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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1996.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
____________.
Commission file number 0-23862
fonix corporation
(Name of Small Business Issuer in Its Charter)
Delaware 22-2994719
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
60 East South Temple Street, Suite 1225
Salt Lake City, Utah 84111
(Address and Zip Code of Principal Executive Offices)
(801) 328-0161
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or Section 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] or No[ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.[ ]
The issuer's revenues for its most recent fiscal year were $0.
The aggregate market value of the voting stock held by non-affiliates
(approximately 16,003,439 shares) computed by reference to the price of the
Company's common stock as reported by the NASDAQ Small Cap Market on March
21, 1997 was $136,029,232.
As of March 21, 1997, the total number of shares of the Company's
common stock, par value $.0001 per share, issued and outstanding was
41,726,563.
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FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-KSB
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, AND THE COMPANY DESIRES TO TAKE
ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS THEREOF. THEREFORE, THE COMPANY IS
INCLUDING THIS STATEMENT FOR THE EXPRESS PURPOSE OF AVAILING ITSELF OF THE
PROTECTIONS OF SUCH SAFE HARBOR WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED HEREIN, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED. IN THIS REPORT, THE
WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "PROJECTED"
AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE
CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS DESCRIBED BELOW [SEE ITEM 6.
MANAGEMENT'S PLAN OF OPERATION -- FACTORS THAT COULD AFFECT THE COMPANY'S
ABILITY TO ACHIEVE ITS OBJECTIVES] AND NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE
AFTER THE DATE HEREOF.
PART I
Item 1.Description of Business
The Company
fonix(TM) corporation (the "Company" or "fonix") was incorporated under
the laws of the State of Delaware on September 12, 1985. On June 4, 1994,
the Company and fonix Systems Corporation, a wholly-owned subsidiary of the
Company ("Systems"), entered into an Agreement and Plan of Merger with Phonic
Technologies, Inc., a Utah corporation ("PTI"), which provided, among other
things, for the merger of PTI with and into Systems effective June 17, 1994.
Unless the context clearly requires otherwise, the term "Company" as used
herein shall include, collectively, fonix corporation and Systems. Before
the merger and acquisition of PTI, the Company was an inactive development
stage company. Since the merger, the Company has continued the business
previously conducted by PTI.
PTI was incorporated under the laws of the State of Utah in 1993, and
until its acquisition by the Company, operated as a private development stage
corporation engaged in research and development of automatic speech
recognition technologies (such proprietary technologies of the Company,
including neural technologies, are referred to in this Report collectively as
the "Automatic Speech Recognition Technologies" or "ASRT"). The ASRT, as it
has been developed to date, employs a proprietary phonetic speech modeling
engine and a linguistic and contextual process based on a proprietary neural
network system (artificial intelligence).
PTI acquired its rights to the ASRT from Synergetics, Inc., a Utah
corporation ("Synergetics"), by means of a Product Development and Assignment
Agreement between PTI and Synergetics dated as of October 16, 1993 (the
"Synergetics Agreement"). The Synergetics Agreement provided, among other
things, for Synergetics to assign to the Company or its predecessor all of
the then-existing and to-be-developed speech recognition technologies and to
continue development of the ASRT under the direction of the Company. In
consideration for that assignment, the Company agreed to pay Synergetics a
continuing royalty equal to 10% of gross revenues received from the use,
marketing and/or sale of the ASRT and any products incorporating it (the
"Royalty"), and the Company was obligated to provide financial resources to
enable such development to continue. Upon its acquisition of PTI, the
Company succeeded to all of PTI's right, title and interest in and to the
speech recognition technology (now referred to as the ASRT), including PTI's
rights to such technology under the Synergetics Agreement. On March 30,
1995, the Company and Synergetics entered into a Re-Stated Product
Development and Assignment Agreement (the "Re-Stated Synergetics Agreement")
(the Synergetics Agreement and the Re-Stated Synergetics Agreement are
referred to collectively in this Report as the "Synergetics Agreements").
The Re-Stated Synergetics Agreement did not materially change the obligations
between the parties as described immediately above.
On March 13, 1997, the Company reached an agreement in principle with
Synergetics to modify the Synergetics Agreements with regard to the
development and assignment of the Company's ASRT. Until March 13, 1997,
Synergetics had compensated engineers, employees, members of its development
team and other financial backers, in part, with the issuance of "Project
Shares" granting the holders of such shares the right to share pro rata in
future Royalty payments. In addition to issuance of Project Shares,
Synergetics had made loans and advances to some members of its project team
(collectively, the "Advances") on a non-recourse basis. Repayment of the
Advances was secured by future disbursements under the Project Shares.
Pursuant to a Memorandum of Understanding executed by the Company,
Synergetics and the principal shareholder of Synergetics, C. Hal Hansen
("Hansen"), and dated as of March 13, 1997 (the "Modification Agreement"),
the parties agreed to modify the Synergetics Agreements as follows:
1. The rights and obligations of Synergetics under the Synergetics
Agreements, including the Royalty, will be assigned to a new
wholly-owned subsidiary of the Company ("fonix Acquisition");
2. fonix Acquisition will also assume the obligations of Synergetics
to all holders of Project Shares;
3. The Company and fonix Acquisition will release Synergetics from
any further obligation or duty under the Synergetics Agreements;
4. In consideration for the assignment of the rights to the Royalty
by Synergetics to fonix Acquisition, the Company will issue
warrants to Synergetics and the Project Share holders to acquire,
in the aggregate, up to 4,800,000 shares of the Company's common
stock at an exercise price of $10.00 per share (the "Warrants").
A holder of Project Shares will be entitled to receive Warrants
to purchase 800 shares of the Company's common stock for each
Project Share held; provided, however, that the number of
Warrants to be issued will be reduced by the amount of one
Warrant for each $37.50 in Advances;
5. The Warrants will become exercisable subject to progress made in
further development of the ASRT and the first to occur of (i) a
minimum daily closing bid price for shares of the Company's
common stock of $37.50 for a period of at least 15 consecutive
trading days, or (ii) thirty (30) months from the date the
Warrants are issued. The exercise date shall be accelerated upon
the consummation of certain business combinations or
reorganizations, such as a merger, involving the Company. The
terms relating to development of the ASRT will be subject to a
confidentiality and non-disclosure agreement and covenants;
6. In consideration of the assumption by fonix Acquisition of the
obligations of Synergetics, the release of Synergetics from its
further duties under the Synergetics Agreements, and the issuance
of the Warrants to Synergetics and holders of Project Shares, the
Royalty will be canceled;
7. All Project Shares tendered in exchange for Warrants will be
canceled;
8. Effective March 13, 1997, the Company employed certain former
members of the Synergetics project team as employees of the
Company on terms and conditions approximately equivalent to the
terms and conditions of their prior employment with Synergetics,
but including the right to participate in the Company's employee
stock option plans; and
9. The Company engaged Hal Hansen, the founder and principal
stockholder of Synergetics, and/or Synergetics as a consultant to
assist with the further development of the ASRT.
The parties to the Modification Agreement have acknowledged that the
consummation of the transactions described above will require, among other
things, execution of definitive agreements and compliance with applicable
federal and state laws, including securities laws. Those agreements will
include standard terms and provisions that are typical of such transactions,
including mutual releases and indemnification covenants. Synergetics has
other business interests and activities and will continue to conduct its
business in the usual course following the closing. If all of the Warrants
were immediately exercisable and were fully exercised, the Company would
receive cash of $48,000,000 and Synergetics and the former Project Share
holders exercising the Warrants would own 4,800,000 shares of the Company's
common stock, or approximately 11.5% of the presently issued and outstanding
shares of the Company's common stock.
The Market for Automatic Speech Recognition Technologies
The Company believes that there is a very substantial market for
products incorporating its ASRT. Leading speech recognition industry expert
John A. Oberteuffer, Ph.D., recently appointed to the Company's Board of
Directors, has projected that the market for speech recognition technologies
will be $3 billion by the year 2001. Contributing to the explosive growth of
this potential market are factors such as (i) the perceived preference for
human speech as the most efficient and convenient form of communication with
computer devices; (ii) the increasing use of and dependence on electronic
devices for a vast array of commercial, financial, industrial, personal and
recreational applications; and (iii) recent advances in hardware and micro
processing technology that make possible the development and commercial
deployment of speech recognition technologies and applications on a large and
affordable scale.
The Company believes that many industry segments could benefit from the
incorporation of its ASRT into existing applications and new applications
under development. The Company will focus its initial efforts on deploying
the ASRT through third-party licenses and co-development with the computer
and telecommunications industries. The Company also intends to expand its
scientific research and development focus into the development of new
applications requiring the capabilities of the Company's proprietary ASRT.
The Company believes, based principally upon forecasts by technology industry
analysts, that automatic speech recognition technologies will be the focus of
the next generation of computing advances.
These new technologies are complex and demanding, and are opening new
possibilities for partnership and strategic collaboration through appropriate
specialization. In this new environment, the Company believes successful,
sustainable enterprises will be those that can form and manage such strategic
alliances, both within traditional markets and across geographical and
cultural borders.
Technology Overview & Competition
The Company has completed its core Automatic Speech Recognition
Technologies. The ASRT is a major departure from current industry methods
and is designed to provide superior speech recognition for both current and
potential future applications.
Traditional speech recognition technology supports major potential
applications for business and personal use. Since World War II, such
technology has been the subject of research supported by government, academia
and private industry. A large number of applications in discrete ("pause-
between-each-spoken-word") markets such as telephony services, industrial and
professional data input, multi-media personal computing, context specific
dictation, and discrete general dictation are presently available as a result
of that ongoing research effort. All such current traditional applications
are based on similar traditional approaches, including the Hidden Markov
Models (AHMMs). However, industry analysts are on record as predicting, and
the Company believes, that a number of important potential applications for
mass market implementation cannot be realized without new technical methods.
Speech recognition algorithms in software have been developed and
refined over the past ten years. However, the increase in processing speed
and memory capacity of personal computers has accounted for much of the
improvement in traditional speech recognition systems during that period.
This improvement includes vocabulary size and recognition accuracy. More
recently, speech recognition systems with vocabulary-specific continuous
speech recognition capability have been introduced. Currently available
speech recognition systems for personal computers include speech command
systems for navigating the Windows(R) interface and inexpensive, discrete
word dictation systems offered by Dragon Systems, IBM, and Kurzweil.
Recently, vocabulary-specific continuous speech dictation systems also have
been introduced by Philips, IBM, and Dragon. In addition, telephony
applications with menu choice systems and small vocabulary dialogue systems
have been demonstrated by Nuance, Nortel, and others.
Despite the nominal advances in performance of such presently available
systems, there are significant limitations inherent in all of these systems,
each of which continue to use traditional approaches generally based on HMMs
technology. These traditional approaches have not appreciably advanced since
the late 1980's. Such traditional speech recognition systems for personal
computers all require close-talking microphones in relatively low noise
environments and a formal, discrete speaking style to achieve acceptable
accuracy. In so-called continuous dictation systems, significant adaptation
to user speech, speaking style, and content area also are required. These
traditional systems are generally restricted to speech recognition for a
single individual dictating in a quiet environment; presently available
telephony-based systems are even more limited in general functionality.
The present industry standard methodology, the HMMs, is a general
template or pattern matching technique using a statistical modeling approach.
Massachusetts Institute of Technology researcher, Dr. Victor Zue, has noted
that speech-recognition systems based on such technology:
"utilize little or no specific-speech knowledge, but rely instead
primarily on general-purpose pattern-recognition algorithms.
While such techniques are adequate for a small class of well-
constrained speech recognition problems, their extendibility to
multiple speakers, large vocabularies, and/or continuous speech
is highly questionable. In fact, even for the applications that
these devices are designed to serve, their performance typically
falls far short of human performance."
HMMs are presently used in telephony, discrete dictation, and command and
control applications. HMMS widely recognized weaknesses are many: (i) it
does not meet the needs for mass market implementation, (ii) it has limited
input feature types, (iii) it accounts for only limited context, (iv) it has
limited ability to generalize acoustic and language structure, (v) it
requires training data from the end-user for acceptable performance, (vi)
models become extremely large and complex as vocabulary grows, and (vii)
there is a lack of hardware parallel processing capability.
The unique fonix ASRT is a clear and complete departure from the HMMs.
The Company's ASRT follows closely those techniques employed by the human
auditory system and language understanding centers in the brain. These
technologies extract and process more information from the speech signal than
HMMs-based solutions. In addition, fonix ASRT uses proprietary neural
technologies for speech recognition rather than relying on the HMMs approach.
By contrast to HMMs technology, the easy recognition of natural,
spontaneous speech spoken by one or more individuals in a variety of common
environments by means of a conveniently placed microphone provided by the
ASRT would allow for the development of important applications. Such
applications enhance those currently offered via traditional HMMs technology
such as computer interface navigation, data input, text generation, and
telephony transactions. But perhaps of even more importance, in the
Company's estimation, would be new applications such as the transcription of
business meetings and conversations, real-time speech-to-speech language
translation, natural dialogues with computers for information access and
consumer electronic devices controlled by natural language.
In addition to providing significant improvements of and enhancement to
traditional applications, the Company's proprietary ASRT is targeted at next
generation applications which cannot be accomplished merely by incremental
evolution of current speech technologies.
Researchers at the Company have developed what the Company believes to
be a fundamentally new approach to the analysis of human speech sounds and
the understanding of speech. The core fonix ASRT and underlying scientific
discoveries follow closely the techniques employed by the human auditory
system and language understanding centers in the human brain. The ASRT uses
information in speech sounds perceptible to humans but not discernible by
current automatic speech recognition systems. It also employs neural
technologies (artificial intelligence techniques) for identifying speech
components and word sequences contextually, similar to the way in which
scientists believe information is processed by the human brain. As presently
developed, the ASRT is comprised of several components including a phonetic
sound representation recognition engine, audio signal processing, a feature
extraction process, a phoneme estimation process, and a linguistic process
consisting of two components, one of which is expert-or rule-based and one of
which is based on proprietary neural technologies (artificial intelligence)
that are designed to interpret human speech contextually. The Company
believes that its ASRT will make possible major new speech recognition
applications and significantly improve the performance, utility and
convenience of current continuous dictation and other applications. The
Company also believes that its ASRT will also be able to take full advantage
of projected future increases in computing power. [See "Certain Factors That
Could Affect the Company's Ability to Achieve its Objectives"]
Thus, in the near term, the Company believes that its ASRT will
initially offer unique speech processing techniques that will be both
complementary and significantly enhancing to currently available speech
recognition systems. The Company anticipates that it will initially license
its ASRT to third-parties and co-develop the ASRT with research and
development groups in government, industry, and academia. In the long term,
the Company anticipates that automatic speech recognition systems employing
the Company's unique new ASRT will dominate the market and set the industry
standard for all automatic speech recognition applications because of its
anticipated capacities to overcome the weaknesses of HMMs.
In addition, the Company expects that certain elements of its ASRT will
have industry-leading applications in such other disciplines as artificial
intelligence and data compression. (Technologies developed and being
developed by the Company which have application and utility in non-speech
recognition industries, market segments and disciplines, plus the ASRT, are
sometimes collectively referred to in this Report as the "Core
Technologies"). Although these plans represent management's belief and
expectation based on its current understanding of the market and its
experience in the industry, there can be no assurance that actual results
will meet these expectations. [See Item 6. Management's Plan of Operation]
The Company is unaware of any other speech recognition product or
technology presently available which could offer the benefits anticipated
from the ASRT. Nevertheless, in light of the significant potential market
for speech recognition products, the Company expects a high degree of
competition for that market, some of which may be from entities having much
greater research, development, manufacturing, marketing and distribution
resources and experience than the Company.
Current Operations
The Company, a development stage company, has no revenue producing
operations at this time. The primary business of the Company continues to be
scientific research and development with a view to entering into third-party
license and co-development relationships for inclusion of the ASRT in
products manufactured by such third parties or co-developers. The Company
will not produce any revenue until such time as it enters into such third-
party license or co-development agreements. The Company has completed its
Core Technologies, and anticipates that the earliest date by which the
Company could be receiving revenues from license and/or co-developer
relationships is within the first half of fiscal 1997. As with all
development-stage entities, there can be no assurance that the Company will
receive revenues by the date set forth above, nor can there be any assurance
that the Company will not experience additional delays in its implementation
schedule. [See Item 6. Management's Plan of Operation]
The Company historically has relied primarily on equity financing to
fund its scientific research and development and general and administrative
requirements, supplemented from time to time by standard commercial financing
arrangements and the Company's ongoing cash management program [see below].
Most of the Company's operating expenses historically have been for
scientific research and development, and general corporate operations.
During 1996, the Company relocated the principal physical operations
associated with research and development of the ASRT from Provo, Utah, to a
larger facility located in Draper, Utah, leased by the Company. [See Item 2.
Description of Property] The Company has no present plans to sell or
purchase any significant plant or equipment, except in connection with
customary operations. With the completion of the Core Technologies, and
based upon the value and revenue received from license and/or co-developer
agreements anticipated during 1997, the Company would then determine whether
it will independently manufacture a product or products incorporating its
Core Technologies for commercial distribution. If the Company elects to
independently manufacture and market product(s) incorporating the Core
Technologies, or based upon the time of receipt of and/or amount of revenue
from third-party licensing or co-developer agreements, the Company likely
will require significant amounts of additional capital, which capital the
Company would expect to procure through equity or debt financing. There can
be no assurance that such additional financing will be available when and if
required, or that such financing will be available on terms and conditions
acceptable to the Company.
During 1996, the Company depended on third parties for most its ongoing
needs, other than scientific research and development with respect to its
Core Technologies and the management of the Company. Such services included
corporate and shareholder relations and accounting and legal services. In
December, 1996, Jeffrey N. Clayton assumed the positions of Vice
President/Legal, and Secretary of the Company and, as such, will coordinate
much of the Company's ongoing legal services. In March, 1997, and pursuant
to the Modification Agreement among the Company, Synergetics and Hansen, the
Company employed approximately 55 engineers and other professionals formerly
employed by Synergetics. The employment of the former Synergetics employees
should not materially increase the Company's costs, since the costs of their
prior employment with Synergetics was borne by the Company through the
Synergetics Agreements. For the foreseeable future the Company intends to
contract for independent audit and consulting services, specialized legal,
and some other professional services. Based on market circumstances,
third-party licenses, and co-developer relationships, the Company will
determine the number of additional employees, if any, required to provide
additional engineering and development of Core Technologies, customer
support, training, sales, and other administrative services.
Intellectual Property Protection
The Company has received formal notice of allowance from the United
States Patent and Trademark office for all 36 claims of its initial patent
application. The patent is now in the process of being prepared by the
Patent and Trademark Office for issuance on June 17, 1997. The patent
describes technologies to allow a computer to accurately recognize continuous
human speech by any speaker. The technologies described in the patent
extract only the essential components of incoming human speech signals and
then isolate those components in a manner such that the underlying sound
characteristics common to all speakers can be specified and used to
accurately identify the phonetic make-up of the speech signals. According to
the patent, this permits the technologies to recognize speech utterances by
any speaker of a given language, without requiring the user to first "train
or enroll" the system with specific voice characteristics. Further, the
technologies implement this speaker independent speech recognition ability in
substantially "real time," allowing the speaker to speak at normal
conversational speeds and without pausing after each word. Finally, the
technologies described in the patent utilize various linguistic and
contextual processing techniques to translate the identified phonetic sounds
into a corresponding word or phrase of any given language.
The Company regards its Core Technologies as proprietary and has
attempted in the past and intends to continue to attempt to protect such
technologies with U.S. and foreign patents, copyrights, trade secret laws
customary in the technology industry and restrictions on disclosure. There
can be no assurance that the Company will be able to take adequate measures
to protect its intellectual property rights with respect to the Core
Technologies or that they will find commercial acceptance despite the
issuance of the patent. The Company could find it necessary to spend
substantial sums defending or enforcing its rights to a particular
application or use of the Core Technologies or other intellectual property
rights. Because of the rapid pace of technological change in its potential
markets, the Company believes that legal protection of its proprietary
information is of equal and substantial importance to the Company's
competitive position with such other factors as product innovation and
response to evolving industry standards, technical and cost effective
manufacturing expertise, and effective product marketing strategies. Without
comprehensive intellectual property protection, it may be possible for
unauthorized third parties to commercially exploit the proprietary aspects of
the Company's Core Technologies. The Company's policy is to aggressively
protect and enforce its intellectual property rights.
Other Information
The original name of the Company was Taris Inc.; the name was changed
to Advanced Sensor Industries, Inc., on March 22, 1994, and then to fonix
corporation on May 13, 1994.
The Company presently is unaware of any governmental or regulatory
approval that must be obtained before commencing the licensing of the Core
Technologies or manufacturing products incorporating its Core Technologies,
either by the Company independently or by third-party licensees or co-
developers. During the preceding two fiscal years, the Company has spent or
incurred expenses of approximately $14,546,242 on the scientific research and
development and related administrative and operational activities.
At December 31, 1996, the Company had 14 full-time employees (including
its executive officers); as of March 21, 1997, the Company had 50 full-time
employees, 11 part-time employees and various consultants. The Company's
scientific research and development employees have expertise in numerous
scientific disciplines, including artificial intelligence, neural technology,
computer science, linguistics, signal processing, speech pathology,
statistics, mathematics modeling and approximation, chemical engineering, and
electrical engineering.
Item 2. Description of Property
The Company owns no real property. Commencing in October 1996, the
Company leased a 25,600 square foot facility in Draper, Utah, from an
unaffiliated third party at which it conducts all of its scientific research
and development activities. The Company's lease of that facility is for a
term of 8 years, with an option to renew for 5 years. The base monthly lease
payment for that facility is $25,387. These terms were negotiated through
arms-length transactions, and the Company believes that such terms are
consistent with prevailing market conditions. The Company presently
anticipates that the Draper facility will meet all of the Company's ongoing
scientific research and development and, if necessary, manufacturing
requirements for the foreseeable future. Before November 1996, the Company
conducted its principal scientific research and development activities in
Provo, Utah, at premises leased by Synergetics, which lease was personally
guaranteed by an executive officer of the Company without compensation or
fee. In addition to the Draper facility, the Company presently sub-leases
office space at market rates for its corporate headquarters and
administrative operations in Salt Lake City, Utah, from Studdert Companies
Corp., a Utah corporation ("SCC"). SCC is an international investment
management company that is owned and controlled by three individuals who each
are executive officers and directors of the Company and who each
beneficially owns more than 10% of the Company's common stock. [See Certain
Relationships and Related Transactions, and Security Ownership of Certain
Beneficial Owners and Management]. The base monthly rental for the sub-
leased space during 1996 was $5,500, plus reimbursable direct expenses for
the use of telephone, facsimile, photocopy and other business equipment. The
three executive officers of the Company have personally guaranteed this lease
in favor of SCC's landlord. The Company presently has no plans to relocate
its corporate headquarters. The Company believes that it has procured
adequate insurance coverage for its operations at both the Draper facility
and the Salt Lake City corporate offices.
Item 3. Legal Proceedings.
During the fiscal year ended December 31, 1996, the Company was not a
party to any material litigation proceeding. On February 10, 1997, an action
(the "Palomba Action") was filed in the Delaware Chancery Court for New
Castle County by Richard J. Palomba, the owner of approximately 15,000 shares
of the Company's common stock, against the Company, six of its directors, and
SMD, L.L.C. ("SMD"), a Utah limited liability company indirectly owned and
controlled by Stephen M. Studdert, Roger D. Dudley and Thomas A. Murdock,
each of whom is an executive officer and director of the Company and
beneficially owns more than 10% of the Company's common stock. The complaint
alleges that certain of the individual employee director defendants
wrongfully caused the Company to engage in a series of loan transactions with
K.L.S. Enviro Resources, Inc., a Nevada corporation ("KLSE"), and thereafter
appropriated to themselves certain corporate opportunities resulting from
such loan transactions. The Complaint further alleges that the non-employee
director defendants wrongfully acquiesced in or ratified the conduct of the
employee-directors, and that all of the individual defendants breached their
fiduciary duties to the Company. The Complaint seeks to compel an accounting
for any alleged profits earned by the employee director defendants, equitable
relief in the form of an order requiring certain of the employee director
defendants to forfeit certain securities of KLSE they allegedly acquired in
breach of their fiduciary duties to the Company, monetary damages in an
unspecified amount, and costs and legal fees.
After the Palomba Action was filed, the Company was provided with a
copy of the Complaint. Thereafter, though process has never been served on
the Company, the Company contacted Mr. Palomba, assessed his concerns and
requested that he voluntarily dismiss the Action. Settlement discussions
commenced which resulted in an agreement in principle to settle the Palomba
Action. Said agreement is subject to approval by the court. When approved,
the Palomba Action will be dismissed with prejudice and on the merits. The
Company will not pay any amounts to the plaintiff as part of the settlement.
Regardless of the outcome of settlement negotiations, the Company
believes that the claims asserted against the Company in the Palomba Action
are entirely without merit, and that the material facts and circumstances
surrounding the relationship between the Company and KLSE have been fully
disclosed in accordance with applicable laws and regulations. [See "Certain
Relationships and Related Party Transactions"]. If and when service of
process for the Palomba Action is accomplished, the Company will vigorously
defend itself against the claims asserted in the Palomba Action.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the shareholders of the Company for a vote
during the fourth quarter of 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information. The Company's common stock is traded on the NASDAQ
SmallCap Market, commencing on July 31, 1996 (trading symbol: "FONX"). Prior
to being listed on the NASDAQ SmallCap Market, the Company's common stock was
quoted on the NASD Electronic Bulletin Board system. The following table
shows the range of high and low bid information for the Company's common
stock as quoted on the NASDAQ SmallCap Stock Market for the third and fourth
quarters of fiscal 1996 and the Electronic Bulletin Board for the first and
second quarters of 1996 and all four quarters of fiscal 1995. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions
and may not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year 1996 Fiscal Year 1995
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $5.9375 $2.2750 $1.7500 $0.9375
Second Quarter 12.0625 3.3750 1.1250 0.6875
Third Quarter 9.6250 5.1250 1.0625 0.6875
Fourth Quarter 8.5625 5.0000 4.2500 0.9375
</TABLE>
Holders. The approximate number of record holders as of March 21,
1997, of the Company's common stock was 146. This number represents the
number of actual record holders as reflected on the records of the Company's
stock transfer agent and does not include beneficial owners of shares held in
"nominee" or "street" name, as to the number of which the Company has not
attempted to speculate.
Dividends. The Company has not paid cash dividends on its common stock
during the preceding two fiscal years. Even assuming that the Company is
able to license its ASRT and begin to receive revenues from license and/or
co-development agreements, the Company nevertheless does not anticipate
declaring a dividend in respect of its common stock in the foreseeable
future.
Recent Sales of Unregistered Securities. During the fiscal year ended
December 31, 1996, the Company issued equity securities that were not
registered under the Securities Act of 1933, as amended (the "Act"), other
than unregistered sales made in reliance on Regulation S under the Act, as
follows:
On October 23, 1995, the Company entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") with Beesmark Investments,
L.C. ("Beesmark"), a Utah limited liability company controlled by Alan C.
Ashton, who assumed a position on the Company's Board of Directors in
connection with the execution of the Securities Purchase Agreement. Beesmark
is and was at all relevant times an "accredited investor" as that term is
defined in Rule 501 of Regulation D under the Act. Under the Securities
Purchase Agreement, Beesmark agreed to invest a total of $6,050,000 in
exchange for which the Company agreed to issue, in the aggregate, 11,562,500
shares of common stock and a $500,000 debenture convertible, at Beesmark's
option, into up to 166,667 shares of preferred stock (if and when the Company
is authorized to issue such preferred stock) or into 166,667 shares of common
stock. The Securities Purchase Agreement further provided that Beesmark's
cash investment would be payable over approximately one year according to a
schedule set forth in the Securities Purchase Agreement. During the fiscal
year ended December 31, 1996, as set forth in the Securities Purchase
Agreement, the Company issued to Beesmark under the Securities Purchase
Agreement a total of 8,218,750 shares of common stock for an aggregate price
of $3,945,000. The Company offered and sold the shares covered by the
Securities Purchase Agreement without registration under the Act in reliance
on Section 4(2) of the Act and Rule 506 of Regulation D promulgated
thereunder. All of the common stock issued to Beesmark under the Securities
Purchase Agreement was issued as restricted securities and the certificates
representing such shares were stamped with a restrictive legend to prevent
any resale without registration under the Act or in compliance with an
exemption.
On April 10, 1996, the Company issued options to purchase 100,000
shares of common stock at the exercise price of $3.24 per share to an
unaffiliated entity in exchange for the rendering by that entity of certain
consulting services to the Company. The unaffiliated entity qualified as an
"accredited investor". This transaction was not registered under the Act in
reliance on the exemption from registration in Section 4(2) of the Act, as a
transaction not involving any public offering. The purchase options were
issued as, and the common stock issuable upon exercise of the purchase option
will be issued as, restricted securities and the option agreement was (and
any certificates to be issued upon exercise will be) stamped with a
restrictive legend to prevent any resale without registration under the Act
or in compliance with an exemption.
On May 6, 1996, the Company sold 169,492 shares of common stock to two
accredited investors, as joint tenants, for the aggregate purchase price of
$500,000. This transaction was not registered under the Act in reliance on
the exemption from registration in Sections 3(b) and 4(2) under the Act and
Rules 505 and 506 of Regulation D under the Act. The common stock issued in
connection with this transaction was issued as restricted securities and the
certificates representing such common stock were stamped with a restrictive
legend to prevent any resale without registration under the Act or in
compliance with an exemption from such registration requirement.
In December 1996, the Company issued a total of 60,000 shares of common
stock upon the exercise by two individuals of stock options that were issued
by the Company in fiscal 1995. The aggregate exercise price for such shares
upon exercise of such options was $30,000. These transactions were not
registered under the Act in reliance on the exemption from registration in
Section 4(2) of the Act, as transactions not involving any public offering.
Item 6. Management's Plan of Operation
fonix is a development-stage company engaged in scientific research and
development of its Core Technologies. The Company's strategic direction is
to deliver through scientific discovery Automatic Speech Recognition
Technologies comprised of components which may be licensed in whole or in
part. The Company has completed the Core Technologies such that they are
available for third-party licensing and co-development. Heretofore, on
advice of intellectual property counsel, the Company has not licensed the
ASRT to any third party vendor or co-developer pending receipt of formal
notice of allowance of its initial patent application. However, having
received such notice of allowance, the Company is presently engaged in
discussions with such potential licensees and co-developers.
The Company's primary development objective is to further develop the
Core Technologies and enhance the main components of its ASRT.
The Company's initial marketing direction is to focus on licensing its
ASRT to third parties and co-developers. These licenses will be made
available to the horizontal computer industry (application software,
operating systems, computers and microprocessor chips) and research and
development entities worldwide, including academia, government, industry and
commercial speech product developers who will want to take advantage of the
Company's Core Technologies in their existing products. The Company will
sell or license its Core Technologies on terms advantageous to the Company.
Run-time product license royalty rates will vary according to applications,
sales volumes, and end-user pricing of products using the ASRT. The Company
will reserve exclusive rights in some fields of use for the internal
development of high value end-user products and applications.
The Company's scientific research and development activities
historically have been conducted by Synergetics pursuant to the Synergetics
Agreements. Under that arrangement, Synergetics provided the personnel and
facilities, and the Company financed such scientific research and development
on an as-required basis. There was no minimum requirement or limit with
respect to the amount of funding the Company was obligated to provide to
Synergetics under the Synergetics Agreements, and the Company was obligated
to use its best efforts in raising all of the necessary funding for the
development of the ASRT. The amounts of payments to Synergetics pursuant to
the Synergetics Agreements were determined as Synergetics submitted weekly
pre-authorized work orders and budgets, which were then reviewed and approved
by the Company. All funds paid to Synergetics have been accounted for by the
Company as research and development expense. Moreover, under the Synergetics
Agreements, the Company, if and when the Company began receiving revenue from
sales of the ASRT or products incorporating the ASRT, was obligated to pay
the Royalty to Synergetics. Under the Modification Agreement, and further
assuming that the definitive agreements relating thereto are executed and the
other preconditions to the effectiveness of the Modification Agreement are
satisfied, of which there can be no assurance, the Company will no longer
have any obligation to pay to Synergetics the Royalty or any percentage of
the gross revenue received from entering into licensing and/or co-development
agreements or otherwise from the manufacture of products incorporating the
ASRT.
As a development stage company which has not yet licensed its Core
Technologies, the Company has not received any revenues from operations.
During the fiscal years ended December 31, 1996 and December 31, 1995, the
Company incurred research and development expenses of $4,758,012 and
$2,704,165 respectively. General and administrative expenses were $3,530,400
and $3,553,665, respectively, for the fiscal years ended December 31, 1996
and December 31, 1995. Due to the lack of revenues and these research and
development and general and administrative expenses, the Company has incurred
losses from operations of $8,288,412 in 1996 and $6,257,830 in 1995. The
Company has not incurred any losses from its cash management program [see
below]. At December 31, 1996, the Company had an accumulated deficit of
$19,841,807 and stockholders' equity of $6,270,189. The Company anticipates
that its investment in ongoing scientific research and development of
artificial intelligence and compression/decompression technologies will
continue at present or increased levels for at least fiscal 1997.
Although the Company presently anticipates that it will enter into
third party license or co-development agreements for its ASRT by the end of
the first half of fiscal 1997, there can be no assurance that the Company
will be able to license the ASRT within that time frame. Even assuming that
the Company is able to begin licensing the ASRT during the first half of
1997, the Company may not receive revenues from operations until later in
1997. Accordingly, the Company expects to incur significant losses at least
through the end of fiscal 1997 and until such time as it is able to enter
into substantial licensing and co-development agreements and actually receive
substantial revenues from such arrangements.
During the preceding two fiscal years, the Company's principal source
of operating capital has been private and other exempt sales of the Company's
equity securities. Private and other exempt sales of the Company's
securities resulted in net cash proceeds of $11,888,443 during 1996.
Additional equity securities were issued for service related, non-cash
consideration of $901,520.
The Company has an established relationship with a major regional
federally insured financial institution pursuant to which the Company has
entered into an agreement allowing it to borrow against its own funds on
deposit with the institution. As of December 31, 1995, the Company had funds
on deposit of $8,000,000, and the Company owed $5,617,522 to the institution.
As of December 31, 1996, the Company had funds on deposit of $20,000,000, and
the Company owed the institution $16,377,358, which obligation matured on
February 3, 1997. The relationship with the institution is re-negotiated
quarterly to enhance the earning potential to the Company of that deposit.
On February 3, 1997 the Company and the institution agreed to extend the term
of the borrowing relationship for an additional three-month term on
comparable competitive terms. The rate of interest paid by the institution
for the Company's funds on deposit at the institution and the interest rate
paid to the Company by the institution was a net difference of 1% for 1996.
Interest income and expense is payable monthly and the principal amount is
payable in full at maturity.
During 1996, and as a result of sales of the Company's equity
securities, the Company accumulated substantial cash resources with which to
fund its ongoing scientific research and development activities and corporate
operations. In an effort to prudently manage and maximize yields on a
portion of its cash resources until such time as they are required for
operations, the Company commenced a program, using a limited portion of its
cash resources, of making short-term loans to other entities, at above
market interest rates. Pursuant to this cash management program, the Company
extended several loans to other entities during 1996 at interest rates
ranging from 12% to 18%, plus payment of loan origination fees. During 1996,
the Company collected interest from said loans in the aggregate amount of
$160,877 and aggregate loan origination fees in the amount of $110,700.
Presently, as a result of the Company's private and other exempt sales
of equity securities during 1996, the Company anticipates that it will be
able to satisfy its cash requirements during the next twelve months.
Nevertheless, the scientific research and development, corporate operations
and marketing expenses will continue to require large amounts of capital.
Because the Company presently has no revenue from operations, the Company
intends to continue to rely primarily on financing through the sale of its
equity and debt securities to satisfy future capital requirements until such
time as the Company is able to enter into acceptable third party licensing or
co-development arrangements such that it will be able to finance ongoing
operations out of license, royalty and sales revenue. There can be no
assurance that the Company will be able to enter into acceptable third party
licensing or co-development agreements. Furthermore, the issuance of equity
securities or other securities which are or may become convertible to the
equity securities of the Company in connection with such financing would
result in immediate and, most likely, substantial dilution to the
shareholders of the Company.
In connection with the Modification Agreement, 55 employees of
Synergetics became full-time or part-time employees of the Company. Taking
account of these employees, the Company presently employs 61 persons and has
a need for approximately 15 additional scientific professionals and 10
additional technology asset managers.
The Company has no plans to purchase any new plants or expand beyond
any existing facility.
Certain Factors That Could Affect the Company's Ability to Achieve Its
Objectives. Notwithstanding the Company's efforts and planning, any one or
more of several factors could delay, obstruct or otherwise hinder the
Company's ability to execute its plan of operation or cause actual results of
such operations to materially differ from expected or anticipated results
including, without limitation, those which are expressed in forward-looking
statements contained in this Report. Included among such factors could be
the following:
Development Stage of ASRT. While the Company generally is pleased with
the progress made to date with respect to the research and development of its
ASRT, the Company presently has no commercial "shrink wrapped" product
incorporating its ASRT and has not yet entered into revenue-generating third
party licensing or co-development contracts. Moreover, the Company has no
present plans to manufacture such a "shrink-wrapped" product. There can be
no assurance that the Company will ever be able to license its ASRT such that
the ASRT or products based thereon will be commercially viable.
Unproven Market; Risks of New Technology. The Company believes that
there is a market for products incorporating speaker-independent, natural
language, continuous speech recognition technology with vocabulary
contextually sufficient to be useful for general purpose consumer, commercial
and industrial use, and capable of operating in real time with acceptable
levels of accuracy. Nevertheless, the Company is subject to all of the risks
inherent in developing and marketing a new product with new technology,
together with the risks associated with market acceptance of such technology,
technological obsolescence, inappropriate intellectual property appropriation
and inadequate funding to commence and/or sustain operations. The Company's
ASRT is new and represents a significant departure from technologies which
have already found a degree of acceptance in the marketplace. There can be
no assurance that the Company's ASRT will receive similar acceptance. Even
if the ASRT is licensed and products incorporating such technology are
manufactured and marketed, the occurrence of warranty or product liability,
or retraction of market acceptance due to product failure, excess product
returns or failure of the products to meet market expectations could prevent
the Company from achieving or sustaining profitable operations.
Competition and Technological Change. The computer hardware and
software industries and into which the ASRT would be incorporated are highly
competitive. Several companies already manufacture and market computer
speech recognition products against which products incorporating the ASRT
will compete. Some, if not all, of those companies have greater experience
in manufacturing and marketing speech recognition products, and many have far
greater financial and other resources than the Company and/or its potential
licensees and co-developers, as well as broader name-recognition, more-
established technology reputations, and mature distribution channels for
their products. Additionally, as the market for automatic speech recognition
expands and matures, the Company expects many more entrants into this already
competitive arena. Computer technologies historically have changed and
evolved at a rapid pace. Consequently, there can be no assurance that the
Company will be able to keep pace with such rapid evolution in the industry.
There can be no assurance that the distinguishing characteristics of the ASRT
as completed and/or as may be enhanced in the future, and any products
employing such technology will be sufficient to allow the Company to
successfully compete in the marketplace.
Ongoing Losses; Accumulated Deficit. Since commencing its business of
developing its ASRT, the Company has had no revenues from operations. During
each of the preceding three fiscal years, the Company has sustained ongoing
losses associated with its research and development costs. As of December
31, 1996, the Company had an accumulated deficit of $19,841,807. Additional
losses will be incurred in the future until such time as the Company is able
to complete licensing or co-development arrangements with third parties.
Need for Additional Financing. The Company has spent, and will
continue to spend, substantial amounts of money in connection with the
research and development of its ASRT. During the year ended December 31,
1996, the Company incurred total research and development expenses in the
amount of $4,758,012. It is not presently possible for the Company to
predict whether its present cash resources will be sufficient to enable the
Company to complete the development of its ASRT. In the event that
substantial amounts of additional financing are required, the Company does
not believe it will be able to obtain such financing from traditional
commercial lenders. Moreover, if additional funding is necessary, the
Company likely will have to conduct additional sales of its equity
securities. There can be no assurance that such additional equity financing
will be available if and when, and in the amounts required, by the Company.
Moreover, even if such financing is available if and when required, there can
be no assurance that such financing will be obtained on terms that are
favorable to the Company, and substantial and immediate dilution to existing
shareholders likely would result.
Controlling Interest of Related Parties. Thomas A. Murdock, a
director, executive officer and founding shareholder of the Company is the
trustee of a voting trust into which is deposited a majority of the Company's
issued and outstanding common stock which effectively gives Mr. Murdock
control of the Company. The Company believes that it will be controlled by
its founding shareholders for the foreseeable future.
Lack of Diversification of the Company's Business. The Company is not
engaged in and does not intend to engage in any business other than the
further development and marketing of its Core Technologies.
Intellectual Property Protection. The Company has received formal
notice of allowance from the United States Patent and Trademark Office for
all 36 claims of its initial patent application. The patent is now in the
process of being prepared by the Patent and Trademark Office for issuance.
When a patent for such technology subsequently issues, as is anticipated on
June 17, 1997, the Company will own such patent pursuant to the Synergetics
Agreements. However, there can be no assurance that such patent, when
issued, would be incontestable to a user with prior rights. The Company is
unaware of any facts or circumstances suggesting that the ASRT or the
Company's anticipated use thereof infringes or will infringe any third party
intellectual property rights. Regardless of the foregoing, there can be no
assurance that the ASRT will not infringe upon third party intellectual
property rights, nor can there be any assurance that a third party will not
assert that the Company has infringed its intellectual property rights, in
which case the Company could be involved in protracted and costly litigation
which could seriously impede the Company's development or otherwise adversely
affect its operations. Additionally, attempts may be made to copy or reverse
engineer aspects of the ASRT, or to obtain, use or exploit information or
methods which the Company deems proprietary. Policing the use of the Core
Technologies and perhaps infringing technology is difficult and expensive.
Litigation or other action may be necessary in the future to protect the
Company's proprietary rights and to determine the validity and scope of the
proprietary rights of others. Such litigation or proceedings could result in
substantial costs and diversions of resources and management's attention, and
could have a material adverse impact upon the Company's business, operating
results and financial condition.
Dependence on Key Personnel. The Company is dependent on the
knowledge, skill and expertise of several key scientific employees and
consultants, including but not limited to C. Hal Hansen, Dale Lynn Shepherd,
R. Brian Moncur, and Tony R. Martinez, and its executive officers, Messrs.
Studdert, Murdock and Dudley. The loss of any of such personnel could
materially and adversely affect the Company's future business efforts.
Moreover, although the Company has taken reasonable steps to protect its
intellectual property rights, if one or more of the Company's key scientific
employees or consultants resigns from the Company to join a competitor, the
loss of such personnel and the employment of such personnel by a competitor
could have a material adverse effect on the Company. In the event of loss of
any of the Company's key employees or consultants, there can be no assurance
that the Company would be able to prevent the unauthorized disclosure or use
of its proprietary technology by such former employees or consultants,
although the Company's employees and consultants have entered into
confidentiality agreements with the Company. The Company does not presently
have any key man life insurance on any of its employees.
Item 7. Financial Statements
Financial statements, with the report of the Company's auditors,
Deloitte & Touche LLP, follow immediately and are listed in Item 13 of Part
IV of this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On February 9, 1995, the Company engaged the Salt Lake City certified
public accounting firm of Peterson, Siler & Stevenson to provide outside
accounting and auditing services for the Company relating to the 1994 audit.
There were no disagreements between the Company and its previous accounting
firm. Peterson, Siler & Stevenson subsequently changed its name to
Pritchett, Siler & Hardy, P.C., and that firm continued as the Company's
independent accountant until March 24, 1997.
On March 24, 1997, the Company engaged the international certified
public accounting firm of Deloitte & Touche LLP as its independent public
accountant. There were no disagreements between the Company and Pritchett,
Siler & Hardy. That firm did, however, include in its Independent Auditors'
Report for the 1995 fiscal year the statement that "the Company is still in
the development stage and has suffered recurring losses which raise
substantial doubt about its ability to continue as a going concern." The
inclusion of this statement, as is common for development stage companies,
was unrelated to the Company's decision to change its independent
accountants, and the Company expects Deloitte & Touche LLP to include a
similar going concern caveat in future accountant's reports. The Company's
decision to change auditors was approved by the Company's Board of Directors.
Deloitte & Touche LLP has conducted the 1996 audit.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The following table sets forth certain information concerning the
executive officers and directors of the Company as of March 21, 1997:
Name Age Position
Stephen M. Studdert 48 Chairman/ CEO
Alan C. Ashton, Ph.D. 54 Director
Joseph Verner Reed 59 Director
James B. Hayes 58 Director
Rick D. Nydegger 48 Director
John A. Oberteuffer, Ph.D. 56 Director
Thomas A. Murdock 53 Director, President/Chief
Operating Officer
Roger D. Dudley 44 Director, Executive Vice
President, Chief Financial
Officer and Treasurer
All directors hold office until the next annual meeting of the
stockholders of the Company and until their successors have been elected and
qualified. The officers of the Company are elected annually and serve at the
pleasure of the Board of Directors.
Stephen M. Studdert, Chairman, Chief Executive Officer. Mr. Studdert
has been Chairman and founder of the Company since the merger of PTI and the
Company in June 1994, and has been the Company's Chief Executive Officer
since May 1996. He also is the Chairman of the Board of Directors of KLSE, a
company with a class of securities registered under Section 12(g) of the
Exchange Act. From 1992 until the present date, Mr. Studdert has been
Chairman of SCC. He served as a White House advisor to U.S. Presidents Bush,
Reagan and Ford. Mr. Studdert has served as a member of the President's
Export Council and the Foreign Trade Practices Subcommittee, and he is a
director and former chairman of the Federal Home Loan Bank of Seattle.
Alan C. Ashton, Ph.D., Director. Dr. Ashton has served on the
Company's Board of Directors since October 23, 1995. He conducted research
and taught computer science for more than 16 years before launching his own
word-processing computer software company, WordPerfect Corporation.
WordPerfect employed more than 4,000 employees worldwide and realized annual
revenues of more than $700 million. He served as a director and executive
officer of WordPerfect for more than five years prior to the acquisition of
WordPerfect by Novell, Inc., the Orem, Utah-based producer of network
software applications, on June 24, 1994. Thereafter, and until November 30,
1996, Dr. Ashton served on the board of directors of Novell, Inc. He
presently serves on the board of directors of Geneva Steel and SkyMall, Inc.
Novell, Geneva Steel and SkyMall each have a class of securities registered
under Section 12 of the Exchange Act. Dr. Ashton also currently serves on
the governing board of Utah Valley State College.
Joseph Verner Reed, Director. Ambassador Reed has served as a director
of the Company since June 1994. He was Under Secretary General of and held
other posts with the United Nations in New York until his retirement from
that post effective January 31, 1997. Following a career as a senior advisor
to the Chairman of the Chase Manhattan Bank, Ambassador Reed became United
States Ambassador to Morocco. He subsequently served as United States
Ambassador to the United Nations and Chief of Protocol of the United States.
He holds honorary doctorates from several universities. Since December 31,
1996, Ambassador Reed also has served as a director of KLSE, a company with a
class of securities registered pursuant to Section 12(g) of the Exchange Act.
James B. Hayes, Director. Mr. Hayes is the former Publisher of
FORTUNE, one of America's most prestigious business publications, and a
former Vice President of Time, Inc. He joined Time, Inc. in 1959 and held
various positions including Publisher of Discover. In July 1995, he was
appointed President and Chief Executive Officer of Junior Achievement, Inc.,
a position he continues to occupy. He was one of 15 U.S. business executives
selected for a Presidential Mission to the former Soviet Union to discuss
business development and economic cooperation. He presently is Chairman of
Moorehouse School of Medicine. Mr. Hayes has served on the Company's Board
of Directors since June 1994.
Rick D. Nydegger, Director. Mr. Nydegger is a patent and trademark
attorney. Mr. Nydegger was a founder and, during the past five years, he has
been a shareholder and director of the law firm Workman, Nydegger & Seeley in
Salt Lake City, Utah, a firm specializing in patent, trademark, copyright,
trade secret, unfair competition, licensing and intellectual property
matters. Mr. Nydegger received his law degree from the J. Reuben Clark Law
School (cum laude, 1974) in Provo, Utah. He has published numerous articles
in trade journals and law reviews on the subject of computer law and
intellectual property. Mr. Nydegger is registered to practice before the
U.S. Patent and Trademark Office and has been admitted to practice before the
U.S. Court of Appeals in the Federal Circuit and the Fifth and Tenth
Circuits, as well as the U.S. Supreme Court. Mr. Nydegger has been a member
of the Company's Board of Directors since December 1996. He also joined the
Board of Directors of KLSE in December 1996.
John A. Oberteuffer, Ph.D. Director. Dr. Oberteuffer is founder and
president of Voice Information Associates, Inc. ("VIA"). VIA is a consulting
group providing strategic technical, market evaluation, product development
and corporate information to the automatic speech recognition industry. In
addition, VIA publishes the monthly newsletter, ASRNews. He is also
executive director of the American Voice Input/Output Society ("AVIOS"). Dr.
Oberteuffer was formerly vice president, personal computer systems, of Voice
Processing Corp. (now merged with Voice Control Systems, Inc.). He was also
founder and CEO of Iris Graphics, which was acquired by Seitex Corp. Dr.
Oberteuffer received his bachelor's and master's degrees from Williams
College, and his Ph.D. in Physics from Northwestern University, and was a
member of the research staff at MIT for five years.
Thomas A. Murdock, President, Chief Operating Officer and Director.
Mr. Murdock was a founder and has served as an executive officer and member
of the Company's Board of Directors since June 1994. Mr. Murdock has also
served as President of SCC since 1992 and Assistant to the Chairman and
Director of Synergetics. For much of his career, Mr. Murdock has been a
commercial banker and a senior corporate executive with significant
international emphasis and experience. Mr. Murdock also serves as a director
of KLSE, a company with a class of securities registered under Section 12(g)
of the Exchange Act.
Roger D. Dudley, Executive Vice President, Chief Financial Officer and
Director. Mr. Dudley was a founder and has served as an executive officer
and member of the Company's Board of Directors since June 1994. Mr. Dudley
is also executive vice president of SCC, a position he has held since 1993.
After several years at IBM in marketing and sales, he began his career in the
investment banking and asset management industry. He has extensive
experience in real estate asset management and in project development. He
also serves as Executive Vice President of an international investment fund,
and has managed assets in excess of $200 million. He also serves as a
director of KLSE, a company with a class of securities registered under
Section 12(g) of the Exchange Act.
In addition to the officers and directors identified above, the Company
expects the following individuals (listed in alphabetical order) to make
significant contributions to the Company's business.
David S. Harkness. Mr. Harkness, 32, is the Company's Vice President
of Technology Assets & Business Development. Mr. Harkness jointed the
Company in March 1996. He came to the Company from Novell, Inc. and
WordPerfect Corporation, where he was a product marketing director for
Novell's business applications division. Prior to occupying that position,
Mr. Harkness held several different sales positions at both Novell and
WordPerfect commencing in 1991. He has led world-wide marketing initiatives
through design specifications, competitive analysis, and product roll-out
planning for various product releases.
Carl Hal Hansen. Mr. Hansen, 47, is Senior Project Engineer for the
Company's ASRT, and Chairman and CEO of Synergetics. Mr. Hansen holds a
degree in Electronics from the Utah Trade Technical Institute of Provo, Utah.
For approximately fourteen years, Mr. Hansen was employed by Signetics, Inc.
in various capacities, including Test Equipment Engineer, Characterization
Engineer, Product Engineer, and as an Electronic Specialist. He was involved
in the design, fabrication and release of layout design for PC boards and
interfaces. In 1991, Mr. Hansen founded Synergetics, where he continues to
have direct leadership with respect to new product development and
engineering. Since March 13, 1997, he has been a full-time consultant to the
Company.
Dale Lynn Shepherd. Mr. Shepherd, 38, was employed by Synergetics from
1992 to March 13, 1997, when he became a full-time employee of the Company.
He graduated from Brigham Young University with a Bachelor of Science Degree
in Electrical Engineering. He also received a Masters of Business
Administration from B.Y.U. Before his employment with Synergetics, Mr.
Shepherd was employed with Mentorgraphics where he acted as a software
systems architect in automatic semiconductor design. Before Mentorgraphics,
Mr. Shepherd worked on a contract basis with Signetics, Inc.
R. Brian Moncur. Mr. Moncur, 38, was employed by Synergetics from 1992
to March 13, 1997, when he became a full-time employee of the Company. He
graduated from Brigham Young University with a Bachelor of Science degree in
chemical engineering. Before his employment with Synergetics, Mr. Moncur was
employed by Signetics, Inc. and Mentorgraphics, where he was a Senior Process
Engineer and Software Development Engineer.
Tony R. Martinez. Dr. Martinez, 38, is senior consulting scientist for
the Company's neural network development. He received his Ph.D. in computer
science at UCLA in 1986. He is an associate professor of Computer Science at
Brigham Young University and currently heads up the Neural Network and
Machine Learning Laboratory in the BYU Ph.D./MS program. His main research
is in neural networks, machine learning, ASOCS, connectionist systems,
massively parallel algorithms and architectures, and non von Neuman computing
methods. He is associate editor of the Journal of Artificial Neural
Networks.
None of the officers or directors of the Company are related to any
other officer or director of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities Exchange Act of 1934 requires the Company's officers and
directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent shareholders
are required by regulation of the Securities and Exchange Commission to
furnish the Company with copies of all Section 16(a) forms which they file.
Based solely on its review of the copies of such forms furnished to the
Company during the fiscal year ended December 31, 1996, the Company is aware
of the following untimely filings: (i) a Form 4 reflecting a trade during
February 1996 by Mr. Murdock's adult son who then shared his household and
disclaiming beneficial ownership as to such shares was filed by Mr. Murdock
in April 1996; and (ii) Forms 5 reflecting the grant in April 1996 of
certain stock options exempt from the short-swing liability provisions of
Section 16(b) of the Exchange Act by virtue of SEC Rule 16b-3 were filed by
all of the Company's directors but Mr. Nydegger (who received no such options
and was not therefore required to file a Form 5) in April 1997. Other than
as disclosed immediately above, the Company believes that during its 1996
fiscal year all Section 16(a) filings required of its officers, directors and
greater than ten-percent beneficial owners were timely made.
Item 10. Executive Compensation.
Executive Compensation. Between June 1994 when the Company merged with
PTI and April 1996, the Company did not pay or award any compensation in any
form directly to the Company's chief executive officer or any other executive
officer. During that period, however, the Company had a management services
contract with SCC, an entity owned and controlled by Messrs. Studdert,
Murdock and Dudley. Accordingly, during the period that the management
services contract between the Company and SCC was in effect, the Company's
executive officers were compensated by SCC, in part, from funds paid by the
Company pursuant to the management contract. [See Item 12. Certain
Relationships and Related Transactions.] In April 1996, the Company and SCC
agreed to modify their contractual arrangement respecting the management
services contract. From and after that time, SCC continued to provide
certain management services such as payroll and human resources assistance,
and SCC continued to be reimbursed for actual expenses incurred on behalf of
the Company. Moreover, after the management services contract was modified,
the Company's executive officers began to be compensated directly by the
Company, which compensation was as follows:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Long Term
Compensation Compensation Awards
------------------------------ --------------------------
Name and Securities Underlying
Principal Position Year Salary Options (#)(1)
- ------------------ ---- --------- --------------------------
<S> <C> <C> <C>
Stephen M. Studdert 1994 -- --
CEO (4/96-Present) 1995 -- --
1996 $131,539 800,000
Thomas A. Murdock 1994 -- --
CEO (6/94 to 4/96) 1995 -- --
President, COO 1996 $131,539 800,000
Roger D. Dudley 1994 -- --
Exec. V.P./CFO 1995 -- --
1996 $131,539 800,000
- ---------------------
</TABLE>
(1) All options granted to named executive officers during fiscal
1996 were granted under the Company's 1996 Director's Stock
Option Plan as compensation for their service on the Company's
Board of Directors [See Director Compensation, below].
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Number of Securities % of Total Options
Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price Date
- -------------------- -------------------- -------------------- --------- -----------
<S> <C> <C> <C> <C>
Stephen M. Studdert 800,000(1)(2) $4.063 4/30/2006
Thomas A. Murdock 800,000(1)(2) 4.063 4/30/2006
Roger D. Dudley 800,000(1)(2) 4.063 4/30/2006
- ---------------------
</TABLE>
(1) Of the total number of options granted, 400,000 became
exercisable six months after the grant date of April 30, 1996 (or
October 30, 1996), 200,000 vest on January 1, 1997, and 200,000
vest on January 1, 1998, assuming that the grantee of such
options continues serving as one of the Company's directors for
at least six months during fiscal 1997.
(2) All options granted to the named executive officers during fiscal
1996 were granted under the Company's 1996 Director's Stock
Option Plan for their service as members of the Company's Board
of Directors. [See Director Compensation, below] Options to
purchase a total of 226,000 shares of the Company's common stock
were granted to various employees of the Company during fiscal
1996 under the Company's Long-Term Stock Investment and Incentive
Plan for employees. Adding the options granted to the named
executive officers under the Company's Directors' Plan to the
number of options issued under the employees' plan, the Company
granted options to purchase a total of 2,626,000 shares of common
stock during fiscal 1996. Of that amount, each of the named
executive officers received approximately 30% of the total number
of options issued to the Company's employees (including the named
executive officers in their capacities as directors).
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES(1)
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End(#) at FY-End ($)(2)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ------------------------- ----------------------- --------------------
<S> <C> <C>
Stephen M. Studdert 400,000/ $2,349,800/
400,000 2,349,800
Thomas A. Murdock 400,000/ 2,349,800/
400,000 2,349,800
Roger D. Dudley 400,000/ 2,349,800/
400,000 2,349,800
- --------------------------
</TABLE>
(1) All options included in table were granted to the named executive
officers under the Company's 1996 Director's Stock Option Plan
[See Director Compensation, below].
(2) Value calculations based on $5.8745 per share (the per share
closing market price on December 31, 1996 of $8.9375 less the
$4.063 per share exercise price for the options).
Director Compensation. Prior to April 1996, the Company's directors
received no compensation for their service as such, although the Company
historically has reimbursed its directors for actual expenses incurred in
traveling to and participating in director's meetings, and the Company
intends to continue that policy for the foreseeable future. On April 30,
1996, the Company's board of directors adopted, and the Company's
shareholders subsequently approved, the Company's 1996 Directors Stock Option
Plan (the "Directors Plan"). Under the Directors Plan, members of the board
are to receive options to purchase 200,000 shares of the Company's common
stock for each year (or any portion thereof consisting of at least six
months) during which such persons have served on the board for each of fiscal
years 1994, 1995, 1996 and 1997. Such options have terms of 10 years.
Under the Directors Plan, during the fiscal year ended December 31, 1996, the
Company granted stock options to members of the board as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS GRANTED TO DIRECTORS DURING FISCAL YEAR
Shares Date Exercise Shares Vested
Name Granted (#) Granted Price Per Share at FY-End(1)
- ------------------------ ------------- ---------- --------------- ------------------
<S> <C> <C> <C> <C>
Stephen M. Studdert 800,000 4/30/96 $4.063 400,000
Alan C. Ashton 400,000 4/30/96 4.063 -
Joseph Verner Reed 800,000 4/30/96 4.063 400,000
James B. Hayes 800,000 4/30/96 4.063 400,000
Thomas A. Murdock 800,000 4/30/96 4.063 400,000
Roger D. Dudley 800,000 4/30/96 4.063 400,000
- --------------------------
</TABLE>
(1) All directors' stock options vested as of December 31, 1996, were
in-the-money, but none of such options have been exercised as of
the date of this Report.
Employment Contracts. The Company presently has executive employment
agreements with each of its executive officers, Messrs. Studdert, Murdock and
Dudley. The material terms of each executive employment agreement with each
executive officer are identical and are as follows: The term of each
employment contract is from November 1, 1996 through December 31, 2001.
Annual base compensation for each executive for the first three years of such
term is $250,000 from November 1, 1996 through December 31, 1996; $325,000
from January 1, 1997 through December 31, 1997; and $425,000 from January 1,
1998 through December 31, 1999. The annual base compensation for the final
two years of the employment agreement is $550,000 from January 1, 2000
through December 31, 2000; and $750,000 from January 1, 2001 through December
31, 2001. However, for these final two contract years, annual base
compensation and the performance-based incentive compensation will be subject
to review by the Company's Board of Directors based upon either or both of
the market price of the Company's common stock and profits derived by the
Company from annual revenues from operations. In addition, each executive
officer is entitled to annual performance-based incentive compensation
payable on or before December 31 of each calendar year during the contract
term. During the first three years of the contract term, the performance-
based incentive compensation is determined with relation to the market price
of the Company's common stock, adjusted for stock dividends and splits. If
the price of the Company's common stock maintains an average price equal to
or greater than the level set forth below over a period of any three
consecutive months during the calendar year, the performance-based incentive
compensation will be paid in the corresponding percentage amount of annual
base salary for each year as follows:
Quarterly Average Stock Price Percentage Bonus
$10.00 30%
$12.50 35%
$15.00 40%
$20.00 45%
$25.00+ 50%
Each such executive officer also is entitled to customary insurance
benefits, office and support staff and the use of an automobile. In
addition, if any executive is terminated without cause during the contract
term then all salary then and thereafter due and owing under the executive
employment agreement shall, at the executive's option, be immediately paid in
a lump sum payment to the executive officer and all stock options, warrants
and other similar rights granted by the Company and then vested or earned
shall be immediately granted to the executive officer without restriction or
limitation of any kind. Further, each executive officer is entitled to
receive one-time cash compensation on or after March 15, 1997 in an amount
sufficient for each executive officer to pay all personal state and federal
income taxes on his 1/3 portion of 3.7 million shares purchased by SCC on
August 11, 1995 and to pay all personal state and federal income taxes on
said compensation amount. No compensation has been paid by the Company to
any executive officer pursuant to this provision to date, but at December 31,
1996, the Company established a reserve of $1,350,000 against this obligation
to all such executives.
Each executive employment agreement contains a non-disclosure,
confidentiality, non-solicitation and non-competition clause. Under the
terms of the non-competition clause, each executive has agreed that for a
period of one year after the termination of his employment with the Company
that the executive not engage in any capacity in a business which competes
with or may compete with the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 21, 1997, the number of
shares of common stock of the Company beneficially owned by all persons known
to be holders of more than five percent (5%) of the Company's voting
securities and by the Executive Officers and Directors of the Company:
<TABLE>
<CAPTION>
Number of
Name and Address of 5% Shares
Beneficial Owners, Beneficially Percent of
Executive Officers and Directors Owned Class(1)
- -------------------------------- ------------------- --------------
<S> <C> <C>
Thomas A. Murdock 26,277,198(2) 62.8%
President, COO and Director
60 East South Temple Street,
Suite 1225
Salt Lake City, Utah 84111
Alan C. Ashton, Director 11,929,167(3)(4) 28.3
c/o Beesmark Investments, L.C.
261 East 1200 South
Orem, Utah 84097
Beesmark Investments, L.C. 11,729,167(4) 28.0
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
Roger D. Dudley, Executive 7,779,596(5) 18.4
Vice President
Chief Financial Officer, Director
60 East South Temple Street,
Suite 1225
Salt Lake City, Utah 84111
Stephen M. Studdert, 7,779,296(6) 18.4
Chairman of the Board
Chief Executive Officer
60 East South Temple Street,
Suite 1225
Salt Lake City, Utah 84111
Studdert Companies Corp. 3,700,000(7) 8.9
5% Beneficial Owner
60 East South Temple Street,
Suite 1225
Salt Lake City, Utah 84111
Joseph Verner Reed, Director 620,000(8) 1.5
73 Sterling Road
Greenwich, Connecticut 06831
James B. Hayes, Director 620,000(8) 1.5
One Education Way
Colorado Springs, Colorado 80906
Rick D. Nydegger, Director --(9) --
10217 North Oak Creek Lane
Highland, Utah 84003
John A. Oberteuffer, Ph.D. -- --
Voice Information Associates, Inc.
14 Glen Road South
Lexington, Massachusetts 02173
Officers and Directors as a Group 9,089,588 64.5%
(8 persons)
- ---------------------------------
</TABLE>
(1) Percentages rounded to nearest 1/10th of one percent. Except as
indicated in the footnotes below, each of the persons listed exercises sole
voting and investment power over the shares of the Company's common stock
listed for each such person in the table.
(2) Includes 25,657,749 shares of common stock deposited in a voting
trust (the "Voting Trust") as to which Mr. Murdock is the sole trustee.
Persons who have deposited their shares of the Company's common stock into
the Voting Trust have dividend and liquidation rights in proportion to the
number of shares of the Company's common stock they have deposited in the
Voting Trust, but have no voting rights with respect to such shares. All
voting rights associated with the shares deposited into the Voting Trust are
exercisable solely and exclusively by the Trustee of the Voting Trust. The
Voting Trust expires, unless extended according to its terms, on the earlier
of September 30, 1999 or any of the following events: (i) the Trustee
terminates it; (ii) the participating shareholders unanimously terminate it;
or (iii) the Company is dissolved or liquidated. Although as the sole
trustee of the Voting Trust Mr. Murdock exercises the voting rights of all of
the shares deposited into the Voting Trust, and accordingly has listed all
shares in the Table above, he has no economic or pecuniary interest in any of
the shares deposited into the Voting Trust except 3,465,083 shares as to
which he directly owns the economic interests, and 3,700,000 shares the
economic rights as to which are owned by SCC, of which Mr. Murdock is a 1/3
equity owner. Also includes 2,813 shares owned directly by Mr. Murdock,
5,236 shares owned by members of Mr. Murdock's immediate family, 11,400
shares owned by SMD, an entity 1/3 owned and controlled by Mr. Murdock, and
600,000 shares of common stock underlying presently exercisable stock
options.
(3) Includes all common stock beneficially owned by Beesmark
Investments, L.C. ("Beesmark") but only to the extent that Dr. Ashton is one
of two managers of Beesmark, and, as such, is deemed to share investment
power with respect to shares beneficially owned by Beesmark. Also includes
200,000 shares of common stock underlying stock options presently exercisable
by Dr. Ashton.
(4) Beesmark's beneficial ownership includes 166,667 shares of common
stock presently issuable upon the conversion of a $500,000 Series A
Convertible Subordinated Debenture (the "Debenture") or, alternatively, upon
the conversion of any Series A Convertible Preferred Stock into which the
balance of the Debenture is convertible, assuming the issuance of such
preferred stock will be approved by the Company's shareholders at the next
annual meeting of shareholders. All shares are deposited into the Voting
Trust. The managers of Beesmark are Alan C. Ashton and Karen Ashton. As
managers of Beesmark, they each are deemed to share voting control over
shares beneficially owned by Beesmark. Mrs. Ashton beneficially owns no
shares other those deemed to be owned by her as a control person of Beesmark,
and consequently her beneficial ownership is not separately reported.
(5) Includes (i) 3,465,083 shares owned by Mr. Dudley and deposited
into the Voting Trust, (ii) 3,700,000 shares owned by SCC as to which Mr.
Dudley shares investment power because of his management position with and
1/3 ownership of SCC, which shares are deposited in the Voting Trust; (iii)
2,813 shares owned directly by Mr. Dudley; (iv) 300 shares owned by Mr.
Dudley's minor children; (v) 11,400 shares owned by SMD, as to which Mr.
Dudley has 1/3 indirect equity ownership and control; and (vi) 600,000 shares
underlying presently exercisable stock options.
(6) Includes (i) 3,465,083 shares owned by Mr. Studdert and deposited
into the Voting Trust, (ii) 3,700,000 shares owned by SCC as to which Mr.
Studdert shares investment power because of his management position with and
1/3 ownership of SCC, which shares are deposited in the Voting Trust; (iii)
2,813 shares owned directly by Mr. Studdert; (iv) 11,400 shares owned by SMD,
as to which Mr. Studdert has 1/3 direct equity ownership and control; and (v)
600,000 shares underlying presently exercisable stock options.
(7) All shares deposited into the Voting Trust.
(8) Includes 600,000 shares of common stock underlying presently
exercisable stock options.
(9) Does not include options to purchase 200,000 shares of common
stock granted to Mr. Nydegger on March 13, 1997 under the fonix corporation
1997 Stock Option and Incentive Plan, which options are exercisable at the
per share price of $7.125 and are exercisable at any time after September 13,
1997.
Item 12. Certain Relationships and Related Transactions.
Studdert Companies Corp.
SCC is a Utah corporation that provides investment and management
services. The officers, directors and owners of SCC are Stephen M. Studdert,
Thomas A. Murdock and Roger D. Dudley, each of whom is a director and an
executive officer of the Company and each of whom beneficially owns more than
ten percent of the Company's issued and outstanding common stock. Between
June 1994, when the Company commenced its present business of developing its
ASRT, and April 30, 1996, the Company did not pay or award any compensation
in any form directly to the Company's executive officers. Rather, in June
1994 the Company entered into an Independent Consulting Agreement (the "SCC
Agreement") with SCC pursuant to which SCC, through Messrs. Studdert, Murdock
and Dudley, rendered certain management and financial services to the
Company.
In 1993, SCC began to render management services to PTI, the Company's
predecessor in interest, with respect to PTI's business of developing the
ASRT. Those services included providing day-to-day administrative management
services, debt financing directly to PTI, procuring debt financing from third
parties, and commencing a search for a joint venture partner or merger
candidate at monthly charges ranging from $50,000 to $100,000. In June 1994,
PTI merged with and into a subsidiary of the Company, after which the Company
entered into the SCC Agreement with SCC dated as of June 22, 1994. Under the
SCC Agreement, SCC agreed that for a period of two years it would manage all
aspects of the Company's day-to-day business, have authority to engage on
behalf of the Company such employees, agents and professionals as it deemed
appropriate, and be reimbursed for its reasonable costs and expenses incurred
for and on behalf of the Company. In return for such services, the Company
agreed to compensate SCC in the amount of $50,000 per month, which monthly
amount was exclusive of (i) fees for capital raising activities by SCC on the
Company's behalf and (ii) actual expenses incurred by SCC.
Pursuant to the SCC Agreement, the Company paid to SCC $209,300 during
the year ended December 31, 1994. At December 31, 1994, the Company owed SCC
$1,164,200 for accrued management fees and $66,805 for expenses incurred.
Between January and July 1995, SCC continued to invoice the Company for
services rendered under the Consulting Agreement. By July 1995, the Company
owed SCC approximately $1,417,000 pursuant to the terms of the SCC Agreement.
On November 16, 1994, the Company's Board of Directors approved the issuance
of warrants to purchase up to 3,700,000 shares of the Company's common stock
to SCC (the "SCC Warrants"). The authorized purchase price of the SCC
Warrants was $.033 per share, and the authorized exercise price for each
share of common stock underlying the SCC Warrants was $.35. The Board of
Directors' resolution authorizing the issuance of the SCC Warrants specified
that the purchase price for the SCC Warrants and the exercise price for
shares of common stock underlying the SCC Warrants could be satisfied by
canceling invoices for services previously rendered to the Company under the
Consulting Agreement or by cash payment. The November 16, 1994 Board meeting
was attended by a quorum of the Board, but only one director who was not also
a principal of SCC was present. Subsequently, on April 11, 1995, pursuant to
the unanimous consent of all disinterested directors in lieu of a special
Board meeting, all of the Company's disinterested directors ratified the
adoption of the resolution authorizing the Company to offer the SCC Warrants.
On July 31, 1995, the Company issued and SCC purchased the SCC Warrants. The
purchase price of the SCC Warrants was $.033 per share of common stock
underlying the SCC Warrants, or an aggregate of $122,100. On August 11,
1995, SCC exercised the SCC Warrants at an exercise price of $.35 per share
of common stock underlying the SCC Warrants. Both the $122,100 purchase
price and the $1,295,000 aggregate exercise price for the SCC Warrants were
satisfied by the cancellation of amounts invoiced to the Company by SCC
pursuant to the SCC Agreement during the fiscal year ended December 31, 1994
and the period between January 1, 1995 and August 11, 1995. Such
cancellation was accomplished on a dollar-for-dollar basis.
Between August 1995 and October 1995, SCC continued to invoice the
Company for its $50,000 monthly management fee under the Consulting
Agreement, portions of which amounts continued to accrue. On October 23,
1995, the Company entered into an investment agreement (the "Beesmark
Agreement") with Beesmark. In connection with the Company's execution of the
Beesmark Agreement, SCC and the Company collaterally agreed that any then
accrued but unpaid balance due to SCC for management services rendered under
the SCC Agreement would be placed on "conditional status" and deferred until
the Company successfully completed certain developmental milestones set forth
in the Beesmark Agreement, at which time such amounts would be due and
payable in full. With respect to management services to be rendered by SCC
after the closing of the Beesmark Agreement, SCC agreed that the Company
would pay only $30,000 of the monthly invoiced $50,000, the balance to be
placed on conditional status. Thus, of the total $600,000 invoiced to the
Company by SCC during the year ended December 31, 1995, the Company paid SCC
$90,000 in cash; $257,000 of accrued but unpaid amounts were placed on
conditional status under the Investment Agreement; and $253,000 was canceled
in partial payment of the exercise price of the SCC Warrants. In addition to
the amounts invoiced by SCC for management fees during the 1995 fiscal year,
the Company also reimbursed SCC for actual expenses incurred in the amount of
$337,405. Thus, at December 31, 1995, the Company owed SCC $257,000 in
management fees, all of which was on conditional status under the terms of
the Beesmark Agreement and was payable to SCC only in the event that the
Company achieved the developmental milestones set forth in the Beesmark
Agreement. At December 31, 1995, the Company also owed SCC $3,825 for
expenses incurred. Additionally, during the year ended December 31, 1995,
SCC charged a total of $70,915 in capital raising fees to the Company. Of
that amount, $49,576 was written off by SCC in connection with the Beesmark
Agreement, and $21,339 was paid to SCC.
Between January 1, 1996 and April 30, 1996, SCC invoiced the Company
for services under the SCC Agreement in the amount of $200,000. Of that
amount, $80,000 was placed on conditional status pursuant to the Beesmark
Agreement and $120,000 was paid to SCC. On April 30, 1996, the disinterested
members of the Company's Board of Directors authorized the Company to enter
into an agreement with SCC modifying the SCC Agreement effective May 1, 1996.
Under the SCC Agreement, as modified, SCC no longer invoices the Company for
management services, but continues to invoice the Company for reimbursement
of actual expenses incurred on the Company's behalf. SCC and the Company
agreed that any amounts invoiced under the SCC Agreement but placed on
conditional status pursuant to the Beesmark Agreement would remain
outstanding obligations of the Company payable only if the Company achieved
the milestones specified in the Beesmark Agreement. The Company further
agreed to pay any then accrued but unpaid amounts invoiced under the SCC
Agreement, including amounts owed and carried over from the year ended
December 31, 1995, which amounts totaled $5,862, as well as outstanding
amounts for expenses incurred. In connection with the modification of the
SCC Agreement, the disinterested members of the Company's Board of Directors
approved base salaries for fiscal year 1996 for each of the Company's
executive officers, effective as of April 1996, as follows: Stephen M.
Studdert, Chief Executive Officer -- $180,000; Thomas A. Murdock, President
and Chief Operating Officer -- $180,000; and Roger D. Dudley, Executive Vice
President and Chief Financial Officer -- $180,000. Effective November 15,
1996, the disinterested members of the Company's Board of Directors approved
an increase in the base salaries of the executive officers from $180,000 to
$250,000 per annum for the remainder of fiscal 1996, with base compensation
increasing annually over the five-year term of those persons' employment
agreements. [See Item 10. Executive Compensation]. In September 1996,
Beesmark made the last of the funding payments provided for under the terms
of the Beesmark Agreement. On February 10, 1997, the Company paid to SCC the
entire balance due to SCC for accrued management fees in the amount of
$337,000. Thus, during the year ended December 31, 1996, the Company paid to
SCC a total of $120,000 for management fees and SCC was reimbursed for actual
expenses incurred on the Company's behalf in the amount of $740,052. During
1996, the Company made no payments to SCC for capital raising activities.
The Company and SCC have agreed to extend the SCC Agreement, at least insofar
as the Company has agreed to reimburse SCC for actual expenses incurred on
behalf of the Company, until December 1998.
The Company paid no compensation in any form directly to any of its
executive officers during fiscal 1995 and until April 1, 1996. However, as
the principals of SCC, during such periods, the Company's executive officers
received a portion of the amounts paid by the Company to SCC under the SCC
Agreement.
Cancellation of Debt By SCC and Thomas A. Murdock
In connection with the Beesmark Agreement, SCC and the Company entered
into a collateral agreement whereby SCC agreed that it would cancel principal
debt of $135,368 and accrued interest of $19,298 owed by the Company to SCC
in connection with a promissory note executed by PTI and assumed by the
Company at the time of the merger of PTI with and into a subsidiary of the
Company. In another collateral agreement, the Company and Thomas A. Murdock,
a director and executive officer of the Company, agreed that the Company
would cancel principal debt of $286,493 and accrued interest of $65,715 due
to Mr. Murdock under a promissory note initially made by PTI and assumed by
the Company at the time of the merger of PTI with and into a subsidiary of
the Company.
Alan C. Ashton and Beesmark Investments, L.C.
On October 23, 1995, the Company, Beesmark and Dr. Ashton entered into
the Beesmark Agreement. Dr. Ashton is presently a director of the Company,
although he did not occupy such position when the Beesmark Agreement was
negotiated and executed. Dr. Ashton also is a co-manager of and has an
indirect pecuniary interest in a portion of Beesmark's assets. Pursuant to
the Beesmark Agreement, Beesmark agreed to provide a total of $6,050,000 of
funding to the Company over a period of approximately 11 months, provided
that during that time the Company was able to timely meet, to Beesmark's
satisfaction, specified developmental milestones. In return for the funding
provided to Beesmark, the Company agreed to issue 11,562,500 shares of common
stock at a price of $.48 per share and a $500,000 Series A Convertible
Subordinated Debenture that is convertible into either 166,667 shares of
Series A Convertible Preferred Stock (assuming the Company's shareholders
approve the issuance of such preferred stock) or 166,667 shares of the
Company's common stock. During the year ended December 31, 1996, Beesmark
paid all installments payable by Beesmark under the Beesmark Agreement, and
the Company issued, in the increments specified, all of the securities
issuable to Beesmark under the Beesmark Agreement. The Company's remaining
obligations under the Beesmark Agreement are limited to using its best
efforts to cause the Company's shareholders to approve necessary amendments
to the Company's certificate of incorporation to allow the Company to issue
the Series A Convertible Preferred Stock into which the Debenture issued to
Beesmark is convertible.
K.L.S. Enviro Resources, Inc. and SMD, L.L.C.
Between May 1996 and August 1996, as part of the Company's short-term
cash management policy, the Company entered into a series of loan
transactions with KLSE, an entity which then was unaffiliated with the
Company. The Company was introduced to KLSE by an unaffiliated third party.
KLSE's common stock is traded in the "over-the-counter" market on the
Electronic Bulletin Board. As of August 12, 1996 the Company had loaned to
KLSE a total of $1,900,000, which loans were due upon demand, bore interest
at the rate of 12% per annum, required the payment of certain loan
origination fees, and were secured by substantially all of the assets of
KLSE, except its real property. The first of the loans from the Company in
the amount of $710,000 was made on May 16, 1996 and the last advance prior to
August 12, 1996, in the amount of $590,000, was made on July 16, 1996.
Pursuant to the terms of the promissory note representing the $710,000
advanced by the Company to KLSE in May 1996, all or part of the balance due
under that note was convertible at the option of the holder of the note to
2,366,667 shares of the restricted common stock of KLSE at the rate of $.30
per share. Similarly, the remaining $1,190,000 owed to the Company,
represented by four separate promissory notes, was convertible into a total
of 2,975,000 shares of KLSE restricted common stock at the rate of $.40 per
share. KLSE also entered into a registration rights agreement with the
Company. In connection with that course of financing, Thomas A. Murdock
assumed a position on KLSE's board of directors, effective July 10, 1996.
In July 1996, the Company was offered the right to acquire 2,561,000
shares of KLSE's restricted common stock and 100,000 shares of KLSE
preferred stock (convertible into 500,000 shares of common stock) from the
Estate of James R. Bell, a former executive officer of KLSE, at a price of
$.48 per common share. Because management viewed this offer as a corporate
opportunity belonging to the Company, management presented this offer
to the Board of Directors of the Company on August 5, 1996. At that same
meeting Messrs. Studdert, Murdock and Dudley advised the disinterested members
of the Board of Directors that, if the Company declined the opportunity to
acquire the KLSE stock, they or an entity controlled by them may desire to
do so. After discussion by the board, but with Messrs. Studdert, Murdock and
Dudley abstaining, the disinterested members of the Board of Directors voted
to decline the opportunity to purchase the KLSE stock from the Bell Estate.
Thereafter, SMD, an entity controlled by Messrs. Studdert, Murdock and
Dudley, acquired the common and preferred stock of KLSE owned by the Bell
Estate. The purchase price is payable in cash in four installments on
February 16, 1997, August 16, 1997, February 16, 1998 and August 16, 1998.
In September 1996, the Company conducted a regular periodic review of
the KLSE loans. As a result of this review, the Company determined that KLSE
had not closed previously anticipated debt and equity financings and that
other events had occurred or failed to occur which, in the judgment of the
Company management, diminished the probability that KLSE would be able to
repay all or substantially all of the loans from the Company by December 31,
1996. The Company then inquired of KLSE concerning its ability to repay the
loans from the Company. KLSE's management responded that because of certain
financing delays, it did not have sufficient cash to then promptly retire the
aggregate amount or a substantial portion of the amount due to the Company.
The Company's Board of Directors then considered the advisability of
converting the balance due on the notes payable by KLSE into common stock.
Among other considerations, the Board sought and received the independent
advice of an unaffiliated investment banking firm. That investment banking
firm advised the Company and its Board of Directors that it was unlikely that
if the Company converted the loans into KLSE common stock and promptly
thereafter sought to dispose of such stock, it would be able to do so in a
fashion which would allow the Company to quickly recover the balance due and
owing under the loans. In light of the investment banking firm's conclusions
and other factors and circumstances, the Company's Board of Directors, with
Messrs. Studdert, Murdock and Dudley abstaining, determined that it would
neither be in the Company's financial interests nor consistent with core
Company business objectives to convert the amounts owed by KLSE into common
stock.
On September 30, 1996, Messrs. Studdert, Murdock and Dudley, through
SMD, advanced debt financing (the "SMD Loan") to KLSE in the amount of
$1,673,730. The SMD Loan was due on demand, bore interest at the rate of 12%
per annum and was secured by the assets of KLSE, except its real property.
The proceeds of the SMD Loan enabled KLSE to pay the Company $1,673,700 in
satisfaction of all then-outstanding balances due the Company except a
balance of $272,156 due and owing under the first promissory note from KLSE
to the Company in the amount of $710,000. In return for the provision of
the SMD Loan to KLSE, SMD acquired warrants to purchase 6,600,000 shares of
KLSE restricted common stock at the exercise price of $.40 per share. Those
warrants have never been exercised and no gain has been realized thereon by
SMD.
Based upon certain changed circumstances at KLSE, on October 29, 1996,
the Company made an additional loan of $200,000 to KLSE on the same terms
as the loans described above. As anticipated, that additional advance was
repaid in full, with accrued interest, by KLSE on December 24, 1996. Also,
on December 31, 1996 the Company sold for cash and assigned $270,000 of the
balance due under the $710,000 promissory note to Ballard Investment Company,
a Utah limited partnership unaffiliated with the Company. Also, on December
31, 1996, KLSE paid the Company the balance of approximately $10,500 due and
owing under the $710,000 promissory note. Thus, as of December 31, 1996, KLSE
was not indebted to the Company in any amount nor did the Company have any
beneficial interest in KLSE. Messrs. Studdert, Murdock and Dudley retain a
controlling interest in KLSE, and Messrs. Studdert, Dudley, Reed and Nydegger
each assumed positions on the board of directors of KLSE on December 31, 1996.
In December 1996, KLSE entered into a management services contract with
SCC. Under the management services contract, KLSE will pay SCC a monthly
management fee of $50,000 in return for which SCC will provide investment
banking, investor relations, financial management and strategic planning
services for KLSE for a term of five years.
Synergetics
Thomas A. Murdock, a director and the Chief Operating Officer of the
Company, is also one of seven directors of Synergetics. In addition, Mr.
Murdock, Stephen M. Studdert and Roger D. Dudley, each of whom is an
executive officer and director of the Company, own shares of the common stock
of Synergetics, although such share ownership in the aggregate constitutes
less than 5% of the total shares of Synergetics common stock issued and
outstanding.
Workman, Nydegger & Seeley
Rick D. Nydegger, who became a director of the Company in December
1996, is a patent and trademark attorney. He is a founding shareholder and
director of the law firm Workman, Nydegger & Seeley in Salt Lake City, Utah,
a firm specializing in patent, trademark, copyright, trade secret, unfair
competition, licensing and intellectual property matters. During each of the
fiscal years ended December 31, 1996 and 1995, Workman Nydegger & Seeley was
patent and intellectual property counsel to the Company, although since Mr.
Nydegger's assumption of a position on the Company's Board of Directors, that
firm ceased to represent the Company, and the Company has engaged the
Washington, D.C., law firm of Finnegan, Henderson, Farabow, Garrett & Dunner,
LLP as its intellectual property counsel. The Company paid legal fees to Mr.
Nydegger's firm in the amounts of $34,598 and $27,063 during the fiscal years
ended December 31, 1996 and 1995, respectively.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Report on Form 8-K
(a) Documents filed as part of Form 10-KSB:
1. Financial Statements (included in Part II, Item 7):
Independent Auditors' Report F-2
Consolidated Balance Sheet, December 31, 1995 F-4
Consolidated Statements of Operations for the Years
Ended December 31, 1996 and 1995 and from October 1,
1993 (Date of Inception) to December 31, 1996 F-5
Consolidated Statements of Stockholders' Equity
from October 1, 1993 (Date of Inception) to December
31, 1996 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996 and 1995 and from October 1,
1993 (Date of Inception) through December 31, 1995 F-8
Notes to Consolidated Financial Statements F-10
2. Regulation S-B Exhibits
(2) Agreement and Plan of Merger dated as of June 6, 1994, by
and among fonix corporation, fonix systems corporation (a
wholly-owned subsidiary of fonix) and Phonic Technologies,
Inc. (including schedules thereto) which is incorporated by
reference from the Company's Current Report on Form 8-K
dated as of June 17, 1994
(3)(i)Articles of Incorporation of the Company which are
incorporated by reference from the Company's Registration
Statement on Form S-18 dated as of September 12, 1989
(3)(i) Certificate of Amendment of Certificate of Incorporation
dated as of March 21, 1994, which is incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(3)(i) Certificate of Amendment of Certificate of Incorporation
dated as of May 13, 1994, which is incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(3)(ii)The Company's Bylaws, as amended, which are incorporated
by reference from the Company's Annual Report for the
Fiscal Year Ended December 31, 1994 on Form 10-KSB
(4) Description of the Company's common stock and other
securities and specimen certificates representing such
securities which are incorporated by reference from the
Company's Registration Statement on Form S-18 dated as
of September 12, 1989, as amended
(9)(i)Voting Trust Agreement dated as of December 10, 1993 by and
among Phonic Technologies, Inc., Stephen M. Studdert,
Thomas A. Murdock and Roger D. Dudley, which is
incorporated by reference from the Company's Current Report
on Form 8-K dated as of June 17, 1994
(9)(ii)Amendment of Voting Trust Agreement by and among the
Company, Stephen M. Studdert, Thomas A. Murdock, Roger D.
Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
October 23, 1995, incorporated by reference from the
Company's Current Report on Form 8-K dated as of October
23, 1995
(9)(iii)Second Amendment of Voting Trust Agreement by and among
the Company, Stephen M. Studdert, Thomas A. Murdock, Roger
D. Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
July 2, 1996, filed herewith
(9)(iv)Third Amendment of Voting Trust Agreement by and among
the Company, Stephen M. Studdert, Thomas A. Murdock, Roger
D. Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
September 20, 1996, filed herewith
(9)(v)Fourth Amendment of Voting Trust Agreement by and among
the Company, Stephen M. Studdert, Thomas A. Murdock, Roger
D. Dudley, Beesmark Investments, L.C., Studdert Companies
Corporation, and Thomas A. Murdock as Trustee, dated as of
September 20, 1996, filed herewith
(10)(i)Product Development and Assignment Agreement dated as of
October 16, 1993 between Phonic Technologies, Inc. and
Synergetics, Inc., which is incorporated by reference from
the Company's Current Report on Form 8-K dated as of June
17, 1994
(10)(ii) Re-Stated Product Development and Assignment Agreement
dated as of March 30, 1995, between fonix Corporation and
Synergetics, Inc., which is incorporated by reference from
the Company's Annual Report for the Fiscal Year Ended
December 31, 1994 on Form 10-KSB
(10)(iii) Independent Consulting Agreement dated as of June 22,
1994, between the Company and Studdert Companies Corp.,
which is incorporated by reference from the Company's
Annual Report for the Fiscal Year Ended December 31, 1994
on Form 10-KSB
(10)(iv) Securities Purchase Agreement byand among the Company,
Beesmark Investments, L.C., and Alan C. Ashton dated as of
October 23, 1995, which is incorporated by reference from
the Company's Current Report on Form 8-K dated as of
October 23, 1995
(10)(v) Memorandum of Understanding dated as of March 13, 1997,
by and among the Company, Synergetics, Inc. and C. Hal
Hansen, filed herewith
(10)(vi) Employment Agreement by and between the Company and
Stephen M. Studdert, filed herewith
(10)(vi) Employment Agreement by and between the Company and
Thomas A. Murdock, filed herewith
(10)(vi) Employment Agreement by and between the Company and
Roger D. Dudley, filed herewith
(16)(i) Letter on Changes in Certifying Accountant, which is
incorporated by reference from the Company's Annual Report
for the Fiscal Year Ended December 31, 1994 on Form 10-KSB,
as amended
(16)(ii) Letter on Changes in Certifying Accountant, which is
incorporated by reference from the Company's Current Report
on Form 8-K dated as of March 24, 1997
(21) List of the Company's subsidiaries, the states of
incorporation of those subsidiaries and the names under
which the subsidiaries do business, which is incorporated
by reference from the Company's Annual Report for the
Fiscal Year Ended December 31, 1994 on Form 10-KSB, as
amended
(23) Consent of Pritchett, Siler & Hardy, P.C., filed herewith
(27) Financial Data Schedule, filed herewith
(b) Reports on Form 8-K: During the fourth quarter of fiscal year 1996,
the Company filed no current report on Form 8-K.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), the registrant has caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized:
fonix corporation
Date: April 15, 1997 By: /s/ Stephen M. Studdert
-------------- -------------------------------------
Stephen M. Studdert, Chairman
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
/s/ Stephen M. Studdert /s/ Alan C. Ashton
- ---------------------------------- -----------------------------------
Stephen M. Studdert, Chairman, Alan C. Ashton, Ph.D., Director
Principal Executive Officer
April 15, 1997 April 11, 1997
- --------------------- -------------------
Date Date
/s/ Roger D. Dudley /s/ Ambassador Joseph Verner Reed
- ---------------------------------- -----------------------------------
Roger D. Dudley, Principal Ambassador Joseph Verner Reed,
Financial Officer, Principal Director
Accounting Officer, Director
April 15, 1997 April 11, 1997
- ---------------------- ----------------------
Date Date
/s/ Thomas A. Murdock
- ---------------------------------- ------------------------------------
Thomas A. Murdock, Director James B. Hayes, Director
April 15, 1997
- -------------------------- -------------------------
Date Date
/s/ John A. Oberteuffer /s/ Rick D. Nydegger
- ---------------------------------- ------------------------------------
John A. Oberteuffer, Ph.D., Director Rick D. Nydegger, Director
April 11, 1997 April 11, 1997
- -------------------------- -------------------------
Date Date
<PAGE>
fonix(TM) corporation and
Subsidiary
(A Development Stage Company)
Consolidated Financial Statements for the Years
Ended December 31, 1996 and 1995 and from
October 1, 1993 (Date of Inception) to December
31, 1996 and Independent Auditors' Report
<PAGE>
fonix(TM) corporation
(A Development Stage Company)
TABLE OF CONTENTS
_____________________________________________________________________________
Page
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet, December 31, 1996 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 and from October 1, 1993
(Date of Inception) to December 31, 1996 F-5
Consolidated Statements of Stockholders' Equity from
October 1, 1993 (Date of Inception) to December
31, 1996 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 and from October 1, 1993
(Date of Inception) to December 31, 1996 F-8
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
fonix(TM) corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of fonix(TM)
corporation and subsidiary (a development stage company) (the Company) as of
December 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended, and for the
period from October 1, 1993 (date of inception) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit. The Company's consolidated financial statements as of and for
the year ended December 31, 1995, and for the period from October 1, 1993
(date of inception) to December 31, 1995 were audited by other auditors whose
report, dated March 4, 1996, except as to Note 12, as to which the date is
March 28, 1997, expressed an unqualified opinion on those statements and
included an explanatory paragraph regarding the Company's ability to continue
as a going concern. The financial statements for the period October 1, 1993
(date of inception) through December 31, 1995 reflect a net loss of
$12,012,299 of the total net loss. The other auditors' report has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for such prior periods, is based solely on the report of such other
auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, such
financial statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 1996, and
the results of its operations and its cash flows for the year then ended, and
for the period from October 1, 1993 (date of inception) to December 31, 1996,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company is a
development stage enterprise engaged in developing
F-2
<PAGE>
automated speech recognition technologies. As discussed in Note 1 to the
consolidated financial statements, the Company's operating losses since
inception raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
March 28, 1997
/s/ Deloitte & Touche LLP
F-3
<PAGE>
fonix(TM) corporation and Subsidiary
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
_____________________________________________________________________________
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 5) $ 22,805,786
Note receivable (Note 2) 1,000,000
Interest receivable 157,643
Prepaid assets 4,172
--------------
Total current assets 23,967,601
EQUIPMENT (Net of accumulated depreciation of $80,232) (Note 3) 1,279,746
INTANGIBLE ASSETS (Net of accumulated amortization of $4,168) 53,011
OTHER ASSETS 30,912
--------------
TOTAL ASSETS $ 25,331,270
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 307,931
Accounts payable - related party 411,743
Accrued expenses (Note 7) 1,464,049
Convertible debenture (Note 4) 500,000
Note payable (Note 5) 16,377,358
--------------
Total current liabilities 19,061,081
--------------
COMMITMENTS AND CONTINGENCIES (Notes 8, 10, and 11)
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, $.0001 par value, 100,000,000 shares authorized,
no shares issued and outstanding
Common stock, $.0001 par value, 100,000,000 shares authorized,
shares issued and outstanding at December 31, 1996 were 41,626,563 4,163
Additional paid-in capital 26,107,833
Deficit accumulated during the development stage (19,841,807)
-------------
Total stockholders' equity 6,270,189
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,331,270
=============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
fonix(TM) corporation and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
FROM OCTOBER 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
_____________________________________________________________________________
<TABLE>
<CAPTION>
From
October 1,
Year Ended 1993 (Date of
December 31, Inception) to
-------------------------------- December 31,
1996 1995 1996
<S> <C> <C> <C>
REVENUES NONE NONE NONE
-------------- -------------- --------------
EXPENSES:
General and administrative (Note 7) $ 3,530,400 $ 3,553,665 $ 9,299,558
Research and development (Note 8) 4,758,012 2,704,165 10,870,999
-------------- -------------- --------------
Total expenses 8,288,412 6,257,830 20,170,557
LOSS FROM OPERATIONS (8,288,412) (6,257,830) (20,170,557)
OTHER INCOME (EXPENSES):
Interest income 1,180,259 191,929 1,392,457
Interest expense (Note 7) (721,355) (279,996) (1,094,255)
-------------- -------------- --------------
Total other income (expenses) 458,904 (88,067) 298,202
-------------- -------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM (7,829,508) (6,345,897) (19,872,355)
EXTRAORDINARY ITEM -
Forgiveness of debt (Note 7) 30,548 30,548
-------------- -------------- --------------
NET LOSS $ (7,829,508) $ (6,315,349) $ (19,841,807)
============== ============== ==============
LOSS PER COMMON SHARE:
Loss before extraordinary item $ (0.21) $ (0.30) $ (0.86)
Extraordinary item Nil
-------------- -------------- --------------
LOSS PER COMMON SHARE $ (0.21) $ (0.30) $ (0.86)
============== ============== ==============
WEIGHTED AVERAGE
NUMBER OF SHARES 36,982,610 21,343,349 23,098,260
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
fonix(TM) corporation and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FROM OCTOBER 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
_____________________________________________________________________________
<TABLE>
<CAPTION>
Accumulated
Deficit
Common Stock Additional During the
------------------------------- Paid-in Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992
(As previously reported) 37,045,000 $ 3,704 $ 136,659 $ (29,495) $ 110,868
Reverse stock split of
one share for ninety shares (36,633,389) (3,663) 3,663
Restatement for reverse acquisition
of fonix corporation by Phonic
Technology, Inc. 9,983,638 999 (141,362) 29,495 (110,868)
-------------- -------------- --------------- -------------- --------------
BALANCE, October 1, 1993
(Date of inception) 10,395,249 1,040 (1,040)
Net loss for the period October 1,
1993 (date of inception) to
December 31, 1993 (1,782,611) (1,782,611)
-------------- -------------- --------------- -------------- --------------
BALANCE, December 31, 1993 10,395,249 1,040 (1,040) (1,782,611) (1,782,611)
Acquisition of Taris, Inc. 411,611 41 1,240 1,281
Shares issued for services at $.14
to $.18 1,650,000 165 249,835 250,000
Shares issued for services at $.25 per
share 20,000 2 4,998 5,000
Shares issued for conversion of notes
payable and interest payable at
$.04 per share 3,900,000 390 156,515 156,905
Shares issued for cash at $1.19 to
$3.13 per share less offering
costs of $368,450 1,819,293 181 3,315,874 3,316,055
Net loss for the year ended December
31, 1994 (3,914,339) (3,914,339)
-------------- -------------- --------------- -------------- --------------
BALANCE, December 31, 1994 18,196,153 1,819 3,727,422 (5,696,950) (1,967,709)
Shares issued during the year for cash,
at $.45 to $2.50 per share less
offering costs of $267,714 6,442,538 645 4,509,542 4,510,187
Shares issued during the year for non-
cash services rendered and cancellation
of accounts payable at $.55 to $1.55
per share 516,630 52 355,319 355,371
(Continued)
</TABLE>
F-6
<PAGE>
fonix(TM) corporation and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FROM OCTOBER 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996 (CONTINUED)
_____________________________________________________________________________
<TABLE>
<CAPTION>
Accumulated
Deficit
Common Stock Additional During the
------------------------------- Paid-in Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Warrants issued during the year for
non-cash cancellation of accounts
payable, at $.033 per warrant $ 122,100 $ 122,100
Shares issued during the year upon
conversion of warrants for non-cash
cancellation of accounts payable
at $.35 per share (Additional compen-
sation expense of $2,282,900 or
$.62 per share was recorded in
accordance with APB Opinion No. 25) 3,700,000 $ 370 3,577,530 3,577,900
Shares issued during the year upon
conversion of warrants for cash,
at $.50 to $1.00 per share 550,000 55 474,945 475,000
Warrants issued during the year for
cash, at $.0033 to $.10 per warrant
less offering costs of $5,040 45,360 45,360
Forgiveness of debt with related
parties 506,874 506,874
Net loss for the year ended
December 31, 1995 $ (6,315,349) (6,315,349)
-------------- -------------- --------------- -------------- --------------
BALANCE, December 31, 1995 29,405,321 2,941 13,319,092 (12,012,299) 1,309,734
Shares issued during the year for non-
cash finders fees at $1.52 to
$2.72 per share 420,000 42 901,478 901,520
Shares issued during the year upon
conversion of warrants for cash
at $.50 per share 60,000 6 29,994 30,000
Shares issued during the year for
cash, at $.48 to $3.38 per share
less offering costs of $2,033,286 11,741,242 1,174 11,857,269 11,858,443
Net loss for the year ended
December 31, 1996 (7,829,508) (7,829,508)
-------------- -------------- --------------- -------------- --------------
BALANCE, December 31, 1996 41,626,563 $ 4,163 $ 26,107,833 $ (19,841,807) $ 6,270,189
See notes to consolidated financial statements. (Concluded)
</TABLE>
F-7
<PAGE>
fonix(TM) corporation and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
OCTOBER 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
_____________________________________________________________________________
<TABLE>
<CAPTION>
October 1,
Year Ended 1993 (Date of
December 31, Inception) to
-------------------------------- December 31,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM DEVELOPMMENT ACTIVITIES:
Net loss $ (7,829,508) $ (6,315,349) $ (19,841,807)
Adjustments to reconcile net loss to net cash
used in development activities:
Common stock issued for services 901,520 167,750 1,324,270
Additional compensation expense recorded in
accordance with APB Opinion No. 25 2,282,900 2,282,900
Write-off of assets received in acquisition 1,281
Depreciation and amortization 83,183 1,217 84,400
Non-cash gain on forgiveness of debt (30,548) (30,548)
Changes in assets and liabilities:
Interest receivable (131,419) (21,827) (157,643)
Prepaid assets (4,172) (4,172)
Other assets (30,912) (30,912)
Accounts payable 42,702 1,652,731 1,943,200
Accounts payable - related party 150,918 (970,180) 411,743
Accrued expenses 1,433,053 50,136 1,555,967
-------------- -------------- --------------
Net cash used in development activities (5,384,635) (3,183,170) (12,461,321)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (1,311,236) (48,742) (1,359,978)
Investment in intangible assets (33,126) (24,053) (57,179)
Investment in notes receivable (963,106) (36,894) (1,000,000)
-------------- -------------- --------------
Net cash used in investing activities (2,307,468) (109,689) (2,417,157)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in revolving note payable 10,759,836 3,619,300 16,377,358
Proceeds from notes payable 824,551 2,351,667
Payments on notes payable (977,818) (1,779,806)
Proceeds from issuance of convertible debenture 500,000 500,000
Proceeds from issuance of common stock 11,888,443 5,030,547 20,235,045
-------------- -------------- --------------
Net cash provided by financing activities 22,648,279 8,996,580 37,684,264
-------------- -------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,956,176 5,703,721 22,805,786
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,849,610 2,145,889 None
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,805,786 $ 7,849,610 $ 22,805,786
============== ============== ==============
(Continued)
</TABLE>
F-8
<PAGE>
fonix(TM) corporation and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
OCTOBER 1, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1996
_____________________________________________________________________________
<TABLE>
<CAPTION>
October 1,
Year Ended 1993 (Date of
December 31, Inception) to
-------------------------------- December 31,
1996 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION - Interest paid $ 638,302 $ 229,039 $ 888,466
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING INFORMATION:
For the year ended December 31, 1996:
* The Company issued 420,000 shares of common stock to unrelated parties for
finders fees valued at $901,520.
For the year ended December 31, 1995:
* The Company was forgiven of related party notes payable of $286,493 and
$135,368 with accrued interest of $65,715 and $19,298, respectively. The
Company was also forgiven of various accounts payable in the amount of
$30,548 (Note 7).
* The Company issued 285,000 shares of common stock to unrelated parties for
services rendered valued at $167,750.
* The Company issued 231,630 shares of common stock to unrelated parties to
cancel $187,621 in accounts payable.
* The Company issued 3,700,000 shares of common stock upon conversion of
3,700,000 warrants to a company controlled by the majority shareholders of
the Company in lieu of payment of management fees for services previously
rendered of $1,417,100 included in accounts payable.
See notes to consolidated financial statements. (Concluded)
F-9
<PAGE>
fonix(TM) corporation and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - fonix(TM) corporation (known as Taris, Inc. prior to its
acquisition by Phonic Technologies, Inc., as described below) (the
Company) was organized under the laws of the state of Delaware on
September 12, 1985. Taris, Inc. was a public shell with no operations.
Prior to June 17, 1994, Taris, Inc. had a reverse stock split of one share
for ninety shares. The financial statements have been adjusted to reflect
the stock split as though it had happened January 1, 1993. Phonic
Technologies, Inc. (PTI) was organized on October 1, 1993 (date of
inception) for the purpose of developing a proprietary automated speech
recognition technology. On June 17, 1994, fonix(TM) corporation entered
into a merger agreement with PTI whereby fonix(TM) corporation issued
10,395,249 shares of its common stock for all of the issued and
outstanding common shares of PTI. Upon completion of the merger, PTI
shareholders owned in excess of 90 percent of the outstanding common stock
of fonix(TM). The transaction is accounted for as a reverse acquisition
as though PTI acquired fonix(TM). The financial statements, therefore,
reflect the operations of fonix(TM) since the acquisition on June 17, 1994
and PTI, since October 1, 1993 (date of inception). fonix(TM) is a
development stage company. fonix(TM) proposes to use proceeds from the
sales of stock and other sources of capital for working capital,
marketing, and further development of related technologies of its
proprietary automated speech recognition technologies.
Basis of Presentation - The accompanying consolidated financial statements
of fonix(TM) have been prepared on a going-concern basis, which
contemplates profitable operations and the satisfaction of liabilities in
the normal course of business. As with most development stage companies,
there are uncertainties that raise substantial doubt about the ability of
fonix(TM) to continue as a going concern. As shown in the consolidated
statements of operations, the company has not yet achieved profitable
operations and continues to report operating losses including a loss of
$7,829,508 for the year ended December 31, 1996 and cumulative losses of
$19,841,807 for the period October 1, 1993 (date of inception) to December
31, 1996. Marketing of complete automated speech recognition technologies
for third party licensing, including original equipment manufacturer (OEM)
licensing arrangements, development of related technologies, and strategic
partnering may require additional financing or capital. As of December
31, 1996, fonix(TM) has working capital of $4,906,520, which may not be
adequate to finish such activities.
The Company has completed development of its sound representation engine,
neural network, audio signal processor, and command processing engine for
use in its core automated speech recognition technologies. The Company
continues development work concerning related technologies. The Company
has been seeking U.S. and foreign patent protection for various aspects of
its technologies through the filing of several domestic and international
applications. The Company has received formal notice of allowance from
the U.S. Patent and Trademark Office (PTO) for all 36 claims of its
initial patent application. The application is now in the process of
being prepared by the PTO for issuance. Although the Company has
completed development of its core technologies, there can be no assurance
that fonix(TM) will be able to sell, license, or otherwise market its
technologies to third parties in order to generate sufficient revenues to
pay its operating costs and complete development of its related
technologies. Management plans to continue financing the operations of the
Company through additional loans and/or sales of equity securities.
F-10
<PAGE>
The Company's continuation as a going concern is dependent upon its
ability to satisfactorily meet its debt obligations, license its completed
technologies, meet its development goals, secure adequate financing or
additional equity and ultimately to generate sufficient cash flows to
achieve profitable operations. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Consolidation - The accompanying consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, fonix(TM)
Systems Corporation (fonix(TM) Systems), which is the primary operating
entity in the consolidated group. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - For purposes of the statement of cash flows,
the Company considers all highly liquid debt instruments with a maturity
of three months or less to be cash equivalents.
Equipment - Equipment is stated at cost. Depreciation is computed for
financial statement purposes on a straight-line basis over the estimated
useful lives of the assets as follows:
Furniture and fixtures 5 years
Computer equipment 3 to 5 years
Leasehold improvements 8 years
Intangible Assets - Intangible assets consist of the direct costs incurred
by the Company to date in applying for patents on its technology.
Amortization is computed for financial statement purposes on a
straight-line basis over the patent's estimated useful life of seventeen
years.
Research and Development - All research and development activities are
contracted from an unaffiliated research and development entity,
Synergetics, Inc. (see Notes 8 and 11). All monies paid to Synergetics,
Inc. are charged to expense as incurred.
Concentration of Credit Risks - The Company is a development stage
enterprise and has not commenced principal business operations. It has no
sales or receivables. The Company's cash is pledged as collateral on a
revolving note (see Note 5) and is maintained in bank deposit accounts
which exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Long-Lived Assets - On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of".
This statement addresses the accounting for the impairment of long-lived
assets, such as property, plant, and equipment, certain identifiable
intangibles, and goodwill related to those assets. Long-lived assets and
certain identifiable intangibles are to be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss is
recognized when the sum of the estimated future cash flows (undiscounted
and without interest charges expected from the use of the asset and its
eventual disposition)
F-11
<PAGE>
is less than the carrying amount of the asset. The statement also
requires that long-lived assets and identifiable intangibles be accounted
for at the lower of cost or fair value less cost to sell. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial
statements.
Stock-Based Compensation - On January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 requires
expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded. Since
the Company has decided to continue to apply APB Opinion No. 25 (as
permitted by SFAS No. 123), the appropriate required disclosure of the
effects of SFAS No. 123 is included in Note 6.
Loss Per Share - Loss per share is calculated by dividing net loss by the
weighted average number of shares of common stock outstanding during the
period. Common stock equivalents were not included in the loss per share
calculation as they are antidilutive.
Income Tax - The Company provides deferred tax assets or liabilities equal
to the expected future tax benefit or expense of temporary reporting
differences between assets and liabilities for book and income tax
reporting purposes and also for any available operating loss or tax credit
carryforwards.
Other - Certain reclassifications have been made in the prior year amounts
to conform with classifications adopted in the current year.
2. CASH MANAGEMENT PROGRAM - NOTE RECEIVABLE
At December 31, 1996 the Company had an unsecured note receivable from an
unrelated third party in the amount of $1,000,000 which bears interest at
12% per annum and is due and payable thirty days after written notice from
the Company.
3. EQUIPMENT
Equipment consists of the following at December 31, 1996:
Furniture and fixtures $ 602,620
Computer equipment 687,987
Leasehold improvements 69,371
--------------
Total 1,359,978
Less accumulated depreciation and amortization (80,232)
--------------
Total $ 1,279,746
==============
4. CONVERTIBLE DEBENTURE
During October 1995, the Company issued a Series A Subordinated
Convertible Debenture in the amount of $500,000 to a private investment
entity. The debenture is due October 23, 1997, has an annual interest rate
of 5% and may be converted to Series A Preferred Stock or into common
stock (see Note 6).
F-12
<PAGE>
5. NOTE PAYABLE
At December 31, 1996, the Company had a revolving note payable to a bank
in the amount of $16,377,358 which bears interest at the rate of 5.75%.
This note payable was due February 3, 1997, and is secured by a
certificate of deposit in the amount of $20,000,000. On February 3, 1997
similar terms were negotiated to extend the maturity date of the note to
April 30, 1997 and to change the rate to 5.8%.
6. STOCKHOLDERS' EQUITY
Issuance of Stock - During 1996, the Company issued an additional
11,741,242 shares of common stock to unrelated private investors pursuant
to various stock purchase agreements. In connection with these stock
issuances, the Company issued an additional 420,000 shares of common stock
valued at $901,520 as payment of finders fees to unrelated third parties.
During 1995, the Company issued a total of 11,209,168 shares of common
stock.
Preferred Stock - In 1994, the Company amended its articles of
incorporation to authorize the issuance of Series A Preferred stock. As
of December 31, 1996 the Company's board of directors and shareholders had
not yet authorized the issuance of preferred stock or determined the
dividend rate, liquidation preferences, participation rights, or
redemption requirements of the stock.
Funding Agreement - In October 1995, the Company entered into a funding
arrangement with a private investment entity. Under terms of the
agreement, the investor agreed to fund the Company with $6,050,000
(Funding Commitment) over an 11 month period for a total of 11,562,500
shares of the Company's common stock, including $500,000 for a debenture
which is convertible into 166,667 Series A Preferred Stock. The Company
received $3,945,000 (which includes the $500,000 convertible debenture)
and $2,105,000 of the Funding Commitment in 1996 and 1995, respectively.
Stock Options and Warrants - During 1996, employees were granted an
aggregate of 46,000 stock options as signing incentives. The exercise
price of such options is the closing market price of the stock on the date
the options are granted. These options are exercisable at any time
beginning six months after the date of grant and expire July 30, 2006.
In April 1996, the directors approved a directors' stock option plan,
under which the aggregate number of shares available for issuance is
5,400,000. The shareholders of the Company approved the plan at their
annual meeting in July 1996. In lieu of cash compensation to the
directors, the plan is administered by a committee consisting of two or
more directors of the Company. The plan provides that each director shall
receive options to purchase 200,000 shares of common stock for services
rendered as a director during each entire calendar year or portion of a
calendar year in excess of six months. The exercise price of such options
is the closing market price of the stock on the date the options are
granted. The option term is ten years from the date of grant.
In April 1996, the directors approved an employee stock option plan under
which the aggregate number of shares available for issuance is 900,000
shares. The exercise price of such options is the closing market price of
the stock on the date the options are granted. The term of the plan is 10
years and options are subject to a three year vesting schedule, pursuant
to which one-third of the total number of options granted may be exercised
each year. These options expire between July and November 2006.
In April 1996, the Company granted 100,000 warrants to an unrelated
individual to purchase 100,000 shares of the Company's common stock.
These warrants were granted in lieu of cash for services rendered the
Company in connection with the Funding Commitment.
F-13
<PAGE>
In April 1995 three unrelated individuals were offered and purchased
120,000 warrants for common stock in connection with a stock purchase
agreement. The warrants are exercisable anytime prior to April 1998.
In April 1995, the disinterested directors of the Company approved the
issuance of warrants to purchase 3,700,000 shares of common stock to an
entity controlled by three directors of the Company who also are majority
shareholders of the Company, in lieu of payment of $1,417,100 in
management fees for services previously rendered, due from the Company to
the entity controlled by the three directors.
In November 1994, the Company granted warrants for the purchase of an
aggregate of 155,000 shares of common stock to certain individuals,
including warrants for 30,000 shares to three directors. In October 1995,
certain of these individuals were granted the right to purchase warrants
to purchase an additional 185,000 shares of restricted common stock. In
order to preserve the Company's limited cash, warrants were granted in
lieu of cash for services rendered to the Company. The warrants, as well
as the right to purchase the warrants, expire between April 1998 and
October 1998.
In October 1994 the Company granted 150,000 warrants to purchase common
stock to an employee. Due to the limited cash funds of the Company, these
warrants were granted in lieu of cash for previous and future services.
As part of a September 1994 restated stock purchase agreement, the Company
granted a shareholder the right to purchase 500,000 warrants at $.10 for
the purchase of common stock restricted by Regulation S. In December 1995
the 500,000 warrants were purchased for $50,000. At the time of the
purchase of said warrants, the rights were assigned to two foreign
entities which purchased the 500,000 shares for $500,000.
A summary of the status of the options granted under the Company's stock
option plan and employment agreements for the year ended December 31, 1996
is presented below (there were no options in 1995):
<TABLE>
<CAPTION>
Weighted
Average
Stock Exercise
Options Price
-------------- --------------
<S> <C> <C>
Outstanding at beginning of year None -
Granted 4,626,000 $ 4.07
Exercised - -
Forfeited - -
Canceled - -
-------------- --------------
Outstanding at end of year 4,626,000 $ 4.07
============== ==============
Exercisable at end of year 2,000,000 $ 4.06
============== ==============
Weighted average fair value of options
granted during the year $ 4.83
==============
</TABLE>
F-14
<PAGE>
A summary of the status of the options outstanding under the Company's
Stock option plans and employment agreements at December 31, 1996 is
presented below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.97 - 3.66 155,000 9.6 years $ 3.55
4.06 4,400,000 9.3 years 4.06 2,000,000 $ 4.06
5.00 - 5.06 51,000 9.8 years 5.00
8.50 - 9.31 20,000 9.6 years 8.91
-------------- -------------- -------------- -------------- -------------- --------------
$ 2.97 - 9.31 4,626,000 9.32 years $ 4.07 2,000,000 $ 4.06
============== ============== ============== ============== ============== ==============
</TABLE>
A summary of the status of the warrants granted by the Company during the
years ended December 31, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------------- --------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 560,000 $ 1.22 305,000 $ 1.24
Granted 100,000 3.24 4,505,000 0.51
Exercised (60,000) 0.50 (4,250,000) 0.47
Forfeited - - - -
Canceled - - - -
-------------- -------------- -------------- --------------
Outstanding at end of year 600,000 $ 1.63 560,000 $ 1.22
============== ============== ============== ==============
Weighted average fair value of
warrants granted during the year $ 5.67 $ 3.49
============== ============== ============== ==============
</TABLE>
F-15
<PAGE>
A summary of the status of the warrants outstanding from the Company at
December 31, 1996 is presented below:
<TABLE>
<CAPTION>
Warrants Outstanding Exercisable
-------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ .50 230,000 1.6 years $ 0.50 230,000 $ 0.50
2.00 270,000 1.1 years 2.00 270,000 2.00
3.24 100,000 2.3 years 3.24 100,000 3.24
-------------- -------------- -------------- -------------- -------------- --------------
$ .50 - 3.24 600,000 1.5 years $ 1.63 600,000 $ 1.63
============== ============== ============== ============== ============== ==============
</TABLE>
Had compensation cost for these options and warrants been determined in
accordance with the method prescribed by SFAS No. 123, the Company's net
loss and loss per common share would have been increased to the proforma
amounts indicated below:
Year Ended December 31,
--------------------------------
1996 1995
-------------- --------------
Net loss:
As reported $ 7,829,508 $ 6,315,349
Proforma 8,644,083 6,486,254
Loss per common share:
As reported (0.21) (0.30)
Proforma (0.23) (0.30)
The fair value of options and warrants is estimated on the date granted
using the Black-Scholes pricing model with the following assumptions used
for grants during 1996 and 1995:
Risk-free interest rate of 6.5% and 6% for 1996 and 1995, respectively.
Expected dividend yield of 0% for both 1996 and 1995. Expected life of
ten years and three years for 1996 and 1995, respectively. Expected
volatility of 118% and 205% for 1996 and 1995, respectively.
In February 1997, SFAS Nos. 128, "Earnings Per Share" and 129,
"Disclosures of Information about Capital Structure" were issued. SFAS
No. 128 changes the computation, presentation, and disclosure requirements
of earnings per share (EPS) for entities with publicly held common stock.
SFAS No. 129 addresses standards for disclosing information about an
entity's capital structure. Although such statements are not effective
until December 31, 1997, had such statements been adopted for the years
ended December 31, 1996 and 1995, and for the period from October 1, 1993
(date of inception) to December 31, 1996 the effect would not be
significant.
F-16
<PAGE>
7. RELATED PARTY TRANSACTIONS
Related party transactions with a company owned by the majority
shareholders not otherwise disclosed for the years ended December 31, 1996
and 1995 were as follows:
1996 1995
Expenses:
Management fees expense $ 200,000 $ 600,000
Interest expense None 8,881
Rent expense 52,000 24,000
Payables:
Accounts payable 411,743
Accrued expenses 1,350,000
The Company rents office space from a company owned by the majority
shareholders under a month-to-month lease. The lease, to the company
owned by the majority shareholders, is guaranteed by the three majority
shareholders of the Company.
In October 1995, a note payable to an officer and shareholder of the
Company in the amount of $286,493 along with the accrued interest of
$65,715, were forgiven and were accounted for as additional paid-in
capital from forgiveness of debt to the Company.
In October 1995, a note payable to a company owned by the majority
shareholders of the Company in the amount of $135,368 along with accrued
interest of $19,298, were forgiven by the related company, and were
accounted for as additional paid-in capital from forgiveness of debt to
the Company.
In October 1995, accounts payable to unrelated third parties in the amount
of $30,548 were forgiven and were accounted for as extraordinary income
from forgiveness of debt to the Company.
During 1996, the disinterested members of the Company's Board of Directors
authorized the Company to reimburse certain officers for any taxes payable
by the officers in conjunction with the exercise of 3,700,000 warrants in
1995 by a company owned by the officers. Accordingly, as of December 31,
1996 the Company accrued $1,350,000 for such tax reimbursements.
8. RESEARCH AND DEVELOPMENT
In October 1993, the Company entered into an agreement (R&D Agreement)
with a research and development entity, Synergetics, Inc. (Synergetics),
whereby Synergetics is to develop certain technologies related to
automated speech recognition (the VoiceBox Technology). The president of
the Company is one of seven members of the board of directors of
Synergetics, and the majority shareholders of the Company own less than
five percent of the common stock of Synergetics. Under the terms of the
agreement, the Company owns intellectual property rights, and technologies
and technology rights that are developed by Synergetics. The Company
agreed to provide all funding necessary for Synergetics to develop
commercially viable technologies. There is no minimum requirement or limit
with respect to the amount of the funding to be provided by the Company.
However, under the terms of the agreement the Company is obligated to use
its best efforts in raising the necessary funding for the engineering,
development, manufacturing and marketing of the VoiceBox Technology. In
October 1993, the Company agreed to pay Synergetics a royalty of 10% of
gross revenues from sales of its automated speech recognition
F-17
<PAGE>
technologies. The Company has not yet licensed its technologies, and
consequently, Synergetics has not recorded any revenues from royalty
payments. Under the terms of the agreement, the Company paid to
Synergetics $4,758,012 and $2,704,165 in 1996 and 1995, respectively, for
research and development efforts (see Note 11).
The Company presently anticipates that it will complete a working
demonstration of its automated speech recognition technologies and that
PTO will issue the initial patent during the first half of 1997. Assuming
issuance of the patent, as described above, the Company anticipates that
it will thereafter enter into license and/or original equipment
manufacture agreements with third parties, which could result in revenues
prior to the end of the first half of 1997.
9. INCOME TAXES
At December 31, 1996, net deferred tax assets, before considering the
valuation allowance, totaled $7,802,776. The amount of and ultimate
realization of the benefits from the deferred tax assets for income tax
purposes is dependent, in part, upon the tax laws in effect, the Company's
future earnings, and other future events, the effects of which cannot be
determined. Because of the uncertainty surrounding the realization of the
loss carryforwards the Company has established a valuation allowance for
all net deferred tax assets. Accordingly, because of recurring losses and
the valuation allowance, there is no provision for income taxes in the
accompanying statements of operations. The net change in the valuation
allowance was $5,218,894 for the year ended December 31, 1996.
The Company has available at December 31, 1996, unused federal operating
loss carryforwards of approximately $16,870,000 and unused state operating
loss carryforwards of approximately $17,685,000, which may be applied
against future taxable income and which expire in various years beginning
in 2008 through 2011.
The temporary differences and carryforwards which give rise to the
deferred tax assets (liabilities) as of December 31, 1996 are as follows:
Deferred tax assets:
Net operating losses:
Federal $ 5,737,199
State 884,388
Research and development credits 551,980
Payables to cash-basis related parties 153,580
Accrued bonus 503,550
--------------
Total 7,830,697
--------------
Deferred tax liabilities:
Depreciation (27,621)
Intangibles (300)
--------------
Total (27,921)
--------------
Net deferred tax asset before valuation allowance 7,802,776
Valuation allowance (7,802,776)
--------------
Net deferred tax asset NONE
==============
F-18
<PAGE>
A reconciliation of income tax expense at the federal statutory rate to
the company's effective rate is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Computed tax at the expected statutory rate 34.00 % 34.00 %
State and local income taxes, net of federal benefit 3.00 3.00
Valuation allowance (37.00) (37.00)
------------ ------------
Income tax expense 0.00 % 0.00 %
============ ============
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Employment Agreements - On November 1, 1996, the Company entered into
three employment contracts with senior officers which expire on December
31, 2000. The future minimum salary payments required on these contracts
are as follows as of December 31, 1996:
Year ending December 31:
1997 $ 975,000
1998 1,275,000
1999 1,650,000
2000 2,250,000
2001 1,875,000
----------------
Total $ 6,150,000
================
Litigation - The Company is involved in litigation as part of its normal
business operations. In management's opinion, the ultimate resolution of
such litigation will not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
Lease Agreement - The Company has a long-term operating lease agreement
for office space. The future aggregate minimum obligations under this
operating lease as of December 31, 1996 are as follows:
Years ending December 31:
1997 $ 340,672
1998 340,672
1999 340,672
2000 340,672
2001 340,672
Thereafter 958,549
------------
Total $ 2,661,909
============
Rental expense under operating lease agreements was $130,298 and $24,000
for the years ending December 31, 1996 and 1995, respectively.
F-19
<PAGE>
11. SUBSEQUENT EVENTS
In March 1997, the Company reached an agreement in principle with
Synergetics (Note 8) to modify the R&D Agreement with regard to the
development and assignment of the Company's VoiceBox Technology. Until
March 1997, Synergetics had compensated engineers, employees, members of
its development team, and other financial backers, in part, with the
issuance of "Project Shares" granting the holders of such shares the right
to share pro rata in future royalty payments. In addition to issuance of
Project Shares, Synergetics had made loans and advances to some members of
its project team (collectively, the Advances) on a non-recourse basis.
Repayment of the Advances was secured by future disbursements under the
Project Shares.
Pursuant to a Memorandum of Understanding executed by the Company dated
March 13, 1997, Synergetics and the principal shareholder of Synergetics
agreed to modify the R&D Agreement as follows:
* The rights and obligations of Synergetics under the R&D Agreement,
including the royalty, will be assigned to a newly created wholly-
owned subsidiary of the Company, fonix(TM) Acquisition (Acquisition);
* Acquisition will also assume the obligations of Synergetics to all
holders of Project Shares;
* The Company and Acquisition will release Synergetics from any further
obligation or duty under the R&D Agreement;
* In consideration for the assignment of the rights to the royalty by
Synergetics to Acquisition, the Company will issue warrants to
Synergetics and the holders of Project Shares to acquire, in the
aggregate, up to 4,800,000 shares of the Company's common stock at an
exercise price of $10.00 per share (the Warrants). A holder of
Project Shares will be entitled to receive Warrants to purchase 800
shares of the Company's common stock for each Project Share held;
provided, however, that the number of Warrants to be issued will be
reduced by the amount of one Warrant for each $37.50 in Advances;
* The Warrants will become exercisable subject to progress made in
further development of the VoiceBox Technology and the first to occur
of (i) a minimum daily closing bid price for shares of the Company's
common stock of $37.50 for a period of at least 15 consecutive trading
days, or (ii) thirty months from the date the Warrants are issued.
The exercise date shall be accelerated upon certain business
combinations or reorganizations, such as a merger, involving the
Company. The terms relating to development of the VoiceBox Technology
will be subject to a confidentiality and non-disclose agreement and
covenants;
* In consideration of the assumption by Acquisition of the obligations
of Synergetics, the release of Synergetics from its further duties
under the R&D Agreement, and the issuance of the Warrants to
Synergetics and holders of Project Shares, the royalty and Project
Shares tendered in exchange for Warrants will be canceled;
* Effective March 1997, the Company employed certain former members of
the Synergetics project team as employees of the Company on terms and
conditions approximately equivalent to the terms and conditions of
their prior employment with Synergetics, and including the right to
participate in the Company's employee stock option plans; and
F-20
<PAGE>
* The Company engaged the founder and principal stockholder of
Synergetics as a consultant to assist with the further development of
the VoiceBox Technology.
The parties to the Modification Agreement have acknowledged the
consummation of the transactions described above will require, among
other things, execution of definitive agreements and compliance with
applicable federal and state laws, including securities laws. Those
agreements will include standard terms and provisions that are typical of
such transactions, including mutual releases and indemnification
covenants. Synergetics has other business interest and activities and
will continue to conduct its business in the usual course following the
closing.
Private Placement - Based on prior commitments of the Company and the
accepted filing of a New York state registration, the Company completed a
subscription agreement in March 1997 in which the Company issued 150,000
restricted shares of stock for cash proceeds of $375,000 ($2.50 per
share).
* * * * * *
F-21
Exhibit (9)(iii)
SECOND AMENDMENT OF VOTING TRUST AGREEMENT
This Second Amendment of Voting Trust Agreement (the "Amendment") is for
the purpose of amending the Voting Trust Agreement dated the 10th day of
December, 1993 (the "Voting Trust") and amended on October 23, 1995, and is made
and entered into at Salt Lake City, Utah, on the 2nd day of July, 1996, by and
among fonix Corporation, a Delaware corporation, whose principal place of
business is 1225 Eagle Gate Tower, 60 East South Temple, Salt Lake City, Utah
84111 (the "Company"), which is the successor corporation of Phonic
Technologies, Inc., a Utah corporation ("PTI"), and the following stockholders
in the Company: Stephen M. Studdert, whose address is 1225 Eagle Gate Tower, 60
East South Temple, Salt Lake City, Utah 84111 ("Studdert"), Thomas A. Murdock,
whose address is 1225 Eagle gate Tower, 60 East South Temple, Salt Lake City,
Utah 84111 ("Murdock"), Roger D. Dudley, whose address is 1225 Eagle Gate Tower,
60 East South Temple, Salt Lake City, Utah, 84111 ("Dudley"), Beesmark
Investments, L.C., a Utah limited liability company ("Beesmark") whose principal
place of business is 1361 South 740 East, Orem, Utah 84058; and Studdert
Companies Corporation, a Utah corporation, whose principal place of business is
1225 Eagle Gate Tower, 60 East South Temple, Salt Lake City, Utah 84111 ("SCC")
(collectively the "Stockholders"), and Thomas A. Murdock, as Trustee, whose
address is 1225 Eagle Gate Tower, 60 East South Temple, Salt Lake City, Utah
84111, and his successors in trust (hereinafter called the "Trustee").
RECITALS
WHEREAS, the Voting Trust was established December 10, 1993, with a
termination date of September 30, 1996; and
WHEREAS, in May of 1994 PTI was merged into a subsidiary of the Company
upon which event the Trustee received shares of the Company on behalf of
Studdert, Murdock and Dudley; and
WHEREAS, the Voting Trust was amended on October 23, 1995 to add as
shareholder parties thereto SCC and Beesmark and in certain substantive
respects; and
WHEREAS, the Stockholders presently desire to further amend the Voting
Trust as is set forth herein; and
NOW, THEREFORE, in consideration of the mutual promises herein, the
parties hereto hereby agree as follows:
1.Paragraph 12(a)(4) of the Voting Trust, as amended on October
23, 1995, is amended to delete the reference to "$10.00 per share," and insert
in the stead thereof, "$15.00 per share."
2.The parties hereto direct the Trustee to file a copy of this
Second Amendment with the principal office of the Company in Salt Lake City,
Utah, as directed by Section 1 of the Voting Trust Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company, the Trustee and the Stockholders have
signed this Second Amendment and have stated the number of shares of capital
stock of the Company on deposit with the Trustee, respectively, by them.
THE COMPANY:
fonix Corporation
By: /s/ Thomas A. Murdock
-----------------------------------
Thomas A. Murdock, President
Attest:
/s/ Roger D. Dudley
- ---------------------------------
Roger D. Dudley, Secretary
TRUSTEE:
/s/ Thomas A. Murdock
-----------------------------------
Thomas A. Murdock, individually
NUMBER OF SHARES: SHAREHOLDERS:
/s/ Stephen M. Studdert
- ------------------------ ------------------------------------
Stephen M. Studdert, individually
/s/ Thomas A. Murdock
- ------------------------ ------------------------------------
Thomas A. Murdock, individually
/s/ Roger D. Dudley
- ------------------------ ------------------------------------
Roger D. Dudley, individually
- ------------------------- STUDDERT COMPANIES CORPORATION
By: /s/ Stephen M. Studdert
-------------------------------
Stephen M. Studdert, President
<PAGE>
- -------------------- BEESMARK INVESTMENTS, L.C.
By: /s/ Alan C. Ashton
--------------------------------
Alan C. Ashton, Manager
Exhibit (9)(iv)
THIRD AMENDMENT OF VOTING TRUST AGREEMENT
This Third Amendment of Voting Trust Agreement (the "Amendment") is for
the purpose of amending the Voting Trust Agreement dated the 10th day of
December, 1993 (the "Voting Trust") and amended on October 23, 1995 and July 2,
1996, and is made and entered into at Salt Lake City, Utah, on the 20th day of
September, 1996, by and among fonix Corporation, a Delaware corporation, whose
principal place of business is 1225 Eagle Gate Tower, 60 East South Temple, Salt
Lake City, Utah 84111 (the "Company"), which is the successor corporation of
Phonic Technologies, Inc., a Utah corporation ("PTI"), and the following
stockholders in the Company: Stephen M. Studdert, whose address is 1225 Eagle
Gate Tower, 60 East South Temple, Salt Lake City, Utah 84111 ("Studdert"),
Thomas A. Murdock, whose address is 1225 Eagle gate Tower, 60 East South Temple,
Salt Lake City, Utah 84111 ("Murdock"), Roger D. Dudley, whose address is 1225
Eagle Gate Tower, 60 East South Temple, Salt Lake City, Utah, 84111 ("Dudley"),
Beesmark Investments, L.C., a Utah limited liability company ("Beesmark") whose
principal place of business is 1361 South 740 East, Orem, Utah 84058; and
Studdert Companies Corporation, a Utah corporation, whose principal place of
business is 1225 Eagle Gate Tower, 60 East South Temple, Salt Lake City, Utah
84111 ("SCC") (collectively the "Stockholders"), and Thomas A. Murdock, as
Trustee, whose address is 1225 Eagle Gate Tower, 60 East South Temple, Salt Lake
City, Utah 84111, and his successors in trust (hereinafter called the
"Trustee").
RECITALS
WHEREAS, the Voting Trust was established December 10, 1993, with a
termination date of September 30, 1996; and
WHEREAS, in May of 1994 PTI was merged into a subsidiary of the Company
upon which event the Trustee received shares of the Company on behalf of
Studdert, Murdock and Dudley; and
WHEREAS, the Voting Trust was amended on October 23, 1995 to add as
shareholder parties thereto SCC and Beesmark, to extend the termination date to
September 30, 1999 and in certain substantive respects;
WHEREAS, the Voting Trust was further amended on July 2, 1996; and
WHEREAS, the Stockholders presently desire to further amend the Voting
Trust as is set forth herein; and
NOW, THEREFORE, in consideration of the mutual promises herein, the
parties hereto hereby agree as follows:
1. Paragraph 10(c) of the Voting Trust, as amended on October 23,
1995 and July 2, 1996, is amended to add the following phrase to the end
thereof:
", unless a Stockholder shall make a written request of the Trustee
to do so and provided that (i) the Trustee may pledge, hypothecate
or encumber only certificates or rights deposited by the
Stockholder making the request; (ii) the Trustee may not encumber,
hypothecate or pledge any other certificates or rights of any other
Stockholder; and (iii) the Trustee may refuse a Stockholders
request if he has a reasonable belief that the request is for the
purpose of evading or circumventing any term, provision, covenant
or limitation of this Agreement."
2. The parties hereto direct the Trustee to file a copy of this
Third Amendment with the principal office of the Company in Salt Lake City,
Utah, as directed by Section 1 of the Voting Trust Agreement.
IN WITNESS WHEREOF, the Company, the Trustee and the Stockholders have
signed this Second Amendment and have stated the number of shares of capital
stock of the Company on deposit with the Trustee, respectively, by them.
THE COMPANY:
fonix Corporation
By: /s/ Thomas A. Murdock
-----------------------------------
Thomas A. Murdock, President
Attest:
/s/ Roger D. Dudley
- ---------------------------------
Roger D. Dudley, Secretary
TRUSTEE:
/s/ Thomas A. Murdock
-----------------------------------
Thomas A. Murdock, individually
NUMBER OF SHARES: SHAREHOLDERS:
/s/ Stephen M. Studdert
- ------------------------ ------------------------------------
Stephen M. Studdert, individually
/s/ Thomas A. Murdock
- ------------------------ ------------------------------------
Thomas A. Murdock, individually
/s/ Roger D. Dudley
- ------------------------ ------------------------------------
Roger D. Dudley, individually
- ------------------------- STUDDERT COMPANIES CORPORATION
By: /s/ Stephen M. Studdert
-------------------------------
Stephen M. Studdert, President
<PAGE>
- -------------------- BEESMARK INVESTMENTS, L.C.
By: /s/ Alan C. Ashton
--------------------------------
Alan C. Ashton, Manager
Exhibit (9)(v)
FOURTH AMENDMENT OF VOTING TRUST AGREEMENT
This Fourth Amendment of Voting Trust Agreement (the "Amendment") is for
the purpose of amending the Voting Trust Agreement dated the 10th day of
December, 1993 (the "Voting Trust") and amended on October 23, 1995, July 2,
1996 and September 20, 1996 and is made and entered into at Salt Lake City,
Utah, effective as of the 24th day of September, 1996, by and among fonix
Corporation, a Delaware corporation, whose principal place of business is 1225
Eagle Gate Tower, 60 East South Temple, Salt Lake City, Utah 84111 (the
"Company"), which is the successor corporation of Phonic Technologies, Inc., a
Utah corporation ("PTI"), and the following stockholders in the Company: Stephen
M. Studdert, whose address is 1225 Eagle Gate Tower, 60 East South Temple, Salt
Lake City, Utah 84111 ("Studdert"), Thomas A. Murdock, whose address is 1225
Eagle gate Tower, 60 East South Temple, Salt Lake City, Utah 84111 ("Murdock"),
Roger D. Dudley, whose address is 1225 Eagle Gate Tower, 60 East South Temple,
Salt Lake City, Utah, 84111 ("Dudley"), Beesmark Investments, L.C., a Utah
limited liability company ("Beesmark") whose principal place of business is 1361
South 740 East, Orem, Utah 84058; and Studdert Companies Corporation, a Utah
corporation, whose principal place of business is 1225 Eagle Gate Tower, 60 East
South Temple, Salt Lake City, Utah 84111 ("SCC") (collectively the
"Stockholders"), and Thomas A. Murdock, as Trustee, whose address is 1225 Eagle
Gate Tower, 60 East South Temple, Salt Lake City, Utah 84111, and his successors
in trust (hereinafter called the "Trustee").
RECITALS
WHEREAS, the Voting Trust was established December 10, 1993, with a
termination date of September 30, 1996; and
WHEREAS, in May of 1994 PTI was merged into a subsidiary of the Company
upon which event the Trustee received shares of the Company on behalf of
Studdert, Murdock and Dudley; and
WHEREAS, the Voting Trust was amended on October 23, 1995 to add as
shareholder parties thereto SCC and Beesmark, to extend the termination date to
September 30, 1999 and in certain substantive respects;
WHEREAS, the Voting Trust was further amended on July 2, 1996 and
September 20, 1996; and
WHEREAS, the Stockholders presently desire to further amend the Voting
Trust as is set forth herein; and
NOW, THEREFORE, in consideration of the mutual promises herein, the
parties hereto hereby agree as follows:
1. A paragraph 12(c) is added to Section 12 of the Voting Trust, as
amended on October 23, 1995, July 2, 1996 and September 20, 1996, which
paragraph 12(c) shall read as follows:
"c.As to any shares deposited into the Voting
Trust and subsequently pledged by the Trustee pursuant
to the authority granted the Trustee by paragraph
10(c), as amended on September 20, 1996, this Agreement
shall terminate upon the subsequent foreclosure of any
security interest granted by the Trustee in such
shares."
2. The parties hereto direct the Trustee to file a copy of this Fourth
Amendment with the principal office of the Company in Salt Lake City, Utah, as
directed by Section 1 of the Voting Trust Agreement.
IN WITNESS WHEREOF, the Company, the Trustee and the Stockholders have
signed this Fourth Amendment and have stated the number of shares of capital
stock of the Company on deposit with the Trustee, respectively, by them.
THE COMPANY:
fonix Corporation
By: /s/ Thomas A. Murdock
-----------------------------------
Thomas A. Murdock, President
Attest:
/s/ Roger D. Dudley
- ---------------------------------
Roger D. Dudley, Secretary
TRUSTEE:
/s/ Thomas A. Murdock
-----------------------------------
Thomas A. Murdock, individually
NUMBER OF SHARES: SHAREHOLDERS:
/s/ Stephen M. Studdert
- ------------------------ ------------------------------------
Stephen M. Studdert, individually
/s/ Thomas A. Murdock
- ------------------------ ------------------------------------
Thomas A. Murdock, individually
/s/ Roger D. Dudley
- ------------------------ ------------------------------------
Roger D. Dudley, individually
- ------------------------- STUDDERT COMPANIES CORPORATION
By: /s/ Stephen M. Studdert
-------------------------------
Stephen M. Studdert, President
<PAGE>
- -------------------- BEESMARK INVESTMENTS, L.C.
By: /s/ Alan C. Ashton
--------------------------------
Alan C. Ashton, Manager
Exhibit (10)(v)
Memorandum of Understanding
To: Synergetics, Inc. and Hal Hansen
From: fonix Corporation
Date: March 13, 1997
Subject: Capitalization of Royalty Fee
==============================================================================
The purpose of this Memorandum of Understanding ("Memorandum") is to set
forth the material elements of an agreement between fonix Corporation
("fonix") and Synergetics, Inc. ("Synergetics") whereby (a) the Royalty (as
defined below) will be canceled; (b) the VoiceBox Project Shares (as defined
below) will be surrendered and canceled; (c) fonix will issue Warrants (as
defined below) to purchase shares of fonix Common Stock to Synergetics and
other holders of Project Shares; (d) selected employees and engineers of
Synergetics (the "Synergetics Engineering Teem") will become employees of
fonix; and (e) Hal Hansen ("Hansen") and/or synergetics will become
consultants to fonix.
The parties recognize that the proposed transactions described below
will require further documentation, including the preparation and approval of
definitive agreements (the "Definitive Agreement") which will set forth all of
the terms and conditions of the transactions and the filing by fonix of a
Registration Statement with the Securities and Exchange Commission (the
"Commission"). Nevertheless, the parties desire to execute this memorandum to
evidence their intention to proceed in mutual good faith to complete the work
required to negotiate the Definitive Agreement on terms that are consistent
with this Memorandum.
BACKGROUND
In October 1993, the predecessor of fonix, Phonic Technologies, Inc.
("PTI"), entered into a Product Development and Assignment Agreement (the
"Agreement") with Synergetics whereby Synergetics assigned to PTI all of the
then-existing and to-be-developed technologies and related property for the
"VoiceBox" project (the "Technology"). In consideration for that assignment,
PTI agreed to pay Synergetics a royalty (the "Royalty") of 10% of gross
revenues from the marketing and/or sale of the Technology and products
incorporating the Technology. Pursuant to the terms of the Agreement,
Synergetics continued to develop the Technology to the specifications provided
by fonix and fonix provided the financial resources necessary to continue the
development of the Technology. All Technology is owned by fonix.
With the Agreement with fonix in hand, Synergetics engaged the
Synergetics Engineering Team to assist in the development of the Technology.
In addition to salary, Synergetics offered some of the Synergetics Engineering
Team members an interest in the Synergetics revenues to be generated in the
future from the Royalty. Synergetics called this interest in future revenues
"Project Shares". Synergetics determined to issue no more than 6000 project
shares.
Synergetics has made loans or given advances ("Advances") to some
members of the Synergetics Engineering Team. Those loans and/or advances were
made on a non-recourse basis, payment of which has been secured by future
disbursements from Project Shares.
fonix and Synergetics amended and restated the Agreement in March 1995
to expand the scope of the Technology under development and to make other
technical changes (the "Restated Agreement").
UNDERSTANDING
The material elements of the proposed transaction between the parties
are as follows:
I. A new, wholly-owned subsidiary of fonix will acquire the rights of
Synergetics to the Royalty and the current and future obligations of
Synergetics under the Project Shares, as follows:
A. fonix will create a new, wholly-owned subsidiary (for purposes of
this memorandum, "fonix Acquisition").
B. fonix Acquisition and Synergetics will enter into an Assignment
Agreement [or a Second Amended and Restated Product Development
and Assignment Agreement] pursuant to which: (i) fonix
Acquisition will assume and undertake all of Synergetics'
obligations under the Project Shares; (ii) in consideration
thereof, Synergetics will assign its rights to the Royalty to
fonix Acquisition; (iii) Synergetics will assign all Advances to
fonix Acquisition; (iv) Synergetics will be released from any
further obligation with respect to the development and/or
completion of the Technology other than the continuing non-
competition, confidentiality and assignment of intellectual
property covenants and right of first refusal existing in the
Restated Agreement, as amended; and (v) Synergetics will ratify
its prior assignment and conveyance and continuing obligation to
assign and convey to fonix all Existing Technology, New
Technology, Existing Intellectual Property and New Intellectual
Property (all as defined in the Restated Agreement).
II. Issuance of Warrants to holders of Project Shares in exchange for
surrender and cancellation of Project Shares, as follows:
A. fonix will prepare an offering (the "Offering") to each of the
holders of Project Shares of warrants (the "Warrants") to purchase
up to 4,800,000 shares of fonix Common Stock. Each Warrant shall
have an exercise price of $10.00 and be subject to other
conditions, including Technology development progress and the
first to occur of (i) a minimum daily closing bid price for fonix
shares of $37.50 for a period of at least 15 consecutive trading
days or (ii) 30 months after the date the Warrants are issued
provided, however, that the Warrants shall become immediately
exercisable in the event of a takeover or a merger of fonix. All
matters relating to Technology development progress shall be the
subject of a confidentiality agreement. Each holder of a Project
Share will be offered Warrants to purchase 800 shares of fonix
Common Stock in exchange for one (1) Project Share; provided that
the number of Warrants offered to holders of Project Shares shall
be reduced by one (1) Warrant for each $37.50 in Advances.
B. The issuance of the Warrants to holders of Project Shares will be
subject to a registration statement filed with and declared
effective by the Commission pursuant to the least demanding form
of registration available to fonix.
III. Upon issuance of the Warrants, fonix and fonix Acquisition will cancel
the Royalty and all obligations of fonix thereunder. Concurrently,
fonix and fonix Acquisition will (A) cancel the Project Shares received
from all holders to whom Warrants were issued and (B) indemnify and hold
Synergetics and Hansen harmless from any claims or demands by holders of
Project Shares who did not exchange Project Shares for Warrants.
IV. Each member of the Synergetics Engineering Team selected by fonix will
become a full time employee of fonix on terms and conditions equivalent
to those presently existing with Synergetics, but also including a right
to participate in the fonix Employee Stock Option Plan.
V. Hansen will be retained by fonix as a consultant on terms consistent
with the Agreement.
VI. The shares of fonix Common Stock underlying the Warrants will be the
subject of a registration statement on Form S-3 or such other form as
may be available to fonix for this purpose. Such registration statement
will be filed with the Commission within 90 days after the Warrants
become exercisable.
GENERAL TERMS AND CONDITIONS
1. Definitive Agreement. The transactions described above will be
subject to the negotiation and execution of the Definitive Agreement with
terms satisfactory to fonix, fonix Acquisition, Synergetics and Hansen. The
Definitive Agreement will contain representations, warranties and covenants,
conditions, and indemnification and set-off provisions customary in
transactions of this size and type, subject to the agreement of all parties.
2. Due Diligence. fonix shall have the right to do customary due
dilligence and Synergetics will cause its officers and employees to cooperate
in such due dilligence.
3. Nondisclosure. Except as required by applicable securities laws,
rules and regulations, no press release or other announcement concerning the
proposed acquisition will be issued except by mutual consent of fonix and
Synergetics. Notwithstanding the foregoing, the parties agree that fonix will
issue a press release announcing the execution of this Memorandum and
describing the general scope of the proposed transaction.
4. Conduct of Business; Interim Operations. As long as this Memorandum
remains in effect, Synergetics will use its best efforts to conduct its
business in a reasonable and prudent manner in accordance with past practices,
to preserve its existing business organizations and relationships with its
employees, customers, suppliers, and others with whom it has business
relationships.
5. Broker's Fees. Neither fonix nor Synergetics has entered into any
arrangements with any broker, finder, or investment banker that will result in
payment of a fee in connection with the transactions described above.
6. Expenses. Each party shall be responsible for and shall pay its own
costs and expenses, including without limitation attorneys' fees and
accountants' fees and expenses, in connection with the conduct of the due
diligence inquiry, and negotiation, execution and delivery of this Memorandum.
fonix will reimburse Synergetics its reasonable costs and expenses associated
with the preparation, execution and delivery of the Definitive Agreement.
7. Effect of This Memorandum. The parties do not intend this
Memorandum to be and it is not an offer, purchase or sale of securities and,
except as provided in this paragraph, it reflects only preliminary
negotiations. This Memorandum sets forth the intent of the parties only, is
not binding on the parties, and may not be relied on as the basis for a
contract by estoppel or be the basis for a claim based on detrimental reliance
or any other theory; provided that paragraphs 2, 3 and 6 and this paragraph 7
will be enforceable in accordance with their terms. With the exceptions of
paragraphs 2, 3, 6 and this paragraph 7, the parties understand that no party
shall be bound until the Definitive Agreement has been negotiated, executed,
delivered and approved by the Board of Directors of fonix and the Board of
Directors and shareholders of Synergetics.
If this Memorandum sets forth your intent to proceed in good faith
substantially in the manner outlined in this letter, please sign a copy of
this Memorandum and return it to fonix.
Very truly yours,
fonix Corporation
By /s/ Thomas A. Murdock
---------------------------
Thomas A. Murdock, President
Accepted and agreed to this ____ day of March, 1997.
Synergetics, Inc.
By: /s/ Hal Hansen
------------------------------
Its: CEO
/s/ Hal Hansen
- -----------------------------------
Hal Hansen
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, effective as of the 1st day of November, 1996, is made by
and between fonix [trademark] corporation, a Delaware corporation having its
principal place of business in Salt Lake City, Utah (the "Company"), and
Stephen M. Studdert, a resident of Utah (the "Executive"). The Company and
Executive are collectively referred to as the Parties and individually as
Party.
RECITALS:
A. Executive is a shareholder, Chief Executive Officer and Chairman
of the Board of Directors of the Company. Prior to the Company's formation,
Executive was and continues to serve as a principal of Studdert Companies
Corp. ("SCC"). SCC has had a management contract with the Company and has over
time acted in various capacities with the Company such as business consultant,
and shareholder.
B. During the initial period of the Company's existence, Executive
used personal funds and SCC used its funds to pay from time to time expenses
of the Company. This enabled the Company to continue in business when capital
was not otherwise available to the Company.
C. Prior to the effective date of this Agreement, at times the
Company provided (when it was able to do so) consideration to Executive and to
SCC which represents partial compensation to Executive and SCC, and which has
been used by them for certain of the office and staff expenses of SCC.
D. Executive has since March of 1993, expended great effort on behalf
of and created significant value for the Company. The Company, therefore, as
part of this Agreement, desires to acknowledge the effort and personal funds
expended by Executive and by SCC on its behalf, and the Company also desires
to acknowledge, reconcile and ratify the expenditures which have been made by
the Company to Executive and SCC as reasonable and necessary for the pursuit
of the Company's interests under the foregoing circumstances; and
E. The Company desires to assure the continued services of the
Executive into the future. The Parties thus desire to enter into this
Employment Agreement ("Agreement") to specify more fully each Party's rights
and obligations under the contemplated employment relationship between them.
Accordingly, the Company and the Executive agree as follows:
ARTICLE I
Duties
1.01 Duties. At all relevant times prior to this Agreement, the
Executive has served the Company in the capacity of Chief Executive Officer.
The Company acknowledges that prior to his involvement with the Company and at
all times prior to this Agreement and during the performance to date of his
duties as Chief Executive Officer of the Company, Executive has been and
continues to serve as a principal and officer of SCC and other entities which
take a portion of his time. The Company also acknowledges that Executive has
had significant experience in government, and that at all times prior to this
Agreement and during the performance of his duties as Chief Executive Officer
of the Company, Executive has been and continues to be significantly and
commendably involved in charitable, community and civic affairs. The Company
acknowledges that the Executive's involvement in the foregoing activities
has significantly contributed to the ability of the Executive to serve the
interests of the Company and to enhance the Company's value, and is a proper
part of corporate citizenship. It is therefore contemplated and expected
that Executive's involvement in the foregoing activities will continue;
provided, however, that the Executive shall, to the satisfaction of the
Company's Board of Directors, continue to devote sufficient time to faithfully
discharge the duties of his office as required under the By Laws of the
Company and as assigned from time to time by the Company's Board of
Directors. In accordance with the foregoing, the Executive's position as
Chief Executive Officer of the Company is hereby ratified and confirmed by the
Company, and Executive hereby agrees to continue in this office subject to the
provisions and for the term of this Agreement.
ARTICLE II
Term of Agreement
The term of this Agreement shall commence as of the effective date hereof
and end on December 31, 2001 (the "Contract Term").
ARTICLE III
Compensation
During the Contract Term, the Company shall pay or cause to be paid to
the Executive in cash in accordance with the normal payroll practices of the
Company for key executives, including deductions, withholdings and collections
as required by law, in installments not less frequently than monthly, an
annual base salary ("Annual Base Salary") as set forth in Exhibit "A" attached
hereto.
ARTICLE IV
Other Benefits
4.01 Incentive, Savings and Retirement Plans. In addition to Annual
Base Salary, the Executive shall be entitled to participate during the
Contract Term in the Incentive Pay Arrangement set forth in Exhibit "A,"
together with any savings and retirement plans, practices, policies and
programs applicable to other key executives of the Company.
4.02 Welfare Benefits. During the Contract Term, the Company will
provide to the Executive and/or the Executive's family, as the case may be,
health (including prescription coverage) and dental insurance similar in scope
and coverage to what Executive currently receives at Company expense. In
addition, Executive shall be eligible for participation in and shall receive
all benefits under welfare benefit plans, practices, policies and programs
provided by the Company (including, and without limitation, disability, salary
continuance, employee life, group life, dependent life, accidental death and
travel accident insurance plans and programs) and applicable to other key
executives of the Company.
4.03 Fringe Benefits. During the Contract Term, the Company will
provide to executive fringe benefits commensurate with the office of Chief
Executive Officer and all other fringe benefits made available to key
executives of the Company.
4.04 Expenses. During the Contract Term, the Executive shall be
entitled to receive prompt reimbursement for all reasonable employment-related
expenses incurred by the Executive upon the Company's receipt of accountings
in accordance with practices, policies and procedures applicable to other key
executives of the Company.
4.05 Office and Support Staff. During the Contract Term, the Company
will provide Executive with personal secretarial and support staff, and with
an office or offices of a size and with furnishings, equipment (such as
personal computer, cellular phone with adequate air time, etc.) and other
appointments sufficient to enable Executive to carry out the duties as
contemplated under this Agreement. Such personal secretarial and support
staff, office facilities, equipment and other appointments shall in any event
be at least comparable to those which are currently available to Executive,
and in a location reasonably suitable to Executive.
4.06 Vacation. During the Contract Term, the Executive shall be
entitled to paid vacation time in accordance with the plans, policies, and
programs applicable to other key executives of the Company.
4.07 Automobile. During the Contract Term, the Executive shall have
the use of an automobile of a make, size and model reasonably satisfactory to
the Executive and the Company. The Company shall pay all acquisition or
rental costs therefore as well as all business-related costs of operation,
maintenance and insurance.
ARTICLE V
Change of Control
5.01 Definitions. For purposes of this Article V, the following
terms shall have the meaning set forth below:
(a) The term "Continuing Directors" shall mean those members of
the Board of Directors at any relevant time (i) who were directors on the
effective date of this Agreement or (ii) who subsequently are approved for
nomination, election or appointment to the Board by at least three-fourths of
the Continuing Directors on the Board at the time of such approval (the
directors described in subsection (ii) are referred to herein as the "Approved
Directors").
(b) The term "Change in Control" means a change in control of
beneficial ownership of the Company's voting securities of a nature that would
be required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
or any similar item on a successor or revised form; provided, however, that a
Change in Control shall be deemed to have occurred if:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
representing 30% or more of the combined voting power of the Company's then
outstanding voting securities; or
(ii) During any period of two consecutive years, the
individuals who at the beginning of such period constituted the Board of
Directors, together with any Approved Directors elected during such period,
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that if a Change in Control under this clause
(b)(ii) has not occurred, the Continuing Directors (by a vote of at least
three-fourths of the Continuing Directors then on the Board) may: (1) approve
in advance an acquisition resulting in beneficial ownership as described in
clause (b)(i), in which case it shall not constitute a Change in Control; or
(2) if at any time after such an acquisition as describe din clause (b)(i), no
person beneficially owns securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities,
declare that a Change in Control has ceased, in which case the provisions of
this Article V shall not apply from that time forward, unless another Change
in Control occurs.
(c) The term "Good Reason," in connection with the termination
by the Executive of his employment with the Company subsequent to a Change in
Control, means:
(i) A diminution in the responsibilities, title or office
of the Executive such that he does not serve as President or Chief Executive
Officer of the Company (which diminution was not a result of the Executive's
disability), or the assignment (without the Executive's express written
consent) by the Company to the Executive of any significant duties that are
inconsistent with the Executive's position, duties, responsibilities and
status as Chief Executive Officer of the Company;
(ii) Any reduction by the Company in the Executive's Annual
Base Salary incentive compensation or benefits as in effect on the date of a
Change in Control or as the same may be increased from time to time thereafter
in accordance with this Agreement;
(iii) The Company's transfer or assignment of the
Executive, without the Executive's prior express written consent, to any
location other than the Company's principal executive offices in Utah, except
for required travel on Company business to an extent that does not constitute
a substantial abrupt departure from the Executive's business travel
obligations prior to the Change in Control; or
(iv) The failure by the Company to continue in effect any
benefit or compensation plan, life insurance plan, health and medical benefit
plan, disability plan or any other benefit plan in which the Executive is a
participant at the time of a Change in Control, or the taking of any action by
the Company that would adversely affect the Executive's right to participate
in or materially reduce the Executive's benefits under any of such plans or
benefits, or deprive the Executive of any material fringe benefit enjoyed by
the Executive at the time of the Change in Control, or as the same may be
increased from time to time thereafter.
(d) The terms "Parachute Payments" and "Excess Parachute
Payments" shall each have the meanings attributed to them under Section 280G
of the Internal Revenue code of 1986, as amended (the "Code"), or any
successor section, and any regulations which may be promulgated in connection
with said section.
5.02 Severance payments. In the event that, during the Contract
Term, both (a) a Change of Control occurs, and (b) within six (6) months after
such Change in Control occurs, the Executive's employment is terminated either
(1) by the Company for any reason, other than (A) for Cause (as defined
below), (B) as a result of the Executive's death or disability or (C() as a
result of the Executive's retirement in accordance with the Company's general
retirement policies, or (2) by the Executive for Good Reason, then the
Executive shall be entitled to receive from the Company, and at Executive's
option within thirty (30) days after such termination, an amount in cash equal
to all Annual Base Salary then and thereafter payable hereunder. The Company
shall be obligated to maintain in full force and effect for three (3) years
after termination or for the remaining Contract Term (whichever is longer),
all employee health and medical benefit plans and programs in which the
Executive, his family, or both, were participants immediately prior to
termination, provided that such continued participation is possible under the
general terms and provisions of such plans and programs. If such health and
medical coverage is not available under current Company plans and programs,
the Company will provide substitute coverage of substantially similar content
for three (3) years after termination or for the remaining Contract Term
(whichever is longer) provided, however, that if the Executive becomes
eligible to participate in a health and medical benefit plan or program of
another employer which covers substantially similar benefits, the Executive
shall cease to receive benefits under this subparagraph in respect of such
plan or program. All stock options, warrants and other similar rights granted
by the Company and then vested or earned shall be immediately granted to
Executive without restriction or limitation of any kind, and any incentive
compensation or portion thereof then earned shall be paid in a lump sum
payment to Executive; provided however, that if incentive compensation has not
been earned by Executive at the date of termination but Executive otherwise
would have been entitled to incentive compensation at the end of the Company's
next fiscal year or next period designated by the Company for the
determination of incentive compensation for peer executives (the "Bonus
Determination Date"), the Company shall pay such incentive compensation to
Executive within ten (10) business days after the Bonus Determination Date,
pro rated in amount to the date of Executive's termination. Any amount
payable pursuant to this Section, together with any compensation pursuant to
Article III that is payable for services rendered through the effective date
of termination, shall constitute the sole obligation of the Company payable
with respect to the termination of the Executive as provided in this Section.
5.03 Parachute Payment Limitation. Notwithstanding any other
provision of this Agreement, if the severance payments under Section 5.2 of
this Agreement, together with any other Parachute Payments made by the Company
to the Executive, if any, are characterized as Excess Parachute Payments, then
the following rules shall apply:
(a) The Company shall compute the net value to the Executive of
all such severance payments after reduction for the excise taxes imposed by
Section 4999 of the Code and for any normal income taxes that would be imposed
on the Executive if such severance payments constituted the Executive's sole
taxable income;
(b) The Company shall next compute the maximum amount of
severance payments that can be provided without any such payments being
characterized as Excess Parachute Payments, and reduce the result by the
amount of any normal income taxes that would be imposed on the Executive if
such reduced severance benefits constituted the Executive's sole taxable
income;
(c) If the amount derived in Section 5.3(a) is greater than the
amount derived in Section 5.3(b), then the Company shall pay the Executive the
full amount of severance payments without reduction. If the amount derived in
Section 5.3(a) is not greater than the amount derived in Section 5.3(b), then
the Company shall pay the Executive the maximum amount of severance payments
that can be provided without any such payments being characterized as Excess
Parachute Payments.
5.04 No Mitigation. The Executive shall not be required to mitigate
the amount of any payment provided for in Section 5.2 by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
Section 5.2 be reduced by any compensation earned by the Executive as a result
of employment by another company, self-employment or otherwise.
ARTICLE VI
Restrictive Covenants
6.01 Trade Secrets, Confidential and Propriety Business
Information.
(a) The Company has advised the Executive and the Executive
acknowledged that it is the policy of the Company to maintain as secret and
confidential all Protected Information (as defined below), and that Protected
Information has been and will be developed at substantial cost and effort to
the Company. "Protected Information" means trade secrets, confidential and
propriety business information of the Company, any information of the Company
other than information which has entered the public domain (unless such
information entered the public domain through effects of or on account of the
Executive), and all valuable and unique information and techniques acquired,
developed or used by the Company relating to its business, operations,
employees, customers and suppliers, which give the Company a competitive
advantage over those who do not know the information and techniques and which
are protected by the Company from unauthorized disclosure, including but not
limited to, customer lists (including potential customers), sources of supply,
processes, plans, materials, pricing information, internal memoranda,
marketing plans, internal policies, and products and services which may be
developed from time to time by the Company and its agents or employees.
(b) The Executive acknowledges that the Executive will acquire
Protected Information with respect to the Company and its successors in
interest, which information is a valuable, special and unique asset of the
Company's business and operations and that disclosure of such Protected
Information would cause irreparable damage to the Company.
(c) Either during or after termination of employment by the
Company, the Executive shall not, directly or indirectly, divulge, furnish or
make accessible to any person, firm, corporation, association or other entity
(otherwise than as may be required in the regular course of the Executive's
employment) nor use in any manner, any Protected Information, or cause any
such information of the Company to enter the public domain.
6.02 Non-Competition.
(a) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of one (1) years
after the termination of this Agreement, directly or indirectly, in any
capacity, engage or participate in, or become employed by or render advisory
or consulting or other services in connection with any Prohibited Business as
defined in Section 6.02(c).
(b) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of one (1) year
after the termination of this Agreement, make any financial investment,
whether in the form of equity or debt, or own any interest, directly or
indirectly, in any Prohibited Business. Nothing in this Section 6.02(b)
shall, however, restrict the Executive from making any investment in any
company whose stock is listed on a national securities exchange or actively
traded in the over-the-counter market; provided that (i) such investment does
not give the Executive the right or ability to control or influence the policy
decisions of any Prohibited Business, and (ii) such investment does not create
a conflict of interest between the Executive's duties hereunder and the
Executive's interest in such investment.
(c) For purposes of this Section 6.02, "Prohibited Business"
shall be defined as any business and any branch, office or operation thereof,
which is a competitor of the Company and which has established or seeks to
establish contact, in whatever form (including but not limited to solicitation
of sales, or the receipt or submission of bids), with any entity who is at any
time a client, customer or supplier of the Company (including but not limited
to all subdivisions of the federal government).
(d) The provisions of this paragraph 6.02 and paragraph 6.03
shall not apply to Executive's relationship with Synergetics, Inc. Executive
shall have the unfettered right to continue his activities and relationships
with Synergetics, Inc. during the term of this Agreement and after its
termination.
6.03 Disclosure of Employee-Created Trade Secrets, Confidential and
Propriety Business Information. The Executive agrees to promptly disclose to
the Company all Protected Information developed in whole or in part by the
Executive during the Executive's employment with the company and which relate
to the Company's business. Such Protected Information is, and shall remain,
the exclusive property of the Company. All writings created during the
Executive's employment with the Company (excluding writings unrelated to the
Company's business) are considered to be "works-for-hire" for the benefit of
the Company and the Company shall own all rights in such writings.
6.04 Survival of Undertakings and Injunctive Relief.
(a) The provisions of Sections 6.01, 6.02, 6.03 and 6.04 shall
survive the termination of the Executive's employment with the Company
irrespective of the reasons therefor.
(b) The Executive acknowledges and agrees that the restrictions
imposed upon the Executive by Sections 6.01, 6.02, 6.03 and 6.04 and the
purpose of such restrictions are reasonable and are designed to protect the
Protected Information and the continued success of the Company without unduly
restricting the Executive's future employment by others. Furthermore, the
Executive acknowledges that, in view of the Protected Information which the
Executive has or will acquire or has or will have access to and in view of the
necessity of the restrictions contained in Sections 6.01, 6.02, 6.03 and 6.04,
any violation of any provision of Sections 6.01, 6.02, 6.03 and 6.04 hereof
would cause irreparable injury to the Company and its successors in interest
with respect to the resulting disruption in their operations. By reason of
the foregoing, the Executive consents and agrees that if the Executive
violates any of the provisions of Sections 6.01, 6.02, 6.03 or 6.04 of this
Agreement, the Company and its successors in interest as the case may be,
shall be entitled, in addition to any other remedies that they may have,
including money damages, to an injunction to be issued by a court of competent
jurisdiction, restraining the Executive from committing or continuing any
violation of such Sections of this Agreement.
In the event of any such violation of Sections 6.01, 6.02, 6.03 and 6.04
of this Agreement, the Executive further agrees that the time periods set
forth in such Section shall be extended by the period of such violation.
ARTICLE VII
Termination
7.01 Termination of Employment. Executive's employment may be
terminated at any time during the Contract Term by mutual agreement of the
Parties, or as otherwise provided in this Article.
7.02 Termination for Cause. The Company may terminate Executive's
employment without notice at any time for cause. For purposes of this
Agreement, cause for termination shall include: conviction of or entering a
plea of guilty or nolo contendre to a felony; the Company, in good faith,
after reasonable investigation, determines that Executive has committed
willful fraud, misappropriation or embezzlement; Executive grossly and
willfully breaches a material provision of this Agreement, and does not cure
or cannot cure the breach after notice; or Executive habitually or grossly
neglects his duties. Upon termination for cause, Executive shall not be
entitled to payment of any compensation other than salary and benefits under
this Agreement earned up to the date of such termination and any stock
options, warrants or similar rights which have vested at the date of such
termination.
7.03 Termination Without Cause. Should Executive's employment be
terminated for a reason other than as specifically set forth in Section 7.01
and 7.02 above, all salary then and thereafter payable hereunder shall, at
Executive's option, be immediately paid in a lump sum payment to Executive,
and all stock options, warrants and other similar rights granted by the
Company and then vested or earned shall be immediately granted to Executive
without restriction or limitation of any kind, and any incentive compensation
or portion thereof then earned shall be paid in a lump sum payment to
Executive; provided however, that if incentive compensation has not been
earned by Executive at the date of termination but Executive otherwise would
have been entitled to incentive compensation at the Bonus Determination Date,
the Company shall pay such incentive compensation to Executive within ten (10)
business day s after the Bonus Determination Date, pro rated in amount to the
date of Executive's termination, and all other benefits described in Article
IV (excluding stock options, warrants or other similar rights and bonuses)
hereof shall continue through the end of the Contract Term.
ARTICLE VIII
Prior Management Services
SCC Management Fees. In April of 1995, all the disinterested directors
of the Company approved the issuance of warrants to purchase 3,700,000 shares
of common stock of the Company to SCC with the right to convert SCC accrued
management fees due from the Company for the purchase of 3,700,000 warrants
and the exercise price of the warrants. The warrants offered in April 1995,
were purchased on July 31, 1995 for a purchase price of $.033 per warrant and
were then exercised on August 11, 1995 for a purchase price at $.35 per share
of common stock. SCC cancelled invoices for $1,417,100 in management fees due
from the Company as consideration for the warrants and exercise price of the
warrants. The Company will bonus to Executive, a one-time cash bonus on or
before March 15, 1997, an amount sufficient (i) for Executive to pay all
personal taxes on his portion of the shares received by SCC in exchange for
the management fees and (ii) to pay all personal taxes on the bonus which is
paid pursuant to this Section.
ARTICLE IX
Miscellaneous
9.01 Assignment, Successors. This Company may freely assign its
respective rights and obligations under this Agreement to a successor of the
Company's business, with the prior written consent of the Executive. This
Agreement shall be binding upon and insure to the benefit of the Executive and
the Executive's estate and the Company and any assignee of or successor to the
Company.
9.02 Beneficiary. If the Executive dies prior to receiving all of
the salary payable hereunder, such salary shall be paid in a lump sum payment
to the beneficiary designated in writing by the Executive ("Beneficiary") and
if no such Beneficiary is designated, to the Executive's estate.
9.03 Nonalienation of Benefits. Benefits payable under this
Agreement shall not be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, charge, garnishment,
execution or levy of any kind, either voluntary or involuntary, prior to
actually being received by the Executive, and any such attempt to dispose of
any right to benefits payable hereunder shall be void.
9.04 Severability. If all or any part of this Agreement is declared
by any court or governmental authority to be unlawful or invalid, such
unlawfulness or invalidity shall not serve to invalidate any portion of this
Agreement not declared to be unlawful or invalid. Any paragraph or part of a
paragraph so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such paragraph or
part of a paragraph to the fullest extent possible while remaining lawful and
valid.
9.05 Amendment and Waiver. This Agreement shall not be altered,
amended or modified except by written instrument executed by the Company and
the Executive. A waiver of any term, covenant, agreement or condition
contained in this Agreement shall not be deemed a waiver of any other term,
covenant, agreement or condition, and any waiver of any other term, covenant,
agreement or condition, and any waiver of any default in any such term,
covenant, agreement or condition shall not be deemed a waiver of any later
default thereof or of any other term, covenant, agreement or condition.
9.06 Notices. All notices and other communications hereunder shall
be in writing and delivered by hand or by first class registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: fonix [trademark] corporation
60 East South Temple
1225 Eagle Gate Tower
Salt Lake City, UT 84111
If to the Executive: Stephen M. Studdert
1052 Oak Creek Lane
Highland, UT 84003
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective
when actually received by the addressee.
9.07 Counterpart Originals. this Agreement may be executed in
several counterparts, each of which shall be deemed to be an original but all
of which together will constitute one and the same instrument.
9.08 Entire Agreement. This Agreement forms the entire agreement
between the parties hereto with respect to any severance payment and with
respect to the subject matter contained in the Agreement.
9.09 Applicable Law. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the state of Utah,
without regard to its choice of law principles.
9.10 Forum Selection. The parties agree that any action or
proceeding to enforce, interpret, terminate, or rescind this Agreement shall
be commenced solely in the United States District Court for the District of
Utah or in the Third Judicial District Court for Salt Lake County, State of
Utah, and that such courts shall have sole and exclusive personal jurisdiction
over the parties to any such action or proceeding.
9.11 Effect on Other Agreements. This Agreement shall supersede all
prior agreements, promises and representations regarding employment by the
Company and severance or other payments contingent upon termination of
employment. Notwithstanding the foregoing, the Executive shall be entitled to
any other severance plan applicable to other peer executives of the Company.
9.12 Incorporation of Recitals. All recitals are incorporated as
part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
fonix [trademark] corporation
By:/s/ Thomas A. Murdock
--------------------------
Its Chief Operating Officer
Executive
/s/ Stephen M. Studdert
___________________________________
Stephen M. Studdert
<PAGE>
EXHIBIT "A" TO EMPLOYMENT AGREEMENT
FOR STEPHEN M. STUDDERT
Annual Base Salary and Incentive Pay Arrangement.
Annual Base Salary for the first three (3) years of the Contract Term
shall be as follows: for the salary year of November 1, 1996, $250,000; for
1997-$325,000; for 1998-$425,000. Executive will also be entitled to receive
an Incentive Bonus payable on or before December 31 of each calendar year
during the Contract Term. During the first three (3) years of the Contract
Term, Incentive Bonus will be based upon the market price of the Company
stock, adjusted for stock dividends and splits, etc.
For the last two years of the Contract Term, Annual Base Salary will be
as follows: for 1999, $550,000; and for 2000, $750,000. Provided, however,
that Incentive Bonus will be determined and Annual Base Salary will be subject
to review based upon either or both the market price of the Company stock, and
profits derived by the Company from annual revenues from sales, royalties or
any other source of revenue, as determined by the Board of Directors for that
year.
Whenever Incentive Bonus is based solely upon the market price of the
Company stock, in order to qualify for a bonus the Company stock price must
maintain an average price equal to or above the level set forth below over the
period of three consecutive calendar months during the calendar year in which
the bonus is to be paid, and such bonus will be a percentage of Annual Base
Salary for each year of November 1st through October 31st. One such bonus
will be paid each year based on the highest average stock price during a three
consecutive calendar month period, during the calendar year. The percentage
that will be applied to the Annual Base Salary for purposes of calculating any
such bonus that is based solely on stock price shall be as follows:
Quarterly Average Percentage Bonus
Stock Price
$10. 30%
$12.50 35%
$15. 40%
$20. 45%
$25.+ 50%
EMPLOYMENT AGREEMENT
---------------------
THIS AGREEMENT, effective as of the 1st day of November, 1996, is made by
and between fonix[trademark] corporation, a Delaware corporation having its
principal place of business in Salt Lake City, Utah (the "Company"), and
Thomas A. Murdock, a resident of Utah (the "Executive"). The Company and
Executive are collectively referred to as the Parties and individually as
Party.
RECITALS:
A. Executive is a shareholder, Chief Operating Officer and President,
and a member of the Board of Directors of the Company. Prior to the Company's
formation, Executive was and continues to serve as a principal of Studdert
Companies Corp. ("SCC"). SCC has had a management contract with the Company
and has over time acted in various capacities with the Company such as
business consultant, and shareholder.
B. During the initial period of the Company's existence, Executive
used personal funds and SCC used its funds to pay from time to time expenses
of the Company. This enabled the Company to continue in business when capital
was not otherwise available to the Company.
C. Prior to the effective date of this Agreement, at times the
Company provided (when it was able to do so) consideration to Executive and to
SCC which represents partial compensation to Executive and SCC, and which has
been used by them for certain of the office and staff expenses of SCC.
D. Executive has since March of 1993, expended great effort on behalf
of and created significant value for the Company. The Company, therefore, as
part of this Agreement, desires to acknowledge the effort and personal funds
expended by Executive and by SCC on its behalf, and the Company also desires
to acknowledge, reconcile and ratify the expenditures which have been made by
the Company to Executive and SCC as reasonable and necessary for the pursuit
of the Company's interests under the foregoing circumstances; and
E. The Company desires to assure the continued services of the
Executive into the future. The Parties thus desire to enter into this
Employment Agreement ("Agreement") to specify more fully each Party's rights
and obligations under the contemplated employment relationship between them.
Accordingly, the Company and the Executive agree as follows:
ARTICLE I
Duties
1.01 Duties. At all relevant times prior to this Agreement, the
Executive has served the Company in the capacity of Chief Operating Officer
and President. The Company acknowledges that prior to his involvement with
the Company and at all times prior to this Agreement and during the
performance to date of his duties as Chief Operating Officer and President of
the Company, Executive has been and continues to serve as a principal and
officer of SCC and other entities which take a portion of his time. The
Company also acknowledges that at all times prior to this Agreement and during
the performance of his duties for the Company, Executive has been and
continues to be significantly and commendably involved in charitable,
community and civic affairs. The Company acknowledges that the Executive's
involvement in the foregoing activities has significantly contributed to the
ability of the Executive to serve the interests of the Company and to enhance
the Company's value, and is a proper part of corporate citizenship. It is
therefore contemplated and expected that Executive's involvement in the
foregoing activities will continue; provided, however, that the Executive
shall, to the satisfaction of the Company's Board of Directors, continue to
devote sufficient time to faithfully discharge the duties of his office as
required under the By Laws of the Company and as assigned from time to time by
the Company's Board of Directors. In accordance with the foregoing, the
Executive's position as Chief Operating Officer and President of the Company
is hereby ratified and confirmed by the Company, and Executive hereby agrees
to continue in this office subject to the provisions and for the term of this
Agreement.
ARTICLE II
Term of Agreement
The term of this Agreement shall commence as of the effective date hereof
and end on December 31, 2001 (the "Contract Term").
ARTICLE III
Compensation
During the Contract Term, the Company shall pay or cause to be paid to
the Executive in cash in accordance with the normal payroll practices of the
Company for key executives, including deductions, withholdings and collections
as required by law, in installments not less frequently than monthly, an
annual base salary ("Annual Base Salary") as set forth in Exhibit "A" attached
hereto.
ARTICLE IV
Other Benefits
4.01 Incentive, Savings and Retirement Plans. In addition to Annual
Base Salary, the Executive shall be entitled to participate during the
Contract Term in the Incentive Pay Arrangement set forth in Exhibit "A,"
together with any savings and retirement plans, practices, policies and
programs applicable to other key executives of the Company.
4.02 Welfare Benefits. During the Contract Term, the Company will
provide to the Executive and/or the Executive's family, as the case may be,
health (including prescription coverage) and dental insurance similar in scope
and coverage to what Executive currently receives at Company expense. In
addition, Executive shall be eligible for participation in and shall receive
all benefits under welfare benefit plans, practices, policies and programs
provided by the Company (including, and without limitation, disability, salary
continuance, employee life, group life, dependent life, accidental death and
travel accident insurance plans and programs) and applicable to other key
executives of the Company.
4.03 Fringe Benefits. During the Contract Term, the Company will
provide to executive fringe benefits commensurate with the office of Chief
Operating Officer and President and all other fringe benefits made available
to key executives of the Company.
4.04 Expenses. During the Contract Term, the Executive shall be
entitled to receive prompt reimbursement for all reasonable employment-related
expenses incurred by the Executive upon the Company's receipt of accountings
in accordance with practices, policies and procedures applicable to other key
executives of the Company.
4.05 Office and Support Staff. During the Contract Term, the Company
will provide Executive with personal secretarial and support staff, and with
an office or offices of a size and with furnishings, equipment (such as
personal computer, cellular phone with adequate air time, etc.) and other
appointments sufficient to enable Executive to carry out the duties as
contemplated under this Agreement. Such personal secretarial and support
staff, office facilities, equipment and other appointments shall in any event
be at least comparable to those which are currently available to Executive,
and in a location reasonably suitable to Executive.
4.06 Vacation. During the Contract Term, the Executive shall be
entitled to paid vacation time in accordance with the plans, policies, and
programs applicable to other key executives of the Company.
4.07 Automobile. During the Contract Term, the Executive shall have
the use of an automobile of a make, size and model reasonably satisfactory to
the Executive and the Company. The Company shall pay all acquisition or
rental costs therefore as well as all business-related costs of operation,
maintenance and insurance.
ARTICLE V
Change of Control
5.01 Definitions. For purposes of this Article V, the following
terms shall have the meaning set forth below:
(a) The term "Continuing Directors" shall mean those members of
the Board of Directors at any relevant time (i) who were directors on the
effective date of this Agreement or (ii) who subsequently are approved for
nomination, election or appointment to the Board by at least three-fourths of
the Continuing Directors on the Board at the time of such approval (the
directors described in subsection (ii) are referred to herein as the "Approved
Directors").
(b) The term "Change in Control" means a change in control of
beneficial ownership of the Company's voting securities of a nature that would
be required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
or any similar item on a successor or revised form; provided, however, that a
Change in Control shall be deemed to have occurred if:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
representing 30% or more of the combined voting power of the Company's then
outstanding voting securities; or
(ii) During any period of two consecutive years, the
individuals who at the beginning of such period constituted the Board of
Directors, together with any Approved Directors elected during such period,
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that if a Change in Control under this clause
(b)(ii) has not occurred, the Continuing Directors (by a vote of at least
three-fourths of the Continuing Directors then on the Board) may: (1) approve
in advance an acquisition resulting in beneficial ownership as described in
clause (b)(i), in which case it shall not constitute a Change in Control; or
(2) if at any time after such an acquisition as describe din clause (b)(i), no
person beneficially owns securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities,
declare that a Change in Control has ceased, in which case the provisions of
this Article V shall not apply from that time forward, unless another Change
in Control occurs.
(c) The term "Good Reason," in connection with the termination
by the Executive of his employment with the Company subsequent to a Change in
Control, means:
(i) A diminution in the responsibilities, title or office
of the Executive such that he does not serve as President or Chief Executive
Officer of the Company (which diminution was not a result of the Executive's
disability), or the assignment (without the Executive's express written
consent) by the Company to the Executive of any significant duties that are
inconsistent with the Executive's position, duties, responsibilities and
status as Chief Executive Officer of the Company;
(ii) Any reduction by the Company in the Executive's Annual
Base Salary incentive compensation or benefits as in effect on the date of a
Change in Control or as the same may be increased from time to time thereafter
in accordance with this Agreement;
(iii) The Company's transfer or assignment of the
Executive, without the Executive's prior express written consent, to any
location other than the Company's principal executive offices in Utah, except
for required travel on Company business to an extent that does not constitute
a substantial abrupt departure from the Executive's business travel
obligations prior to the Change in Control; or
(iv) The failure by the Company to continue in effect any
benefit or compensation plan, life insurance plan, health and medical benefit
plan, disability plan or any other benefit plan in which the Executive is a
participant at the time of a Change in Control, or the taking of any action by
the Company that would adversely affect the Executive's right to participate
in or materially reduce the Executive's benefits under any of such plans or
benefits, or deprive the Executive of any material fringe benefit enjoyed by
the Executive at the time of the Change in Control, or as the same may be
increased from time to time thereafter.
(d) The terms "Parachute Payments" and "Excess Parachute
Payments" shall each have the meanings attributed to them under Section 280G
of the Internal Revenue code of 1986, as amended (the "Code"), or any
successor section, and any regulations which may be promulgated in connection
with said section.
5.02 Severance Payments. In the event that, during the Contract
Term, both (a) a Change of Control occurs, and (b) within six (6) months after
such Change in Control occurs, the Executive's employment is terminated either
(1) by the Company for any reason, other than (A) for Cause (as defined
below), (B) as a result of the Executive's death or disability or (C() as a
result of the Executive's retirement in accordance with the Company's general
retirement policies, or (2) by the Executive for Good Reason, then the
Executive shall be entitled to receive from the Company, and at Executive's
option within thirty (30) days after such termination, an amount in cash equal
to all Annual Base Salary then and thereafter payable hereunder. The Company
shall be obligated to maintain in full force and effect for three (3) years
after termination or for the remaining Contract Term (whichever is longer),
all employee health and medical benefit plans and programs in which the
Executive, his family, or both, were participants immediately prior to
termination, provided that such continued participation is possible under the
general terms and provisions of such plans and programs. If such health and
medical coverage is not available under current Company plans and programs,
the Company will provide substitute coverage of substantially similar content
for three (3) years after termination or for the remaining Contract Term
(whichever is longer) provided, however, that if the Executive becomes
eligible to participate in a health and medical benefit plan or program of
another employer which covers substantially similar benefits, the Executive
shall cease to receive benefits under this subparagraph in respect of such
plan or program. All stock options, warrants and other similar rights granted
by the Company and then vested or earned shall be immediately granted to
Executive without restriction or limitation of any kind, and any incentive
compensation or portion thereof then earned shall be paid in a lump sum
payment to Executive; provided however, that if incentive compensation has not
been earned by Executive at the date of termination but Executive otherwise
would have been entitled to incentive compensation at the end of the Company's
next fiscal year or next period designated by the Company for the
determination of incentive compensation for peer executives (the "Bonus
Determination Date"), the Company shall pay such incentive compensation to
Executive within ten (10) business days after the Bonus Determination Date,
pro rated in amount to the date of Executive's termination. Any amount
payable pursuant to this Section, together with any compensation pursuant to
Article III that is payable for services rendered through the effective date
of termination, shall constitute the sole obligation of the Company payable
with respect to the termination of the Executive as provided in this Section.
5.03 Parachute Payment Limitation. Notwithstanding any other
provision of this Agreement, if the severance payments under Section 5.2 of
this Agreement, together with any other Parachute Payments made by the Company
to the Executive, if any, are characterized as Excess Parachute Payments, then
the following rules shall apply:
(a) The Company shall compute the net value to the Executive of
all such severance payments after reduction for the excise taxes imposed by
Section 4999 of the Code and for any normal income taxes that would be imposed
on the Executive if such severance payments constituted the Executive's sole
taxable income;
(b) The Company shall next compute the maximum amount of
severance payments that can be provided without any such payments being
characterized as Excess Parachute Payments, and reduce the result by the
amount of any normal income taxes that would be imposed on the Executive if
such reduced severance benefits constituted the Executive's sole taxable
income;
(c) If the amount derived in Section 5.3(a) is greater than the
amount derived in Section 5.3(b), then the Company shall pay the Executive the
full amount of severance payments without reduction. If the amount derived in
Section 5.3(a) is not greater than the amount derived in Section 5.3(b), then
the Company shall pay the Executive the maximum amount of severance payments
that can be provided without any such payments being characterized as Excess
Parachute Payments.
5.04 No Mitigation. The Executive shall not be required to mitigate
the amount of any payment provided for in Section 5.2 by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
Section 5.2 be reduced by any compensation earned by the Executive as a result
of employment by another company, self-employment or otherwise.
ARTICLE VI
Restrictive Covenants
6.01 Trade Secrets, Confidential and Propriety Business
Information.
(a) The Company has advised the Executive and the Executive
acknowledged that it is the policy of the Company to maintain as secret and
confidential all Protected Information (as defined below), and that Protected
Information has been and will be developed at substantial cost and effort to
the Company. "Protected Information" means trade secrets, confidential and
propriety business information of the Company, any information of the Company
other than information which has entered the public domain (unless such
information entered the public domain through effects of or on account of the
Executive), and all valuable and unique information and techniques acquired,
developed or used by the Company relating to its business, operations,
employees, customers and suppliers, which give the Company a competitive
advantage over those who do not know the information and techniques and which
are protected by the Company from unauthorized disclosure, including but not
limited to, customer lists (including potential customers), sources of supply,
processes, plans, materials, pricing information, internal memoranda,
marketing plans, internal policies, and products and services which may be
developed from time to time by the Company and its agents or employees.
(b) The Executive acknowledges that the Executive will acquire
Protected Information with respect to the Company and its successors in
interest, which information is a valuable, special and unique asset of the
Company's business and operations and that disclosure of such Protected
Information would cause irreparable damage to the Company.
(c) Either during or after termination of employment by the
Company, the Executive shall not, directly or indirectly, divulge, furnish or
make accessible to any person, firm, corporation, association or other entity
(otherwise than as may be required in the regular course of the Executive's
employment) nor use in any manner, any Protected Information, or cause any
such information of the Company to enter the public domain.
6.02 Non-Competition.
(a) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of one (1) years
after the termination of this Agreement, directly or indirectly, in any
capacity, engage or participate in, or become employed by or render advisory
or consulting or other services in connection with any Prohibited Business as
defined in Section 6.02(c).
(b) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of one (1) year
after the termination of this Agreement, make any financial investment,
whether in the form of equity or debt, or own any interest, directly or
indirectly, in any Prohibited Business. Nothing in this Section 6.02(b)
shall, however, restrict the Executive from making any investment in any
company whose stock is listed on a national securities exchange or actively
traded in the over-the-counter market; provided that (i) such investment does
not give the Executive the right or ability to control or influence the policy
decisions of any Prohibited Business, and (ii) such investment does not create
a conflict of interest between the Executive's duties hereunder and the
Executive's interest in such investment.
(c) For purposes of this Section 6.02, "Prohibited Business"
shall be defined as any business and any branch, office or operation thereof,
which is a competitor of the Company and which has established or seeks to
establish contact, in whatever form (including but not limited to solicitation
of sales, or the receipt or submission of bids), with any entity who is at any
time a client, customer or supplier of the Company (including but not limited
to all subdivisions of the federal government).
(d) The provisions of this paragraph 6.02 and paragraph 6.03
shall not apply to Executive's relationship with Synergetics, Inc. Executive
shall have the unfettered right to continue his activities and relationships
with Synergetics, Inc. during the term of this Agreement and after its
termination.
6.03 Disclosure of Employee-Created Trade Secrets, Confidential and
Propriety Business Information. The Executive agrees to promptly disclose to
the Company all Protected Information developed in whole or in part by the
Executive during the Executive's employment with the company and which relate
to the Company's business. Such Protected Information is, and shall remain,
the exclusive property of the Company. All writings created during the
Executive's employment with the Company (excluding writings unrelated to the
Company's business) are considered to be "works-for-hire" for the benefit of
the Company and the Company shall own all rights in such writings.
6.04 Survival of Undertakings and Injunctive Relief.
(a) The provisions of Sections 6.01, 6.02, 6.03 and 6.04 shall
survive the termination of the Executive's employment with the Company
irrespective of the reasons therefor.
(b) The Executive acknowledges and agrees that the restrictions
imposed upon the Executive by Sections 6.01, 6.02, 6.03 and 6.04 and the
purpose of such restrictions are reasonable and are designed to protect the
Protected Information and the continued success of the Company without unduly
restricting the Executive's future employment by others. Furthermore, the
Executive acknowledges that, in view of the Protected Information which the
Executive has or will acquire or has or will have access to and in view of the
necessity of the restrictions contained in Sections 6.01, 6.02, 6.03 and 6.04,
any violation of any provision of Sections 6.01, 6.02, 6.03 and 6.04 hereof
would cause irreparable injury to the Company and its successors in interest
with respect to the resulting disruption in their operations. By reason of
the foregoing, the Executive consents and agrees that if the Executive
violates any of the provisions of Sections 6.01, 6.02, 6.03 or 6.04 of this
Agreement, the Company and its successors in interest as the case may be,
shall be entitled, in addition to any other remedies that they may have,
including money damages, to an injunction to be issued by a court of competent
jurisdiction, restraining the Executive from committing or continuing any
violation of such Sections of this Agreement.
In the event of any such violation of Sections 6.01, 6.02, 6.03 and 6.04
of this Agreement, the Executive further agrees that the time periods set
forth in such Section shall be extended by the period of such violation.
ARTICLE VII
Termination
7.01 Termination of Employment. Executive's employment may be
terminated at any time during the Contract Term by mutual agreement of the
Parties, or as otherwise provided in this Article.
7.02 Termination for Cause. The Company may terminate Executive's
employment without notice at any time for cause. For purposes of this
Agreement, cause for termination shall include: conviction of or entering a
plea of guilty or nolo contendre to a felony; the Company, in good faith,
after reasonable investigation, determines that Executive has committed
willful fraud, misappropriation or embezzlement; Executive grossly and
willfully breaches a material provision of this Agreement, and does not cure
or cannot cure the breach after notice; or Executive habitually or grossly
neglects his duties. Upon termination for cause, Executive shall not be
entitled to payment of any compensation other than salary and benefits under
this Agreement earned up to the date of such termination and any stock
options, warrants or similar rights which have vested at the date of such
termination.
7.03 Termination Without Cause. Should Executive's employment be
terminated for a reason other than as specifically set forth in Section 7.01 and
7.02 above, all salary then and thereafter payable hereunder shall, at
Executive's option, be immediately paid in a lump sum payment to Executive,
and all stock options, warrants and other similar rights granted by the
Company and then vested or earned shall be immediately granted to Executive
without restriction or limitation of any kind, and any incentive compensation
or portion thereof then earned shall be paid in a lump sum payment to
Executive; provided however, that if incentive compensation has not been
earned by Executive at the date of termination but Executive otherwise would
have been entitled to incentive compensation at the Bonus Determination Date,
the Company shall pay such incentive compensation to Executive within ten (10)
business day s after the Bonus Determination Date, pro rated in amount to the
date of Executive's termination, and all other benefits described in Article
IV (excluding stock options, warrants or other similar rights and bonuses)
hereof shall continue through the end of the Contract Term.
ARTICLE VIII
Prior Management Services
SCC Management Fees. In April of 1995, all the disinterested directors
of the Company approved the issuance of warrants to purchase 3,700,000 shares
of common stock of the Company to SCC with the right to convert SCC accrued
management fees due from the Company for the purchase of 3,700,000 warrants
and the exercise price of the warrants. The warrants offered in April 1995,
were purchased on July 31, 1995 for a purchase price of $.033 per warrant and
were then exercised on August 11, 1995 for a purchase price at $.35 per share
of common stock. SCC cancelled invoices for $1,417,100 in management fees due
from the Company as consideration for the warrants and exercise price of the
warrants. The Company will bonus to Executive, a one-time cash bonus on or
before March 15, 1997, an amount sufficient (i) for Executive to pay all
personal taxes on his portion of the shares received by SCC in exchange for
the management fees and (ii) to pay all personal taxes on the bonus which is
paid pursuant to this Section.
ARTICLE IX
Miscellaneous
9.01 Assignment, Successors. This Company may freely assign its
respective rights and obligations under this Agreement to a successor of the
Company's business, with the prior written consent of the Executive. This
Agreement shall be binding upon and insure to the benefit of the Executive and
the Executive's estate and the Company and any assignee of or successor to the
Company.
9.02 Beneficiary. If the Executive dies prior to receiving all of
the salary payable hereunder, such salary shall be paid in a lump sum payment
to the beneficiary designated in writing by the Executive ("Beneficiary") and
if no such Beneficiary is designated, to the Executive's estate.
9.03 Nonalienation of Benefits. Benefits payable under this
Agreement shall not be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, charge, garnishment,
execution or levy of any kind, either voluntary or involuntary, prior to
actually being received by the Executive, and any such attempt to dispose of
any right to benefits payable hereunder shall be void.
9.04 Severability. If all or any part of this Agreement is declared
by any court or governmental authority to be unlawful or invalid, such
unlawfulness or invalidity shall not serve to invalidate any portion of this
Agreement not declared to be unlawful or invalid. Any paragraph or part of a
paragraph so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such paragraph or
part of a paragraph to the fullest extent possible while remaining lawful and
valid.
9.05 Amendment and Waiver. This Agreement shall not be altered,
amended or modified except by written instrument executed by the Company and
the Executive. A waiver of any term, covenant, agreement or condition
contained in this Agreement shall not be deemed a waiver of any other term,
covenant, agreement or condition, and any waiver of any other term, covenant,
agreement or condition, and any waiver of any default in any such term,
covenant, agreement or condition shall not be deemed a waiver of any later
default thereof or of any other term, covenant, agreement or condition.
9.06 Notices. All notices and other communications hereunder shall
be in writing and delivered by hand or by first class registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: fonix[trademark] corporation
60 East South Temple
1225 Eagle Gate Tower
Salt Lake City, UT 84111
If to the Executive: Thomas A. Murdock
4582 South Jupiter Drive
Salt Lake City, UT 84124
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective
when actually received by the addressee.
9.07 Counterpart Originals. this Agreement may be executed in
several counterparts, each of which shall be deemed to be an original but all
of which together will constitute one and the same instrument.
9.08 Entire Agreement. This Agreement forms the entire agreement
between the parties hereto with respect to any severance payment and with
respect to the subject matter contained in the Agreement.
9.09 Applicable Law. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the state of Utah,
without regard to its choice of law principles.
9.10 Forum Selection. The parties agree that any action or
proceeding to enforce, interpret, terminate, or rescind this Agreement shall
be commenced solely in the United States District Court for the District of
Utah or in the Third Judicial District Court for Salt Lake County, State of
Utah, and that such courts shall have sole and exclusive personal jurisdiction
over the parties to any such action or proceeding.
9.11 Effect on Other Agreements. This Agreement shall supersede all
prior agreements, promises and representations regarding employment by the
Company and severance or other payments contingent upon termination of
employment. Notwithstanding the foregoing, the Executive shall be entitled to
any other severance plan applicable to other peer executives of the Company.
9.12 Incorporation of Recitals. All recitals are incorporated as
part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
fonix[trademark] corporation
By:/s/ Thomas A. Murdock
Its Chief Operating Officer
Executive
/s/ Thomas A. Murdock
--------------------------------
Thomas A. Murdock
<PAGE>
EXHIBIT "A" TO EMPLOYMENT AGREEMENT
FOR THOMAS A. MURDOCK
Annual Base Salary and Incentive Pay Arrangement.
Annual Base Salary for the first three (3) years of the Contract Term
shall be as follows: for the salary year of November 1, 1996, $250,000; for
1997-$325,000; for 1998-$425,000. Executive will also be entitled to receive
an Incentive Bonus payable on or before December 31 of each calendar year
during the Contract Term. During the first three (3) years of the Contract
Term, Incentive Bonus will be based upon the market price of the Company
stock, adjusted for stock dividends and splits, etc.
For the last two years of the Contract Term, Annual Base Salary will be
as follows: for 1999, $550,000; and for 2000, $750,000. Provided, however,
that Incentive Bonus will be determined and Annual Base Salary will be subject
to review based upon either or both the market price of the Company stock, and
profits derived by the Company from annual revenues from sales, royalties or
any other source of revenue, as determined by the Board of Directors for that
year.
Whenever Incentive Bonus is based solely upon the market price of the
Company stock, in order to qualify for a bonus the Company stock price must
maintain an average price equal to or above the level set forth below over the
period of three consecutive calendar months during the calendar year in which
the bonus is to be paid, and such bonus will be a percentage of Annual Base
Salary for each year of November 1st through October 31st. One such bonus
will be paid each year based on the highest average stock price during a three
consecutive calendar month period, during the calendar year. The percentage
that will be applied to the Annual Base Salary for purposes of calculating any
such bonus that is based solely on stock price shall be as follows:
Quarterly Average Percentage Bonus
Stock Price
$10. 30%
$12.50 35%
$15. 40%
$20. 45%
$25.+ 50%
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, effective as of the 1st day of November, 1996, is made by
and between fonix [trademark] corporation, a Delaware corporation having its
principal place of business in Salt Lake City, Utah (the "Company"), and Roger
D. Dudley, a resident of Utah (the "Executive"). The Company and Executive
are collectively referred to as the Parties and individually as Party.
RECITALS:
A. Executive is a shareholder, Chief Financial Officer and Executive
Vice President, and a member of the Board of Directors of the Company. Prior
to the Company's formation, Executive was and continues to serve as a
principal of Studdert Companies Corp. ("SCC"). SCC has had a management
contract with the Company and has over time acted in various capacities with
the Company such as business consultant, and shareholder.
B. During the initial period of the Company's existence, Executive
used personal funds and SCC used its funds to pay from time to time expenses
of the Company. This enabled the Company to continue in business when capital
was not otherwise available to the Company.
C. Prior to the effective date of this Agreement, at times the
Company provided (when it was able to do so) consideration to Executive and to
SCC which represents partial compensation to Executive and SCC, and which has
been used by them for certain of the office and staff expenses of SCC.
D. Executive has since March of 1993, expended great effort on behalf
of and created significant value for the Company. The Company, therefore, as
part of this Agreement, desires to acknowledge the effort and personal funds
expended by Executive and by SCC on its behalf, and the Company also desires
to acknowledge, reconcile and ratify the expenditures which have been made by
the Company to Executive and SCC as reasonable and necessary for the pursuit
of the Company's interests under the foregoing circumstances; and
E. The Company desires to assure the continued services of the
Executive into the future. The Parties thus desire to enter into this
Employment Agreement ("Agreement") to specify more fully each Party's rights
and obligations under the contemplated employment relationship between them.
Accordingly, the Company and the Executive agree as follows:
ARTICLE I
Duties
1.01 Duties. At all relevant times prior to this Agreement, the
Executive has served the Company in the capacity of Chief Financial Officer
and Executive Vice President. The Company acknowledges that prior to his
involvement with the Company and at all times prior to this Agreement and
during the performance to date of his duties as Chief Financial Officer and
Executive Vice President of the Company, Executive has been and continues to
serve as a principal and officer of SCC and other entities which take a
portion of his time. The Company also acknowledges that at all times prior to
this Agreement and during the performance of his duties for the Company,
Executive has been and continues to be significantly and commendably involved
in charitable, community and civic affairs. The Company acknowledges that
the Executive's involvement in the foregoing activities has significantly
contributed to the ability of the Executive to serve the interests of the
Company and to enhance the Company's value, and is a proper part of corporate
citizenship. It is therefore contemplated and expected that Executive's
involvement in the foregoing activities will continue; provided, however, that
the Executive shall, to the satisfaction of the Company's Board of Directors,
continue to devote sufficient time to faithfully discharge the duties of his
office as required under the By Laws of the Company and as assigned from time
to time by the Company's Board of Directors. In accordance with the
foregoing, the Executive's position as Chief Financial Officer and Executive
Vice President of the Company is hereby ratified and confirmed by the Company,
and Executive hereby agrees to continue in this office subject to the
provisions and for the term of this Agreement.
ARTICLE II
Term of Agreement
The term of this Agreement shall commence as of the effective date hereof
and end on December 31, 2001 (the "Contract Term").
ARTICLE III
Compensation
During the Contract Term, the Company shall pay or cause to be paid to
the Executive in cash in accordance with the normal payroll practices of the
Company for key executives, including deductions, withholdings and collections
as required by law, in installments not less frequently than monthly, an
annual base salary ("Annual Base Salary") as set forth in Exhibit "A" attached
hereto.
ARTICLE IV
Other Benefits
4.01 Incentive, Savings and Retirement Plans. In addition to Annual
Base Salary, the Executive shall be entitled to participate during the
Contract Term in the Incentive Pay Arrangement set forth in Exhibit "A,"
together with any savings and retirement plans, practices, policies and
programs applicable to other key executives of the Company.
4.02 Welfare Benefits. During the Contract Term, the Company will
provide to the Executive and/or the Executive's family, as the case may be,
health (including prescription coverage) and dental insurance similar in scope
and coverage to what Executive currently receives at Company expense. In
addition, Executive shall be eligible for participation in and shall receive
all benefits under welfare benefit plans, practices, policies and programs
provided by the Company (including, and without limitation, disability, salary
continuance, employee life, group life, dependent life, accidental death and
travel accident insurance plans and programs) and applicable to other key
executives of the Company.
4.03 Fringe Benefits. During the Contract Term, the Company will
provide to executive fringe benefits commensurate with the office of Chief
Financial Officer and Executive Vice President and all other fringe benefits
made available to key executives of the Company.
4.04 Expenses. During the Contract Term, the Executive shall be
entitled to receive prompt reimbursement for all reasonable employment-related
expenses incurred by the Executive upon the Company's receipt of accountings
in accordance with practices, policies and procedures applicable to other key
executives of the Company.
4.05 Office and Support Staff. During the Contract Term, the Company
will provide Executive with personal secretarial and support staff, and with
an office or offices of a size and with furnishings, equipment (such as
personal computer, cellular phone with adequate air time, etc.) and other
appointments sufficient to enable Executive to carry out the duties as
contemplated under this Agreement. Such personal secretarial and support
staff, office facilities, equipment and other appointments shall in any event
be at least comparable to those which are currently available to Executive,
and in a location reasonably suitable to Executive.
4.06 Vacation. During the Contract Term, the Executive shall be
entitled to paid vacation time in accordance with the plans, policies, and
programs applicable to other key executives of the Company.
4.07 Automobile. During the Contract Term, the Executive shall have
the use of an automobile of a make, size and model reasonably satisfactory to
the Executive and the Company. The Company shall pay all acquisition or
rental costs therefore as well as all business-related costs of operation,
maintenance and insurance.
ARTICLE V
Change of Control
5.01 Definitions. For purposes of this Article V, the following
terms shall have the meaning set forth below:
(a) The term "Continuing Directors" shall mean those members of
the Board of Directors at any relevant time (i) who were directors on the
effective date of this Agreement or (ii) who subsequently are approved for
nomination, election or appointment to the Board by at least three-fourths of
the Continuing Directors on the Board at the time of such approval (the
directors described in subsection (ii) are referred to herein as the "Approved
Directors").
(b) The term "Change in Control" means a change in control of
beneficial ownership of the Company's voting securities of a nature that would
be required to be reported pursuant to Item 6(e) of Schedule 14A of Regulation
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
or any similar item on a successor or revised form; provided, however, that a
Change in Control shall be deemed to have occurred if:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
representing 30% or more of the combined voting power of the Company's then
outstanding voting securities; or
(ii) During any period of two consecutive years, the
individuals who at the beginning of such period constituted the Board of
Directors, together with any Approved Directors elected during such period,
cease for any reason to constitute at least a majority of the Board of
Directors; provided, however, that if a Change in Control under this clause
(b)(ii) has not occurred, the Continuing Directors (by a vote of at least
three-fourths of the Continuing Directors then on the Board) may: (1) approve
in advance an acquisition resulting in beneficial ownership as described in
clause (b)(i), in which case it shall not constitute a Change in Control; or
(2) if at any time after such an acquisition as describe din clause (b)(i), no
person beneficially owns securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities,
declare that a Change in Control has ceased, in which case the provisions of
this Article V shall not apply from that time forward, unless another Change
in Control occurs.
(c) The term "Good Reason," in connection with the termination
by the Executive of his employment with the Company subsequent to a Change in
Control, means:
(i) A diminution in the responsibilities, title or office
of the Executive such that he does not serve as President or Chief Executive
Officer of the Company (which diminution was not a result of the Executive's
disability), or the assignment (without the Executive's express written
consent) by the Company to the Executive of any significant duties that are
inconsistent with the Executive's position, duties, responsibilities and
status as Chief Executive Officer of the Company;
(ii) Any reduction by the Company in the Executive's Annual
Base Salary incentive compensation or benefits as in effect on the date of a
Change in Control or as the same may be increased from time to time thereafter
in accordance with this Agreement;
(iii) The Company's transfer or assignment of the
Executive, without the Executive's prior express written consent, to any
location other than the Company's principal executive offices in Utah, except
for required travel on Company business to an extent that does not constitute
a substantial abrupt departure from the Executive's business travel
obligations prior to the Change in Control; or
(iv) The failure by the Company to continue in effect any
benefit or compensation plan, life insurance plan, health and medical benefit
plan, disability plan or any other benefit plan in which the Executive is a
participant at the time of a Change in Control, or the taking of any action by
the Company that would adversely affect the Executive's right to participate
in or materially reduce the Executive's benefits under any of such plans or
benefits, or deprive the Executive of any material fringe benefit enjoyed by
the Executive at the time of the Change in Control, or as the same may be
increased from time to time thereafter.
(d) The terms "Parachute Payments" and "Excess Parachute
Payments" shall each have the meanings attributed to them under Section 280G
of the Internal Revenue code of 1986, as amended (the "Code"), or any
successor section, and any regulations which may be promulgated in connection
with said section.
5.02 Severance Payments. In the event that, during the Contract
Term, both (a) a Change of Control occurs, and (b) within six (6) months after
such Change in Control occurs, the Executive's employment is terminated either
(1) by the Company for any reason, other than (A) for Cause (as defined
below), (B) as a result of the Executive's death or disability or (C() as a
result of the Executive's retirement in accordance with the Company's general
retirement policies, or (2) by the Executive for Good Reason, then the
Executive shall be entitled to receive from the Company, and at Executive's
option within thirty (30) days after such termination, an amount in cash equal
to all Annual Base Salary then and thereafter payable hereunder. The Company
shall be obligated to maintain in full force and effect for three (3) years
after termination or for the remaining Contract Term (whichever is longer),
all employee health and medical benefit plans and programs in which the
Executive, his family, or both, were participants immediately prior to
termination, provided that such continued participation is possible under the
general terms and provisions of such plans and programs. If such health and
medical coverage is not available under current Company plans and programs,
the Company will provide substitute coverage of substantially similar content
for three (3) years after termination or for the remaining Contract Term
(whichever is longer) provided, however, that if the Executive becomes
eligible to participate in a health and medical benefit plan or program of
another employer which covers substantially similar benefits, the Executive
shall cease to receive benefits under this subparagraph in respect of such
plan or program. All stock options, warrants and other similar rights granted
by the Company and then vested or earned shall be immediately granted to
Executive without restriction or limitation of any kind, and any incentive
compensation or portion thereof then earned shall be paid in a lump sum
payment to Executive; provided however, that if incentive compensation has not
been earned by Executive at the date of termination but Executive otherwise
would have been entitled to incentive compensation at the end of the Company's
next fiscal year or next period designated by the Company for the
determination of incentive compensation for peer executives (the "Bonus
Determination Date"), the Company shall pay such incentive compensation to
Executive within ten (10) business days after the Bonus Determination Date,
pro rated in amount to the date of Executive's termination. Any amount
payable pursuant to this Section, together with any compensation pursuant to
Article III that is payable for services rendered through the effective date
of termination, shall constitute the sole obligation of the Company payable
with respect to the termination of the Executive as provided in this Section.
5.03 Parachute Payment Limitation. Notwithstanding any other
provision of this Agreement, if the severance payments under Section 5.2 of
this Agreement, together with any other Parachute Payments made by the Company
to the Executive, if any, are characterized as Excess Parachute Payments, then
the following rules shall apply:
(a) The Company shall compute the net value to the Executive of
all such severance payments after reduction for the excise taxes imposed by
Section 4999 of the Code and for any normal income taxes that would be imposed
on the Executive if such severance payments constituted the Executive's sole
taxable income;
(b) The Company shall next compute the maximum amount of
severance payments that can be provided without any such payments being
characterized as Excess Parachute Payments, and reduce the result by the
amount of any normal income taxes that would be imposed on the Executive if
such reduced severance benefits constituted the Executive's sole taxable
income;
(c) If the amount derived in Section 5.3(a) is greater than the
amount derived in Section 5.3(b), then the Company shall pay the Executive the
full amount of severance payments without reduction. If the amount derived in
Section 5.3(a) is not greater than the amount derived in Section 5.3(b), then
the Company shall pay the Executive the maximum amount of severance payments
that can be provided without any such payments being characterized as Excess
Parachute Payments.
5.04 No Mitigation. The Executive shall not be required to mitigate
the amount of any payment provided for in Section 5.2 by seeking other
employment or otherwise, nor shall the amount of any payment provided for in
Section 5.2 be reduced by any compensation earned by the Executive as a result
of employment by another company, self-employment or otherwise.
ARTICLE VI
Restrictive Covenants
6.01 Trade Secrets, Confidential and Propriety Business
Information.
(a) The Company has advised the Executive and the Executive
acknowledged that it is the policy of the Company to maintain as secret and
confidential all Protected Information (as defined below), and that Protected
Information has been and will be developed at substantial cost and effort to
the Company. "Protected Information" means trade secrets, confidential and
propriety business information of the Company, any information of the Company
other than information which has entered the public domain (unless such
information entered the public domain through effects of or on account of the
Executive), and all valuable and unique information and techniques acquired,
developed or used by the Company relating to its business, operations,
employees, customers and suppliers, which give the Company a competitive
advantage over those who do not know the information and techniques and which
are protected by the Company from unauthorized disclosure, including but not
limited to, customer lists (including potential customers), sources of supply,
processes, plans, materials, pricing information, internal memoranda,
marketing plans, internal policies, and products and services which may be
developed from time to time by the Company and its agents or employees.
(b) The Executive acknowledges that the Executive will acquire
Protected Information with respect to the Company and its successors in
interest, which information is a valuable, special and unique asset of the
Company's business and operations and that disclosure of such Protected
Information would cause irreparable damage to the Company.
(c) Either during or after termination of employment by the
Company, the Executive shall not, directly or indirectly, divulge, furnish or
make accessible to any person, firm, corporation, association or other entity
(otherwise than as may be required in the regular course of the Executive's
employment) nor use in any manner, any Protected Information, or cause any
such information of the Company to enter the public domain.
6.02 Non-Competition.
(a) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of one (1) years
after the termination of this Agreement, directly or indirectly, in any
capacity, engage or participate in, or become employed by or render advisory
or consulting or other services in connection with any Prohibited Business as
defined in Section 6.02(c).
(b) The Executive agrees that the Executive shall not during the
Executive's employment with the Company, and, for a period of one (1) year
after the termination of this Agreement, make any financial investment,
whether in the form of equity or debt, or own any interest, directly or
indirectly, in any Prohibited Business. Nothing in this Section 6.02(b)
shall, however, restrict the Executive from making any investment in any
company whose stock is listed on a national securities exchange or actively
traded in the over-the-counter market; provided that (i) such investment does
not give the Executive the right or ability to control or influence the policy
decisions of any Prohibited Business, and (ii) such investment does not create
a conflict of interest between the Executive's duties hereunder and the
Executive's interest in such investment.
(c) For purposes of this Section 6.02, "Prohibited Business"
shall be defined as any business and any branch, office or operation thereof,
which is a competitor of the Company and which has established or seeks to
establish contact, in whatever form (including but not limited to solicitation
of sales, or the receipt or submission of bids), with any entity who is at any
time a client, customer or supplier of the Company (including but not limited
to all subdivisions of the federal government).
(d) The provisions of this paragraph 6.02 and paragraph 6.03
shall not apply to Executive's relationship with Synergetics, Inc. Executive
shall have the unfettered right to continue his activities and relationships
with Synergetics, Inc. during the term of this Agreement and after its
termination.
6.03 Disclosure of Employee-Created Trade Secrets, Confidential and
Propriety Business Information. The Executive agrees to promptly disclose to
the Company all Protected Information developed in whole or in part by the
Executive during the Executive's employment with the company and which relate
to the Company's business. Such Protected Information is, and shall remain,
the exclusive property of the Company. All writings created during the
Executive's employment with the Company (excluding writings unrelated to the
Company's business) are considered to be "works-for-hire" for the benefit of
the Company and the Company shall own all rights in such writings.
6.04 Survival of Undertakings and Injunctive Relief.
(a) The provisions of Sections 6.01, 6.02, 6.03 and 6.04 shall
survive the termination of the Executive's employment with the Company
irrespective of the reasons therefor.
(b) The Executive acknowledges and agrees that the restrictions
imposed upon the Executive by Sections 6.01, 6.02, 6.03 and 6.04 and the
purpose of such restrictions are reasonable and are designed to protect the
Protected Information and the continued success of the Company without unduly
restricting the Executive's future employment by others. Furthermore, the
Executive acknowledges that, in view of the Protected Information which the
Executive has or will acquire or has or will have access to and in view of the
necessity of the restrictions contained in Sections 6.01, 6.02, 6.03 and 6.04,
any violation of any provision of Sections 6.01, 6.02, 6.03 and 6.04 hereof
would cause irreparable injury to the Company and its successors in interest
with respect to the resulting disruption in their operations. By reason of
the foregoing, the Executive consents and agrees that if the Executive
violates any of the provisions of Sections 6.01, 6.02, 6.03 or 6.04 of this
Agreement, the Company and its successors in interest as the case may be,
shall be entitled, in addition to any other remedies that they may have,
including money damages, to an injunction to be issued by a court of competent
jurisdiction, restraining the Executive from committing or continuing any
violation of such Sections of this Agreement.
In the event of any such violation of Sections 6.01, 6.02, 6.03 and 6.04
of this Agreement, the Executive further agrees that the time periods set
forth in such Section shall be extended by the period of such violation.
ARTICLE VII
Termination
7.01 Termination of Employment. Executive's employment may be
terminated at any time during the Contract Term by mutual agreement of the
Parties, or as otherwise provided in this Article.
7.02 Termination for Cause. The Company may terminate Executive's
employment without notice at any time for cause. For purposes of this
Agreement, cause for termination shall include: conviction of or entering a
plea of guilty or nolo contendre to a felony; the Company, in good faith,
after reasonable investigation, determines that Executive has committed
willful fraud, misappropriation or embezzlement; Executive grossly and
willfully breaches a material provision of this Agreement, and does not cure
or cannot cure the breach after notice; or Executive habitually or grossly
neglects his duties. Upon termination for cause, Executive shall not be
entitled to payment of any compensation other than salary and benefits under
this Agreement earned up to the date of such termination and any stock
options, warrants or similar rights which have vested at the date of such
termination.
7.03 Termination Without Cause. Should Executive's employment be
terminated for a reason other than as specifically set forth in Section 7.01 and
7.02 above, all salary then and thereafter payable hereunder shall, at
Executive's option, be immediately paid in a lump sum payment to Executive,
and all stock options, warrants and other similar rights granted by the
Company and then vested or earned shall be immediately granted to Executive
without restriction or limitation of any kind, and any incentive compensation
or portion thereof then earned shall be paid in a lump sum payment to
Executive; provided however, that if incentive compensation has not been
earned by Executive at the date of termination but Executive otherwise would
have been entitled to incentive compensation at the Bonus Determination Date,
the Company shall pay such incentive compensation to Executive within ten (10)
business day s after the Bonus Determination Date, pro rated in amount to the
date of Executive's termination, and all other benefits described in Article
IV (excluding stock options, warrants or other similar rights and bonuses)
hereof shall continue through the end of the Contract Term.
ARTICLE VIII
Prior Management Services
SCC Management Fees. In April of 1995, all the disinterested directors
of the Company approved the issuance of warrants to purchase 3,700,000 shares
of common stock of the Company to SCC with the right to convert SCC accrued
management fees due from the Company for the purchase of 3,700,000 warrants
and the exercise price of the warrants. The warrants offered in April 1995,
were purchased on July 31, 1995 for a purchase price of $.033 per warrant and
were then exercised on August 11, 1995 for a purchase price at $.35 per share
of common stock. SCC cancelled invoices for $1,417,100 in management fees due
from the Company as consideration for the warrants and exercise price of the
warrants. The Company will bonus to Executive, a one-time cash bonus on or
before March 15, 1997, an amount sufficient (i) for Executive to pay all
personal taxes on his portion of the shares received by SCC in exchange for
the management fees and (ii) to pay all personal taxes on the bonus which is
paid pursuant to this Section.
ARTICLE IX
Miscellaneous
9.01 Assignment, Successors. This Company may freely assign its
respective rights and obligations under this Agreement to a successor of the
Company's business, with the prior written consent of the Executive. This
Agreement shall be binding upon and insure to the benefit of the Executive and
the Executive's estate and the Company and any assignee of or successor to the
Company.
9.02 Beneficiary. If the Executive dies prior to receiving all of
the salary payable hereunder, such salary shall be paid in a lump sum payment
to the beneficiary designated in writing by the Executive ("Beneficiary") and
if no such Beneficiary is designated, to the Executive's estate.
9.03 Nonalienation of Benefits. Benefits payable under this
Agreement shall not be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance, charge, garnishment,
execution or levy of any kind, either voluntary or involuntary, prior to
actually being received by the Executive, and any such attempt to dispose of
any right to benefits payable hereunder shall be void.
9.04 Severability. If all or any part of this Agreement is declared
by any court or governmental authority to be unlawful or invalid, such
unlawfulness or invalidity shall not serve to invalidate any portion of this
Agreement not declared to be unlawful or invalid. Any paragraph or part of a
paragraph so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such paragraph or
part of a paragraph to the fullest extent possible while remaining lawful and
valid.
9.05 Amendment and Waiver. This Agreement shall not be altered,
amended or modified except by written instrument executed by the Company and
the Executive. A waiver of any term, covenant, agreement or condition
contained in this Agreement shall not be deemed a waiver of any other term,
covenant, agreement or condition, and any waiver of any other term, covenant,
agreement or condition, and any waiver of any default in any such term,
covenant, agreement or condition shall not be deemed a waiver of any later
default thereof or of any other term, covenant, agreement or condition.
9.06 Notices. All notices and other communications hereunder shall
be in writing and delivered by hand or by first class registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company: fonix[trademark] corporation
60 East South Temple
1225 Eagle Gate Tower
Salt Lake City, UT 84111
If to the Executive: Roger D. Dudley
3703 South 2700 East
Salt Lake City, UT 84109
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notice and communications shall be effective
when actually received by the addressee.
9.07 Counterpart Originals. this Agreement may be executed in
several counterparts, each of which shall be deemed to be an original but all
of which together will constitute one and the same instrument.
9.08 Entire Agreement. This Agreement forms the entire agreement
between the parties hereto with respect to any severance payment and with
respect to the subject matter contained in the Agreement.
9.09 Applicable Law. The provisions of this Agreement shall be
interpreted and construed in accordance with the laws of the state of Utah,
without regard to its choice of law principles.
9.10 Forum Selection. The parties agree that any action or
proceeding to enforce, interpret, terminate, or rescind this Agreement shall
be commenced solely in the United States District Court for the District of
Utah or in the Third Judicial District Court for Salt Lake County, State of
Utah, and that such courts shall have sole and exclusive personal jurisdiction
over the parties to any such action or proceeding.
9.11 Effect on Other Agreements. This Agreement shall supersede all
prior agreements, promises and representations regarding employment by the
Company and severance or other payments contingent upon termination of
employment. Notwithstanding the foregoing, the Executive shall be entitled to
any other severance plan applicable to other peer executives of the Company.
9.12 Incorporation of Recitals. All recitals are incorporated as
part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
fonix[trademark] corporation
By: /s/ Thomas A. Murdock
------------------------
Its Chief Operating Officer
Executive
/s/ Roger D. Dudley
---------------------------
Roger D. Dudley
<PAGE>
EXHIBIT "A" TO EMPLOYMENT AGREEMENT
FOR ROGER D. DUDLEY
Annual Base Salary and Incentive Pay Arrangement.
Annual Base Salary for the first three (3) years of the Contract Term
shall be as follows: for the salary year of November 1, 1996, $250,000; for
1997-$325,000; for 1998-$425,000. Executive will also be entitled to receive
an Incentive Bonus payable on or before December 31 of each calendar year
during the Contract Term. During the first three (3) years of the Contract
Term, Incentive Bonus will be based upon the market price of the Company
stock, adjusted for stock dividends and splits, etc.
For the last two years of the Contract Term, Annual Base Salary will be
as follows: for 1999, $550,000; and for 2000, $750,000. Provided, however,
that Incentive Bonus will be determined and Annual Base Salary will be subject
to review based upon either or both the market price of the Company stock, and
profits derived by the Company from annual revenues from sales, royalties or
any other source of revenue, as determined by the Board of Directors for that
year.
Whenever Incentive Bonus is based solely upon the market price of the
Company stock, in order to qualify for a bonus the Company stock price must
maintain an average price equal to or above the level set forth below over the
period of three consecutive calendar months during the calendar year in which
the bonus is to be paid, and such bonus will be a percentage of Annual Base
Salary for each year of November 1st through October 31st. One such bonus
will be paid each year based on the highest average stock price during a three
consecutive calendar month period, during the calendar year. The percentage
that will be applied to the Annual Base Salary for purposes of calculating any
such bonus that is based solely on stock price shall be as follows:
Quarterly Average
Stock Price Percentage Bonus
$10. 30
$12.50 35
$15. 40
$20. 45
$25.+ 50
Exhibit (23)
PRITCHETT, SILER & HARDY, P.C.
430 EAST 400 SOUTH
SALT LAKE CITY, UTAH 84111
(801) 328-1123
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
fonix corporation
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of fonix
corporation and subsidiary [a development stage company] as of December 31,
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1995, and for
the period from October 1, 1993 (date of inception) to December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of fonix corporation
and subsidiary (a development stage company) as of December 31, 1995, and the
results of their operations and their cash flows for the year ended December 31,
1995 and for the period from October 1, 1993 (date of inception) to December 31,
1995, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10
to the consolidated financial statements, the Company is still in the
development stage and has suffered recurring losses which raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 10. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PRITCHETT, SILER & HARDY, P.C.
March 4, 1996, except as to Note 12
as to which the date is March 28, 1997
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,806
<SECURITIES> 0
<RECEIVABLES> 1,158
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,968
<PP&E> 1,360
<DEPRECIATION> 80
<TOTAL-ASSETS> 25,331
<CURRENT-LIABILITIES> 19,061
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 6,266
<TOTAL-LIABILITY-AND-EQUITY> 25,331
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,288
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 721
<INCOME-PRETAX> (7,830)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,830)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,830)
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