or other stock exchange or market on which the Common
Stock has been listed, or (b) if the Common Stock is not listed on the Nasdaq
SmallCap Market or any stock exchange or market, a day on which the Common Stock
is traded in the over-the-counter market, as reported by the OTC Bulletin Board,
or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on
which the Common Stock is quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization or
agency succeeding its functions of reporting prices).
"Transaction Documents" means collectively, the Purchase Agreement and
---------------------
the exhibits and schedules thereto, including, the Warrants and the Registration
Rights Agreement.
-17-
"Underlying Shares" means the number of shares of Common Stock into
-----------------
which the Shares are convertible in accordance with the terms hereof and the
Purchase Agreement and shares of Common Stock issuable on account of dividends
on or with respect to the Preferred Stock.
"Underlying Securities Registration Statement" shall mean a
--------------------------------------------
registration statement under the Securities Act prepared by the Company and
filed with the Commission in accordance with the Registration Rights Agreement,
covering the resale of the Underlying Shares and naming the holders of the
Preferred Stock as "selling stockholders" thereunder.
Section 8. Redemption Upon Triggering Events.
---------------------------------
(a) Upon the occurrence of a Triggering Event, each Holder shall
(in addition to all other rights it may have hereunder or under applicable law),
have the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount plus (ii) the product of (A) the number of Underlying Shares
issued in respect of conversions or as payment of dividends hereunder and then
held by the Holder and (B) the Per Share Market Value on the date such
redemption is demanded or the date the redemption price hereunder is paid in
full, whichever is greater (the "Mandatory Redemption Price"). The Mandatory
Redemption Price shall be due and payable within ten (10) days of the date of
the notice for the payment therefor is provided by a Holder.
(b) If the Company fails to pay the Mandatory Redemption Price
hereunder in full pursuant to this Section within seven (7) days after the date
when due in accordance with the terms of Section 7(a), the Company will pay
interest thereon at a rate of 18% per annum, accruing daily from such seventh
day until the Mandatory Redemption Price, plus all such interest thereon, is
paid in full. For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Underlying Shares
upon a conversion (or attempted conversion) thereof.
(c) A "Triggering Event" means (whatever the reason and whether it
shall be voluntary or involuntary or effected by operation of law or pursuant to
any judgement, decree or order of any court, or any order, rule or regulation of
any administrative or governmental body) the failure of an Underlying
Securities Registration Statement to be filed with the Commission on or prior to
the 45th day after the Original Issue Date.
-18-
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the registered holder
in order to convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series E
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.0001 per share (the "Common Stock"), of fonix corporation (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations:
_______________________________________________________
Date to effect conversion
________________________________________________________
Number of shares of Preferred Stock to be converted
_______________________________________________________
Number of shares of Common Stock to be issued
_______________________________________________________
Applicable conversion price
_______________________________________________________
Name of Holder
_______________________________________________________
_______________________________________________________
Address of Holder
__________________________________
Authorized Signature
EXHIBIT B
---------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made and
---------
entered into as of September 30, 1998, by and between FONIX CORPORATION, a
Delaware corporation (the "Company"), and DOMINION CAPITAL FUND, LTD., a
-------
[__________] corporation ("Dominion"), and SOVEREIGN PARTNERS LP, a
--------
[_______________] corporation ("Sovereign") (Dominion and Sovereign are each
---------
referred to as a "Purchaser" and are collectively referred to as "Purchasers").
--------- ----------
This Agreement is made pursuant to the Series E Convertible Stock
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "Purchase Agreement").
------------------
The Company and the Purchasers hereby agree as follows:
1. Definitions
-----------
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
------
"Affiliate" means, with respect to any Person, any other Person that
---------
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
-------
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "affiliated," "controlling" and "controlled" have meanings
---------- ----------- ----------
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day which
------------
shall be a legal holiday or a day on which banking institutions in the state of
Delaware generally are authorized or required by law or other government actions
to close.
"Closing Date" shall have the meaning set forth in the Purchase
------------
Agreement.
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the Company's Common Stock, par value $.0001 per
------------
share.
"Effectiveness Date" means December 1, 1998.
------------------
"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 15th day following the Closing Date.
-----------
"Holder" or "Holders" means the holder or holders, as the case may be,
------ -------
from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
-----------------
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
------------------
"Losses" shall have the meaning set forth in Section 5(a).
------
"Person" means an individual or a corporation, partnership, trust,
------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Preferred Shares" means the shares of Series E Preferred Stock, par
----------------
value $.0001 per share, of the Company issued to the Purchasers on the Closing
Date.
"Proceeding" means an action, claim, suit, investigation or proceeding
----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
----------
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock issuable (a)
----------------------
upon conversion in full of the Preferred Shares, (b) upon exercise in full of
the Warrants and (c) as payment in full of dividends on the Preferred Shares;
provided, however that in order to account for the fact that the number of
-------- -------
shares of Common Stock that are issuable upon conversion of Preferred Shares or
exercise of the Warrants is determined in part upon the market price of the
Common Stock at the time of conversion or exercise, Registrable Securities
contemplated by clause (a) of this definition shall be deemed to include not
less than, and the initial Registration Statement to be filed hereunder shall
cover no less than, 200% of the number of shares of Common Stock issuable upon
conversion in full of the Preferred Shares assuming such conversion were to have
occurred on the Filing Date or the Closing Date, whichever date yields a lower
Conversion Price, and contemplated by clause (b) of this definition shall be
deemed to include not less than 200% of the number of shares of Common Stock
issuable upon exercise of the Warrants, assuming the maximum number of Warrants
were issued and that such exercise were to have occurred on the Filing Date or
the Closing Date, whichever date yields a
-2-
lower Conversion Price. The Company shall be required to file additional
Registration Statements to the extent the actual number of shares of Common
Stock into which the Preferred Shares are convertible (together with dividends
thereon) and Warrants are exercisable exceeds the number of shares of Common
Stock initially registered in accordance with the immediately prior sentence
(the Company shall have 20 days to file such additional Registration Statement
after notice of the requirement thereof, which the Holders may give at such time
when the number of shares of Common Stock as are issuable upon exercise of the
Warrants, as payment of dividends in respect of the Preferred Stock and upon
conversion of the Preferred Stock exceeds 75% of the number of shares of Common
Stock then covered by an effective Registration Statement.
"Registration Statement" means the registration statement contemplated
----------------------
by Section 2(a) (covering such number of Registrable Securities and any
additional Registration Statements contemplated in the definition of Registrable
Securities), including (in each case) the Prospectus, amendments and supplements
to such registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to
--------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
---------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Special Counsel" means the law firm acting as counsel to the Holders,
---------------
for which the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
--------------------------------------------------
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means the Common Stock purchase warrants issued to the
--------
Purchasers (or their successors) as provided in the Certificate of Designation.
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
-3-
to be made on a continuous basis pursuant to Rule 415. The Registration
Statement shall be on Form S-3 promulgated under the Securities Act (or, if the
Company is not permitted to register the resale of the Registrable Securities on
Form S-3, the Registration Statement shall be on such other appropriate form in
accordance herewith as the Holders of a majority in interest of the Registrable
Securities may consent). The Registration Statement shall state, to the extent
permitted by Rule 416 under the Securities Act, that it also covers such
indeterminate number of Common Stock as may be required to effect conversion of
the shares of Preferred Stock (and payment of dividends thereon) or exercise of
the Warrants, in each case to prevent dilution resulting from stock splits,
stock dividends or similar events, or by reason of changes in the Conversion
Price in accordance with the terms of the Certificate of Designation (as defined
in the Purchase Agreement) or by reason of changes in the Exercise Price (as
defined in the Warrants) in accordance with the terms of the Warrants. The
Company shall use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event prior to the Effectiveness Date, and shall use
its best efforts to keep such Registration Statement continuously effective
under the Securities Act until the date which is three years after the date that
such Registration Statement is declared effective by the Commission or such
earlier date when all Registrable Securities covered by such Registration
Statement have been sold or may be sold without volume restrictions pursuant to
Rule 144(k) promulgated under the Securities Act, as determined by the counsel
to the Company pursuant to a written opinion letter to such effect, addressed
and acceptable to the Company's transfer agent (the "Effectiveness Period"). The
---------------------
Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able to
sell all of the Registrable Securities covered by such Registration Statement
during the Effectiveness Period, unless such action is required under applicable
law or the Company has filed a post-effective amendment to the Registration
Statement and the Commission has not declared it effective.
(b) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, the investment banker that will administer the offering will be selected
by the Holders of a majority of the Registrable Securities to be included in
such offering. In connection with any Underwritten Offering, if the managing
underwriters advise the Company and the participating Holders in writing that in
their opinion the amount of Registrable Securities proposed to be sold in such
Underwritten Offering exceeds the amount of Registrable Securities which can be
sold in such Underwritten Offering, there shall be included in such Underwritten
Offering the amount of such Registrable Securities which in the opinion of such
managing underwriters can be sold, and such amount shall be allocated pro rata
--- ----
among the Holders proposing to sell Registrable Securities in such Underwritten
Offering. No Holder may participate in any 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.
-4-
3. Registration Procedures
-----------------------
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement (and any additional Registration Statements as
may be required hereunder) in accordance with Section 2(a), and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than five (5) Business Days prior to
-------- -------
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the opinion of respective counsel to such Holders and such
underwriters, to conduct a reasonable investigation within the meaning of the
Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto if the Holders of a
majority of the Registrable Securities, their Special Counsel, or any managing
underwriters, shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to all
Registrable Securities for the Effectiveness Period and prepare and file with
the Commission such additional Registration Statements in order to register for
resale under the Securities Act all of the Registrable Securities; (ii) cause
the related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424
(or any similar provisions then in force) promulgated under the Securities Act;
(iii) respond as promptly as practicable to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and promptly provide the Holders true and complete copies of all correspondence
from and to the Commission relating to the Registration Statement; and (iv)
comply with the provisions of the Securities Act and the Exchange Act with
respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods 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
-5-
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, Pro spectus 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
-6-
each amendment thereto, including financial statements and schedules, all
documents incorporated or deemed to be incorporated therein by reference, and
all exhibits to the extent requested by such Person (including those previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions as any Holder or underwriter requests in writing, to keep
each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
-------- -------
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where it
is not then so subject or subject the Company to any material tax in any such
jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement, which
certificates shall be free of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered 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
-7-
securities issued by the Company are then listed as and when required pursuant
to the Purchase Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance as
is customary in Underwritten Offerings) and take all such other actions in
connection therewith (including those reasonably requested by any managing
underwriters and the Holders of a majority of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered into, (i)
make such representations and warranties to such Holders and such underwriters
as are customarily made by issuers to underwriters in underwritten public
offerings, and confirm the same if and when requested; (ii) obtain and deliver
copies thereof to each Holder and the managing underwriters, if any, of opinions
of counsel to the Company and updates thereof addressed to each selling Holder
and each such underwriter, in form, scope and substance reasonably satisfactory
to any such managing underwriters and Special Counsel to the selling Holders
covering the matters customarily covered in opinions requested in Underwritten
Offerings and such other matters as may be reasonably requested by such Special
Counsel and underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement or at the time of delivery of any Registrable Securities
sold pursuant thereto (at the option of the underwriters), obtain and deliver
copies to the Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in the Registration Statement), addressed to each Person and in
such form and substance as are customary in connection with Underwritten
Offerings; (iv) if an underwriting agreement is entered into, the same shall
contain indemnification provisions and procedures no less favorable to the
selling Holders and the underwriters, if any, than those set forth in Section 7
(or such other provisions and procedures acceptable to the managing
underwriters, if any, 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
-8-
delivery of such information shall be kept confidential by such Persons, unless
(i) disclosure of such information is required by court or administrative order
or is necessary to respond to inquiries of regulatory authorities; (ii)
disclosure of such information, in the opinion of counsel to such Person, is
required by law; (iii) such information becomes generally available to the
public other than as a result of a disclosure or failure to safeguard by such
Person; or (iv) such information becomes available to such Person from a source
other than the Company and such source is not known by such Person to be bound
by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the Commission
and make generally available to its security holders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
not later than 45 days after the end of any 12-month period (or 90 days after
the end of any 12-month period if such period is a fiscal year) (i) commencing
at the end of any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm commitment or best efforts Underwritten Offering and (ii)
if not sold to underwriters in such an offering, commencing on the first day of
the first fiscal quarter of the Company after the effective date of the
Registration Statement, which statement shall cover said 12-month period, or end
shorter periods as is consistent with the requirements of Rule 158.
(o) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration Statement
and the Company may exclude from such registration the Registrable Securities of
any such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (i) the inclusion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the
ownership by such Holder of such securities is not to be construed as a rec
ommendation by such Holder of the investment quality of the Company's securities
covered thereby and that such ownership does not imply that such Holder will
assist in meeting any future financial requirements of the Company, or (ii) if
such reference to such Holder by name or otherwise is not required by the
Securities Act or any similar Federal statute then in force, the deletion of the
reference to such Holder in any amendment or supplement to the Registration
Statement filed or prepared subsequent to the time that such reference ceases to
be required.
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.
-9-
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 Pro spectus 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 Pro spectus 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
printing of prospectuses is requested by the managing underwriters, if any, or
by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, in the case of the Special Counsel, to a maximum amount of $10,000, (v)
Securities Act liability insurance, if the Company so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement. In addition, the Company shall be responsible for all of its internal
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, the fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange as
required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the
terms hereof, the Company shall be responsible for all costs, fees and expenses
in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants, which shall be borne by the
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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 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
-11-
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 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
-12-
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within 10 Business
Days of written notice thereof to the Indemnifying Party (regard less of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
--------
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(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.
-13-
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. Other Company Registration Obligations; Piggy-Back Registration.
---------------------------------------------------------------
(a) No Inconsistent Agreements. Except as and to the extent
--------------------------
specifically set forth in Schedule 6(a) attached hereto, neither the Company nor
-------------
any of its subsidiaries has, as of the date hereof, nor shall the Company or any
of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Except as and to the extent specifically set forth in
Schedule 6(a) attached hereto, neither the Company nor any of its subsidiaries
-------------
has previously entered into any agreement granting any registration rights with
respect to any of its securities to any Person. Without limiting the generality
of the foregoing, without the written consent of the Holders of a majority of
the then outstanding Registrable Securities, the Company shall not grant to any
Person the right to request the Company to register any securities of the
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.
Furthermore, if the Company grants any registration rights during the 180-day
period following the date hereof, in addition to complying the foregoing
provisions of this Section 6(a), no registration statement shall become
effective for a period of at least 180 days after the closing date of the
transaction in respect of which such registration rights are granted.
(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.
-14-
7. Miscellaneous
-------------
(a) Remedies. In the event of a breach by the Company or by a Holder,
--------
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least sixty-six and two-thirds percent (66 2/3%) of the
then outstanding Registrable Securities; provided, however, that, for the pur
-------- -------
poses 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
00 Xxxx Xxxxx Xxxxxx Xxxxxx
Xxxxx 0000
Xxxx Xxxx Xxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxx X. Xxxxxx
-15-
With copies to: Durham, Evans, Xxxxx & Xxxxxxx, P.C.
Suite 850 Key Bank Tower
00 Xxxxx Xxxx Xxxxxx
Xxxx Xxxx Xxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxxxx X. Xxxxx, Esq.
If to Purchasers: Dominion Capital Fund, Ltd.
Sovereign Partners, LP
c/o Thomson Kernaghan & Co.
000 Xxx Xxxxxx
Xxxxxxx, Xxxxxx
Fax (000) 000-0000
Attention: Xxxx Xxxxxxxxx
With copies to: Xxxxxxx & Prager
000 0xx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Fax: (000) 000-0000
Attn. Xxxxxx X. Xxxxxxx, Esq.
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
-16-
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 Agree ment 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 restric tion. 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]
-17-
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
fonix corporation
By:
------------------------------------------
Name:
----------------------------------
Title:
---------------------------------
DOMINION CAPITAL FUND, LTD
By:______________________________________
Its:_______________________________
SOVEREIGN PARTNERS, LP
By:______________________________________
Its:_______________________________
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
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, certificates 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. AcuVoice, Inc. In March 1998, the Company acquired AcuVoice, Inc, a
-------------
California corporation ("AcuVoice"), pursuant to a statutory merger of
AcuVoice with and into a wholly-owned subsidiary of the Company. The
former shareholders of AcuVoice received cash payment and fonix common
stock in exchange for their common stock of AcuVoice. Pursuant to the
Agreement and Plan of Reorganization executed by the parties to the
AcuVoice merger, the shareholders of AcuVoice obtained demand registration
rights that may be exercised at any time 12 months after the effective time
of the merger, provided that such demand does not occur during the period
starting with the date 60 days prior to fonix's filing of, and ending on
the date 90 days after the effective date of any other registration
statement.
4. Articulate Systems, Inc. On July 31, 1998, the Company entered into a
-----------------------
definitive Agreement and Plan of Merger pursuant to which it acquired
Articulate Systems, Inc, a Delaware corporation ("Articulate"), through a
statutory merger of Articulate with and into a wholly-owned subsidiary of
the Company effective as of September 2, 1998. The stockholders of
Articulate received cash payment and fonix restricted common stock in
exchange for their capital stock of Articulate. Pursuant to the Agreement
and Plan of Merger executed by the parties to the Articulate merger, the
shareholders of Articulate obtained piggyback registration rights that may
be exercised at any time 6 months after the effective time of the merger.
The piggyback rights do not apply to (i) a registration relating solely to
employee benefit plans, (ii) a registration relating solely to a Rule 145
transaction or (iii) a registration pursuant to registration rights granted
as of the date of the merger agreement.
5. Papyrus Transactions. On September 10, 1998, the Company entered into an
--------------------
Agreement and Plan of Merger among the Company, Papyrus Acquisition
Corporation, a Utah corporation and wholly-owned subsidiary of the Company,
and Papyrus Associates, Inc., a Pennsylvania corporation. In a related
transaction, on September 10, 1998, the Company entered into an Agreement
and Plan of Merger among the Company, Papyrus Acquisition Corporation and
Papyrus Development Corporation, a Massachusetts corporation. Pursuant to
the Papyrus Agreements, the Company will acquire by merger the Papyrus
entities, in return for which the Company will issue (in addition to the
payment of cash consideration as specified in the agreements), a total of
$3,640,000 in Common Stock, each share of which will be valued at the
average of the closing bid prices for the Common Stock for the 30 trading
day periods immediately preceding the closing dates for the Papyrus
transactions. Pursuant to the Papyrus Agreements, the shareholders of the
Papyrus entities who receive Common Stock will obtain piggyback
registration rights that may be exercised at any time 6 months after the
effective time of the mergers. The piggyback rights do not apply to (i) a
registration relating solely to employee benefit plans, (ii) a registration
relating solely to a Rule 145 transaction or (iii) a registration pursuant
to registration rights granted as of the date of the merger agreement.
6. 3D Planet Transaction. On September 8, 1998, the Company entered into an
---------------------
Asset Purchase Agreement between the Company and 3D Planet, Inc., a
Delaware corporation. Pursuant to the 3D Planet Agreement, the Company will
acquire all of the assets of 3D Planet, in consideration for which the
Company will issue (in addition to the payment of cash consideration as
specified in the agreement), a total of $5,900,000 in Common Stock, each
share of which will be valued at the average of the averages of the closing
bid prices for the 3 10-trading-day periods immediately preceding May 29,
1998, September 8, 1998 and the closing date of the 3D Planet transaction.
Pursuant to the 3D Planet Agreement, the shareholders of 3D Planet (or 3D
Planet) who receive Common Stock will obtain piggyback registration rights
that may be exercised at any time 6 months after the effective time of the
transaction. The piggyback rights do not apply to (i) a registration
relating solely to employee benefit plans, (ii) a registration relating
solely to a
Rule 145 transaction or (iii) a registration pursuant to registration
rights granted as of the date of the merger agreement. The Company
presently believes the 3D Planet transaction will close in October 1998,
although there can be no assurance that the closing will occur.
7. In addition to the foregoing, the Company presently has 3 effective S-3
registration statements covering resales of Common Stock underlying
warrants issued in connection with previous financings, and would be, under
certain circumstances, obligated to file additional registration statements
in respect of those securities.
-22-
EXHIBIT C
---------
TRANSFER AGENT INSTRUCTIONS
September 30, 1998
Ladies and Gentlemen:
Reference is made to that certain Series E Convertible Preferred Stock
Purchase and Exchange Agreement (the "PURCHASE AGREEMENT") between fonix
corporation, a Delaware corporation (the "COMPANY"), and the buyers named
therein (the "HOLDERS") pursuant to which the Company is issuing to the Holders
shares of its 4% Series E Convertible Preferred Stock, par value $.0001 per
share (the "PREFERRED SHARES"), and Common Stock purchase warrants (the
"WARRANTS") which shall be convertible and exercisable, respectively, into
shares of the Company's common stock, $.0001 par value per share (the "COMMON
STOCK"). The shares of Common Stock issuable upon conversion of the Preferred
Shares and the issuance of dividends thereon and the shares of Common Stock
issuable upon exercise of the Warrants are collectively referred to herein as
"UNDERLYING SHARES."
This letter shall serve as our irrevocable authorization and direction to
you (provided that you are the transfer agent of the Company at such time) to
issue shares of Common Stock upon conversion of the Preferred Shares or exercise
of the Warrants, from time to time, upon surrender to you of (i) a properly
completed and duly executed Conversion Notice, in the form attached hereto as
EXHIBIT I or Exercise Notice, in the form attached hereto as EXHIBIT II, and
(ii) certificates representing Preferred Shares being converted or the Warrants
being exercised (or an indemnification undertaking with respect to such share
certificates in the case of their loss, theft or destruction).
So long as you have previously received an opinion of the Company's outside
counsel substantially in the form of EXHIBIT III attached hereto (which the
Company shall direct be delivered to you by such outside counsel upon the
effectiveness of the registration statement covering Underlying Shares) stating
that a registration statement covering resales of Underlying Shares has been
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and that Underlying Shares may be resold
without any restrictive legend (the "OPINION"), certificates representing
Underlying Shares shall not bear any legend restricting transfer of Underlying
Shares thereby and should not be subject to any stop-transfer restriction.
Provided, however, that if you have not previously received a copy of the
Opinion, then the certificates for Underlying Shares shall bear the following
legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
and, provided further, that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for Underlying Shares in
the event a registration statement covering Underlying Shares is subject to
amendment for events then current.
Please be advised that the Holders have relied upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, the Holders
are a third party beneficiary to these instructions.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at (000) 000-0000.
Very truly yours,
fonix corporation
By:___________________________________
Name:_________________________________
Title:________________________________
ACKNOWLEDGED AND AGREED:
CONTINENTAL STOCK TRANSFER & TRUST CO.
By:_________________________________________
Name:_______________________________________
Title: _____________________________________
-2-
EXHIBIT I
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of 4% Series E
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.0001 per share (the "Common Stock"), of fonix corporation (the
"Company") according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than undersigned, the
undersigned will pay all transfer taxes payable with respect thereto and is
delivering herewith such certificates and opinions as reasonably requested by
the Company in accordance therewith. No fee will be charged to the holder for
any conversion, except for such transfer taxes, if any.
Conversion calculations: _________________________________________
Date to Effect Conversion
_________________________________________
Number of shares of Preferred Stock to be
Converted
_________________________________________
Number of shares of Common Stock to be
Issued
_________________________________________
Applicable Conversion Price
_________________________________________
Signature
_________________________________________
Name
_________________________________________
Address
EXHIBIT II
NOTICE OF EXERCISE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To fonix corporation:
In accordance with the Warrant enclosed with this Notice of Exercise, the
undersigned hereby irrevocably elects to purchase [___________] shares of common
stock, $.0001 par value, of fonix corporation ("Common Stock") and, if such
Holder is not utilizing the cashless exercise provisions set forth in this
Warrant, encloses herewith $________ in cash or certified or official bank check
or checks, which sum represents the aggregate Exercise Price (as defined in the
Warrant) for the number of shares of Common Stock to which this Notice of
Exercise relates, together with any applicable taxes payable by the undersigned
pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If the number of shares of Common Stock issuable upon this exercise shall
not be all of the shares of Common Stock which the undersigned is entitled to
purchase in accordance with the enclosed Warrant, the undersigned requests that
a New Warrant (as defined in the Warrant) evidencing the right to purchase the
shares of Common Stock not issuable pursuant to the exercise evidenced hereby be
issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
Dated: ____________, _____
Name of Holder:
(Print)_______________________________________________________________
(By:)_________________________________________________________________
(Name:)
(Title:)
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
EXHIBIT III
[FORM OF OUTSIDE COUNSEL OPINION]
[Addressee]
[Address]
To Whom It May Concern:
The Registration Statement on Form S-3 (File No. 333-______________) of
fonix corporation (the "Registration Statement") was declared effective at
___:____ __.M. Eastern Time on _____________, 199___. Upon conversion of the
Preferred Shares (and payment of dividends thereon) and upon exercise of the
Warrants referred to in the Company's instruction letter attached, you are
authorized to issue certificates for the Company's common stock without
restrictive legends.
Very truly yours,
EXHIBIT D
---------
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
FONIX CORPORATION
WARRANT
-------
Warrant No. [__] Dated ________, 199__
fonix corporation, a Delaware corporation (the "Company"), hereby certifies
that, for value received, [___________________], or its registered assigns
("Holder"), is entitled, subject to the terms set forth below, to purchase from
the Company up to a total of [______________ ] shares of Common Stock, $.0001
par value per share (the "Common Stock"), of the Company (each such share, a
"Warrant Share" and all such shares, the "Warrant Shares") at an exercise price
equal to $[____]/1/ per share (as adjusted from time to time as provided in
Section 8, the "Exercise Price"), at any time and from time to time from and
after the date hereof and through and including August ___, 2001 (the
"Expiration Date"), and subject to the following terms and conditions:
1. Registration of Warrant. The Company shall register this
-----------------------
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to time.
The Company may deem and treat the registered Holder of this Warrant as the
absolute owner hereof for the purpose of any exercise hereof or any distribution
to the Holder, and for all other purposes, and the Company shall not be affected
by notice to the contrary.
--------------------
/1/ Exercise price equal to 120% of the average of the closing bid price of the
Common Stock for the five (5) trading days immediately preceding the issue date
hereof.
2. Registration of Transfers and Exchanges.
---------------------------------------
(a) The Company shall register the transfer of any portion of this
Warrant in the Warrant Register, upon surrender of this Warrant, with the Form
of Assignment attached hereto duly completed and signed, to the Company at the
office specified in or pursuant to Section 3(b). Upon any such registration or
transfer, a new warrant to purchase Common Stock, in substantially the form of
this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of
this Warrant so transferred shall be issued to the transferee and a New Warrant
evidencing the remaining portion of this Warrant not so transferred, if any,
shall be issued to the transferring Holder. The acceptance of the New Warrant
by the transferee thereof shall be deemed the acceptance of such transferee of
all of the rights and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender hereof by the
Holder to the office of the Company specified in or pursuant to Section 3(b) for
one or more New Warrants, evidencing in the aggregate the right to purchase the
number of Warrant Shares which may then be purchased hereunder. Any such New
Warrant will be dated the date of such exchange.
3. Duration and Exercise of Warrants.
---------------------------------
(a) This Warrant shall be exercisable by the registered Holder on any
business day before 5:30 P.M., Salt Lake City time, at any time and from time to
time on or after the date hereof to and including the Expiration Date. At 5:30
P.M., Salt Lake City time on the Expiration Date, the portion of this Warrant
not exercised prior thereto shall be and become void and of no value. This
Warrant may not be redeemed by the Company.
(b) Subject to Sections 2(b), 6 and 11, upon surrender of this
Warrant, with the Form of Election to Purchase attached hereto duly completed
and signed, to the Company at its address for notice set forth in Section 11 and
upon payment of the Exercise Price multiplied by the number of Warrant Shares
that the Holder intends to purchase hereunder, in lawful money of the United
States of America, in cash or by certified or official bank check or checks, all
as specified by the Holder in the Form of Election to Purchase, the Company
shall promptly (but in no event later than 3 business days after the Date of
Exercise (as defined herein)) issue or cause to be issued and cause to be
delivered to or upon the written order of the Holder and in such name or names
as the Holder may designate, a certificate for the Warrant Shares issuable upon
such exercise, free of restrictive legends other than as required by the
Purchase Agreement of even date herewith between the Holder and the Company.
Any person so designated by the Holder to receive Warrant Shares shall be deemed
to have become holder of record of such Warrant Shares as of the Date of
Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company shall have
received (i) this Warrant (or any New Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or attached to such New Warrant)
appropriately completed and duly signed, and (ii) payment of the Exercise Price
for the number of Warrant Shares so indicated by the holder hereof to be
purchased.
(c) This Warrant shall be exercisable, either in its entirety or,
from time to time, for a portion of the number of Warrant Shares. If less than
all of the Warrant Shares which may be purchased under this Warrant are
exercised at any time, the Company shall issue or cause to be issued, at its
expense, a New Warrant evidencing the right to purchase the remaining number of
Warrant Shares for which no exercise has been evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this Warrant, the
-----------------------------
Company may not file any registration statement with the Securities and Exchange
Commission (other than registration statements of the Company filed on Form S-8
or Form S-4, each as promulgated under the Securities Act of 1933, as amended,
pursuant to which the Company is registering securities pursuant to a Company
employee benefit plan or pursuant to a merger, acquisition or similar
transaction including supplements thereto, but not additionally filed
registration statements in respect of such securities) at any time when there is
not an effective registration statement covering the resale of the Warrant
Shares and naming the Holder as a selling stockholder thereunder, unless the
Company provides the Holder with not less than 20 days written notice of its
intention to file such registration statement and provides the Holder the option
to include any or all of the applicable Warrant Shares therein. The piggyback
registration rights granted to the Holder pursuant to this Section shall
continue until all of the Holder's Warrant Shares have been sold in accordance
with an effective registration statement or upon the expiration of this Warrant.
The Company will pay all registration expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary stamp taxes
----------------
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder, and the Company shall not be required to issue or cause to be issued
or deliver or cause to be delivered the certificates for Warrant Shares unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid. The Holder shall be
responsible for all other tax liability that may arise as a result of holding or
transferring this Warrant or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen
----------------------
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and indemnity, if
reasonably satisfactory to it. Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it will at
-----------------------------
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of
persons other than the Holders (taking into account the adjustments and
restrictions of Section 8). The Company covenants that all Warrant Shares that
shall be so issuable and deliverable shall, upon issuance and the payment of the
applicable Exercise Price in accordance with the terms hereof, be duly and
validly authorized, issued and fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of Warrant Shares
-------------------
issuable upon exercise of this Warrant are subject to adjustment from time to
time as set forth in this Section 8. Upon each such adjustment of the Exercise
Price pursuant to this Section 8, the Holder shall thereafter prior to the
Expiration Date be entitled to purchase, at the Exercise Price resulting from
such adjustment, the number of Warrant Shares obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is outstanding,
(i) shall pay a stock dividend or otherwise make a distribution or distributions
on shares of its Common Stock (as defined below) or on any other class of
capital stock (and not the Common Stock) payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock into a larger number of shares, or
(iii) combine outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision or
combination, and shall apply to successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another person, the sale or
transfer of all or substantially all of the assets of the Company in which the
consideration therefor is equity or equity equivalent securities or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities or property, then the Holder shall have the right thereafter to
exercise this Warrant only into the shares of stock and other securities and
property receivable upon or deemed to be held by holders of Common Stock
following such reclassification, consolidation, merger, sale, transfer or share
exchange, and the Holder shall be entitled upon such event to receive such
amount of securities or property of the Company's business combination partner
equal to the amount of Warrant Shares such Holder would have been entitled to
had such Holder exercised this Warrant immediately prior to such
reclassification, consolidation, merger, sale, transfer or share exchange. The
terms of any such consolidation, merger, sale, transfer or share exchange shall
include such terms so as to continue to give to the Holder the right to receive
the securities or property set forth in this Section 8(b) upon any exercise
following any such reclassification, consolidation, merger, sale, transfer or
share exchange.
(c) If the Company, at any time while this Warrant is outstanding,
shall distribute to all holders of Common Stock (and not to holders of this
Warrant) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
8(a), (b) and (d)), then in each such case the Exercise Price shall be
determined by multiplying the Exercise Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Exercise Price
determined as of the record date mentioned above, and of which the numerator
shall be such Exercise Price on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may be
the firm that regularly examines the financial statements of the Company) (an
"Appraiser") mutually selected in good faith by the holders of a majority in
interest of the Warrants then outstanding and the Company. Any determination
made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding, the Company
shall issue or cause to be issued rights or warrants to acquire or otherwise
sell or distribute shares of Common Stock to all holders of Common Stock for a
consideration per share less than the Exercise Price then in effect, then,
forthwith upon such issue or sale, the Exercise Price shall be reduced to the
price (calculated to the nearest cent) determined by dividing (i) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by the Exercise Price, and
(B) the consideration, if any, received or receivable by the Company upon such
issue or sale by (ii) the total number of shares of Common Stock outstanding
immediately after such issue or sale.
(e) For the purposes of this Section 8, the following clauses shall
also be applicable:
(i) Record Date. In case the Company shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in securities
convertible or exchangeable into shares of Common Stock, or (B) to subscribe for
or purchase Common Stock or securities convertible or exchangeable into shares
of Common Stock, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other distribution
or the date of the granting of such right of subscription or purchase, as the
case may be.
(ii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(g) If:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; or
(ii) the Company shall declare a special nonrecurring cash
dividend on or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to all holders
of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or
of any rights; or
(iv) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the
Common Stock of the Company, any consolidation or merger
to which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company, or
any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; or
(v) the Company shall authorize the voluntary dissolution,
liquidation or winding up of the affairs of the Company,
then the Company shall cause to be mailed to each Holder at their last addresses
as they shall appear upon the Warrant Register, at least 30 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, however, that the failure to mail such notice or any
-------- -------
defect therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Payment of Exercise Price. The Holder may pay the Exercise Price in
-------------------------
cash or, in the event that a registration statement covering the resale of the
Warrant Shares and naming the holder thereof as a selling stockholder thereunder
is not effective for the resale of the Warrant Shares at any time during the
term of this Warrant, pursuant to a cashless exercise, as follows:
(a) Cash Exercise. The Holder shall deliver immediately
-------------
available funds;
(b) Cashless Exercise. The Holder shall surrender this Warrant to
-----------------
the Company together with a notice of cashless exercise, in which event the
Company shall issue to the Holder the number of Warrant Shares determined as
follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to the Holder.
Y = the number of Warrant Shares with respect to which this
Warrant is being exercised.
A = the average of the closing sale prices of the Common Stock
for the five (5) Trading Days immediately prior to (but not
including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged that the Warrant Shares issued in a cashless
exercise transaction shall be deemed to have been acquired by the Holder, and
the holding period for the Warrant Shares shall be deemed to have been
commenced, on the issue date.
10. Fractional Shares. The Company shall not be required to issue or
-----------------
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented. If any fraction of
a Warrant Share would, except for the provisions of this Section 10, be issuable
on the exercise of this Warrant, the Company shall, at its option, (i) pay an
amount in cash equal to the Exercise Price multiplied by such fraction or (ii)
round the number of Warrant Shares issuable, up to the next whole number.
11. Notices. Any and all notices or other communications or deliveries
-------
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section, (ii) the business day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iii) upon actual receipt by
the party to whom such notice is required to be given. The addresses for such
communications shall be: (1) if to the Company, to fonix corporation, 00 Xxxx
Xxxxx Xxxxxx Xxxxxx, Xxxxx 0000, Xxxx Xxxx Xxxx, Xxxx 00000, or to Facsimile
No.: (000) 000-0000 Attention: Chief Financial Officer, or (ii) if to the
Holder, to the Holder at the address or facsimile number appearing on the
Warrant Register or such other address or facsimile number as the Holder may
provide to the Company in accordance with this Section 11.
12. Warrant Agent.
-------------
(a) The Company shall serve as warrant agent under this Warrant.
Upon thirty (30) days' notice to the Holder, the Company may appoint a new
warrant agent.
(b) Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act. Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.
13. Miscellaneous.
-------------
(a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and permitted assigns. This
Warrant may be amended only in writing signed by the Company and the Holder.
(b) Subject to Section 13(a), above, nothing in this Warrant shall
be construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant; this
Warrant shall be for the sole and exclusive benefit of the Company and the
Holder.
(c) This Warrant shall be governed by and construed and enforced in
accordance with the internal laws of the State of Delaware without regard to the
principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not constitute
a part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.
(e) In case any one or more of the provisions of this Warrant shall
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Warrant shall not in any way be
affected or impaired thereby and the parties will attempt in good faith to agree
upon a valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.
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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.
FONIX CORPORATION
By:_______________________________
Name:_____________________________
Title:____________________________
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)
To fonix corporation:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase [___________]
shares of Common Stock ("Common Stock"), $.0001 par value per share, of fonix
corporation and encloses herewith $________ in cash or certified or official
bank check or checks, which sum represents the aggregate Exercise Price (as
defined in the Warrant) for the number of shares of Common Stock to which this
Form of Election to Purchase relates, together with any applicable taxes payable
by the undersigned pursuant to the Warrant.
The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
If the number of shares of Common Stock issuable upon this exercise shall
not be all of the shares of Common Stock which the undersigned is entitled to
purchase in accordance with the enclosed Warrant, the undersigned requests that
a New Warrant (as defined in the Warrant) evidencing the right to purchase the
shares of Common Stock not issuable pursuant to the exercise evidenced hereby be
issued in the name of and delivered to:
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
________________________________________________________________________________
Dated:__________________, _____ Name of Holder:
(Print)_____________________________________
(By:)_______________________________________
(Name:)
(Title:)
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of fonix corporation to
which the within Warrant relates and appoints ________________ attorney to
transfer said right on the books of fonix corporation with full power of
substitution in the premises.
Dated:
_______________, ____
_______________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
EXHIBIT E
---------
VOTING AGREEMENT
----------------
The undersigned, Xxxxxx X. Xxxxxxx, as Trustee of that certain voting
trust (the Voting Trust") pursuant to that certain Voting Trust Agreement dated
the 10/th/ day of December 1993, and as amended to date, by and among, fonix
corporation a Delaware corporation (the "Company"), Xxxxxxx X. Xxxxxxxx, Xxxxxx
X. Xxxxxxx, Xxxxx X. Xxxxxx, Beesmark Investments, L.C., a Utah limited
liability company, Studdert Companies Corp., a Utah corporation and Xxxxxx X.
Xxxxxxx as Trustee, hereby irrevocably agrees to vote all shares of voting stock
of the Company owned by the Voting Trust (including any shares acquired by the
Voting Trust after the date hereof) in any meeting of the stockholders of the
Company or in any written consent in lieu of such a meeting in favor of any
resolution to approve the Series E Convertible Preferred Stock Purchase
Agreement (the "Purchase Agreement") by and among the Company and the Purchasers
named therein (the "Purchasers") and the issuance of shares of Common Stock upon
conversion of the shares of the Company's convertible preferred stock and upon
exercise of Common Stock purchase warrants, in each case, issued in accordance
with the Purchase Agreement and the instruments contemplated thereunder
(including any issuance of Common Stock at a price below the market or book
value of the Common Stock).
The undersigned acknowledges that the execution, delivery and
performance of this Voting Agreement is a material inducement to the execution
by the Purchasers of the Purchase Agreement and the performance by the
Purchasers of the transactions contemplated thereby and that each of the
Purchasers (all of whom shall be third party beneficiaries of this Voting
Agreement) shall be entitled to specific performance of the Voting Trust's
obligations hereunder, and that this Voting Agreement is the valid and binding
obligation of the Voting Trust enforceable against it in accordance with the
terms hereof. The undersigned hereby represents that he has the power and
authority to execute, deliver and perform this Voting Agreement, that the Voting
Trust has received adequate consideration therefor, and that the Voting Trust
and its beneficiaries will benefit from the execution and delivery of the
Purchase Agreement. The undersigned further represents and warrants that he has
the sole voting power with respect to a total of twenty-three million seven
hundred seven thousand seven hundred forty-nine (23,707,749) shares of Common
Stock of the Company.
The Company shall enforce the terms of this Voting Agreement in favor
of the Purchasers. This Voting Agreement may not be amended or otherwise
modified in any respect without the written consent of each of the Company, the
Purchasers and the undersigned. This Voting Agreement shall be construed and
enforced in accordance with the laws of the State of Delaware, without regard to
the principles of conflicts of laws.
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Dated as of September 30, 1998
COMPANY:
fonix corporation
By:________________________________________
Name:
Title:
XXXXXX X. XXXXXXX
___________________________________________
Xxxxxx X. Xxxxxxx, Trustee of Voting Trust pursuant to
Voting Trust Agreement dated December 10, 1993, as
amended to date
