SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of October
11, 2002, by and among Fonix Corporation, a Delaware corporation (the
"Company"), and Breckenridge Fund, LLC, a New York limited liability company
(the "Buyer"). The Company and the Buyer may each be referred to herein
separately as a "Party" and collectively as the "Parties."
RECITALS
A. The Company and the Buyer are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("Regulation D") as promulgated by the
Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act").
B. The Buyer wishes to purchase and the Company wishes to offer and sell,
upon the terms and conditions stated in this Agreement, (i) an
aggregate principal amount of $1,500,000 of the Company's Series D 12%
Convertible Debentures, due April 9, 2003, in the form of Exhibit A
attached hereto (the "Debentures"), which are convertible into shares
(together with shares of Common Stock issuable in payment of interest
on such Debentures, the "Common Shares") of the Class A Common Stock
of the Company, par value $.0001 per share (the "Common Stock").
C. The obligations of the Company to make payments under the Debentures
are secured by the issuance of 83,333,333 restricted shares of the
Company's Common Stock (the "Collateral Shares"), which have been
placed into escrow pursuant to an escrow agreement (the "Escrow
Agreement") of even date herewith.
D. In further consideration of the Buyer's willingness to purchase the
Debentures, the Company also wishes to issue to the Buyer 7,777,778
shares of Common Stock (the "Additional Shares").
E. For purposes of this Agreement, "Conversion Price," "Original Issue
Date" and "Per Share Market Value" shall have the meanings set forth
in Exhibit A; and
AGREEMENT
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows
1. PURCHASE AND SALE OF SECURITIES.
-------------------------------
(a) The Closing. The issuance and sale of the Debentures pursuant to this
Agreement shall occur on October 11, 2002, or on such other date as may be
mutually agreed to by the parties (the "Closing Date"). The closing of the
transactions contemplated by this Agreement (the "Closing") shall occur on the
Closing Date at the offices of Durham Xxxxx & Xxxxxxx, PC, or at such other
location as may be agreed to by the parties.
(b) Deliveries at Closing. At the Closing, the Parties shall deliver the
following:
1. The Company
(i) The Company shall deliver to the Buyer the Debentures to be
acquired by the Buyer, in such denominations as requested by the
Buyer.
(ii) In addition to the Debenture, the Company shall cause to be
issued in the name of Buyer, Eighty-three Million, Three Hundred
Thirty- three Thousand, Three Hundred Thirty-three (83,333,333)
shares of the Company's restricted common stock (the "Collateral
Shares"). The Collateral Shares shall be delivered to the Escrow
Agent (as defined in the Escrow Agreement).
(iii)The Company shall also cause to be issued in the name of the
Buyer Seven Million Seven Hundred Seventy-seven Thousand Hundred
Seventy-eight (7,777,778) restricted shares of Common Stock (the
"Additional Shares") and shall deliver the certificate at or
within three days of the Closing.
(iv) The Company shall also deliver the legal opinion letter of Durham
Xxxxx & Xxxxxxx, P.C., outside counsel to the Company, dated as
of the Closing Date, in form satisfactory to such Buyer.
(v) The Company shall also deliver all other instruments and writings
required to have been delivered at or prior to the Closing by the
Company pursuant to this Agreement, including without limitation,
an executed Escrow Agreement between the Company, the Buyer, and
the Escrow Agent, dated as of the Closing Date, in the form of
Exhibit B hereto (the "Escrow Agreement"), an executed
Registration Rights Agreement, dated as of the Closing Date,
among the Company and the Buyer in the form of Exhibit C attached
hereto (the "Registration Rights Agreement"), and transfer
-2-
agent instructions executed by the Company and its transfer agent
in the form attached hereto as Exhibit D (the "Transfer Agent
Instructions").
2. The Buyer
(i) The Buyer shall deliver or cause to be delivered to the Company
(i) by wire transfer of immediately available funds, in
accordance with the Company's written wire instructions, the
aggregate purchase price (the "Purchase Price") of One Million
Five Hundred Thousand Dollars ($1,500,000).
(ii) The Buyer shall also deliver all other instruments and writings
required to have been delivered at or prior to the Closing by the
Company pursuant to this Agreement, including without limitation,
an executed Escrow Agreement between the Company, the Buyer, and
the Escrow Agent, dated as of the Closing Date, in the form of
Exhibit B hereto (the "Escrow Agreement"), an executed
Registration Rights Agreement, dated as of the Closing Date,
among the Company and the Buyer in the form of Exhibit C attached
hereto (the "Registration Rights Agreement"), and transfer agent
instructions executed by the Company and its transfer agent in
the form attached hereto as Exhibit D (the "Transfer Agent
Instructions").
(c) Per Share Market Value. For purposes of this Agreement, "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 OTCBB or other 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 OTCBB 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 National Quotation Bureau Incorporated or similar
organization or agency succeeding to its functions of reporting prices) at the
close of business on such date, or (c) if the Common Stock is not then reported
by the National Quotation Bureau Incorporated (or similar organization or agency
succeeding to its functions of reporting prices), then the average of the "Pink
Sheet" quotes for the relevant conversion period, as determined in good faith by
the Holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an appraiser selected
in good faith by the Holders of a majority in interest of the Debentures.
(d) Trading Day. For purposes of this Agreement, "Trading Day" shall mean
(i) a day on which the Common Stock is listed for trading on the NASDAQ or on
the New York Stock
-3-
Exchange, American Stock Exchange or Nasdaq National Market, or any of their
respective successors (each a "Subsequent Market") or (ii) if the Common Stock
is not listed on the NASDAQ or a Subsequent Market, a day on which the Common
Stock is traded in the over-the-counter market, as reported by the OTC Bulletin
Board, or (iii) if the Common Stock is not quoted on the OTC Bulletin Board, a
day on which the Common Stock is quoted in the over-the-counter market as
reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions of reporting prices); provided,
however, that in the event that the Common Stock is not listed or quoted as set
forth in (i), (ii) and (iii) hereof, then a Trading Day shall be a Business Day.
(e) Business Day. For purposes of this Agreement, "Business Day" shall
mean any day except Saturday, Sunday and any day which shall be a legal holiday
or a day on which banking institutions in the State of Delaware are authorized
or required by law or other government action to close.
(f) Change of Control Transaction. For purposes of this Agreement, a
"Change of Control Transaction" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in
excess of 40% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 40% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
(g) Escrow of Collateral Shares. The Parties agree that the Company
shall deposit with the Escrow Agent the Collateral Shares as security for the
Company's obligations under the Debentures, as set forth in the Debentures and
in the Escrow Agreement. It is the intention of the Parties that the Collateral
Shares shall not be the sole recourse of the Buyer in the event of any
delinquency or default by the Company with respect to its payment obligations
under the Debenture, and that the Collateral Shares shall be received and held
by the Escrow Agent and delivered to the Company or the Buyer, as the case may
be, pursuant to the terms and conditions of the Escrow Agreement.
2. COMPANY REPRESENTATIONS AND WARRANTIES. The Company hereby makes
the following representations and warranties to the Buyers:
(a) Organization and Qualification. The Company is a corporation, duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the requisite corporate power and
authority to own and use its properties and assets and to carry
-4-
on its business as currently conducted. The Company has no subsidiaries other
than those set forth on Schedule 2(a) (collectively the "Subsidiaries" and each
a "Subsidiary"). Each of the Subsidiaries is a corporation, duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
Each of the Company and the Subsidiaries is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of the Debentures or
any of this Agreement, the Registration Rights Agreement, or the Escrow
Agreement (collectively, the "Transaction Documents"), (y) have or result in 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 (any of (x), (y) or
(z), a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents, and otherwise to carry out
its obligations thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company. Each of the Transaction Documents has been duly executed by the Company
and, when delivered in accordance with the terms thereof, will 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 of
the provisions of its respective certificate of incorporation, by-laws or other
charter documents.
(c) Capitalization. The number of authorized, issued and outstanding
capital stock of the Company is set forth in Schedule 2(c). No shares of Common
Stock are entitled to preemptive or similar rights, nor is any holder of Common
Stock entitled to preemptive or similar rights arising out of any agreement or
understanding with the Company by virtue of any of the Transaction Documents.
Except as disclosed in Schedule 2(c), there are no outstanding options,
warrants, script rights to subscribe to, calls or commitments of any character
whatsoever relating to, or, except as a result of the purchase and sale of the
Debentures, 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 Reports
-5-
(as defined below) or Schedule 2(c), no Person or group of related Persons
beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) or has the
right to acquire by agreement with or by obligation binding upon the Company
beneficial ownership of in excess of 5% of the Common Stock. A "Person" means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any kind.
(d) Issuance of the Securities The Debentures are duly authorized and,
when issued and paid for in accordance with the terms hereof, shall have been
validly issued, fully paid and nonassessable, free and clear of all liens,
encumbrances and rights of first refusal of any kind (collectively, "Liens").
The Company will, at all times while the Debentures are outstanding, maintain an
adequate reserve of duly authorized shares of Common Stock which is not less
than the sum of (i) 150% of the number of shares of Common Stock issuable upon
conversion in full of the Debentures, assuming such conversion occurred on the
Original Issue Date or the Filing Date (as defined in the Registration Rights
Agreement), whichever yields the lowest Conversion Price, and (ii) the number of
shares Common Stock issuable upon payment of interest on the Debentures,
assuming all of the Debentures issued on the Closing Date are outstanding for
three years and all interest is paid in shares of Common Stock (such number of
shares of Common Stock referred to herein as the "Initial Minimum"). The shares
of Common Stock issuable upon conversion of the Debentures and as payment of
interest thereon are collectively referred to herein as the "Underlying Shares."
The Debentures and the Underlying Shares are collectively referred to herein as
the "Securities." When issued in accordance with the Debentures, the Underlying
Shares shall have been duly authorized, validly issued, fully paid and
nonassessable, free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of its certificate of incorporation, bylaws or other
charter documents (each as amended through the date hereof), or (ii) subject to
obtaining the Required Approvals (as defined below), 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 (with or without notice, lapse of time
or both) of, any agreement, credit facility, indenture or instrument (evidencing
a Company debt or otherwise) to which the Company or any Subsidiary is a party
or by which any property or asset of the Company or any Subsidiary 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 and the rules and regulations of the principal
market or exchange on which the Common Stock is listed or traded), 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,
-6-
ordinance or regulation of any governmental authority, except for violations
which, individually or in the aggregate, could not have or result in a Material
Adverse Effect.
(f) Consents and Approvals. Neither the Company nor any Subsidiary is
required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the filings required to comply with its requirements
under Sections 4(a) and 4(d), (ii) the filing of one or more registration
statements (each an "Underlying Shares Registration Statement") with the
Securities and Exchange Commission ("Commission") meeting the requirements set
forth in the Registration Rights Agreement and covering the resale of the
Underlying Shares by the Buyers, (iii) the application(s) to the NASDAQ (and
with any Subsequent Market) for the listing therewith of the Underlying Shares,
(iv) applicable Blue Sky filings and (v) in all other cases where the failure to
obtain such consent, waiver, authorization or order, or to give such notice or
make such filing or registration could not have or result in, individually or in
the aggregate, a Material Adverse Effect (the consents, waivers, authorizations,
orders, notices and filings referred to in (i)-(v) of this Section are,
collectively, the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed in the
Disclosure Materials (as hereinafter defined) or in Schedule 2(g), there is no
action, suit, notice of violation, proceeding or investigation pending or, to
the 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. Except as specifically disclosed in the
Disclosure Materials or in Schedule 2(h), neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as could not, individually or in the
aggregate, have or result in a Material Adverse Effect or, except in the case of
clause (i) above as has not been waived pursuant to an effective waiver.
(i) Private Offering. Assuming the accuracy of the representations and
warranties of the Buyers set forth in Section 3(a)-(f), the offer, issuance and
sale of the Securities to the Buyers as contemplated hereby are exempt from the
registration requirements of the Securities Act.
-7-
Neither the Company nor any Person acting on its behalf has taken any action
that could subject the offering, issuance or sale of the Securities to the
registration requirements of the Securities Act.
(j) SEC Reports; Financial Statements. The Company has filed all
reports required to be filed by it under the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the two 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
Reports" and, together with the Schedules to this Agreement the "Disclosure
Materials") on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration of any such
extension. As of their respective dates, the SEC Reports complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and, the rules and regulations promulgated thereunder, and none of the SEC
Reports, 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. All material agreements to which the Company is
a party or to which the property or assets of the Company are subject have been
filed as exhibits to the SEC Reports to the extent required. The financial
statements of the Company included in the SEC Reports comply in all material
respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
("GAAP"), 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 and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments. Since December 31, 1997, except as specified in the
SEC Reports, (i) there has been no event, occurrence or development that has had
or that could have or result in a Material Adverse Effect, (ii) the Company has
not incurred any liabilities (contingent or otherwise) other than (x)
liabilities incurred in the ordinary course of business consistent with past
practice and (y) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting or the identity of its auditors and (iv) the Company has not declared
or made any payment or distribution of cash or other property to its
stockholders or officers or directors (other than in compliance with existing
Company stock option plans) with respect to its capital stock, or purchased,
redeemed (or made any agreements to purchase or redeem) any shares of its
capital stock or debt convertible into shares of Common Stock.
(k) Investment Company. The Company is not, and is not an Affiliate (as
defined in Rule 405 under the Securities Act) of, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
-8-
(l) Certain Fees. Buyers shall have no obligation with respect to any
fees or commissions or with respect to any claims made by or on behalf of any
Person for any fees or commissions that may be due in connection with the
transactions contemplated by this Agreement to any broker, adviser, consultant,
finder, placement agent, banker or other Person. As among the Company and the
Buyers (including, for such purposes, Affiliates and agents of the Buyers), the
Company shall be solely responsible for all such fees and amounts and the
Company shall indemnify and hold harmless each Buyer, its 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 or amounts, as such fees and expenses are incurred. The Company
specifically acknowledges that a finder's fee of $__________ is due and payable
by the Company to Michalaur International in connection with the Buyer's
purchase of the Debentures.
(m) Form S-2 Eligibility. The Company is eligible to register
securities for resale with the Commission under Form S-2 promulgated under the
Securities Act.
(n) [Reserved].
(o) Patents and Trademarks. The Company has, or has rights to use, all
patents, patent applications, trademarks, trademark applications, service marks,
trade names, copyrights, licenses and rights (collectively, the "Intellectual
Property Rights") which are necessary for use in connection with its business,
or which the failure to do so have would have a Material Adverse Effect. To the
best knowledge of the Company, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of any of
the Intellectual Property Rights.
(p) Registration Rights; Rights of Participation. Except as set forth
on Schedule 6(a) to the Registration Rights Agreement, the Company has not
granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(q) Regulatory Permits. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Reports, except where the failure to possess
such permits could not, individually or in the aggregate, have or result in a
Material Adverse Effect ("Material Permits"), and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
(r) Disclosure. The Company confirms that it has not provided the Buyers or
their respective agents or counsel with any information that constitutes or
might constitute material
-9-
non-public information. The Company understands and confirms that the Buyers
shall be relying on the foregoing representation in effecting transactions in
securities of the Company. All information relating to or concerning the Company
or its Subsidiaries set forth in the Transaction Documents and the Disclosure
Materials is true and correct and does not fail to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
3. BUYERS REPRESENTATIONS AND WARRANTIES. Buyer hereby represents and
-------------------------------------
warrants to the Company as follows:
(a) Organization; Authority. Such Buyer is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate power and authority to enter into and
to consummate the transactions contemplated by the Transaction Documents and
otherwise to carry out its obligations thereunder. The purchase by such Buyer of
the Securities hereunder has been duly authorized by all necessary action on the
part of such Buyer. Each of this Agreement and the Registration Rights Agreement
has been duly executed and delivered by such Buyer and constitutes the valid and
legally binding obligation of such Buyer, enforceable against it 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.
(b) Investment Intent. Such Buyer is acquiring the Securities to be
issued and sold to it 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 Buyer'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) Buyer Status. At the time such Buyer was offered the Securities, it
was, and on the Closing Date it will be, an "accredited investor" as defined in
Rule 501(a) under the Securities Act.
(d) Experience of Buyer. Such Buyer, either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Securities, and has so evaluated the merits
and risks of such investment.
(e) Ability of Buyer to Bear Risk of Investment. Such Buyer is able to
bear the economic risk of an investment in the Securities and, at the present
time, is able to afford a complete loss of such investment.
-10-
(f) Access to Information. Such Buyer 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 opportu nity to obtain such additional information which the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the investment
and to verify the accuracy and completeness of the information contained in the
Disclosure Materials. Neither such inquiries nor any other investigation
conducted by or on behalf of such Buyer or its representatives or counsel shall
modify, amend or affect such Buyer'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 Buyer understands and acknowledges that (i) the
Securities 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 Buyer hereby consents to such
reliance.
The Company acknowledges and agrees that the Buyer makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.
4. COVENANTS AND CERTAIN AGREEMENTS.
--------------------------------
(a) Certain Securities Law Disclosures. The Company shall: (i) issue a
press release acceptable to the Buyers disclosing the transactions contemplated
hereby on the Closing Date, (ii) file with the Commission a report on Form 8-K
or Form 10-Q disclosing the transactions contemplated hereby within ten (10)
Business Days after the Closing Date, and (iii) file in a timely manner with the
Commission a Form D promulgated under the Securities Act as required under
Regulation D and provide a copy thereof to the Buyers promptly after the filing
thereof. The Company shall, no less than two (2) Business Days prior to the
filing of any disclosure required by clause (ii) above, provide a copy thereof
to the Buyers.
(b) Furnishing of Information. So long as Buyer owns Securities, the
Company covenants to file in a timely manner (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 while a Buyer owns any of the Securities the
Company is not required to file reports pursuant to Section 13(a) or 15(d) of
the Exchange Act, it will prepare and furnish to such Buyer and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial
-11-
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, as well as any other information required thereby, 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 the Securities may reasonably request, all to the extent
required from time to time to enable such holder to sell Common Shares and
Collateral Shares without registration under the Exchange Act under Rule 144
promulgated under the Securities Act. Upon the request of any such holder, the
Company shall deliver thereto a written certification of a duly authorized
officer as to whether it has complied with such requirements.
(c) Use of Proceeds. The Company will use up to the full $1,500,000 for
working capital, payment of expenses and other Company obligations, including
payroll expenses.
(d) Reservation of Underlying Shares. Within five days of the Closing
Date, the Company shall take all action necessary to at all times have
authorized, and reserved for the purpose of issuance, no less than the number of
shares of Common Stock which is not less than the Initial Minimum. If the
Company would be, if a notice of conversion with respect to the Debentures were
to be delivered on such date, precluded from issuing the full number of Common
Shares as would then be issuable if all Debentures were converted on such date
(and in payment of interest in shares of Common Stock), due to the
unavailability of a sufficient number of shares of authorized but unissued or
re-acquired Common Stock, then the Board of Directors of the Company shall
promptly (and in any case within 30 Business Days from such date) prepare and
mail to the shareholders of the Company proxy materials requesting authorization
to amend the Company's certificate of incorporation to increase the number of
shares of Common Stock which the Company is authorized to issue to at least a
number of shares equal to the sum of (1) all shares of Common Stock then
outstanding, (2) the number of shares of Common Stock issuable on account of all
outstanding warrants, options and convertible securities (other than the
Debentures) and on account of all shares reserved under any stock option, stock
purchase, warrant or similar plan, and (3) 150% of the number of Common Shares
to be issued upon conversion of all Debentures and in payment of interest in
shares of Common Stock (the aggregate of the shares of Common Stock referenced
in Subsection (3) are referred to herein as the "Current Required Minimum"). In
connection therewith, the Company will use its best efforts to cause the Board
of Directors of the Company to (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 five (5) Business
Days of obtaining such shareholder authorization, file an appropriate amendment
to the Company's certificate of incorporation to evidence such increase.
(e) Listing. The Company shall list the Underlying Shares within 10
Business Days of the Closing Date and shall promptly secure the listing of all
additional Registrable Securities not
-12-
previously listed as such shares are issued on the NASDAQ or each other
Subsequent Market on which the Common Stock is then listed or traded and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all such securities from time to time issuable under the terms of the
Transaction Documents. The Company shall maintain the Common Stock's
authorization for listing on the OTC BB and any other Subsequent Market on which
the Common Stock is then listed or traded. The Company shall promptly provide to
the Buyers copies of any notices it receives from the OTC BB or any other
Subsequent Market on which the Common Stock is then listed or traded regarding
the continued eligibility of the Common Stock for listing on such automated
quotation system or securities exchange. If the number of Underlying Shares
issuable upon conversion in full of the then outstanding Debentures and as
payment of interest thereon exceeds 85% of the number of Underlying Shares
previously listed on account thereof with NASDAQ (or any such other required
exchanges), then the Company shall take the necessary actions to immediately
list a number of Underlying Shares as equals no less than the then Current
Required Minimum. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section.
(f) Minimum Reserve. The Company shall at all times maintain a reserve
of shares of Common Stock for issuance upon conversion of the Debentures and for
payment of interest thereupon in shares of Common Stock in accordance with this
Agreement and the Debentures, in such amount as may be required to fulfill its
obligations in full under the Transaction Documents, which reserve shall equal
no less than the Initial Minimum or the then Current Required Minimum, as then
applicable.
(g) Transfer Restrictions; Legends.
------------------------------
(i) Legends. The Securities may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements of the Securities Act. In connection with any
transfer of any Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, 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 without any
legal opinion any transfer by a Buyer to an Affiliate thereof or a fund under
common management with such Buyer, or any transfers among any such Affiliates or
such other funds provided the transferee (x) certifies to the Company that it is
an "accredited investor" as defined in Rule 501(a) under the Securities Act and
(y) agrees in writing to be bound by the terms of the Registration Rights
Agreement. Any such transferee shall have the rights of such Buyer under the
Transaction Documents.
(ii) The Parties agree to the imprinting, so long as is
required by this Section 4(g)(ii), of the following legend (or such
substantially similar legend as is acceptable to the
-13-
Buyers, the Parties agreeing that any unacceptable legended Securities shall be
replaced promptly by and at the Company's cost) on the Securities:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("THE SECURITIES ACT"), OR
APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER 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.
During the pendency of the effectiveness of the registration statement,
certificates representing Registrable Securities will bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN ANY
MANNER UNLESS THE HOLDER OR A BROKER, ON BEHALF OF THE HOLDER,
REPRESENTS THAT IT HAS COMPLIED WITH THE PROSPECTUS DELIVERY
REQUIREMENTS CONTAINED IN SECTION 5 OF THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNLESS AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF
SUCH ACT IS AVAILABLE.
The Underlying Shares shall not contain any legend other than as set
forth above if the conversion of Debentures and the payment of interest thereon
or other issuances of Underlying Shares as contemplated hereby, by the
Debentures occurs at any time while an Underlying Shares Registration Statement
is effective under the Securities Act or, in the event there is not an effective
Underlying Shares 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 shall cause
its counsel to issue the legal opinion included in the Transfer Agent
Instructions to the Company's transfer agent on the day that the Underlying
Shares Registration Statement is declared effective by the Commission. The
Company agrees that, in the event any Underlying Shares are issued with a legend
in accordance with this Section, it will, within three (3) Trading Days after
request therefor by a Buyer, provide such Buyer with a certificate or
certificates representing such Underlying Shares, free from such legend at such
time as such legend would not have been required under this Section had such
issuance occurred on the date of such request. 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.
-14-
(h) [Reserved].
(i) Notice of Breaches. Each of the Company and the Buyer 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 and after the Closing Date. However, no disclosure by any
party pursuant to this Section shall be deemed to cure any breach of any
representation, warranty or other agreement contained in any Transaction
Document.
(j) Exercise and Conversion Procedures. The Transfer Agent Instructions
and Conversion Notice (as defined below) set forth all procedures, required
information and instructions, including the form of legal opinion, if necessary,
that shall be rendered to the Company's transfer agent and such other
information and instructions as may be reasonably necessary to enable the Buyers
to convert the Debentures as contemplated in the Debentures.
(k) Exercise and Conversion Obligations of the Company. The Company
shall honor conversions of the Debentures and shall deliver and Common Shares
upon such conversions in accordance with the respective terms and conditions and
time periods set forth in the respective Debentures.
(l) Transfer of Intellectual Property Rights. Except 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 any of the Intellectual Property Rights to become subject to
any Liens, or fail to renew such Intellectual Property Rights (if renewable and
would otherwise expire).
(m) 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 Buyers.
(n) Acknowledgment of Dilution. The Company acknowledges that the
issuance of Common Shares upon conversion of the Debentures and payment of
interest thereon, in accordance with their terms, will 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 shares of Common Stock in accordance with the terms of and with respect
to the Debentures is unconditional and absolute regardless of the effect of any
such dilution.
-15-
5. INDEMNIFICATION. In consideration of the Buyer's execution and delivery of
this Agreement and acquisition of the Securities and in addition to all of the
Company's other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless the Buyer and its stockholders,
officers, directors, employees and investors and any of the forgoing person's
agents or other representatives (including, without limitation, those retained
in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys' fees and disbursements (the
"Indemnified Liabilities"), as incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any cause of action, suit or claim brought or
made against such Indemnitee and arising out of or resulting from the execution,
delivery, performance, breach or enforcement of the Transaction Documents, or
(b) the status of the Buyer as an investor in the Company (however, the Buyer
shall not be entitled to indemnity under this clause (b) as a result solely of
investment losses it may suffer in its investment in the Securities not
attributable to an Indemnified Liability). To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.
6. MISCELLANEOUS.
-------------
(a) Fees and Expenses. The Company shall pay the Buyer's legal fees and
disbursements in connection with the preparation and negotiation of the
Transaction Documents in the aggregate amount identified in the attached
Schedule 4. Other than the amount contemplated by the immediately preceding
sentence, and except as set forth in the Registration Rights Agreement, each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all stamp and other taxes and duties levied in
connection with the issuance of the Common Shares pursuant hereto. Buyer shall
be responsible for its own respective tax liability that may arise as a result
of the investment hereunder or the transactions contemplated by this Agreement.
(b) Entire Agreement; Amendments, Exhibits and Schedules. This
Agreement, together with the Exhibits and Schedules hereto, the Transfer Agent
Instructions, the Debenture, the Escrow Agreement, the Registration Rights
Agreement, and any other agreement executed contemporaneously therewith, 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, which the parties acknowledge have been merged
with such documents, exhibits and schedules. 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.
-16-
(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
000 Xxxx Xxxxxxxx Xxxx
Xxxxx 000
Xxxxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxx X. Xxxxxx, Executive Vice President
With copies to: Durham Xxxxx & Xxxxxxx, P.C.
000 Xxxx Xxxxxxxx
Xxxxx 000
Xxxx Xxxx Xxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxxxx X. Xxxxx, Esq.
If to the Buyer: Breckenridge Fund LLC
00 Xxxxxxx Xxxxxx
Xxxxxxxxx, XX 00000
Fax: 000-000-0000
Attn.: Xxxx Xxxxx
With copies to: Xxxxxxx & Prager, LLP
00 Xxxxxxxx, Xxxxx 0000
Xxx Xxxx, Xxx Xxxx 00000
Attn. Xxxxxx X. Xxxxxxx
Facsimile No.: 000-000-0000
Any Person may in writing and in the same manner designate another address for
service and notification hereunder.
-17-
(d) 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 the Company and the Buyer, or, in the case of a waiver, by the party against
whom enforcement of any such waiver is sought. No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of a
party to exercise any right hereunder in any manner impair the exercise of any
such right accruing to it thereafter.
(e) 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.
(f) 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 Buyers transfer Securities. The Company may
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the Buyer. Except as set forth in Section 4(g), the
Buyer may not assign this Agreement or any of the rights or obligations
hereunder, other than to affiliates of the Buyer, without the consent of the
Company. This provision shall not limit Buyer's right to transfer securities or
transfer or assign rights hereunder or under the Registration Rights Agreement.
(g) No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
(h) Governing Law. This Agreement shall be governed by an interpreted
in accordance with the laws of the State of New York for contracts to be wholly
performed in such state and without giving effect to the principles thereof
regarding the conflict of laws. Each of the parties consents to the exclusive
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement or
any of the other Transaction Documents and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions.
(i) Survival. The representations, warranties, agreements and covenants
contained in this Agreement shall survive the Closing and the issuance of the
Underlying Shares.
(j) 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
-18-
the same force and effect as if such facsimile signature page were an original
thereof.
(k) Publicity. The Company and the Buyer shall consult with each other
in issuing any press releases or otherwise making public statements with respect
to the transactions contemplated hereby and no party shall issue any such press
release or otherwise make any such public statement without the prior written
consent of the other parties, which consent shall not be unreasonably withheld
or delayed, except that no prior consent shall be required if such disclosure is
required by law, in which such case the disclosing party shall provide the other
parties with prior notice of such public statement. Notwithstanding the
foregoing, the Company shall not publicly disclose the name of the Buyer without
its prior written consent, except to the extent required by law, in which case
the Company shall provide such Buyer with prior written notice of such public
disclosure.
(l) 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.
(m) 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.
[THE SIGNATURES OF THE PARTIES ARE ON THE FOLLOWING PAGES.]
-19-
IN WITNESS WHEREOF, the Buyer and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
FONIX CORPORATION
By: /s/ Xxxxx X. Xxxxxx
--------------------------------------------------
Name: Xxxxx X. Xxxxxx
Its: Executive Vice President and Chief
Financial Officer
BRECKENRIDGE FUND LLC
a New York limited liability company
By: Breckenridge Capital Management, LLC
Its Manager
By: Wellington Capital Corporation
Its: Manager
By: /s/ Xxxx Xxxxx
Name: Xxxx Xxxxx
Secretary, Treasurer
By: /s/ Xxxx Xxxxxxx
Name: Xxxx Xxxxxxx
President
-20-
SCHEDULE 2(a)
SUBSIDIARIES
1. Fonix/AcuVoice, Inc., a Utah corporation, wholly owned by the Company.
2. Fonix/Papyrus Corporation, a Utah corporation, wholly owned by the Company.
3. Fonix UK, Ltd., a corporation organized under the laws of Great Britain,
wholly owned by the Company.
4. Fonix Sales, Korea Group, Ltd., a corporation organized under the laws of
South Korea, wholly owned by the Company.
-21-
SCHEDULE 2(c)
CAPITALIZATION
The Company has an authorized capitalization consisting of 800,000,000 shares of
common stock, par value $.0001 per share, and 50,000,000 shares of Preferred
Stock, par value $.0001 per share. As of the date hereof, the Company has issued
and outstanding 484,475,556 shares of Class A Common Stock. As of the date of
this agreement, 31,186,909 shares of Class A Common Stock are subject to
issuance upon the conversion or exercise of presently issued and outstanding
warrants and options of the Company. 166,667 shares of Series A Preferred Stock
have been issued and 166,667 shares are outstanding, which shares are
convertible into 166,667 shares of Class A Common Stock. Except as set forth
above, as of the date of this Agreement, there are no outstanding options,
warrants, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or, except as a result of the purchase and sale of the
Shares, securities, rights or obligations convertible into or exchangeable for,
or giving any Person any right to subscribe for or acquire, any shares of Class
A Common Stock, or contracts, commitments, understandings, or arrangements by
which the Company or any Subsidiary is or may become bound to issue additional
shares of Class A Common Stock or securities or rights convertible or
exchangeable into shares of Class A Common Stock, except as disclosed herein,
except that the Company has entered into a Third Equity Line of Credit Agreement
with a third party investor (the "Equity Line Investor"). The Company granted
registration rights to the Equity Line Investor and a registration statement
covering the resale of shares by the Equity Line Investor is pending before the
U.S. Securities and Exchange Commission. Upon effectiveness of the registration
statement, if and when the Company draws funds under the equity line of credit,
the Equity Line Investor has the right to receive shares as repayment of such
draws.
-22-
SCHEDULE 2(g)
LITIGATION
1. Global Marketing Partners, Inc., v. Fonix Corporation. On June 14, 2002,
Global Marketing Partners, Inc. ("GMP") filed a complaint against the Company in
the United States District Court for the Central District of California, located
in Los Angeles, California. GMP seeks damages in the amount of $75,688 plus
interest and attorneys fees based on claims for breach of contract, account
stated, open book account and money had and received. GMP claims that the
Company breached its contract by failing to pay for services rendered by GMP
related to the marketing and distribution of the Company's voice recognition
software products through various retail channels. On July 18, 2002, the Company
answered GMP's complaint denying the material allegations stated therein and
asserting various affirmative defenses, including the defense that GMP's claim
are barred by GMP's own failure to perform the terms of the parties' contract.
The Company intends to vigorously defend this litigation. In addition, the
parties are engaged in settlement discussions and it is anticipated that these
discussions will result in an amicable resolution of this litigation. The case
is set for a one day bench trial to be held on February 25, 2003.
2. Xxxxxx v. Fonix/AcuVoice, Inc. On September 12, 2002, Xxx Xxxxxx, a former
employee of Fonix filed suit in the Third Judicial District Court of Salt Lake
County, State of Utah, claiming that the Company failed to pay his wages in the
amount of $11,698.64. The Company will file an answer to the complaint and
vigorously defend the suit.
3. Wistisen v. Fonix Corporation. On September 23, 2002, Xxxxx Xxxxxxxx, a
former employee of Fonix filed suit in the Third Judicial District Court of Salt
Lake County, State of Utah, claiming that the Company failed to pay his wages in
the amount of $24,923.12. The Company will file an answer to the complaint and
vigorously defend the suit.
-23-
SCHEDULE 2(h)
DEFAULTS
Utah Code Annotated ss. 34-28-5 provides that an employer must pay a
terminated employee all unpaid wages within 24 hours of the time of separation.
The Company has not paid thirty-five former employees of the Company who have
quit or been terminated since July 15, 2002. However, with the exception of six
former employees with unpaid wage claims totaling $94,440, four of whom have
filed claims with the Utah Division of Labor and two of whom have filed lawsuits
against the Company, the remaining twenty-nine former employees have agreed that
their unpaid wages may be paid by the Company on a schedule to be determined
when the registration statement filed in connection with the Company's Third
Equity Line of Credit Agreement with Queen, LLC, is declared effective by the
U.S. Securities and Exchange Commission.
-24-
SCHEDULE 4
Estimated Use of Proceeds
Investment funds $1,500,000
Use of Funds
Payroll $1,000,000
Working Capital 500,000
Total $1,500,000
==========
-25-
EXHIBIT A
FORM OF DEBENTURE
-26-
EXHIBIT B
FORM OF ESCROW AGREEMENT
-27-
EXHIBIT C
FORM OF REGISTRATION RIGHTS AGREEMENET
-28-
EXHIBIT D
FORM OF TRANSFER AGENT INSTRUCTIONS
-29-
