SERIES I 8% CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
Between
Fonix Corporation,
and
The Breckenridge Fund, LLC
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DECEMBER 31, 2003
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THIS SERIES I 8% CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated
as of December 31, 2003 (this "Agreement"), is entered into between Fonix
Corporation, a Delaware corporation (the "Company"), and The Breckenridge Fund,
LLC, a New York limited liability company (the "Purchaser"). The Company and the
Purchaser may each be referred to herein as a "Party" and collectively as the
"Parties."
Recitals
A. The Purchaser desires to purchase, and the Company desires to issue and sell
to the Purchaser shares of Series I 8% Convertible Preferred Stock, $.0001 par
value per share, with a stated value of $1,000 per share ("Series I Preferred")
(or a total of 3,250 shares) for an aggregate purchase price of $3,250,000.
B. Additionally, the Purchaser desires to receive, and the Company desires to
grant to the Purchaser or its designees as further inducement to enter into this
Agreement, warrants (the "Warrants") to purchase up to Nine Hundred Sixty-Five
Thousand, Eight Hundred Thirty-nine (965,839) shares of the Company's Common
Stock.
C. Additionally, as further inducement to the Purchaser to enter into this
Agreement, the Company desires to issue to the Purchaser or its designees One
Million Nine Hundred Thirty-One Thousand, Six Hundred Seventy-Seven (1,931,677)
shares of the Company's Common Stock (the "Additional Shares").
D. Additionally, as a fee payable to the Purchaser in connection with this
Transaction, the Company desires to issue to the Purchaser or its designees Four
Hundred Eighty-two Thousand Nine Hundred Nineteen (482,919) shares of the
Company's Common Stock (the "Fee Shares").
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 1.
CERTAIN DEFINITIONS
Section 1. Certain Definitions. As used in this Agreement, unless the
context requires a different meaning, the following terms have the meanings
indicated in this Section 1.1:
"Affiliate" means, with respect to any Person, any Person
that, directly or indirectly, controls, is controlled by, or is under common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with") shall mean the possession, directly or indirectly, of the
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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.
"Business Day" means any day except Saturday, Sunday and any
day which shall be a Federal legal holiday or a day on which banking
institutions in the State of Delaware are authorized or required by law or other
government actions to close.
"Certificate of Designation" shall have the meaning set forth
in Section 2.1(a).
"Closing" shall have the meaning set forth in Section 2.1(b).
"Closing Date" shall have the meaning set forth in Section
2.1(b).
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Class A common stock, par
value $.0001 per share.
"Company" shall have the meaning set forth in the recitals
hereto.
"Conversion Price" shall have the meaning set forth in the
Certificate of Designation.
"Conversion Ratio" shall have the meaning set forth in the
Certificate of Designation.
"Disclosure Materials" means, collectively, the SEC Documents
and the Schedules to this Agreement and all other information furnished by or on
behalf of the Company relating to or concerning the Company and provided to the
Purchaser 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.
"Holder" shall mean the then-current holder of the Shares.
"Initial Reserve" shall have the meaning set forth in Section
3.1(d).
"Intellectual Property Rights" shall have the meaning set
forth in Section 3.1(q).
"Legal Opinion" means the legal opinion letter of Durham Xxxxx
& Xxxxxxx, P.C., outside counsel to the Company, addressed to the Purchaser,
dated the Closing Date and in form and substance acceptable to the Purchaser.
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"Lien" means, with respect to any asset, any mortgage, lien,
pledge, right of first refusal, charge, security interest or encumbrance of any
kind in or on such asset or the revenues or income thereon or therefrom.
"Material Adverse Effect" shall mean any event which has an
adverse effect on the results of operations, assets, prospects, or condition
(financial or otherwise) of the Company and the Subsidiaries, and which, taken
as a whole adversely impairs the Company's ability to perform fully on a timely
basis its obligations under any Transaction Document.
"Original Issue Date" shall mean the first issuance of any
Shares, regardless of the number of transfers of any particular Share and
regardless of the number of certificates which may be issued to evidence any
particular Share.
"Per Share Market Value" shall have the meaning set forth in
the Certificate of Designation.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Preferred Stock" shall have the meaning set forth in the
recitals hereto.
"Purchaser(s)" shall have the meaning set forth in the
recitals hereto.
"Required Approvals" shall have the meaning set forth in
Section 3.1(f).
"Registrable Securities" means the shares of Common Stock
issuable (a) upon conversion in full of the Preferred Shares, (b) as payment in
full of dividends on the Preferred Shares, (c) exercise in full of the Warrants,
(d) the Additional Shares, and (e) the Fee Shares; provided, however that in
order to account for the fact that the number of shares of Common Stock that are
issuable upon conversion of Preferred Shares is determined in part upon the
market price of the Common Stock at the time of conversion or exercise,
Registrable Securities contemplated by clause 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, Twenty Three Million Five Hundred Thousand
(23,500,000) shares. 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) exceeds the number of shares of Common Stock initially registered in
accordance with the immediately prior sentence. The Company shall have 10 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 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.
"SEC Documents" shall have the meaning set forth in Section
3.1(c).
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"Securities" means, collectively, the Shares and the
Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of Preferred Stock to be purchased
or issued pursuant to this Agreement.
"Stated Value" means $1,000 per share of Preferred Stock.
"Subsidiaries" shall have the meaning set forth in Section
3.1(a).
"Trading Day" shall have the meaning set forth in the
Certificate of Designation.
"Transaction Documents" means collectively, this Agreement,
and the Certificate of Designation, the Registration Rights Agreement, the
Escrow Agreement, and the Intellectual Property Security Agreement.
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of the Shares and as payment of dividends thereon in accordance
with the terms of the Certificate of Designation.
"Underlying Securities Registration Statement" means a
registration statement under the Securities Act prepared by the Company and
filed with the Commission, covering the resale of the Underlying Shares and
naming the holder or holders of such Underlying Shares as "selling stockholders"
thereunder.
ARTICLE 2.
PURCHASE OF SHARESARTICLE 3.
Section 2.1 Purchase and Exchange of Shares; Closing.
(a) Subject to the terms and conditions set forth below, the Company
shall sell to the Purchaser, and the Purchaser shall purchase an aggregate
of Three Thousand Two Hundred Fifty (3,250) Shares of Preferred Stock for
the aggregate purchase price of Three Million, Two Hundred Fifty Thousand
($3,250,000) (the "Purchase Price"). The Shares issued pursuant to this
Agreement shall have the respective rights, preferences and privileges set
forth in Exhibit A (the "Certificate of Designation"). Subject to the terms
and conditions set forth below, the Company shall also sell to the
Purchaser, or its designees, warrants (the "Warrants") to purchase up to
Nine Hundred Sixty-five Thousand, Eight Hundred Thirty-nine (965,839)
shares of the Company's Common Stock, as well as One Million Nine Hundred
Thirty-one Thousand, Six Hundred Seventy-seven (1,931,677) shares of the
Company's Common Stock (the "Additional Shares") and Four Hundred
Eighty-two Thousand Nine Hundred Nineteen (482,919) shares of the Company's
Common Stock (the "Fee Shares").
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(b) The closing of the purchase and sale of the Shares (the "Closing")
shall take place at the offices of Durham Xxxxx & Xxxxxxx, P.C., 000 Xxxx
Xxxxxxxx, Xxxxx 000, Xxxx Xxxx Xxxx, Xxxx 00000. The date of the Closing
shall be the date that is three days after receipt by the Company of proof
of filing of the Certificate of Designation and is hereinafter referred to
as the "Closing Date."
(c) At the Closing the parties shall deliver the following:
(i) The Company shall deliver or cause to be
delivered:
(A) stock certificates representing
Three Thousand Two Hundred fifty
(3,250) Shares of Preferred Stock,
registered according to instructions
to be provided by the Purchaser at
or before the Closing;
(B) a warrant, issued in the name of
Wellington Capital Corporation, to
purchase up to Nine Hundred Sixty
Five Thousand Eight Hundred Thirty
Nine (965,839) shares of Common
Stock;
(C) certificates, issued in the name of
The Breckenridge Fund, LLC, for One
Million Nine Hundred Thirty-One
Thousand Six Hundred Seventy
Seven (1,931,677) shares;
(D) certificates, issued in the name of
Wellington Capital Corporation, for
Four Hundred Eighty Two Thousand
Nine Hundred Nineteen (482,919)
shares of the Company's Common
Stock; and
(E) a Legal Opinion addressed to the
Purchaser.
(ii) The Purchaser shall deliver or cause to be
delivered:
(A) Three Million Two Hundred Fifty
Thousand Dollars ($3,250,000), in
United States dollars in presently
available funds according to wire
instructions to be provided by the
Company at or before Closing, minus
any funds advanced prior to the
Closing.
(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.
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ARTICLE 3.
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company. The Company
hereby represents and warrants to the Purchaser as follows:
(a) Organization and Qualification. The Company is a corporation, duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the requisite corporate power and
authority to own and use its properties and assets and to carry on its
business as currently conducted. The Company has no subsidiaries other than
as set forth in Schedule 3.1(a) (collectively, the "Subsidiaries"). Each of
the Subsidiaries is a corporation, duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of its incorporation,
with the requisite corporate power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Each of the Company and the Subsidiaries is duly qualified to do business
and is in good standing as a foreign corporation in each jurisdiction in
which the nature of the business conducted or property owned by it makes
such qualification necessary, except where the failure to be so qualified
or in good standing, as the case may be, could not, individually or in the
aggregate, adversely affect the legality, validity or enforceability of the
Shares or any Transaction Document.
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and to otherwise
carry out its obligations thereunder. The execution and 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.
(c) Capitalization. The authorized, issued and outstanding capital
stock of the Company is set forth in Schedule 3.1(c). No shares of Common
Stock are entitled to preemptive or similar rights. Except as specifically
disclosed in Schedule 3.1(c), there are no outstanding options, warrants,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or, except as a result of the purchase and sale of the Shares,
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
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additional shares of Common Stock or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the SEC Documents or Schedule 3.1(c),
no Person or group of Persons beneficially owns (as determined pursuant to
Rule 13d-3 promulgated under the Exchange Act) or has the right to acquire
by agreement with or by obligation binding upon the Company beneficial
ownership of in excess of 5% of the Common Stock. As of the Closing, the
Company is negotiating for the purchase of the outstanding equity of LTEL
Holdings Corporation, for which the Company would issue (A) shares of
common stock equal, at the time of the closing of such transaction, to
Three Million Dollars ($3,000,000); (B) shares of Series H Preferred Stock
with a stated value of Twenty Million Dollars ($20,000,000), and (C) a $10
million, non-convertible, promissory note. The number of shares of common
stock will be determined by dividing $3 million by an amount equal to 90%
of the average closing bid price of the Company's common stock for the 30
trading days immediately prior to the third trading day preceding the
closing. However, the Company is presently negotiating such transaction,
and the issuance of shares of Common and Series H Preferred Stock is
contingent on the closing of that transaction.
(d) Issuance of Securities. The Shares are duly authorized and, when
issued in accordance with the terms hereof, shall be validly issued, fully
paid and nonassessable, free and clear of all Liens. Subject to Section
4.7, the Company has and at all times while any Shares 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 and the Certificate of
Designation 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, 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) (such sum, the "Initial
Reserve"). If at any time the sum of the number of shares of Common Stock
issuable (a) upon conversion in full of the then outstanding Shares and (b)
as the payment of dividends on the Shares (assuming all such dividends are
to be paid in Common Stock) exceeds 75% 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, the Underlying Shares
will be duly authorized, validly issued, fully paid and nonassessable, and
free and clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated thereby do not and will not (i) conflict with
or violate any provision of its certificate of incorporation, bylaws or
other charter documents (each as amended through the date hereof), (ii)
subject to obtaining the consents referred to in Section 3.1(f), conflict
with, or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
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indenture or instrument (evidencing a Company debt or otherwise) to which
the Company is a party or by which any property or asset of the Company is
bound or affected, or (iii) result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of any
court or governmental authority to which the Company is subject (including
federal and state securities laws and regulations), or by which any
property or asset of the Company is bound or affected; except in the case
of each of clauses (ii) and (iii), as could not, individually or in the
aggregate, have or result in a Material Adverse Effect. The business of the
Company is not being conducted in violation of any law, ordinance or
regulation of any governmental authority, except for violations which,
individually and in the aggregate, could not have or result in a Material
Adverse Effect.
(f) Consents and Approvals. Neither the Company nor any Subsidiary is
required to obtain any consent, waiver, authorization or order of, or make
any filing or registration with, any court or other federal, state, local,
foreign or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) the filing of the Certificate of Designation with
the Secretary of State of Delaware, (ii) the filing of one or more
Underlying Securities Registration Statements with the Commission and the
making of applicable blue-sky filings under state securities laws with
respect to the Securities and the transactions contemplated hereby, (iii)
the application for the listing of the Underlying Shares on the Nasdaq
SmallCap Market (and on each other national securities exchange, market or
trading facility on which the Common Stock is then listed), and (iv) other
than, in all other cases, where the failure to obtain such consent, waiver,
authorization or order, or to give or make such notice or filing, could
not, individually or in the aggregate, have or result in a Material Adverse
Effect (the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed in the
Disclosure Materials, there is no action, suit, notice of violation,
proceeding or investigation pending or, to the best knowledge of the
Company, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties before or by any court,
governmental or administrative agency or regulatory authority (federal,
state, county, local or foreign) which (i) adversely affects or challenges
the legality, validity or enforceability of any Transaction Document or the
Securities or (ii) could, individually or in the aggregate, have or result
in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (or has received notice of a
claim that it is in default under or that it is in violation of) any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound, (ii)
is in violation of any order of any court, arbitrator or governmental body,
or (iii) is in violation of any statute, rule or regulation of any
governmental authority, except as could not, individually or in the
aggregate, have or result in a Material Adverse Effect or, except in the
case of clause (i) above, as has not been waived pursuant to an effective
waiver.
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(i) Private Offering. Assuming the accuracy of the representations and
warranties of the Purchaser contained in Sections 3.2(b)-3.2(f), the
offering, issuance or sale of the Securities as contemplated hereunder are
exempt from the registration requirements of the Securities Act.
(j) Certain Fees. 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 Purchaser shall have no obligation with respect to such fees or
with respect to any claims made by or on behalf of other Persons for fees
of a type contemplated in this Section that may be due in connection with
the transactions contemplated hereby. The Company shall indemnify and hold
harmless Purchaser, its respective employees, officers, directors, agents,
and partners, and their respective Affiliates, from and against all claims,
losses, damages, costs (including the costs of preparation and attorney's
fees) and expenses suffered in respect of any such claimed or existing
fees, as and when incurred.
(k) SEC Documents; Financial Statements; No Adverse Change. The
Company has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the three
years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials being
collectively referred to herein as the "SEC Documents") on a timely basis
or has received a valid extension of such time of filing and has filed any
such SEC Documents prior to the expiration of any such extension. As of
their respective dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the
rules and regulations of the Commission promulgated thereunder, and none of
the SEC Documents, when filed, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto. Such financial
statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial statements
or the notes thereto, and fairly present in all material respects the
financial position of the Company as of and for the dates thereof and the
results of operations, retained earnings and cash flows for the periods
then ended, subject, in the case of unaudited statements, to normal
year-end audit adjustments. Since the date of the financial statements
included in the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1999, 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, 1999, and has not received any comments from the
Commission in respect thereof.
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(l) Seniority. Except for the Company's Series A Preferred Stock and
Series H Preferred Stock, no class of equity securities of the Company is
senior to the Shares in right of payment, whether with respect to dividends
or upon liquidation, dissolution or otherwise.
(m) Form S-2 Eligibility. The Company is, and at the Closing Date will
be, eligible to register securities for resale with the Commission under
Form S-2 promulgated under the Securities Act.
(n) Investment Company. The Company is not, and is not an "Affiliate
person" of, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(o) Listing and Maintenance Requirements Compliance. Other than as
previously disclosed in writing to the Purchaser, 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 Purchaser true and complete copies of all such notices
contemplated by this Section.
(p) Patents and Trademarks. The Company has, or has rights to use, all
patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses, trade secrets and other
intellectual property rights which are necessary for use in connection with
its business or which the failure to so have would have a Material Adverse
Effect (collectively, the "Intellectual Property Rights"). To the best
knowledge of the Company, none of the Intellectual Property Rights infringe
on any rights of any other Person, and the Company either owns or has duly
licensed or otherwise acquired all necessary rights with respect to the
Intellectual Property Rights. The Company has not received any notice from
any third party of any claim of infringement by the Company of any of the
Intellectual Property Rights, and has no reason to believe there is any
basis for any such claim. To the best knowledge of the Company, there is no
existing infringement by another Person on any of the Intellectual Property
Rights.
(q) Disclosure. All information relating to or concerning the Company
set forth in the Transaction Documents or the Disclosure Materials (other
than the SEC Documents) is true and correct in all material respects and
does not fail to state any material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which
they were made, not misleading. The Company confirms that it has not
provided to the Purchaser or any of its representatives, agents or counsel
any information that constitutes or might constitute material nonpublic
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information. The Company understands and confirms that the Purchaser shall
be relying on the foregoing representation in effecting transactions in
securities of the Company.
Section 3.2 Representations and Warranties of the Purchaser. The
Purchaser hereby represents and warrants to the Company as follows:
(a) Organization; Authority. The Purchaser is an entity
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite power and authority
to enter into and to consummate the transactions contemplated by the
Transaction Documents and to carry out its obligations thereunder. The
acquisition of the Securities to be acquired hereunder and the payment
of the purchase price therefor by the Purchaser have been duly
authorized by all necessary action on the part of the Purchaser. This
Agreement has been duly executed by the Purchaser and, when delivered
by the Purchaser in accordance with the terms hereof, shall constitute
the valid and legally binding obligation of the 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. The Purchaser is acquiring the
Securities to 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 the Purchaser's right, subject to the provisions
of this 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 the Purchaser was offered
the Securities to be acquired hereunder by the 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. The Purchaser, either alone or
together with its representatives, has such knowledge, sophistication
and experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such
investment.
(e) Ability of Purchaser to Bear Risk of Investment. The
Purchaser acknowledges that an investment in the Securities is
speculative and involves a high degree of risk. The Purchaser is able
to bear the economic risk of an investment in the Securities to be
acquired hereunder by the Purchaser, and, at the present time, is able
to afford a complete loss of such investment.
(f) Access to Public Information. The Purchaser acknowledges
receipt of the Disclosure Materials and further acknowledges that it
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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 public 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 public
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 the Purchaser or its
representatives, agents or counsel shall modify, amend or affect the
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. The Purchaser understands and acknowledges that (i) the
Securities to be acquired by it hereunder are being offered and sold to it
without registration under the Securities Act in a private placement that
is exempt from the registration provisions of the Securities Act and (ii)
the availability of such exemption, depends in part on, and the Company
will rely upon the accuracy and truthfulness of, the foregoing
representations and the Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that Purchaser
makes no representations or warranties with respect to transactions
contemplated hereby other than those specifically set forth in this
Section 3.2.
(h) Other Agreements of the Parties(i)
(i) Transfer Restrictions.
(i) The Securities may only be disposed of pursuant to an
effective registration statement under the Securities Act, to the
Company or pursuant to an available exemption from or in a transaction
not subject to the registration requirements thereof. In connection
with any transfer of any Securities other than pursuant to an
effective registration statement or to the Company, the Company may
require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which
opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration under the Securities
Act. Notwithstanding the foregoing, the Company hereby consents to and
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agrees to register (i) any transfer of Securities by the Purchaser to
an Affiliate of the Purchaser, or any transfers among any such
Affiliates, and (ii) any transfer by the Purchaser to any investment
entity under common management with the Purchaser, 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
Purchaser under this Agreement.
(ii) The Purchaser agrees 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 Purchaser and its
counsel, the parties agreeing that any unacceptable legended
Securities shall be replaced promptly by and at the Company's cost) on
the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
[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.
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
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AMENDED, OR UNLESS AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF
SUCH ACT IS AVAILABLE.
(iii) Notwithstanding paragraphs 3.2(i)(i) and 3.2(i)(ii) above,
if the Purchaser, through its broker, represents to the Company or its
counsel that the broker has complied or will comply with the
prospectus delivery requirements of Section 5 of the Securities Act of
1933, as amended, the Company agrees to instruct its transfer agent to
issue shares free of restrictive language or legends, except as
otherwise required by law.
(iv) The Underlying Shares shall not contain any legend other
than as set forth above if the conversion of Shares 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 Purchaser, upon request, with a
certificate or certificates representing Underlying Shares, free from
such legend at such time as such legend is no longer required
hereunder. The Company may not make any notation on its records or
give instructions to any transfer agent of the Company which enlarge
the restrictions of transfer set forth in this Section 3.1(i).
(j) Acknowledgment of Dilution. The Company acknowledges that the
issuance of Underlying Shares upon conversion of the Shares and as payment
of dividends thereon 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 is
unconditional and absolute regardless of the effect of any such dilution.
(k) Furnishing of Information. As long as the Purchaser 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
prior to the date on which the Purchaser may resell all of its Underlying
Shares without volume restrictions pursuant to Rule 144(k) promulgated
under the Securities Act (as determined by counsel to the Company pursuant
to a written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent for the benefit of and enforceable by the
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Purchaser) the Company is not required to file reports pursuant to such
sections, it will prepare and furnish to the Purchaser 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.
(l) 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 Purchaser in connection with resales of the Securities
other than pursuant to an effective registration statement.
(m) Blue Sky Laws. The Company shall qualify the Underlying Shares
under the securities or Blue Sky laws of such jurisdictions as the
Purchaser may reasonably request and shall continue such qualification at
all times until the Purchaser notifies 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.
(n) 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 Purchaser.
(o) Reserved.
(p) Notice of Breaches. Each of the Company and the Purchaser shall
give prompt written notice to the other of any breach by it of any
representation, warranty or other agreement contained in any Transaction
Document, as well as any events or occurrences arising after the date
hereof, which would reasonably be likely to cause any representation or
warranty or other agreement of such party, as the case may be, contained in
the Transaction Document to be incorrect or breached as of such Closing
Date. However, no disclosure by either party pursuant to this Section shall
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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
Purchaser of any notice or claim (written or oral) that it receives from
any lender of the Company to the effect that the consummation of the
transactions contemplated 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
Purchaser a copy of any written statement in support of or relating to such
claim or notice.
(q) Conversion Procedures. Exhibit "A" to the Certificate of
Designation 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, 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 the Company changes its transfer agent at
any time prior to the conversion of all of the Shares held by the
Purchaser, the Company shall deliver any transfer agent instructions
contained in Exhibit "B" to such replacement transfer agent and cause such
transfer agent to comply therewith.
(r) Conversion and Exercise Obligations of the Company. The Company
shall honor conversions of the Shares 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.
(s) Use of Proceeds. The Company shall use the proceeds from the sale
of the Shares to the Purchaser as follows: $1,500,000 for working capital
to pay operating expenses and for fees and expenses incurred on connection
with the offering of the Shares, and $1,750,000 for net discounted
liabilities.
Section 3.3 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) after the release of the security
interest as set forth in the Security Agreement, and while any shares of the
Preferred Stock remain outstanding.
Section 3.4 Certain Conversion Restrictions. In no event (except (i)
with respect to an automatic conversion of the Preferred Stock as provided in
Section 5(a)(ii) of the Certificate of Designation, (ii) if the Company is in
default of any of its obligations hereunder or any of the Transaction Documents,
as defined in Section 7 of the Certificate of Designation, or (iii) except as
otherwise set forth in the Certificate of Designation) shall any Holder be
entitled to convert any Preferred Stock to the extent that, after such
conversion, the sum of (1) the number of shares of Common Stock beneficially
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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
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 in this paragraph 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 paragraph will not apply to any conversion pursuant to
Section 5 (a)(ii) of the Certificate of Designation, and may be waived by a
Holder (but only as to itself and not to any other Holder) upon not less than 65
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 65th day (or later, if stated in the notice of waiver). Other Holders
shall be unaffected by any such waiver.
Section 3.5 Default; Escrow Account; Security; Remedy.
(a) In the event that the Company defaults under its obligations to
issue shares upon conversion of the Preferred Stock under this Agreement,
the Purchaser shall give written notice of such default to the Company
pursuant to Section 5.3 below. If the Company does not cure such default
within sixty (60) days of receipt by the Company of the notice of default,
the Purchaser may declare the Company to be in default (a "Declared
Default").
(b) As partial collateral security for its obligations under this
Agreement, the Company will deposit into an account for the benefit of
Purchaser (the "Escrow Account") the following amounts (the "Escrow Funds")
on the following conditions:
(i) If, prior to August 31, 2004, the Company has closed or is
actively working to close its acquisition of the capital stock of LTEL
Holdings Corporation, and there has not been a Declared Default under
this Agreement, the Company will deposit into the Escrow Account
twenty-five percent (25%) of any amount the Company receives in excess
of One Million Dollars ($1,000,000), calculated per put, under the
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terms of the Fifth Equity Line of Credit (the "Fifth Equity Line")
between the Company and Queen, LLC, dated as of July 1, 2003, or other
similar equity line of financing arrangement.
(ii) If, prior to August 31, 2004, the Company has closed or is
actively working to close its acquisition of the capital stock of LTEL
Holdings Corporation, and there has been a Declared Default under this
Agreement, the Company will deposit into the Escrow Account
thirty-three percent (33%) of any amount the Company receives in
excess of One Million Dollars ($1,000,000), calculated per put, under
the terms of the Fifth Equity Line or other similar equity line of
financing arrangement.
(iii) If as of August 31, 2004, the Company has not closed or has
abandoned its attempt to acquire the capital stock of LTEL Holdings
Corporation, whether or not there has been a Declared Default under
this Agreement, the Company will deposit into the Escrow Account fifty
percent (50%) of any amount the Company receives in excess of One
Million Dollars ($1,000,000), calculated per put, under the terms of
the Fifth Equity Line or other similar equity line of financing
arrangement.
(iv) If the Company has at any time deposited into the Escrow
Account Escrow Funds so that the Escrow Funds equal or exceed the
Redemption Price (as defined in the Certificate of Designation)
multiplied by the Applicable Percentage (as defined in the Certificate
of Designation), the Company's obligation to deposit the Escrow Funds
shall be suspended until such time, if any, that the Escrow Funds do
not exceed the Redemption Price multiplied by the Applicable
Percentage.
(c) In the event that the Company defaults under its obligations under
the Purchase Agreement, and such default has not been cured within 60 days,
and there has been a Declared Default, the Purchaser shall have the right,
exercisable at its option, to demand that the Company redeem from funds
legally available therefor all or any portion of the then-outstanding
shares of the Preferred Stock at a price equal to the Redemption Price
(defined in the Certificate of Designation) multiplied by the Applicable
Percentage (defined in the Certificate of Designation) at any time after
the balance in the Escrow Account (defined below) equals or exceeds the
Redemption Price multiplied by the Applicable Percentage. Any redemptions
pursuant to this Section 3.5(b)(i) shall be effected by the delivery of a
notice to the Company, 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 tenth (10th) day after the
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date such notice is deemed delivered pursuant to Section 5.3 (the "Default
Redemption Date"). All redeemed shares of Preferred Stock shall cease to be
outstanding and shall have the status of authorized but unissued preferred
stock. The Redemption Price under this Section shall be paid in cash on the
Default Redemption Date.
(d) In the Event that there remain in the Escrow Account Escrow Funds
following either (i) the conversion of all of the outstanding shares of
Preferred Stock, together with any accrued and unpaid dividends thereon, or
(ii) redemption of all of the outstanding shares of Preferred Stock,
together with any accrued and unpaid dividends thereon, those funds shall
be released from the Escrow Account to the Company.
Section 3.6 Additional Security. As further security for its
obligations under this Agreement, the Company agrees to grant to the Purchaser a
first lien position on the Company's intellectual property assets, as is more
fully set forth in the Intellectual Property Security Agreement; however,
Purchaser agrees to release such lien upon the occurrence of: (i) the
registration statement governing the Registrable Securities becoming effective
and (ii) the Company depositing Two Million Dollars ($2,000,000) in the Escrow
Account.
ARTICLE 4.
CONDITIONS; TERMINATION
Section 4.1 Conditions Precedent.
(a) Conditions Precedent to the Obligation of the Company to Sell the
Shares. The obligation of the Company to sell the Shares hereunder to a
Purchaser is subject to the satisfaction or waiver by the Company, at or
before the Closing, of each of the following conditions:
(i) Accuracy of the Purchaser's Representations and Warranties.
The representations and warranties of the Purchaser shall be true and
correct in all material respects as of the date when made and as of
the Closing Date, as though made on and as of such date; and
(ii) Performance by the Purchaser. The Purchaser shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by it at or
prior to the Closing.
(b) Conditions Precedent to the Obligation of the Purchaser to Purchase the
Shares. The obligation of the Purchaser to acquire and pay for the Shares to be
acquired by it hereunder is subject to the satisfaction or waiver by the
Purchaser, at or before the Closing, of each of the following conditions:
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(i) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company set forth herein shall be
true and correct in all material respects as of the date when made and as
of the Closing Date as though made on and as of such date;
(ii) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by the Company at or prior to the
Closing;
(iii) No Prohibitions. The purchase of and payment for the Shares to
be purchased by the Purchaser (and upon conversion thereof, the Underlying
Shares) hereunder (i) shall not be prohibited or enjoined (temporarily or
permanently) by any applicable law or governmental regulation and (ii)
shall not subject the Purchaser 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 Purchaser 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);
(iv) 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;
(v) No Suspensions of Trading in Common Stock . Trading in the Common
Stock shall not have been suspended from trading on the Nasdaq SmallCap
Market or any subsequent exchange, market, or trading facility at any time
between the date hereof and the Closing;
(vi) 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 or the OTC Bulletin Board; 1.
(vii) Required Approvals. All Required Approvals shall have been
obtained; and
(viii) Certificate of Designation. The Certificate of Designation
shall have been duly filed with the Secretary of State of Delaware.
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Section 4.2 Termination.
(a) Termination by Mutual Consentb. . 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 Purchaser.
(b) Termination by the Company or the Purchaser. This Agreement and
the transactions contemplated hereby with respect to the Purchaser may be
terminated prior to Closing by either the Company or the Purchaser, by
giving written notice of such termination to the other party, if:
(i) there shall be in effect any statute, rule, law or regulation
that prohibits the consummation of the Closing or the transaction
contemplated by the Transaction Documents or if the consummation of
the Closing Documents would violate any non-appealable final judgment,
order, decree, ruling or injunction of any court of or governmental
authority having competent jurisdiction; or
(ii) there shall have been an amendment to Regulation D
promulgated under the Securities Act or an interpretive release
promulgated or issued thereunder, which, in the judgment of the
terminating party, could have or result in a Material Adverse Effect.
(c) Termination by the Company. This Agreement and the transactions
contemplated hereby may be terminated prior to Closing as to the Purchaser
by the Company, by giving written notice of such termination to the
Purchaser, if the Purchaser has breached in any material respect any
representation, warranty, covenant or agreement contained in any
Transaction Document and such breach is not cured within five (5) Business
Days following receipt by the Purchaser of notice of such breach.
(d) Termination by the Purchaser. This Agreement and the transactions
contemplated hereby may be terminated as to the Purchaser prior to Closing
by the Purchaser, by giving written notice of such termination to the
Company, if:
(i) the Company has breached in any material respects any
representation, warranty, covenant or agreement contained in any
Transaction Document and such breach is not cured within one (1)
Business Day following receipt by the Company of notice of such
breach;
(ii) there has occurred an event or series of events which,
individually or in the aggregate, could have or result in a Material
Adverse Effect which is not disclosed fully in the Disclosure
Materials;
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(iii) trading in the Common Stock has been suspended or the
Common Stock has failed to be listed for trading on the OTC Bulletin
Board or on any subsequent exchange, market, or trading facility.
ARTICLE 5.
MISCELLANEOUS (c)
-------------
Section 5.1 Fees and Expenses. Each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, except that
the Company agrees to pay the Purchaser's legal fees in connection with the
negotiation of the purchase of the Preferred Stock. The Company shall pay all
stamp and other taxes and duties levied in connection with the issuance of the
Shares pursuant hereto. The Purchaser shall be responsible for its own
respective tax liability that may arise as a result of the investment hereunder
or the transactions contemplated by this Agreement.
Section 5.2 Entire Agreement; Amendments, Exhibits and Schedules. This
Agreement, together with the Exhibits and Schedules hereto, and the Certificate
of Designation 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 5.3 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 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
0000 X 000 X, Xxxxx 000
Xxxx Xxxx Xxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxx X. Xxxxxx, Executive Vice President
With copies to: Durham Xxxxx & Xxxxxxx, P.C.
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000 Xxxx Xxxxxxxx, Xxxxx 000
Xxxx Xxxx Xxxx, Xxxx 00000
Facsimile No.: (000) 000-0000
Attn: Xxxxxxx X. Xxxxx, Esq.
If to the Purchaser: Breckenridge Fund LLC
0000 Xxxxxxx Xxxxxxxx
Xxxxx 000X
Xxxxxxx, 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
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
Section 5.4 Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by both the Company and the Purchaser, or, in the case of a waiver,
by the party against whom enforcement of any such waiver is sought, provided
however that Section 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 5.5 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 5.6 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns, including any Persons to whom the Purchaser transfers Shares. The
assignment by a party of this Agreement or any rights hereunder shall not affect
the obligations of such party under this Agreement.
Section 5.7 No Third-Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and, other than with respect to permitted assignees under Section
6.6, is not for the benefit of, nor may any provision hereof be enforced by, any
other Person.
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Section 5.8 Governing Law; Venue. 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.
Additionally, any action arising out of the interpretation of or performance
under this Agreement by either party shall be brought in a court of competent
jurisdiction in the State of Delaware.
Section 5.9 Survival. The representations, warranties, agreements and
covenants contained in this Agreement shall survive the Closing and the
conversion of the Shares.
Section 5.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement, and shall become effective when counterparts have been signed by
each party and delivered to the other 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 5.11 Publicity. The Company and the Purchaser shall consult
with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby and 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 Purchaser without the prior written consent of the Purchaser, except to
the extent required by law, in which case the Company shall provide the
Purchaser with prior written notice of such public disclosure.
Section 5.12 Severability. In case any one or more of the provisions of
this Agreement shall be invalid or unenforceable in any respect, the validity
and enforceability of the remaining terms and provisions of this Agreement shall
not in any way be 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 5.13 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.
-24-
Section 5.14 Rights in Bankruptcy. The holder of any shares of Series I
Preferred shall be entitled to exercise its conversion privilege with respect to
the Series I Preferred notwithstanding the commencement of any case under 11
U.S.C. ss.101 et seq. (the "Bankruptcy Code"). In the event the Company is a
debtor under the Bankruptcy Code, the Company hereby waives, to the fullest
extent permitted, any rights to relief it may have under 11 U.S.C. ss.362 in
respect of the conversion of the Series I Preferred.
Section 5.15 Information. The Company will authorize its transfer agent
to give information relating to the Company directly to the Purchaser or the
Purchaser's representatives upon the request of the Purchaser or any such
representative, to the extent such information relates to (i) the status of
shares of Common Stock issued or claimed to be issued to the Purchaser in
connection with a Notice of Conversion, or (ii) the number of outstanding shares
of Common Stock of all stockholders as of a current or other specified date. The
Company will provide the Purchaser with a copy of the authorization so given to
the transfer agent.
Section 5.16 Trading in Securities. The Company specifically
acknowledges that, except to the extent specifically provided herein or in any
of the other Transaction Documents (but limited in each instance to the extent
so specified), the Holder retains the right (but is not otherwise obligated) to
buy, sell, engage in hedging transactions or otherwise trade in the securities
of the Company, including, but not necessarily limited to, the Securities, at
any time before, contemporaneous with or after the execution of this Agreement
or from time to time, but only, in each case, in any manner whatsoever permitted
by applicable federal and state securities laws.
Section 5.17 Delay in Delivery. (A) The Company understands that a
delay in the issuance of the Shares of Common Stock could result in economic
loss to the Holder. As compensation to the Holder for such loss, the Company
agrees to pay late payments to the Holder for late issuance of Shares upon
Conversion in accordance with the following schedule (where "No. Business Days
Late" refers to the number of business days which is beyond two (2) business
days after the Delivery Date):
Late Payment For Each $10,000 of Stated Amount
No. Business Days Late Being Converted
1 $ 100
2 $ 200
3 $ 300
4 $ 400
5 $ 500
6 $ 600
7 $ 700
8 $ 800
9 $ 900
10 $1,000
>10 $1,000 +$200 for each Business
Day Late beyond 10 days
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(B) Furthermore, in addition to any other remedies which may
be available to the Holder, in the event that the Company fails for any reason
to effect delivery of such shares of Common Stock by close of business on the
Delivery Date, the Holder will be entitled to revoke the relevant Notice of
Conversion by delivering a notice to such effect to the Company, whereupon the
Company and the Holder shall each be restored to their respective positions
immediately prior to delivery of such Notice of Conversion; provided, however,
that an amount equal to any payments contemplated by this Section which have
accrued through the date of such revocation notice shall remain due and owing to
the Converting Holder notwithstanding such revocation.
(C) If, by the relevant Delivery Date, the Company fails for
any reason to deliver the Shares to be issued upon conversion of a Debenture and
after such Delivery Date, the Holder of the Shares being converted (a
"Converting Holder") purchases, in an arm's-length open market transaction or
otherwise, shares of Common Stock (the "Covering Shares") in order to make
delivery in satisfaction of a sale of Common Stock by the Converting Holder (the
"Sold Shares"), which delivery such Converting Holder anticipated to make using
the Shares to be issued upon such conversion (a "Buy-In"), the Converting Holder
shall have the right, to require the Company to pay to the Converting Holder, in
addition to and not in lieu of the amounts due under Section 5(c) hereof (but in
addition to all other amounts contemplated in other provisions of the
Transaction Agreements, and not in lieu of any such other amounts), the Buy-In
Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the
amount equal to the excess, if any, of (x) the Converting Holder's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (y) the net proceeds (after brokerage commissions, if any) received by the
Converting Holder from the sale of the Sold Shares. The Company shall pay the
Buy-In Adjustment Amount to the Company in immediately available funds
immediately upon demand by the Converting Holder. By way of illustration and not
in limitation of the foregoing, if the Converting Holder purchases shares of
Common Stock having a total purchase price (including brokerage commissions) of
$11,000 to cover a Buy-In with respect to shares of Common Stock it sold for net
proceeds of $10,000, the Buy-In Adjustment Amount which Company will be required
to pay to the Converting Holder will be $1,000.
(D) In lieu of electronically transmitting the Common Stock
issuable upon conversion to the Holder by crediting the account of Holder's
Prime Broker with DTC through its Deposit Withdrawal Agent Commission system,
upon request of the Holder and its compliance with the provisions contained in
this paragraph, the transfer agent may deliver physical certificates
representing the Common Stock issuable upon conversion.
5.18 Transfer Agent. The Company will authorize its transfer agent to
give information relating to the Company directly to the Holder or the Holder's
representatives upon the request of the Holder or any such representative, to
the extent such information relates to (i) the status of shares of Common Stock
issued or claimed to be issued to the Holder in connection with a Notice of
Conversion or exercise of a Warrant, or (ii) the number of outstanding shares of
Common Stock of all shareholders as of a current or other specified date. On the
Closing Date, the Company will provide the Holder with a copy of the
authorization so given to the transfer agent.
-26-
IN WITNESS WHEREOF, the parties hereto have caused this Series
I 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
Its:Executive Vice President & CFO
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
-27-
SCHEDULE 3.1(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.
-28-
SCHEDULE 3.1(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 shares. As of the date hereof, the Company has
issued and outstanding 54,728,616 shares of Common Stock. As of the date of this
agreement, 864,163 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
4,167 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 Fifth 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 has been declared effective by 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.
-29-
EXHIBIT A
CERTIFICATE OF DESIGNATION
-30-
EXHIBIT B
TRANSFER AGENT INSTRUCTIONS
-31-
