FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-31425
PROSPECTUS Dated November 4, 1997
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fonix corporation
1,280,928 shares
Common Stock, par value $.0001 per share
consisting of:
577,426 shares issued upon conversion of $3,000,000 principal
amount of Series B 5% Convertible Subordinated Debentures Due 2007;
up to 453,502 shares issuable upon conversion of 125,000 shares
of the Company's Series B Convertible Preferred Stock; and
250,000 shares underlying Common Stock Purchase Warrants
expiring June 18, 2002
This Prospectus relates to 1,280,928 shares of Common Stock, $.0001
par value, (the "Shares") of fonix corporation, a Delaware corporation
(the "Company", the "Registrant" or "fonix") consisting of: (i) 577,426
shares issued upon conversion of $3,000,000 principal amount of Series B 5%
Convertible Subordinated Debentures Due June 18, 2007 (the "Series B
Debentures"); (ii) up to 453,502 shares issuable upon conversion of the
Company's Series B Convertible Preferred Stock (the "Series B Preferred"),
and (iii) 250,000 shares issuable upon the exercise of presently issued and
outstanding Common Stock Purchase Warrants at the exercise price of $8.28
per share expiring June 18, 2002 (the "Warrants"), all of which securities
are owned of record by the selling stockholder (the "Selling Stockholder")
and are convertible or exercisable as described in the "Selling
Stockholder" and "Plan of Distribution" sections of the Prospectus. The
Series B Debentures, the Series B Preferred, the Warrants and, to the
extent issued prior to the effective date of the registration statement of
which this Prospectus is part, the Shares issued upon conversion of the
Series B Debentures or the Series B Preferred or exercise of the Warrants
were issued pursuant to an exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), provided by
Section 4(2) thereof and the rules and regulations promulgated thereunder.
The Shares are being registered by the Company pursuant to a Registration
Rights Agreement between the Company and the Selling Stockholder as a
condition to the Selling Stockholder's acquisition of the Series B
Debentures, the Warrants and the Series B Preferred. All shares to be
registered hereby are to be offered by the Selling Stockholder, and the
Company will receive no proceeds from the sale of such Shares. The Shares
may be offered by the Selling Stockholder, or by its pledgees, donees,
transferees or other successors in interest, from time to time on the
Nasdaq SmallCap Market, in ordinary brokerage transactions, in negotiated
transactions, or otherwise, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. See
"Selling Stockholder" and "Plan of Distribution." The Company has agreed
to indemnify the Selling Stockholder against certain liabilities, including
certain liabilities under the Securities Act, or to contribute to payments
which such Selling Stockholder may be required to make in respect thereof.
See "Plan of Distribution". The Company will bear certain expenses
incurred in effecting the registration of the Shares. Notwithstanding the
inclusion in this Prospectus of the Shares, the Selling Stockholder has no
obligation to sell any or all of the Shares.
The Company's Common Stock, par value $.0001 per share, is listed on
the National Association of Securities Dealers Automated Quotation System
("Nasdaq") and traded on the Nasdaq SmallCap Market. The last reported bid
price of the Common Stock on the Nasdaq SmallCap Market on October 31, 1997
was $6.3125 per share.
The Selling Stockholder and any broker-dealers or agents that
participate with the Selling Stockholder in the distribution of the Shares
may be deemed to be "underwriters" within the meaning of Section 2(11) of
the Securities Act, and any commissions received by them and any profit on
the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
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THE SHARES HAVE NOT BEEN REGISTERED FOR SALE BY THE SELLING STOCKHOLDER
UNDER THE SECURITIES LAWS OF ANY STATE AS OF THE DATE OF THIS PROSPECTUS.
BROKERS OR DEALERS EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THE
REGISTRATION THEREOF UNDER THE SECURITIES LAWS OF THE STATES IN WHICH SUCH
TRANSACTIONS OCCUR, OR THE EXISTENCE OF AN EXEMPTION FROM REGISTRATION.
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Price to Public Underwriting Discounts and Proceeds to Issuer or
Commissions (1) Other Persons
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit $6.3125 (2) 0 0 (3)
Total $8,085,858 (2) 0 0 (3)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) None, to the Company's knowledge.
(2) Based on the closing bid price of the Company's common stock as
reported on the Nasdaq SmallCap Market on October 31, 1997.
Represents estimate of price to public, assuming sales of all Shares
at closing bid price as of October 31, 1997. The actual price at
which the securities covered by this Prospectus may be offered to the
public may vary and could be substantially different. See "Selling
Stockholder".
(3) The Company will receive none of the proceeds of sales of the
securities offered by this Prospectus. The Company can provide no
estimate of the proceeds the Selling Stockholder would receive upon
sales of the securities offered by this Prospectus. See "Selling
Stockholder" and "Plan of Distribution".
The date of this Prospectus is November 4, 1997
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE SELLING STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company with
the Commission pursuant to the informational requirements of the Exchange
Act may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials also may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. In addition, the Company is required to
file electronic versions of these documents through the Commission's
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). The
Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants filed electronically with the Commission. The Common
Stock of the Company is traded on the Nasdaq SmallCap Market. Reports and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington,
D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments, supplements, exhibits and schedules
thereto, the "Registration Statement") under the Securities Act with respect
to the Shares of Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement, as
certain items are omitted in accordance with the rules and regulations of
the Commission. For further information pertaining to the Company and the
Shares, reference is made to the Registration Statement. Statements
contained in this Prospectus regarding the contents of any agreement or
other document are not necessarily complete, and in each instance reference
is made to the copy of such agreement or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement, including all exhibits and
schedules thereto, may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
all or any part thereof may be obtained from the Commission at prescribed
rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and materials filed by the Company with the
Commission are incorporated herein by reference:
(i) The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996, filed with the Commission on April 15, 1997;
(ii) Amendment No. 1 to the Company's Annual Report on Form 10-KSB for the
Year ended December 31, 1996, filed with the Commission on September
8, 1997;
(iii) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, filed with the Commission on May 15, 1997;
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(iv) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, filed with the Commission on August 14, 1997;
(v) Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, filed with the Commission on
September 8, 1997;
(vi) Amendment No. 2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997, filed with the Commission on
September 29, 1997;
(vii) The Company's Current Report on Form 8-K, dated March 13, 1997,
filed with the Commission on March 19, 1997;
(viii) The Company's Current Report on Form 8-K, dated March 24, 1997,
filed with the Commission on March 31, 1997;
(ix) The Company's Definitive Proxy Statement on Schedule 14A filed with
the Commission on May 15, 1997;
(x) Amendment No. 1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, filed with the Commission on
April 15, 1997;
(xi) Amendment No. 1 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1995, filed with the Commission on
April 15, 1997;
(xii) Amendment No. 1 to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1996, filed with the Commission on April
15, 1997;
(xiii) Amendment No. 1 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended June 30, 1996, filed with the Commission on
April 15, 1997;
(xiv) Amendments Nos. 1, 2 and 3 to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1996, filed with the
Commission on January 22, 1997, January 24, 1997 and April 15, 1997,
respectively; and
(xv) The description of the Company's Common Stock included in the
Company's Registration Statement on Form 8-A, as filed with the
Commission on April 1, 1994.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date hereof and prior to the termination of the offering of the Shares
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy
of any or all of the foregoing documents incorporated by reference into this
Prospectus (without exhibits to such documents other than exhibits
specifically incorporated by reference into such documents). All such
requests shall be directed to: fonix corporation, 1225 Eagle Gate Tower, 60
East South Temple Street, Salt Lake City, Utah 84111, Attention: Jeffrey N.
Clayton, Esq., Telephone: (801) 328-0161. The Company maintains a World
Wide Web site that contains certain of the documents incorporated by
reference herein. The address of the Company's web site is
http://www.fonix.com. Alternatively, certain of the documents incorporated
herein by reference are available at the Commission's World Wide Web site at
http://www.sec.gov.
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this Prospectus and in the documents incorporated
herein constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 2B of the Exchange Act. For this
purpose, any statements contained herein or incorporated herein that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "plans,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that
could cause the results of the Company to differ materially from those
indicated by such forward-looking statements. These factors include those
set forth in "Risk Factors" herein.
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the
more detailed information appearing elsewhere in this Prospectus or
incorporated herein by reference and the financial statements which are
incorporated herein by reference.
THE COMPANY . . . . . . . . . fonix corporation (the "Company") is a
development stage company engaged in research
and development of certain proprietary
automatic computer voice recognition
technologies and related technologies. The
Company's present marketing direction is to
focus on licensing its technologies to and
entering into co-development relationships and
strategic alliances with third parties that
are participants in the horizontal computer
industry (including producers of application
software, operating systems, computers and
microprocessor chips)or are research and
development entities, including academia,
government, industry and commercial speech
product developers. The Company intends for
the foreseeable future to generate revenues
from such licensing royalties and strategic
partnerships and alliances, rather than from
the direct manufacture of products
incorporating the Company's proprietary
technologies. The Company to date has not
generated revenues from operations and has not
entered into any licensing agreements or
strategic alliances or partnerships. See "The
Company".
RISK FACTORS. . . . . . . . . Any investment in the Shares involves
substantial risk. See "Risk Factors".
SECURITIES OFFERED. . . . . . 1,280,928 shares of the Company's Common
Stock, par value $.0001 per share, that are
issuable by the Company to the Selling
Stockholder upon the conversion of the
Series B Debentures or the Series B Preferred
or the exercise of the Warrants or are
presently outstanding, having been issued upon
conversion of the Series B Debentures.
OFFERING PRICE. . . . . . . . All or part of the Shares offered hereby may
be sold from time to time in amounts and on
terms to be determined by the Selling
Stockholder at the time of sale. See "Plan of
Distribution".
USE OF PROCEEDS . . . . . . . The Company will receive no part of the
proceeds from the sale of the Shares
registered pursuant to this Registration
Statement. The Company will, however,
receive certain proceeds as a result of the
exercise, if any, of the Warrants.
SELLING STOCKHOLDER . . . . . The Shares being offered hereby are being
offered for the account of the Selling
Stockholder specified under the caption
"Selling Stockholder".
ADDRESS AND TELEPHONE NUMBER
OF THE COMPANY. . . . . . . . 1225 Eagle Gate Tower, 60 East South Temple
Street, Salt Lake City, Utah 84111.
Tel. (801) 328-0161
NASDAQ SMALLCAP MARKET
TRADING SYMBOL. . . . . . . . "FONX"
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RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND SHOULD NOT BE MADE BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. IN CONNECTION WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY IS HEREBY IDENTIFYING
IMPORTANT FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS OF THE COMPANY
MADE BY OR ON BEHALF OF THE COMPANY. THE COMPANY ADVISES READERS NOT TO
PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS IN LIGHT OF THE
RISKS AND UNCERTAINTIES TO WHICH THEY ARE SUBJECT. THE FOLLOWING FACTORS
SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS.
Substantial and Continuing Losses; Accumulated Deficit. Since
commencing its business of developing its automatic speech recognition
technologies ("ASRT") and certain other proprietary technologies, including
data compression and neural network design technologies (collectively the
ASRT and such other related technologies are referred to in this Prospectus
as the "Core Technologies"), 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. The Company incurred a net loss of $7,829,508 for the year ended
December 31, 1996 and a net loss of $4,856,245 for the six-month period
ended June 30, 1997. Accordingly, the auditor's report in the fiscal 1996
financial statements includes an explanatory paragraph relating to the
Company's ability to continue as a going concern. Losses of this magnitude
are expected to continue for the near term and until such time as the
Company is able to complete licensing or co-development arrangements with
third parties which produce revenues sufficient to offset losses associated
with the Company's ongoing operating expenses, and there can be no assurance
that the Company will achieve profitable operations or that profitable
operations will be sustained if achieved. At December 31, 1996, the
Company's accumulated deficit was $19,841,807 and at June 30, 1997, the
Company's accumulated deficit was $27,561,515. The Company anticipates
incurring substantial research and development expenses for the foreseeable
future, which will require substantial amounts of additional cash on an
ongoing basis. The Company must continue to secure additional financing to
complete its research and development activities, and to seek and engage in
negotiations with potential strategic alliance partners and otherwise market
its technology to industry segments that can incorporate the Company's
technologies into their products. The Company believes that the cash
generated to date from its financing activities and the Company's ability to
raise cash in future financing activities will be sufficient to satisfy its
working capital requirements through the next twelve-month period. However,
there can be no assurance that this assumption will prove to be accurate or
that events in the future will not require the Company to obtain additional
financing sooner than presently anticipated. To the extent that the
Company's future financing activities involve the issuance of equity
securities or securities convertible into equity securities, additional
dilution to the interests of the Company's stockholders will result.
Although the Company continues to investigate several financing
alternatives, including strategic partnerships, private, debt and equity
financing and other sources in relation to its ongoing and research and
development activities, there can be no assurance that the current levels of
funding or additional funding will be available when needed, or if available
will be on terms satisfactory to the Company. Failure to obtain additional
financing could have a material adverse effect on the Company, including
possibly requiring it to significantly curtail its operations. See December
31, 1996 Form 10-KSB "Item 1. Description of Business" and "Item 6.
Management's Discussion and Analysis of Financial Condition and Results of
Operations"; and June 30, 1997 Form 10-Q, as amended, Part I "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Development Stage of Core Technologies. While the Company generally is
pleased with the progress made to date with respect to the research and
development of its Core Technologies, currently there are no products
incorporating the Core Technologies. As a development stage company, fonix
intends to enter into licensing and co-development arrangements or strategic
alliances with third parties, although no such relationships presently
exist. The Company presently anticipates that any products incorporating
the Company's Core Technologies would be manufactured and marketed by such
third party licensees and co-development and strategic alliance partners.
There can be no assurance that the Company will ever be able to license its
Core Technologies or enter into co-development or strategic alliance
agreements such that the Core Technologies or products based thereon will be
commercially viable.
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Implementation of Business Strategy. The Company's business strategy
is to achieve revenues through appropriate strategic alliances,
co-development arrangements and license agreements. To date, the Company
has not yet entered into any revenue-generating license, co-development or
strategic relationships. The Company's ability to implement its strategy
fully over the long term, and the ultimate success of this strategy, are
subject to a broad range of uncertainties and contingencies, many of which
are beyond the Company's control. The Company may not be able to achieve the
revenue growth it is seeking as a result of incompatibilities between its
Core Technologies and the needs of third-party developers and manufacturers
or an unwillingness of companies with existing voice recognition products to
integrate the Company's technologies. In addition, there can be no
assurance that the Company will be able to enter into revenue-generating
licensing or co-development arrangements or to implement strategic
relationships, or, if entered into, that such strategic relationships will
in fact further the implementation of the Company's business strategy.
Unproven Market; Risks of New Technology. The market for speech
recognition technologies is relatively new. The Company's Core Technologies
are new and represent a significant departure from technologies which have
already found a degree of acceptance in the nascent voice recognition
marketplace. The financial performance of the Company will depend, in part,
on the future development, growth and ultimate size of the market for voice
recognition products generally, and products incorporating the Company's
Core Technologies specifically. Products, if any, incorporating the
Company's Core Technologies will compete with more conventional means of
information processing (e.g., data entry or access by keyboard or touch-tone
phone). The Company believes that there is a substantial potential 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, there can be no assurance that any market for the Company's
Core Technologies or for products incorporating the Company's Core
Technologies will develop, or that the Company's technology will find
general acceptance in the marketplace, or that sales of products
incorporating the Core Technologies will be profitable. Accordingly, the
Company is subject to all of the risks inherent in developing and marketing
new products based on new technology, together with the risks associated
with market acceptance of such technology, technological obsolescence,
inappropriate and/or illegal intellectual property appropriation and
inadequate funding to commence and/or sustain operations. Even if the Core
Technologies are licensed and products incorporating such technologies 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.
Reliance on Strategic Partners. The Company's strategy for
commercialization of its Core Technologies depends, in part, upon the
formation of strategic alliances and licensing arrangements, although the
Company has not entered into any such arrangements to date. There can be no
assurance that the Company will be able to establish such strategic alliance
or licensing arrangements, that any such arrangements or licenses will be on
terms favorable to the Company, or that any such strategic alliances or
licensing arrangements ultimately will be successful. Even if the Company
were to enter into third party licensing agreements, the extent of revenues
to the Company resulting from such agreements would depend on factors beyond
the Company's control such as the timing and extent of such licensee's
manufacture of products incorporating the Company's Core Technologies, the
scope of the marketing effort related to such products, the price of any
product incorporating the Company's Core Technologies, and competition from
new or existing products. Moreover, disputes may arise with respect to the
ownership of and royalty or other payments for rights to any technology
developed with strategic partners. These and other possible disagreements
between strategic partners and the Company could lead to delays in the
collaborative research, development or commercialization of certain product
candidates, or could require or result in litigation or arbitration, which
could be time consuming and expensive, and which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition and Technological Change. The computer hardware and
software industries into which the Core Technologies would be incorporated
are highly and intensely competitive. In particular, the speech recognition
field and the computer voice and communications industries in which products
employing the Company's Core Technologies would be incorporated are
characterized by rapid technological change. Competition in the field of
speech recognition is based largely on technological superiority. The
development of new technology or material improvements to existing
technologies by the Company's competitors may render the Company's
technology obsolete. Accordingly, the success of the Company will depend
upon its ability to continually enhance its Core Technologies to keep pace
with or ahead of technological developments and to address the changing
needs of the marketplace. Although the Company expects to continue to
devote significant resources to
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research and development activities, there
can be no assurance that these activities will allow the Company's Core
Technologies to successfully be incorporated into marketable products or to
keep pace with changing demands and needs of the marketplace. In addition,
there can be no assurance that the introduction of products or technological
developments by others will not have a material adverse effect on the
Company's operations. Although the Company believes that its Core
Technologies could beneficially be incorporated into most existing computer
speech recognition applications based on traditional Hidden Markov Models
("HMMs") technology, several companies already manufacture and market
computer speech recognition products against which products incorporating
the Core Technologies would 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. One computer speech company,
Dragon Systems, Inc., has recently introduced a continuous speech dictation
product that could have the effect of desensitizing the market to new
dictation products and increasing the installed base of products
incorporating traditional voice recognition technologies.
Additionally, as the market for automatic speech recognition expands and
matures, the Company expects many more entrants into this already
competitive arena. There can be no assurance that the distinguishing
characteristics of the Core Technologies 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.
Need for Additional Financing. The development of the Company's Core
Technologies has required that fonix establish a substantial research and
scientific infrastructure consisting of teams of experts in, among others,
the fields of computer programming and design, electrical engineering and
linguistics, as well as the assembly of certain specialized equipment and
developmental and diagnostic software and hardware, some of which has been
designed and built exclusively by the Company. The Company has consumed
substantial amounts of cash to date in developing this infrastructure and in
developing and refining its Core Technologies. During the year ended
December 31, 1996, the Company incurred total research and development
expenses in the amount of $4,758,012. During the six-month period ended
June 30, 1997, the Company incurred total research and development expenses
of $3,065,279. The Company anticipates that its research and development
expenditures will continue at present rates or increased rates for the
foreseeable future. Even absent revenues from co-development or licensing
agreements, the Company believes that existing cash and cash from
anticipated financings will be sufficient to support the Company's
operations for at least the next 12 months. The Company's actual future
capital requirements, however, will depend on many factors, including
further development of its Core Technologies, the Company's ability to enter
into strategic alliance, co-development and licensing arrangements, the
progress of the development, manufacturing and marketing efforts of the
Company's strategic partners, if any, the level of the Company's activities
relating to commercialization rights it may retain in its strategic alliance
arrangements, competing technological and market developments, and the costs
involved in enforcing patent claims and other intellectual property rights.
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. Rather, the Company likely will have to
conduct additional sales of its equity and/or debt securities. There can be
no assurance that such additional 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 stockholders likely would
result from any sales of equity securities or other securities convertible
into equity securities. To the extent that the Company raises additional
funds through strategic alliance and licensing arrangements, the Company may
be required to relinquish rights to certain of its technologies, or to grant
licenses on terms that are not favorable to the Company, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the event that adequate funds are
not available when and as needed, the Company's business would be adversely
affected.
Nasdaq Stock Market Listing Requirements. The Company's Common Stock
presently is listed on the Nasdaq SmallCap Market under the symbol "FONX".
In order to maintain the continued listing on such market, the Company, like
all companies listed on the Nasdaq SmallCap Market, is subject to certain
minimum asset and capital and surplus requirements; specifically, the
Company's capital and surplus as indicated on its financial statements
prepared in accordance with generally accepted accounting principles must be
at least $1,000,000, and the Company's total assets must be at least
$2,000,000. Effective February 1998, companies with securities listed on
the Nasdaq SmallCap market will be able to satisfy continued listing
requirements by reference, among other factors, to such companies' total
market capitalization. Nevertheless, until such rule changes take effect,
the Company will continue to be subject to the asset and capital and surplus
maintenance requirements referenced above. If the Company fails to meet
such requirements, there can be no assurance that the Company's Common Stock
9
<PAGE>
will not be delisted from the Nasdaq SmallCap Market. If delisted, the
Company's management believes that the Common Stock would continue to be
traded in the over-the-counter market. Nevertheless, in such event, there
can be no assurance that such delisting would not adversely affect the
prevailing market price of the Common Stock or the general liquidity of an
investment in the Company's Common Stock.
Intellectual Property Protection. On June 17, 1997, the United States
Patent and Trademark Office issued U.S. Patent No. 5,640,490 entitled "A
User Independent, Real-time Speech Recognition System and Method." The
patent has a 20-year life running from the November 4, 1994 filing date, and
has been assigned to the Company. However, there can be no assurance that
such patent will be incontestable to a user with prior rights. The Company
is unaware of any facts or circumstances suggesting that the Core
Technologies 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 Core Technologies 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 Core Technologies, 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. In addition to patents, the
Company relies on proprietary technology that it closely guards as trade
secrets. The Company has required nondisclosure and confidentiality
agreements to be executed by its employees, potential licensees, and
potential strategic alliance and co-development partners, and the Company
expects to continue this requirement. However, there can be no assurance
that such non-disclosure and confidentiality agreements will be legally
enforceable or sufficient to maintain the secrecy of the Company's
proprietary technology. Moreover, although the Company presently is seeking
patent protection for certain additional technologies, there can be no
assurance that such patents will issue or that the Company will be able to
sufficiently protect any technologies developed by it in the future.
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 Mr. Murdock, as the trustee of the voting trust and one of 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 and related
technologies.
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.
Other Demands on Management. In addition to occupying positions as the
Company's Chief Executive Officer, President and Chief Operating Officer,
and Executive Vice President, respectively, Messrs. Stephen M. Studdert,
Thomas A. Murdock and Roger D. Dudley are executive officers and owners of
Studdert Companies Corp. ("SCC"), an international investment, finance and
management firm based in Salt Lake City, Utah. SCC engages in a variety of
commercial activities unrelated to the Company, including but not limited to
its present performance under a management services contract with K.L.S.
Enviro Resources, Inc.("KLSE"), a Nevada corporation with a class of
securities registered under the Exchange Act. Under that arrangement, SCC
provides consulting and management services to KLSE. Under the agreement
there is no specific
10
<PAGE>
amount of time required of the SCC principals in
connection with SCC's services to KLSE. Since SCC executed the management
services contract, there has been no material reduction in the amount of
time spent by Messrs. Studdert, Murdock and Dudley in the performance of
their duties as executive officers of the Company. The Company estimates
that, since January 1, 1997, Messrs. Studdert, Murdock and Dudley, on
average, have worked more than 40 hours per week in their respective
capacities as executive officers of fonix. The Company does not expect
there to be in the foreseeable future any material change in the amount of
time spent by those persons in their capacities as executive officers of the
Company or in the Company's overall operations as a result of the management
services contract between SCC and KLSE or as a result of any other
activities of SCC. However, there can be no assurance that the outside
activities of Messrs. Studdert, Murdock or Dudley, in connection with SCC,
KLSE or otherwise, will not materially impede their ability to perform as
executive officers of the Company, in which case the Company's operations
and financial condition could be adversely affected.
Assets Consisting Primarily of Intangible Intellectual Property Rights.
The Company's assets consist primarily of intangible assets, principally
intellectual rights such as patents, trademarks and trade secrets, the value
of which will depend significantly upon the success of the Company's
development of the Core Technologies and its ability to enter into licensing
and co-development arrangements with third parties. In the event of default
on indebtedness or liquidation of the Company, there can be no assurance
that the value of these assets will be sufficient to satisfy its
obligations.
Risks Associated With Pending Litigation. The Company has been named
as a defendant in a shareholder derivative action brought by a shareholder
of the Company against certain directors of the Company and a third party
affiliated with certain of the director-defendants. See Part I, Item 3,
Legal Proceedings of the Company's Annual Report on Form 10-KSB for the Year
Ended December 31, 1996. Although the parties have reached, in principal, a
settlement agreement, as is discussed in more detail below, the complaint in
that action 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 that action was filed but before process was served,
the Company commenced settlement negotiations with the plaintiff. Although
a settlement agreement in principal was reached by the parties, no
settlement agreement has been executed; the discovery process with respect
to the settlement is ongoing. The terms of the definitive settlement
agreement between the parties will be subject to approval by the court.
Regardless of the outcome of the discovery relating to the settlement or the
commencement of litigation proceedings if the settlement is not consummated,
the Company believes that the claims asserted against the Company in this
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 Part II, Item 12, "Certain Relationships and Related Party Transactions"
of the Company's Annual Report on Form 10-KSB for the Year Ended December
31, 1996. After consideration of the nature of the claims and the facts
relating to this action, the Company believes that the resolution of this
action will not have a material effect on the Company's business, financial
condition and results of operations; however, the results of this action,
including any potential settlement, are uncertain and there can be no
assurance to that effect. At a minimum this action will result in some
diversion of management time and effort from the operations of the business.
Potential Adverse Effect of Anti-Takeover Provisions The Company is
subject to anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested shareholder" for a period of three years
after the date of the transaction in which the person first becomes an
"interested shareholder," unless the business combination is approved in a
prescribed manner. The application of Section 203 also could have the effect
of delaying or preventing changes of control or management of the Company,
which could adversely affect the market price of the Company's Common Stock.
These provisions, and other provisions of the Company's Certificate of
Incorporation, may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which shareholders might otherwise receive a
premium for their shares over then current market prices. In addition, these
provisions may limit the ability of shareholders to approve transactions
that they may deem to be in their best interests.
11
<PAGE>
Possible Volatility of Stock Price. The Company believes that factors
such as announcements of developments related to the Company's business,
announcements by competitors, the issuance of patents and financings, and
other factors have caused the price of the Company's stock and its trading
volume to fluctuate, in some cases substantially, and could continue to do
so in the future. In addition, the stock market has experienced extreme
price and volume fluctuations that have particularly affected the market
price for many technology companies and that have often been unrelated to
the operating performance of these companies. These broad market
fluctuations may adversely affect the market price of the Company's common
stock. The trading prices of many technology companies' stocks are at or
near their historical highs, and reflect price/earnings ratios substantially
above historical norms. In the Company's case the absence of revenues from
operations indicates that the market price of the Company's common stock
fluctuates as a result of highly speculative factors. There can be no
assurance that the trading price of the Company's common stock will remain
at or near its current level.
Absence of Dividends. The Company has never paid dividends and does
not intend to pay any dividends for the foreseeable future.
THE COMPANY
The following summary information about the Company should be read in
conjunction with the more detailed information contained in Part I, Item 1
of the Company's Annual Report on Form 10-KSB for the year ended December
31, 1996 and incorporated herein by reference.
fonix (TM) corporation (the "Company" or "fonix") was incorporated
under the laws of the State of Delaware on September 12, 1985. Since June
4, 1994, when Phonic Technologies, Inc., a Utah corporation ("PTI"), merged
with and into a wholly-owned subsidiary of the Company, the Company has
been engaged in research and development of automatic computer speech
recognition technologies ("ASRT") and related technologies such as data
compression and neural network design (the ASRT and such related
technologies of the Company are referred to in this Prospectus collectively
as the "Core Technologies"). The Core Technologies, as developed to date,
employ a proprietary phonetic speech modeling engine and a linguistic and
contextual process based on a proprietary neural network system (artificial
intelligence). Leading speech recognition industry expert, John A,
Oberteuffer, Ph.D., recently appointed to the Company's Board of Directors,
has projected that the global market for speech recognition technologies
will be $3 billion by the year 2001.
Technology Overview
Presently available traditional voice recognition technologies have
been used in a variety of products for industrial, telecommunications,
business and personal applications. 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,
recognition accuracy and continuous speech recognition ability. 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 Phillips, IBM, and Dragon Systems. 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
Hidden Markov Models ("HMMs") technology. These traditional approaches have
not appreciably advanced since the late 1980's. Applications based on 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.
12
<PAGE>
The present industry standard methodology, the HMMs, use 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' widely recognized weaknesses are many: (i) they do not meet the needs
for mass market implementation, (ii) they have limited input feature types,
(iii) they account for only limited context, (iv) they have limited ability
to generalize acoustic and language structure, (v) they require 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.
In contrast to HMMs, fonix researchers have developed what the Company
believes to be a fundamentally new approach to the analysis of human speech
sounds and the contextual recognition of speech. The core fonix ASRT
attempt to approximate the techniques employed by the human auditory system
and language understanding centers in the human brain. The ASRT use
information in speech sounds perceptible to humans but not discernible by
current automatic speech recognition systems. They also employ 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 are 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 the reliable recognition of natural, spontaneous
speech spoken by one or more individuals in a variety of common environments
by means of a conveniently placed microphone, all based on its ASRT will
significantly improve the performance, utility and convenience of
applications currently based on traditional HMMs technology such as computer
interface navigation, data input, text generation, telephony transactions,
continuous dictation and other applications. Additionally, the Company
believes that its ASRT will make possible major new speech recognition
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.
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 Core Technologies will have
industry-leading applications in such non-speech recognition industries,
market segments and disciplines as artificial intelligence and data
compression. 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 "Risk Factors".
USE OF PROCEEDS
All of the Shares, if and when sold, are being offered and sold by the
Selling Stockholder or by its pledgees, donees, transferees or other
successors in interest, and the Company will not receive any proceeds from
the sale of such Shares. The Company will, however, receive the proceeds of
the payment of the exercise price upon the exercise of the Warrants.
13
<PAGE>
SELLING STOCKHOLDER
The Selling Stockholder is an investment entity that is not affiliated
in any way with the Company or any of its affiliates and neither the Selling
Stockholder nor any of its affiliates has any relationship of any type with
the Company and its affiliates other than the presently established
investment relationship between the Selling Stockholder and the Company,
which may be summarized as follows:
On June 18, 1997, the Company and the Selling Stockholder entered into
that certain Convertible Debenture Purchase Agreement ("Purchase Agreement")
pursuant to which the Company agreed to sell and issue and the Selling
Stockholder agreed to acquire Series B Debentures having an aggregate
principal amount of up to $10,000,000 and the Warrants. On June 18, 1997,
and in connection with the closing of the Purchase Agreement, the Selling
Stockholder paid the Company $3,000,000 in return for which the Company
issued a corresponding principal amount of Series B Debentures and the
Warrants. Under the Purchase Agreement, the Selling Stockholder was to fund
the remainder of the purchase price under the Purchase Agreement in two
future installments subject only to the satisfaction of certain conditions
not within its control. On July 16, 1997, and pursuant to a Registration
Rights Agreement between the Company and the Selling Stockholder executed
simultaneously with the Purchase Agreement, the Company filed the
registration statement of which this Prospectus is a part (the "Registration
Statement"). Subsequent to June 18, 1997, the Selling Stockholder converted
the entirety of the Series B Debentures issued to it on June 18, 1997, into
a total of 577,426 shares of Common Stock, all in accordance with the
conversion terms of the Series B Debentures.
Subsequent to June 18, 1997, but prior to the time the next installment
payment became due from the Selling Stockholder, the Company and the Selling
Stockholder agreed to modify and amend the Purchase Agreement such that upon
any future payments by the Selling Stockholder, the Company would issue, in
lieu of additional Series B Debentures, shares of the Series B Preferred
which would have a stated value corresponding to the purchase price paid
therefor, on which amount the Company would pay dividends in cash or stock
at the rate of 5% per annum. Moreover, the Series B Preferred would be
convertible into shares of Common Stock on terms essentially identical to
conversion of the Series B Debentures, adjusted for changes in the market
price of the Company's Common Stock since June 18, 1997.
On October 24, 1997, the Company and the Selling Stockholder executed
an Amended and Restated Purchase Agreement (the "Amendment Agreement"), under
which the Selling Stockholder may acquire up to 125,000 shares of Series B
Preferred, each share having a stated value or purchase price of $20. On
October 27, 1997, the Selling Stockholder acquired the 125,000 shares of
Series B Preferred. Under the Amendment Agreement, each share of Series B
Preferred is convertible at any time after issuance, into that number of
Common Stock as shall be determined by dividing the aggregate stated value
of the Series B Preferred to be converted by the lesser of (i) the average
closing bid price of the Common Stock for the 5 trading day period preceding
the date of issuance of the Series B Preferred, or $5.9813 and (ii) the
average closing bid price of the Common Stock for the 5 trading days
preceding the date of conversion, multiplied by 90% for any conversion on or
prior to the 120th day after the issue date and 87.5% for any conversion
thereafter. In consideration for the Selling Stockholder's execution of the
Amendment Agreement, the Company issued to the Selling Stockholder
additional warrants to purchase 175,000 shares of Common Stock at any time
after the issuance thereof at an exercise price of $7.48 per share (the
"Amendment Warrants"). In addition to the Amendment Warrants, the Company
has agreed to issue, (x) on April 24, 1998, warrants to purchase 10,000
shares of Common Stock (or a proportionally adjusted portion thereof) for
every 50,000 shares of Series B Preferred then owned and for shares of
Common Stock underlying the Series B Preferred then owned and having an
aggregate market value of at $1,000,000 (the "Six Month Warrants"), and (y)
on October 24, 1998, warrants to purchase 30,000 shares of Common Stock (or
a proportionally adjusted portion thereof) for every 50,000 shares of Series
B Preferred then owned and for shares of Common Stock underlying the Series
B Preferred then owned and having an aggregate market value of at $1,000,000
(the "Twelve Month Warrants").
Simultaneously with the execution of the Amendment Agreement, the
Company and the Selling Stockholder executed an Amended and Restated
Registration Rights Agreement pursuant to which the Company agreed to
register with the Commission, to the extent not already included or
includible in the Registration Statement or an additional registration
statement under Commission Rule 462, the shares of Common Stock issuable
upon conversion of the Series B Preferred issued to the Selling Stockholder
pursuant to the Amendment Agreement and the shares issuable upon exercise of
the Amendment
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<PAGE>
Warrant (in addition to the previously registered shares of
Common Stock issued upon conversion of the Series B Debentures and issuable
upon conversion of the Warrants).
The number of shares included in the Registration Statement of which
this Prospectus is a part and available for resale therefore includes (i)
the 577,426 shares of Common Stock issued upon the Selling Stockholder's
conversion of the Series B Debentures issued June 18, 1997, (ii) 250,000
shares issuable upon exercise of the Warrants, and (iii) up to 453,502
shares issuable upon conversion of the Series B Preferred and the payment of
dividends on such Series B Preferred in shares of Common Stock.
Pursuant to the Amended and Restated Registration Rights Agreement,
the Company has agreed to register at least 200% of the number of shares of
Common Stock issuable upon conversion of the then issued and outstanding
shares of Series B Preferred, as well as the exercise of the Warrants and
the Amendment Warrant. The Company therefore anticipates filing additional
registration statements to cover such shares.
To the best of the Company's knowledge, except as stated in this Prospectus,
the Selling Stockholder has not held any office or maintained any material
relationship with the Company or any of its predecessors or affiliates over
the past three years. The Selling Stockholder reserves the right to reduce
the number of shares offered for sale or to otherwise decline to sell any or
all of the Shares registered hereunder.
The following table sets forth information concerning the beneficial
ownership of shares of Common Stock by the Selling Stockholder as of
November 3, 1997, and the number of such shares included for sale in this
Prospectus.
<TABLE>
<CAPTION>
Number of
Shares of
Common Stock
Beneficially Number of Percentage of Shares of
Owned Shares of of Common Stock Common
Name of Prior to Common Stock Beneficially Owned Stock Owned
Selling Stockholder Offering Offered Hereby After Offering After Offering
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Southbrook International 1,029,769 (1)(2) 1,280,928 (2) (3) (3)
Investments, Ltd.
_________________________
</TABLE>
(1) Includes (i) 154,926 shares of Common Stock owned by the Selling
Stockholder as of November 3, 1997, (ii) 250,000 shares issuable upon
exercise of the Warrants, (iii) 175,000 shares issuable upon exercise
of the Amendment Warrant, and (iv) 449,843 shares of Common Stock
issuable upon a hypothetical conversion of the 125,000 shares of
Series B Preferred owned by the Selling Stockholder as of that date.
The Series B Preferred is convertible into that number of shares of
Common Stock as is determined by dividing the aggregate stated value
of the Series B Preferred to be converted by the lesser of (i)$5.9813
and (ii) the average closing bid price of the Common Stock for
the 5 trading days preceding the date of conversion, multiplied by
90% for any conversion on or prior to the 120th day after the issue
date and 87.5% for any conversion thereafter. The number of shares of
Common Stock issuable upon conversion of the Series B Preferred
therefore varies according to the market price at and immediately
preceding the conversion date. Solely for purposes of estimating the
number of shares of Common Stock beneficially owned by the Selling
Stockholder as set forth in (iv) above, the Company and the Selling
Stockholder have agreed to assume a hypothetical conversion of all of
the presently issued and outstanding shares of Series B Preferred on
November 3, 1997, which assumed conversion would yield a per share
conversion price of $5.5575 per share. The actual conversion price
and the number of Shares issuable upon such conversion could differ
substantially.
(2) Pursuant to the terms of the Purchase Agreement and the Amendment
Agreement, the Series B Preferred is convertible and the Warrants and
the Amendment Warrant are exercisable by the Selling Stockholder only
to the extent that the number of shares of Common Stock thereby
issuable would not result in the Selling Stockholder beneficially
owning more than 4.999% of the then outstanding shares of Common
Stock.
(3) There is no assurance that the Selling Stockholder will sell
any or all of the Shares offered hereby.
15
<PAGE>
PLAN OF DISTRIBUTION
Pursuant to the Registration Rights Agreement dated as of June 18,
1997, between the Company and the Selling Stockholder (the "Registration
Rights Agreement"), the Company agreed to file with the Commission a
registration statement covering the Shares by July 18, 1997, and to use its
best efforts to cause such registration statement to be declared effective
as promptly as possible after the filing thereof, but in any event prior to
September 16, 1997. The Registration Statement was filed with the
Commission pursuant to the Registration Rights Agreement, and resales of the
shares of Common Stock included therein could commence at any time after
October 2, 1997. The Selling Stockholder may sell all or a portion of the
Shares held by it from time to time while the Registration Statement of
which this Prospectus is a part remains effective. The Company has agreed
that it will use all reasonable efforts to keep the Registration Statement
effective for a period of three years commencing on the effective date of
the Registration Statement (or a shorter period if all of the Shares have
been sold or may be sold without volume restrictions pursuant to Rule 144
under the Securities Act prior to the expiration of the three-year period).
The aggregate proceeds to the Selling Stockholder from the sale of Shares
offered by the Selling Stockholder hereby will be the prices at which such
securities are sold, less any commissions. There is no assurance that the
Selling Stockholder will sell any or all of the Shares offered hereby.
The Selling Stockholder and its pledgees, donees, transferees and
successors-in-interest may from time to time, sell all or a portion of the
Shares on the NASDAQ SmallCap Market, in privately negotiated transactions
or otherwise, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such market prices or
at negotiated prices. The Shares may be sold by the Selling Stockholder by
one or more of the following methods, without limitation: (a) block trades
in which the broker or dealer so engaged will attempt to sell the Shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction, (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this
Prospectus, (c) exchange distribution in accordance with the rules of such
exchange, (d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers, (e) privately negotiated transactions, (f) short
sales, including short sales against the box, and (g) a combination of any
such methods of sale. In effecting sales, brokers and dealers engaged by
the Selling Stockholder may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from
the Selling Stockholder (or, if any such broker-dealer acts as agent for the
purchaser of such shares, from such purchaser) in amounts to be negotiated
which are not expected to exceed those customary in the types of
transactions involved. Broker-dealers may agree with the Selling
Stockholder to sell a specified number of such Shares at a stipulated price
per share, and, to the extent such broker-dealer is unable to do so acting
as agent for a Selling Stockholder to purchase as principal any unsold
Shares at the price required to fulfill the broker-dealer commitment to the
Selling Stockholder. Broker-dealers who acquire Shares as principal may
thereafter resell such Shares from time to time in transactions (which may
involve block transactions and sale to and through other broker-dealers,
including transactions of the nature described above) in the over-the-
counter market or otherwise at prices and on terms then prevailing at the
time of sale, at prices then related to the then-current market price or in
negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such Shares commissions as described above.
The Selling Stockholder may also sell the Shares in accordance with Rule 144
under the Securities Act, rather than pursuant to this Prospectus.
The Selling Stockholder and any broker-dealers or agents that
participate with the Selling Stockholder in sales of the Shares may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. In such event, any commissions received by such
broker-dealers or agents and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
From time to time the Selling Stockholder may engage in short sales,
short sales against the box, puts and calls and other transactions in
securities of the Company or derivatives thereof, and may sell and deliver
the Shares in connection therewith. If the Selling Stockholder engages in
such transactions, the conversion price of the Series B Preferred may be
affected. From time to time the Selling Stockholder may pledge its shares
pursuant to the margin provisions of its customer agreements with its
brokers. Upon a default by the Selling Stockholder, the broker may offer
and sell the pledged shares of Common Stock from time to time.
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The Company is required to pay all fees and expenses incident to the
offering and sale of the Shares, including fees and disbursements of up to
$10,000 of counsel to the Selling Stockholder. The Company has agreed to
indemnify the Selling Stockholder against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act.
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In order to comply with the securities laws of certain states, the
Shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, the sale and issuance of Shares
may be subject to the notice filing requirements of certain states.
The Selling Stockholder is not restricted as to the price or prices at
which it may sell the Shares. Sales of such Shares at less than market
prices may depress the market price of the Company's Common Stock.
Moreover, the Selling Stockholder is not restricted as to the number of
Shares which may be sold at any one time. The Selling Stockholder and its
pledgees, donees, transferees and successors in interest are acting
independently of the Company in making decisions with respect to the timing,
manner and size of each sale.
The Company has advised the Selling Stockholder that the
anti-manipulative rules under the Exchange Act, including Regulation M, may
apply to sales in the market of the Shares offered hereby and has furnished
the Selling Stockholder with a copy of such rules. The Company has also
advised the Selling Stockholder of the requirement for the delivery of this
Prospectus in connection with resales of the Shares offered hereby.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Durham, Evans, Jones & Pinegar, P.C., 50 South Main Street, Suite
850, Salt Lake City, Utah 84144.
EXPERTS
The financial statements of fonix corporation included in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996, and
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing in
such annual report (which report expresses an unqualified opinion and
includes an explanatory paragraph referring to the Company's ability to
continue as a going concern because the Company is a development stage
enterprise), and have been incorporated by reference in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
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TABLE OF CONTENTS
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Available Information...............................................3
Incorporation of Certain Documents By Reference.....................3
Special Note Regarding Forward-Looking Information..................5
Prospectus Summary..................................................6
Risk Factors........................................................7
The Company........................................................12
Use of Proceeds....................................................13
The Selling Stockholder............................................14
Plan of Distribution...............................................16
Legal Matters......................................................17
Experts............................................................17
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fonix corporation
1,280,928 SHARES
COMMON STOCK
____________________
PROSPECTUS
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November 4, 1997
