Execution Copy
THIS NOTE HAS 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.
U.S. $10,000,000.00 Original Issue Date: February 24, 2004
Holder: ▇▇▇▇▇▇▇▇▇ Avenue, Ltd.
Address:
SECURED NOTE DUE FEBRUARY 24, 2010
THIS SECURED NOTE is made by FONIX CORPORATION, a Delaware corporation,
having a principal place of business at ▇▇▇▇ ▇▇▇▇▇ ▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇,
▇▇▇▇ ▇▇▇▇▇ (the "Company"). This Note was acquired by the ▇▇▇▇▇▇▇▇▇ AVENUE,
LTD., a British Virgin Islands corporation (the "Holder") pursuant to the terms
of that certain Exchange Agreement (the "Exchange Agreement") dated as of
February 24, 2004, by and among the Company, LTEL Acquisition Corporation, a
Delaware corporation and wholly owned subsidiary of the Company ("Fonix Sub"),
LTEL Holdings Corporation, a Delaware corporation ("LTEL"), the Sellers (the
"Sellers") identified in the Exchange Agreement and Holder. Capitalized terms
used but not otherwise defined herein, shall have the meaning ascribed to them
in the Exchange Agreement.
FOR VALUE RECEIVED, the Company promises to pay to the Holder or
registered assigns, the principal sum of Ten Million and 00/100 Dollars
($10,000,000.00), with interest at the rate of five percent (5%) per annum (the
"Base Rate") on the basis of a 360-day year payable, as follows: The Company
shall pay accrued interest (but no principal) quarterly starting on April 15,
2004 and continuing on the 15th day of July 2004, October 2004, and January
2005; thereafter, the Company shall pay equal quarterly payments of Three
Hundred Nineteen Thousand Two Hundred Fourteen and 14/100 Dollars ($319,214.14)
commencing on the 15th day of April, 2005, and continuing on the 15th day of
each April, July, October and January thereafter up to and including January 15,
2010 (each a "Payment Date" and collectively "Payment Dates"), which quarterly
payments shall be applied first to accrued interest and then to principal. All
unpaid principal and accrued and unpaid interest shall be due and payable in
full on January 15, 2010 (the "Maturity Date"). Upon the occurrence of an Event
of Default, as defined herein, all amounts due hereunder shall bear interest at
the rate of twelve percent (12%) per annum from the day an Event of Default
occurs through and including the date of payment of any delinquent amount.
Interest payments hereunder may be paid, at the Company's option, in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts ("Cash"), or in shares of the
Company's Common Stock, par value $.0001 per share ("Interest Shares"), in an
amount equal to the total dollar amount of the interest to be paid by issuing
Interest Shares divided by the average closing bid price of the Company's Common
Stock for the three (3) trading day period immediately preceding the date the
Page 1
interest payment is due, provided that, at the time any Interest Shares are
issued by the Company as payment for interest hereunder, the number of Interest
Shares so issued are covered by a then effective Registration Statement pursuant
to the Registration Rights Agreement. The Company shall give at least five (5)
days' written notice, prior to any Payment Date of its intention to make payment
of accrued interest in Interest Shares. All payments of principal, and all
payments of interest not paid by issuing Interest Shares, shall be paid when due
in Cash. All payments of Cash or Interest Shares shall be delivered to the
Holder at the address of the Holder last appearing on the Company's records.
This Note is subject to the following additional provisions:
Section 1.
(a) This Note may not be sold, transferred, assigned, or
hypothecated except in accordance with this Section 1 and without the prior
written consent of the Company, which consent may be withheld in the sole
discretion of the Company, provided, however, that the Holder may transfer this
Note to any Affiliate of the Holder without the prior written consent of the
Company, subject to the Holder's compliance with the following sentence, and
further provided that this Note may not be subdivided and must be transferred by
the Holder, if at all, in its entirety. The Holder, by acceptance hereof, agrees
to give written notice to the Company ("Transfer Notice") of any proposed
transfer of this Note, which notice shall describe briefly but with reasonable
detail the proposed transfer and set forth the name, address, and tax
identification number of the proposed transferee, and will further provide the
Company with an opinion of the Holder's counsel (reasonably acceptable to the
Company) that such transfer can be accomplished in accordance with federal and
applicable state securities laws. If the proposed transferee is an Affiliate of
the Holder, the proposed transfer shall be deemed to be effective upon delivery
of the Transfer Notice. If the proposed transferee is not an Affiliate of the
Holder, and the Company fails to object to the proposed transfer within thirty
(30) days after delivery of the Transfer Notice, the Holder may complete the
proposed transfer upon the expiration of such thirty (30) day period, provided
that the Holder provides additional written notice to the Company of such
transfer.
(b) Prior to transfer of this Note in compliance with this
Section 1, the Company and any agent of the Company may treat the person in
whose name this Note is duly registered on the Company's records as the owner
hereof for the purpose of receiving payment as herein provided and for all other
purposes, whether or not this Note is overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.
Section 2. Default.
"Event of Default" wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(i) any default by the Company in the payment of
principal or interest payable in respect of this Note, which default
continues for a period of sixty (60) calendar days after the due date
for such payment;
(ii) any failure to observe or perform any other
Page 2
material covenant, agreement or warranty contained in, or otherwise to
materially breach, this Note, the Exchange Agreement, the Collateral
Pledge Agreement or the Security Agreement, and such failure or breach
shall not have been remedied within sixty (60) days after the date on
which reasonably detailed notice of such failure or breach shall have
been given by the Holder or its successor;
(iii) the Company shall commence a voluntary case
under the United States Bankruptcy Code or insolvency laws as now or
hereafter in effect or any successor thereto (the "Bankruptcy Code");
or an involuntary case is commenced against the Company under the
Bankruptcy Code and the petition is not controverted within thirty (30)
days, or is not dismissed within sixty (60) days, after commencement of
such involuntary case; or a "custodian" (as defined in the Bankruptcy
Code) is appointed for, or takes charge of, all or any substantial part
of the property of the Company or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar
law of any jurisdiction whether now or hereafter in effect relating to
the Company or there is commenced against the Company any such
proceeding which remains undismissed for a period of sixty (60) days;
or the Company is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered;
or the Company suffers any appointment of any custodian or the like for
it or any substantial part of its property which continues undischarged
or unstayed for a period of sixty (60) days; or the Company makes a
general assignment for the benefit of creditors; or the Company shall
fail to pay, or shall state that it is unable to pay its debts
generally as they become due; the Company shall call a meeting of all
of its creditors with a view to arranging a composition or adjustment
of its debts; or the Company shall by any act or failure to act
indicate its consent to, approval of or acquiescence in any of the
foregoing; or any corporate or other action is taken by the Company for
the purpose of effecting any of the foregoing;
(iv) the Company, Fonix Sub, LTEL, or any of the
Subsidiaries shall default in any of their obligations under any
mortgage, credit agreement or other facility, indenture, agreement or
other instrument under which there may be issued, or by which there may
be secured or evidenced any indebtedness of the Company, Fonix Sub,
LTEL, or any of the Subsidiaries in an amount exceeding Five Hundred
Thousand Dollars ($500,000.00), whether such indebtedness now exists or
shall hereafter be created and such default shall result in such
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise become due and payable;
(v) the Company, Fonix Sub, LTEL, or any of the
Subsidiaries shall be a party to any Change of Control Transaction (as
defined in Section 5), or shall agree to sell or dispose of all or in
excess of 49% of its assets (based on book value calculation as
reflected in the Company's most recent financial statements) in one or
more transactions (whether or not such sale would constitute a Change
of Control Transaction);
(vi) the Company, Fonix Sub, LTEL, or any of the
Subsidiaries has entered against it by any court or other adjudicatory
body of competent jurisdiction any judgment in an amount equal to at
least Two Hundred Fifty Thousand Dollars ($250,000.00), except for any
judgment in any action pending or threatened against Fonix Sub as of
the date hereof;
(vii) the Company fails to declare and pay, within
Page 3
ninety (90) days after the completion of any full calendar year after
the closing, dividends payable in respect of the Series H Preferred for
such completed calendar year, subject to the provisions of applicable
corporate law or any applicable contract or instrument; or
(viii) if at any time during the term of the Note, a
majority of the Company's board of directors serving as of the Closing
Date are involuntarily replaced other than pursuant to an annual
meeting of the Company's stockholders.
Section 3. Interest Rate Limitation. The parties intend to conform
strictly to the applicable usury laws in effect from time to time during the
term hereof. Accordingly, if any transaction contemplated hereby would be
usurious under such laws, then notwithstanding any other provision hereof: (i)
the aggregate of all interest that is contracted for, charged, or received under
this Agreement shall not exceed the maximum amount of interest allowed by
applicable law (the "Highest Lawful Rate"), and any excess shall be promptly
credited to the Company by the Holder (or, to the extent that such consideration
shall have been paid, such excess shall be promptly refunded to the Company by
the Holder); (ii) neither the Company nor any other Person now or hereafter
liable hereunder shall be obligated to pay the amount of such interest to the
extent that it is in excess of the Highest Lawful Rate; and (iii) the effective
rate of interest shall be reduced to the Highest Lawful Rate. All sums paid, or
agreed to be paid, to the Holder for the use, forbearance, and detention of the
debt of the Company to the Holder shall, to the extent permitted by applicable
law, be allocated throughout the full term of the Note until payment is made in
full so that the actual rate of interest does not exceed the Highest Lawful Rate
in effect at any particular time during the full term thereof. If at any time
the rate of interest under the Note exceeds the Highest Lawful Rate, the rate of
interest to accrue pursuant to this Agreement shall be limited, notwithstanding
anything to the contrary in this Agreement, to the Highest Lawful Rate, but any
subsequent reductions in the Base Rate shall not reduce the interest to accrue
pursuant to this Agreement below the Highest Lawful Rate until the total amount
of interest accrued equals the amount of interest that would have accrued if a
varying rate per annum equal to the interest rate under the Note had at all
times been in effect. If the total amount of interest paid or accrued pursuant
to this Agreement under the foregoing provisions is less than the total amount
of interest that would have accrued if a varying rate per annum equal to the
interest rate under the Note had been in effect, then the Company agrees to pay
to the Holder an amount equal to the difference between (x) the lesser of (A)
the amount of interest that would have accrued if the Highest Lawful Rate had at
all times been in effect, or (B) the amount of interest that would have accrued
if a varying rate per annum equal to the interest rate under the Note had at all
times been in effect, and (y) the amount of interest accrued in accordance with
the other provisions of this Agreement.
Section 4. Prepayment.
(a) Voluntary Prepayment. The Company shall have the right to
prepay this Note in whole or in part, provided, however, the Company may not
prepay in excess of Five Million and 00/100 Dollars ($5,000,000.00) in principal
amount of this Note, so long as any shares of the Company's Series H Preferred
Stock are outstanding.
(b) Required Prepayment. Subject to Section 4(a), above, but
notwithstanding anything else to the contrary herein, commencing with the first
completed calendar month after the One Hundred Eightieth (180th) day after the
date hereof, and continuing for each calendar month until all amounts hereunder
are paid in full, the Holder shall be entitled to receive, and the Company shall
be required to pay, prepayments (the "Net Put Payments") equaling thirty-three
percent (33%) of the amounts received by the Company in such month in excess of
Page 4
Nine Hundred Thousand Dollars ($900,000) pursuant to the Fifth Private Equity
Line Agreement between the Company and Queen LLC, dated as of July 1, 2003 (the
"Equity Line Agreement"). The Company and the Holder agree that if the Equity
Line Agreement is terminated prior to the Company's satisfaction of its
obligations under this Note, and another equity line is commenced with the same
equity line investor or an Affiliate of such investor, the Holder shall have the
same rights to receive Net Put Payments in connection with such new equity line
as under the Equity Line Agreement.
(c) Notice of Voluntary Prepayment. The Company shall give
written notice at least five (5) Business Days, but not more than ten (10)
Business Days, of any intention to prepay any portion of this Note prior to the
Maturity Date pursuant to Section 4(a), above, to the Holder, which notice shall
specify the date such prepayment will be made. Any such prepayment shall be
applied to principal in inverse order of maturity but shall not affect the
amount of each quarterly payment of principal and interest otherwise required
hereunder.
Section 5. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State of
New York are authorized or required by law or other government action to close.
"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 49% of the voting securities of the Company coupled with 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, or (ii) 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 the total voting securities of the
entity surviving such transaction or series of transactions. 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) or (ii) does not
constitute the occurrence of the event until after the event in fact occurs.
Section 6. Except as expressly provided herein, no provision of this
Note shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, interest and liquidated damages (if any)
on, this Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Note is a direct obligation of the Company.
Section 7. If this Note shall be mutilated, lost, stolen or destroyed,
the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Note, or in lieu of or in substitution for a lost,
stolen or destroyed Note, a new Note for the principal amount of this Note so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Note, and of the ownership hereof, and
indemnity, if requested, all reasonably satisfactory to the Company.
Page 5
Section 8. This Note shall be governed by and construed in accordance
with the laws of the State of Delaware. Each of the parties consents to the
exclusive jurisdiction of the federal courts or the state courts of the State of
Delaware sitting in Wilmington, Delaware in connection with any dispute arising
under this Agreement and hereby waives, to the maximum extent permitted by law,
any objection, including any objection based on forum non coveniens, to the
bringing of any such proceeding in such jurisdictions. To the extent determined
by such court, the Company shall reimburse the Holder for any reasonable legal
fees and disbursements incurred by the Holder in enforcement of or protection of
any of its rights under this Note, The Pledge Agreement or the Security
Agreement. THE COMPANY HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, PROCEEDING, OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS
NOTE.
Section 9. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note. Any waiver must be
in writing.
Section 10. Severability. If any provision of this Note is invalid,
illegal or unenforceable, the balance of this Note shall remain in effect, and
if any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
Section 11. Business Day. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment shall be
made on the next succeeding Business Day (or, if such next succeeding Business
Day falls in the next calendar month, the preceding Business Day in the
appropriate calendar month).
Section 12. Security. The obligation of the Company for payment of
principal, interest and all other sums hereunder, in the event of default by the
Company to perform hereunder, is secured by (a) a Security Agreement, and (b)
the pledge of certain securities (the "Pledged Shares") under the terms and
conditions of a Collateral Pledge Agreement, by reference made a part of the
terms of this Note.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
Page 6
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer duly authorized for such purpose, as of the date first
above indicated.
FONIX CORPORATION
By:________________________________
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, President
Attest:
By:___________________________
