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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] for the fiscal year ended December 31, 1995.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] 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 of Incorporation) (I.R.S. Employer
Identification No.)
60 East South Temple, Suite 1225
Salt Lake City, UT 84111
(Address 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 of 1934 during the
preceding 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 10,828,281 shares) computed by reference to the price of the
Company's common stock as reported by the NASDAQ Electronic Bulletin Board on
March 11, 1996 was $31,131,307.
As of March 11, 1996, the total number of shares of the Company's common
stock, par value $.0001 per share, issued and outstanding was 31,768,821.
This amount excludes 138,389 shares that the Company's former attorney caused
to be issued notwithstanding the lack of consideration or appropriate
authorization for such issuance, and the validity of which the Company
presently disputes.
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<PAGE>
This Amendment No. 1 to the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995 (the "Original Report"), is being filed by fonix
corporation (the "Company") to amend Items 1, 6, 7 and 13 of the Original
Report and to replace such Items in their entirety with the following.
Item 1.Description of the Business
fonix Corporation (the "Company") was incorporated under the laws of the
State of Delaware on September 12, 1985. 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. On June 4, 1994, the
Company entered into an Agreement and Plan of Merger with fonix Systems
Corporation, a wholly-owned subsidiary of the Company ("Systems"), and 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.
PTI was incorporated in Utah in 1993, and until its acquisition by the
Company, operated as a private development stage corporation engaged in
research and development of certain computer voice recognition of human speech
technologies and the commercial exploitation of any such technologies. PTI
acquired its rights to certain voice recognition technology 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"). Upon its acquisition of PTI, the Company
succeeded to all of PTI's right, title and interest in and to the computer
voice recognition technology being developed by Synergetics, 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"). Under both the
Synergetics Agreement and the Re-Stated Synergetics Agreement, the Company
must pay a royalty payment in the amount of 10% of total sales in the event of
any sales of any product incorporating the voice recognition technology
developed by Synergetics. Those agreements also require the Company to
provide financing for research and development of the computer software, data
and hardware related to a voice recognition system permitting users to enter
computer commands by way of human voice commands. A domestic and
international patent application covering certain of the technology assigned
to the Company by Synergetics has been filed in the name of the inventors.
That patent application is still pending.
Before the merger and acquisition of PTI, the Company was an inactive
development stage company controlled by Pat Catizone and certain persons
related to or affiliated with him. As a result of the merger and the issuance
of additional shares of the Company's common stock in connection with the
merger, a change of control of the Company occurred and the Company now
continues the commercial exploitation of the technologies and the business
previously conducted by PTI.
The Company has no revenue producing operations at this time. The
primary business of the Company continues to be research and development
including the production of working prototypes of its voice recognition
technologies through the Synergetics Agreement and the Re-Stated Synergetics
Agreement. The Company presently anticipates that it will complete alpha
testing and begin beta testing of its voice recognition technologies sometime
during the second half of 1996. Assuming and after completion of such alpha
and beta testing in that time frame, the Company presently intends to begin
manufacturing and marketing a product incorporating those technologies through
original equipment manufacturing ("OEM") contracts and directly to
distributors. [See Item 6. Management's Plan of Operation]
Currently, the Company relies on equity and debt financing to finance
its research, development, market development, and general and administrative
requirements. The Company does not produce any revenue from operations and
will not do so until such time as it either enters into OEM or similar
licensing agreements, or a product incorporating the Company's technologies is
introduced into and becomes commercially viable in the marketplace.
Most of the Company's operating expenditures are for research,
development and the management of the Company. At the present time, the
Company has no plans to sell or purchase any significant plant or equipment.
Assuming that the Company completes the development of its technologies and
appropriate alpha and beta testing of those technologies during 1996, the
Company would then determine whether it will manufacture a product
incorporating its technologies or contract the manufacturing to third parties.
In the event that, at such time, the Company is able to enter into an
acceptable joint venture or licensing agreement whereby a third party would
assume responsibility for manufacturing the Company's product, the need for
significant amounts of additional capital for marketing and manufacturing may
be alleviated. Absent such an agreement, however, the Company presently
intends to assume responsibility for the manufacturing and distribution of its
product, which will require significant capital expenditure. There are no
assurances that the Company will have sufficient funds to complete the
development of its technologies or to manufacture and distribute a product
based on those technologies without obtaining additional funding through
equity or debt financing.
Except for research, development and the management of the Company, for
the foreseeable future the Company intends to contract with third parties for
most of its ongoing needs, such as corporate and shareholder relations,
accounting and legal services, product packaging and design, manufacturing and
distribution. If and when the Company is able to market and sell a product, it
will determine the number of employees required to provide customer support,
training, sales and other administrative services. In addition, if it were to
commence the manufacturing and distribution of its product in-house, the
Company may hire a significant number of additional employees.
Several other companies already have developed and are marketing certain
voice recognition products. Generally, the presently available voice
recognition technology products may be divided into two primary types. One
type provides large vocabularies of recognizable words, but is not user
independent and requires the user to pause after speaking each word to allow
the system time to recognize each word as spoken. The second general type of
product presently available is speaker independent, but has very limited and
primarily single-purpose vocabularies. The Company anticipates that its voice
recognition technologies will accommodate a large vocabulary, a high degree of
user independence and utility with natural speech patterns without cumbersome
pauses. The Company is unaware of any other voice recognition product or
technology under development or presently available which could offer the
benefits anticipated from the Company's technologies. Nevertheless, in light
of the huge potential market for voice 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.
The Company regards certain of its product designs and related
technologies as proprietary and has attempted in the past and intends to
continue to protect such designs and technologies with patents, trade secret
laws and restrictions on disclosure. As indicated above, the Company has one
United States patent application pending. That patent application describes
technology to allow a computer to accurately recognize continuous human speech
from any speaker. The technology described in the patent application extracts
only the essential components of incoming human speech signals and then
isolates 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
application, this permits the technology to recognize speech utterances from
any speaker of a given language, without requiring the user to first "train or
enroll" the system with specific voice characteristics. Further, the
technology implements this user independent speech recognition ability in
substantially "real time," allowing the user to speak at normal
conversational speeds and without pausing after each word. Finally, the
technology described in the patent application utilizes various linguistic
processing techniques to translate the identified phonetic sounds into a
corresponding word or phrase of any given language. There can be no assurance
that the Company will receive a patent for the technology described in the
pending patent application or in any patent application that subsequently may
be filed.
The Company could find it necessary to spend substantial sums defending
or enforcing its rights to a particular technology 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 importance to the Company's competitive
position with other factors such as product innovation and response to
evolving industry standards, technical and cost effective manufacturing
expertise, and effective product marketing strategies. Without legal
protection, it may be possible for unauthorized third parties to commercially
exploit the proprietary aspects of the Company's potential products, if any
result from the Company's ongoing research and development efforts.
The Company presently is unaware of any governmental or regulatory
approval that must be obtained before it commences manufacturing and
distribution of a prototype product. During the last two fiscal years, the
Company has spent or incurred expenses of approximately $10,119,907 on the
research, development and related administrative and management expenses
associated with the development of its voice-recognition technology. At
December 31, 1995, the Company had two full-time employees (in addition to its
executive officers); as of March 18, 1996, the Company had four such full-time
employees. It has no part-time employees.
When used in this Annual Report on Form 10-KSB, the words "believes",
"anticipates", "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release the results of any
revisions to these forward looking statements that may be made to reflect
events or circumstances after the date of this Report or to reflect the
occurrence of unanticipated events.
Item 6. Management's Plan of Operation
The Company is a development stage business which has been involved in
the research and development of proprietary computer natural language voice
recognition hardware, software and firmware. Because the Company still is in
the research and development stage of its business, the Company has not yet
marketed or distributed its voice recognition product. Therefore, the Company
has had no revenue from its operations during the past two fiscal years.
The Company and Synergetics agreed, by executing the Re-Stated
Synergetics Agreement, that the research and development of the Company's
technology would be conducted by Synergetics but financed by the Company. The
president of the Company is one of seven members of the board of directors of
Synergetics, and the principals of SCC, who also are executive officers and
directors of the Company own shares of the common stock of Synergetics,
although such share ownership constitutes less than 5% of the total number of
Synergetics common stock issued and outstanding. Under the Re-Stated
Synergetics Agreement, the Company is responsible for providing all of the
funding for the development of the voice recognition technology and any
products resulting therefrom. There is no minimum requirement or limit with
respect to the amount of funding the Company must provide under the Re-Stated
Synergetics Agreement. However, the Company is obligated to use its best
efforts in raising all of the necessary funding for the development,
manufacturing and marketing of the voice recognition technology. The amounts
of payments to Synergetics pursuant to the Re-Stated Synergetics Agreement are
determined as Synergetics submits weekly pre-authorized work orders and
budgets, which are then reviewed and approved by the Company. All funds paid
to Synergetics are accounted for by the Company strictly as research and
development expense, since no product incorporating the voice recognition
technologies has yet been completed.
During the fiscal years ended December 31, 1995 and December 31, 1994,
the Company incurred research and development expenses of $2,704,165 and
$2,522,090, respectively. General and administrative expenses (which consist
primarily of management fees to a related entity and professional fees for
legal and accounting services), were $3,553,665 and $1,339,987, respectively,
for the fiscal years ended December 31, 1995 and December 31, 1994. Due to
these significant research and development and general and administrative
expenses, the Company has incurred losses from operations of $6,257,830 in
1995 and $3,862,077 in 1994. At December 31, 1995, the Company had an
accumulated deficit of ($12,012,299) and stockholders' equity of $1,309,734.
The Company anticipates similar losses in the future as it continues the
development of its voice recognition technology and expects such losses to
continue until such time as a commercially viable product incorporating the
Company's technology is completed and significant sales revenues are realized.
However, there can be no assurance that the Company will complete a product
incorporating its technologies, or that sufficient revenues will be generated
from sales of such product to allow the Company to operate profitably.
Although the Company previously had anticipated that it would complete a
working prototype by the end of the second quarter of 1995 and planned to
finish the alpha and beta testing of the product sometime in the third quarter
of 1995, limited amounts of operating capital and other factors prevented
development of the Company's technologies according to that schedule. The
Company presently anticipates that it will complete alpha testing and begin
beta testing of its voice recognition technologies sometime during the second
half of 1996. Assuming and after completion of such alpha and beta testing in
that time frame, the Company presently intends to begin manufacturing and
marketing a product incorporating those technologies through OEM contracts and
directly to distributors. Significant amounts of capital will be necessary to
complete the alpha testing and to begin the beta testing of the Company's
technologies prior to the manufacturing and marketing of a product based on
those technologies. Accordingly, the Company expects to incur significant
losses at least through the end of 1996.
From its inception, the Company's principal source of operating capital
has been borrowing from related parties and private and other exempt sales of
the Company's equity securities. At December 31, 1994, the Company had
outstanding debt to related parties in the amount of $490,543. Pursuant to an
investment agreement between the Company and a private investment entity dated
October 23, 1995 (the "Private Investment Agreement"), $506,874 of a total of
$656,874 of then outstanding debt to related parties was forgiven by the
related parties. [See Item 12--Certain Relationships and Related
Transactions.] This transaction occurred at the request of the private
investment entity to, among other things, alleviate the Company's debt
obligations and to make the arrangement more attractive for the investor. At
December 31, 1995, there was no outstanding debt owed to related parties.
Private and other exempt sales of the Company's securities resulted in net
cash proceeds of $5,030,547 during fiscal 1995. Additional equity securities
were issued for service related, non-cash consideration of $4,055,371.
The Company has a relationship with a local bank pursuant to which the
Company has entered into an agreement allowing it to borrow against its own
funds on deposit with the bank. At December 31, 1994, the Company had funds
on deposit of $2,143,417 and owed the bank a total of $2,141,639. As of
December 31, 1995, the Company had funds on deposit of $8,000,000, and the
Company owed $5,617,522 to the bank, which obligation matured February 28,
1996. The relationship with the bank is re-negotiated every three months. On
February 28, 1996, the Company and the bank agreed to extend the term of the
relationship for an additional three-month term on comparable competitive
terms. The interest rate received for the funds on deposit and the interest
rate paid for the funds borrowed against the Company's funds on deposit was a
net difference of 2% for 1994 and for 1995, with the exception of the month of
December 1995. On December 1, 1995 the Company and the bank negotiated a new
interest rate that yielded a net difference between the rates of interest paid
and received by the Company of 1%. Therefore, the net cost to the Company for
this arrangement was 2% in 1994 and 1995, and at December 31, 1995 was 1%.
Interest is payable monthly and the principal amount is payable in full at
maturity.
On October 23, 1995, the Company entered into the Private Investment
Agreement. Under the terms of the Private Investment Agreement, a private
investor agreed to fund the Company with $6,050,000 (the "Funding Commitment")
over an eleven-month period, in return for which the Company would issue to
the investor a total of 11,729,167 shares of the Company's common stock,
including 166,167 shares of Series A Preferred Stock described below which may
be converted to common stock at the discretion of the investor. $500,000 of
the Funding Commitment was paid to the Company on October 23, 1995 as
consideration for the issuance of a Series A Subordinated Convertible
Debenture, due on October 23, 1996, with an annual interest rate of 5%. This
debenture may be converted into Series A Preferred Stock at a conversion rate
of $3.00 per share at any time after the Company's shareholders and board of
directors authorize the issuance of the Company's Series A Preferred Stock but
before the maturity date of the Debenture. The balance of the Funding
Commitment, $5,550,000, was to be paid as consideration for the issuance by
the Company of 11,562,500 shares of common stock. $1,040,000 of such balance
was paid at the closing of the Private Investment Agreement on October 23,
1995, in exchange for which the Company issued 2,166,667 shares of common
stock. As of December 31, 1995, the investor has funded a total of $1,605,000
of the remaining balance of the Funding Commitment, in exchange for which the
Company has issued 3,343,750 shares of common stock. As of March 21, 1996,
the investor had funded an additional $1,200,000, in exchange for which the
Company issued 2,500,000 additional shares of common stock. The remaining
balance of the Funding Commitment is payable by the investor in specified
amounts at specified times through August 1996 subject to the Company
completing certain technology development milestones. Additional amounts of
common stock will continue to be issued in amounts corresponding to the
amounts of installment payments made by the investor. Under the terms of the
Private Investment Agreement, if the Company does not achieve the milestones
which are specified in the contract, the investor is not obligated to continue
the funding. If the investor stops funding because of the Company's failure
to achieve a specified milestone, the investor will receive a number of shares
commensurate to the total funding invested.
Presently, as a result of the Private Investment Agreement described
above and additional domestic and offshore sales of its equity and debt
securities, and assuming that the Company is able to achieve the developmental
milestones prescribed under the Private Investment Agreement, the Company
anticipates that it will be able to satisfy its cash requirements during the
next 12 months. Nevertheless, the research and development associated with
the development of the Company's voice recognition technologies and any
product incorporating such technologies will continue to require large amounts
of capital. Since the Company 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. If and
when the Company successfully completes the development of a product
incorporating its voice recognition technologies, the Company will seek to
enter into either OEM or licensing agreements pursuant to which royalty or
other payments by third parties could provide a significant amount of the
financing necessary to manufacture and market such a product. Such funds
might alleviate the need for financing through additional sales of the
Company's debt or equity securities. Absent such OEM or licensing agreements,
however, the Company anticipates it will need a significant amount of
additional capital investment to finance the manufacturing, distribution and
marketing of a product incorporating its technologies. There can be no
assurance that the Company will receive the necessary financing to develop and
market its product from either OEM or licensing contracts or by the offer and
sale of the Company's debt or equity securities.
The Company recently hired seven engineers and presently has a need for
four additional engineers with specific scientific expertise in linguistic
processing and neural net development. These persons will be hired as
technology milestones are achieved and additional funding is received under
the Private Investment Agreement or otherwise. In addition, if and when the
Company completes the alpha and beta testing of its technologies,
approximately thirty more employees will be initially required for sales and
marketing and customer support services.
The Company has no plans to purchase any new plants or expand any
existing facility. However, new testing equipment is required and will be
purchased as sufficient capital is raised for its acquisition.
Item 7. Financial Statements
Financial statements, with the report of the Company's auditors,
Pritchett, Siler & Hardy, P.C., follow immediately and are listed in Item 13
of Part III of this Form 10-KSB.
PART III
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):Page Number
Independent Auditors' Report F-1
Consolidated Balance Sheet as of December 31, 1995 F-2
Consolidated Statements of Operations for the Years
Ended December 31, 1995 and December 31, 1994 and
from inception on October 1, 1993 through December
31, 1995 F-3
Consolidated Statement of Stockholders' Equity from
inception on October 1, 1993 through December 31, 1995 F-4
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1995 and December 31, 1994 and
from inception on October 1, 1993 through December
31, 1995 F-7
Notes to Consolidated Financial Statements F-9
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 --
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 --
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) 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 --
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 Original Report --
(10) Material Contracts
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 --
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 --
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 --
Securities Purchase Agreement (referred to
herein as the Private Investment Agreement) by
and 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 --
(16) 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 --
(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 --
(27) Financial Data Schedule Attached
(b) Reports on Form 8-K: During the fourth quarter of fiscal year 1995, the
Company filed one current report on Form 8-KSB, dated as of October 23,
1995. The purpose of that current report was to disclose a change in
control resulting from the closing of the Private Investment Agreement.
<PAGE>
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
By: /s/ Stephen M. Studdert Date: April 14, 1997
-------------------------------- ----------------------------
Stephen M. Studdert, Chairman, CEO
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/ Thomas A. Murdock /s/ Alan C. Ashton
- ---------------------------------- ----------------------------------
Thomas A. Murdock, President, COO, Alan C. Ashton, Ph.D, Director
Director
Date: April 14, 1997 Date: April 11, 1997
----------------------- --------------------------
/s/ Roger D. Dudley /s/ Joseph Verner Reed
- ---------------------------------- -------------------------------------
Roger D. Dudley, Executive Vice Joseph Verner Reed, Director
President, Director
Date: April 14, 1997 Date: April 14, 1997
----------------------- -----------------------
- ----------------------------------
James B. Hayes, Director
Date:
------------------------
<PAGE>
fonix corporation
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
PRITCHETT, SILER & HARDY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
fonix corporation
[A Development Stage Company]
CONTENTS
PAGE
- Independent Auditors' Report F - 1
- Balance Sheet, December 31, 1995 F - 2
- Statements of Operations, for the years ended
December 31, 1995 and 1994 and from
inception on October 1, 1993 through
December 31, 1995 F - 3
- Statement of Stockholders' Equity, from
inception on October 1, 1993 through
December 31, 1995 F - 4
- Statements of Cash Flows for the years ended
December 31, 1995 and 1994 and from
inception on October 1, 1993 through
December 31, 1995 F - 7
- Notes to Financial Statements F - 9
<PAGE>
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 years
ended December 31, 1995 and 1994, 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 years
ended December 31, 1995 and 1994 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.
March 4, 1996, except as to Note 12
as to which the date is March 28, 1997
F-1
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
1995
______________
CURRENT ASSETS:
Cash and cash equivalents $ 7,849,610
Notes receivable 36,894
Interest receivable 26,224
______________
Total Current Assets 7,912,728
EQUIPMENT, net of accumulated
depreciation of $155 48,587
INTANGIBLE ASSETS, net of accumulated
amortization of $1,062 22,991
______________
$ 7,984,306
______________
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 5,617,522
Accounts payable 526,054
Accrued expenses 30,996
Convertible Debenture 500,000
______________
Total Current Liabilities 6,674,572
______________
STOCKHOLDERS' EQUITY:
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, 29,405,321 issued shares
and outstanding 2,941
Additional paid-in capital 13,319,092
Deficit accumulated during the
development stage (12,012,299)
______________
Total stockholders' Equity 1,309,734
______________
$ 7,984,306
______________
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENTS OF OPERATIONS
From Inception
For the Year ended on October 1,
December 31, 1993 through
______________________________ December 31,
1995 1994 1995
_________________________ _____________
REVENUES $ - $ - $ -
_________________________ _____________
EXPENSES:
General and administrative 3,553,665 1,339,987 5,769,158
Research and development 2,704,165 2,522,090 6,112,987
_________________________ _____________
Total Expenses 6,257,830 3,862,077 11,882,145
_________________________ _____________
LOSS FROM OPERATIONS (6,257,830) (3,862,077) (11,882,145)
_________________________ _____________
OTHER INCOME (EXPENSES):
Interest income 191,929 20,269 212,198
Interest (expense) (279,996) (72,531) (372,900)
_________________________ _____________
Total Other Income(Expenses): (88,067) (52,262) (160,702)
_________________________ _____________
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (6,345,897) (3,914,339) (12,042,847)
CURRENT TAX EXPENSE - - -
DEFERRED TAX EXPENSE - - -
_________________________ _____________
LOSS BEFORE EXTRAORDINARY ITEM (6,345,897) (3,914,339) (12,042,847)
EXTRAORDINARY INCOME:
Forgiveness of debt,
net of taxes 30,548 - 30,548
_________________________ _____________
NET LOSS $ (6,315,349)$(3,914,339) $(12,012,299)
_________________________ _____________
LOSS PER COMMON SHARE:
Loss before extraordinary
item $ (.30) $ (.28) $ (.71)
Extraordinary item (.00) (.00) (.00)
_________________________ _____________
LOSS PER COMMON SHARE $ (.30) $ (.28) $ (.71)
_________________________ _____________
WEIGHTED AVERAGE SHARES 21,343,349 14,095,000 16,894,381
_________________________ _____________
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION ON OCTOBER 1, 1993
THROUGH DECEMBER 31, 1995
Common Stock Additional
_____________________ Paid-in Accumulated
Shares Amount Capital Deficit Total
______________________________________________________
BALANCE, December 31,
1992(as previously
reported) 37,045,000 $ 3,704 $ 136,659 $ (29,495) $ 110,868
Reverse stock split
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 1993,
(date of inception) 10,395,249 1,040 (1,040) - -
Net loss for the
period October 1,
1993 (date of
inception) through
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
per share 1,100,000 110 149,890 - 150,000
Shares issued for
services at $.25
per share 20,000 2 4,998 - 5,000
Shares issued for
services at $.18
per share 550,000 55 99,945 - 100,000
[Continued]
F-4
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION ON OCTOBER 1, 1993
THROUGH DECEMBER 31, 1995
Common Stock Additional
____________________ Paid-in Accumulated
Shares Amount Capital Deficit Total
______________________________________________________
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 per
share less offering
costs of $50,000 421,936 42 449,958 - 450,000
Shares issued for
cash at $1.96 per
share less offering
costs of $78,000 397,357 39 701,961 - 702,000
Shares issued for
cash at $1.50 per
share less offering
costs of $30,000 200,000 20 269,980 - 270,000
Shares issued for
cash at $2.33 per
share less offering
costs of $116,665 500,000 50 1,049,940 - 1,049,990
Shares issued for
cash at $3.13 less
offering costs of
$93,785 300,000 30 844,035 - 844,065
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
at $.55 to $1.55
per share 285,000 29 167,721 - 167,750
[Continued]
F-5
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FROM INCEPTION ON OCTOBER 1, 1993
THROUGH DECEMBER 31, 1995
Common Stock Additional
_____________________ Paid-in Accumulated
Shares Amount Capital Deficit Total
______________________________________________________
Shares issued during
the year for non-
cash cancellation of
accounts payable,
at $.81 per share 231,630 23 187,598 - 187,621
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 compensation
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 by
an affiliated company,
accounted for as an equity
contribution - - 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
______________________________________________________
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
From Inception
For the Year ended on October 1,
December 31, 1993 through
______________________________ December 31,
1995 1994 1995
______________________________________
Cash flows from operating
activities:
Net loss $(6,315,349) $(3,914,339) $(12,012,299)
Adjustments to reconcile
net loss to net cash
used in operations:
Common stock issued for
non-cash 2,450,650 255,000 2,705,650
Write-off of assets
received in acquisition - 1,281 1,281
Depreciation and
amortization 1,218 - 1,218
Non cash forgiveness of
debt income (30,548) - (30,548)
Changes in assets and
liabilities:
(Increase) in interest
receivable (21,827) (4,397) (26,224)
Increase (decrease) in
accounts payable 682,551 705,272 2,161,323
Increase (decrease) in
accrued expenses 50,136 52,405 122,914
(Decrease) in cash overdraft - (6) -
________________________________________
Net cash (used) by
operating activities (3,183,169) (2,904,784) (7,076,685)
________________________________________
Cash flows from investing
activities:
Purchase of equipment (48,743) - (48,743)
Investment in intangible assets (24,053) - (24,053)
Investment in notes receivable (36,894) - (36,894)
______________________________________
Net cash (used) by investing
activities (109,690) - (109,690)
______________________________________
Cash flows from financing
activities:
Proceeds from notes payable 4,443,851 2,536,606 7,969,189
Payments on notes payable (977,818) (801,988) (1,779,806)
Proceeds from debenture 500,000 - 500,000
Proceeds from issuance of
common stock 5,030,547 3,316,055 8,346,602
_______________________________________
Net cash provided by
financing activities 8,996,580 5,050,673 15,035,985
________________________________________
Net Increase in Cash and Cash
Equivalents 5,703,721 2,145,889 7,849,610
Cash and Cash Equivalents at
Beginning of Period 2,145,889 - -
________________________________________
Cash and Cash Equivalents at
End of Period $ 7,849,610 $ 2,145,889 $7,849,610
________________________________________
[Continued]
F-7
<PAGE>
fonix corporation
[A Development Stage Company]
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents [Continued]
Supplemental disclosure of cash flow information
Cash paid during the year for:
From Inception
For the Year ended on October 1,
December 31, 1993 through
________________________ December 31,
1995 1994 1995
______________________________________
Interest paid $ 229,039 $ 21,125 $ 250,164
______________________________________
Income taxes paid $ - $ - $ -
______________________________________
Supplemental disclosure of non-cash financial information
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. These items have been accounted for
as capital contributions to additional paid in capital in the
amount of $506,874. The Company was also forgiven of various
accounts payable in the amount of $30,548.
The Company issued 231,630 shares of common stock to cancel
$187,621 in accounts payable.
The Company issued 3,700,000 warrants to purchase common
stock, to a related company controlled by the majority
shareholders of the Company, in payment of accrued management
fees of $122,100 included in accounts payables.
The Company issued 3,700,000 shares of common stock upon the
conversion of warrants for non-cash cancellation of
$1,295,000 in accounts payable.
The Company issued 285,000 shares of common stock for
services rendered valued at $167,750
For the year ended December 31, 1994:
During 1994, the Company converted $150,000 of notes payable
and $6,905 of accrued interest payable to restricted common
stock.
On June 17, 1994, Taris, Inc., issued 10,395,249 shares of
common stock in exchange for all of the issued stock of
Phonic Technologies, Inc. Inasmuch as the 10,395,249 shares
of common stock is in excess of 90 percent of the total
outstanding stock Phonic Technologies, Inc., is deemed to
have acquired Taris, Inc. Taris, Inc. had the following
assets and liabilities at the transaction date:
Total assets: $ 1,281
Net assets purchased: $ 1,281
Fair value of common stock issued: $ 1,281
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - fonix corporation formerly Taris, Inc., (the
Company) was organized under the laws of the state of Delaware
on September 12, 1985. Prior to June 17, 1994, the Company 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. On June 17,
1994, the Company entered into a merger agreement whereby the
Company issued 10,395,249 shares of its common stock for all
of the issued and outstanding common shares of Phonic
Technologies, Inc. ("PTI"). Concurrent with the closing of
the merger, the Company changed its name to fonix corporation
(fonix). Upon completion of the merger, PTI shareholders
owned in excess of 90 percent of the outstanding common stock
of fonix. The transaction is accounted for as a reverse
acquisition as though PTI acquired fonix. The financial
statements, therefore, reflect the operations of fonix since
the acquisition on June 17, 1994 and PTI, since October 1,
1993 (date of inception). Pro forma financial information
reflecting the operations of fonix as though it had been
consolidated for the entire year of 1994 have been presented
(see note 7). The Company has not commenced planned principal
operations. The Company proposes to use the proceeds from the
sale of stock and other sources of capital for research and
development of its proprietary voice recognition technology
which, in the opinion of management, will be in the best
interest of the Company. Further, the Company is considered a
development stage Company as defined in SFAS No. 7. The
Company has, at the present time, not paid any dividends and
any dividends that may be paid in the future will depend upon
the financial requirements of the Company and other relevant
factors.
Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its
subsidiary. 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 which
range from three to five years. Depreciation expense for the
years ended December 31, 1995 and 1994 was $155 and $0,
respectively.
Intangible Assets - Intangible assets consist of the direct
cost of the Company acquiring patents for its technology.
Amortization is computed for financial statement purposes on a
straight-line basis over the patent's estimated useful life of
seventeen years. Amortization expense for the years ended
December 31, 1995 and 1994 was $1,062 and $0, respectively.
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.
F-9
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Continued]
Concentration of Credit Risks - The Company is a development
stage business 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 2] 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.
Research and Development - All monies that go to the
unaffiliated research and development entity are considered
research and development costs and are charged to research and
development expense as incurred. None of these costs are
capitalized since the Company does not have a product that
meets the capitalization requirements [See Note 6].
NOTE 2 - NOTES RECEIVABLE / PAYABLE
At December 31, 1995 the Company had one note receivable in
the amount of $36,894 which is due on March 31, 1996 and bears
interest at 18% per annum. Accrued interest on the note
receivable amounted to $845 at December 31, 1995.
The Company has a revolving note payable in the amount of
$5,617,522 to a bank at an interest rate of 5.75%. This note
payable is due February 28, 1996, and is secured by a
certificate of deposit in the amount of $8,000,000.
Subsequent to year end, the note payable was extended through
May 24, 1996 and was further secured by an additional
certificate of deposit in the amount of $2,600,000.
At December 31, 1994 the Company had a note payable to an
officer and shareholder of the Company totaling $320,793 in
principal and $48,616 in accrued interest. In October 1995
this note payable had a principal balance of $286,493 and
accrued interest balance of $65,715. Interest expense for
this note totaled $17,098 and $29,546 for 1995 and 1994
respectively. In October 1995 the note payable of $286,493
along with the accrued interest of $65,715, were forgiven by
the officer and shareholder of the Company, and were accounted
for as capital contributions to additional paid in capital
from forgiveness of debt to the Company.
At December 31, 1994 the Company had a note payable to a
company owned by the majority shareholders of the Company
totaling $110,918 in principal and $10,216 in accrued
interest. In October 1995 this note payable had a principal
balance of $285,368 and accrued interest balance of $19,298.
Interest expense for this note totaled $8,881 and $10,066 for
1995 and 1994 respectively. In October 1995, $150,000 of the
note payable was paid by the Company, and the remaining
principal amount of $135,368 along with accrued interest of
$19,298, were forgiven by the related company owned by the
majority shareholders, and were accounted for as capital
contributions to additional paid in capital from forgiveness
of debt to the Company.
F-10
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - CONVERTIBLE DEBENTURES
In connection with a funding agreement entered into during
October 1995, the Company issued a Series A Subordinated
Convertible Debenture in consideration for funds received in
the amount of $500,000 on October 23, 1995. The debenture is
due October 23, 1996, has an annual interest rate of 5% and
may be converted to Series A Preferred Stock or into common
stock [See Note 4].
NOTE 4 - CAPITAL STOCK
Preferred Stock - Pursuant to entering into a funding
agreement, the Company has agreed to amend its articles of
incorporation to authorize the issuance of Series A Preferred
stock. As of December 31, 1995 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 Series A Preferred stock into which the
$500,000 debenture is convertible [See Note 3].
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 (described
above). The preferred stock may be converted to common stock
at the discretion of the investor. The first $500,000 of the
Funding Commitment was paid to the Company on October 23, 1995
as consideration for the issuance of a Series A Subordinated
Convertible Debenture [See Note 3]. This debenture may be
converted to Series A Preferred Stock at $3.00 per share any
time after the Company's shareholders and board of directors
authorize the issuance of the Company's Series A Preferred
Stock but before the maturity date of the Debenture. The
balance of the Funding Commitment, $5,550,000 will be paid as
consideration for the issuance by the Company of 11,562,500
shares of common stock. As of December 31, 1995 $1,605,000
has been received, in exchange for which the Company issued
3,343,750 shares of common stock. In January, February and
March of 1996 an additional $340,000, $350,000 and $510,000
was received by the Company, in exchange for which the Company
issued 708,333, 729,167 and 1,062,500 shares of common stock,
respectively. The remaining balance of the Funding Commitment
of $2,745,000 for the common stock is payable by the investor
through August 1996 subject to the Company completing certain
technology development milestones. The balance of the shares
of common stock (5,718,750) will be issued proportionately
upon receipt of the remaining installment payments made by the
investor.
F-11
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK [Continued]
Common Stock Transactions - During the year ended December 31,
1995, the Company issued a total of 11,209,168 shares of
common stock. Of these, 6,662,538 shares were issued for net
cash proceeds of $4,510,187 at prices ranging from $.45 to
$2.50 per share. A total of 516,630 shares were issued for
non-cash consideration including cancellation of $187,621 of
accounts payable and $167,750 for services rendered. The
shares for non-cash consideration were issued at prices
ranging from $.55 to $1.55 per share. Also included were
3,700,000 shares issued upon exercise of warrants (see below)
and 3,343,750 issued as part of a funding arrangement (see
above).
Stock Options and Warrants - On April 3, 1995 three non-
related individuals were offered and purchased 120,000
warrants for restricted common stock in connection with a
stock purchase agreement. The warrants were purchased at
$.0033 per share with an exercise price of $2.00 per share.
The warrants are exercisable anytime prior to April 3, 1996.
In April 1995, all of 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
the majority shareholders of the Company with the right to
convert that entity's accrued management fees due from the
Company for the purchase of 3,700,000 warrants and the
exercise price of the warrants. The warrants were offered in
April 1995, purchased on July 31, 1995 for a purchase price
of $.033 per warrant and were then exercised on August 11,
1995 at $.35 per share of common Stock. The related entity
controlled by the majority shareholders of the Company
canceled invoices for $1,417,100 in management fees due from
the Company as consideration for the warrants and the exercise
price of the warrants. The exercise price was less than the
market price of the Company's common stock because, among
other reasons, the shares issued upon exercise of the warrants
are restricted shares pursuant to Rule 144. In addition, the
exercise price was offered as an incentive to help the Company
in relieving debt and preserving limited cash reserves by
converting payables to restricted common stock.
In November 1994, the Company granted the right to purchase
warrants for the purchase of an aggregate of 155,000 shares of
restricted 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 can be
purchased for $.033 per share of underlying common stock and
can be exercised at $.50 per share of common stock. On
October 30, 1995, one of these individuals exercised 50,000 of
these warrants for a price of $.50 per share. None of the
other warrants have been purchased. The warrants, as well as
the right to purchase the warrants, expire in December 1997.
In October 1994, the Company granted 150,000 warrants to
purchase restricted common stock. Due to the limited cash
funds of the Company, these warrants were granted in lieu of
cash for previous and future services. The 150,000
outstanding warrants have an option price of $2.00 per share
and expire in December 1997.
F-12
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - CAPITAL STOCK [Continued]
As part of a September 30, 1994 restated stock purchase
agreement, the Company granted a shareholder the right to
purchase 500,000 warrants for the purchase of common stock
restricted by Regulation S, each warrant entitling the holder
thereof to purchase one share of common stock. The total
purchase price for the 500,000 warrants is $50,000, $.10 per
warrant. 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, 166,667 and 333,333,
respectively. $500,000 was received as consideration for the
exercise of all 500,000 warrants at an exercise price of
$1.00 per share of common stock restricted by Regulation S.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company recorded the following expenses for services
rendered and recorded the following balances which were
payable to a company owned by the majority shareholders for
1995 and 1994:
1995 1994
_________________________
Expenses:
Management fees expense $ 600,000 $ 600,000
Interest expense 8,881 10,066
Rent expense 24,000 24,000
Payables:
Accounts payable $ 260,825 $ 1,231,005
Accrued interest payable - 10,417
Notes payable - 110,919
The Company rents office space from a company owned by the
majority shareholders under a month-to-month lease for $2,000
per month.
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 capital contributions to additional paid in capital
from forgiveness of debt to the Company [See Note 2].
In October 1995, a note payable to a company owned by the
majority shareholders in the amount of $135,368 along with
accrued interest of $19,298, were forgiven by the related
company, and were accounted for as capital contributions to
additional paid in capital from forgiveness of debt to the
Company [See Note 2].
F-13
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RESEARCH AND DEVELOPMENT
On or about October 16, 1993, the Company entered into an
agreement with a research and development entity ("R&D
Entity"), whereby the R&D Entity is developing certain
technology related to voice-activated computer hardware and
software (the "VoiceBox Technology"). The president of the
Company is one of seven members of the board of directors of
the R&D Entity, and the majority shareholders of the Company
own less than five percent of the common stock of the R&D
Entity. Under the terms of the agreement, the Company owns
the intellectual property rights, all technology and
technology rights that are developed by the entity. The
Company agreed to provide all funding necessary for the R&D
Entity to develop a commercially viable product. 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
development, manufacturing and marketing of the VoiceBox
Technology. The Company has not yet completed the research
and development of its product, and consequently, has not
recorded any revenues from sales. Under the terms of the
agreement the Company paid $2,704,165 to the R&D Entity for
research and development in 1995, and $2,522,090 in 1994.
The Company presently anticipates that it will complete alpha
testing and begin beta testing of its voice-activated computer
hardware and software sometime during the second half of 1996.
Following sufficient time for beta testing results to be
collected and appropriate adjustments made, the Company
presently projects that a viable product will be ready for
market introduction by the end of 1996. If and when sales of
such a product commence, the Company will pay the unaffiliated
R&D Entity a royalty fee amounting to ten percent (10%) of the
sales price of each commercial unit sold.
NOTE 7 - PROFORMA FINANCIAL INFORMATION
Proforma condensed financial information assuming that PTI
and fonix had been consolidated since October 1, 1993 (date
of inception) through December 31, 1993 and for the year
ended December 31, 1994, is as follows:
For the For the
Year Ended Period Ended
December 31, December 31,
1994 1993
___________________________
Revenues - interest $ 20,811 $ -
Expenses 4,268,436 1,782,844
___________________________
Net loss $(4,247,625) $(1,782,844)
___________________________
Loss per share $ (.30) $ (.17)
___________________________
F-14
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
The Company's income taxes are recorded in accordance with
Statement of Financial Accounting Standards No. 109 Accounting
for Income taxes [FASB 109]. FASB 109 requires the Company to
provide a net deferred tax asset or liability equal to the
expected future tax benefit or expense of temporary reporting
differences between book and tax accounting and any available
operating loss or tax credit carryforwards. At December 31,
1995 and 1994, the total of all deferred tax assets was
$3,429,451 and $1,937,000 and the total of the deferred tax
liabilities was $845,569 and $0. 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 of $2,583,882 and $1,937,000 for the years ended
December 31, 1995 and 1994. The net change in the valuation
allowance was $646,882 and $1,331,000 for the years ended
December 31, 1995 and 1994, respectively.
The Company has available at December 31, 1995, unused
operating loss carryforwards of approximately $9,268,786,
which may be applied against future taxable income and which
expire in various years beginning in 2000 through 2010.
The components of income tax expense from continuing
operations for the years ended December 31, 1995 and 1994
consist of the following:
1995 1994
_________________________
Current income tax expense:
Federal $ - $ -
State - -
_________________________
Current tax expense $ - $ -
_________________________
Deferred tax expense (benefit)
arising from:
Excess of tax over financial
accounting depreciation $ 844 $ -
Excess of tax over financial
accounting amortization 52 -
Excess of financial accounting
over tax compensation-APB 25 844,673 -
Net operating loss carryforwards (1,492,451) (1,331,000)
Valuation allowance 646,882 1,331,000
_________________________
Net deferred tax expense $ - $ -
_________________________
Deferred income tax expense results primarily from the
reversal of temporary timing differences between tax and
financial statement income.
F-15
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES [Continued]
A reconciliation of income tax expense at the federal
statutory rate to income tax expense at the company's
effective rate is as follows:
1995 1994
_________________________
Computed tax at the expected
statutory rate 34.00% -%
Depreciation .05 -
Compensation - APB 25 48.31 -
Net operating loss carryover (85.36) -
State and local income taxes,
net of federal benefit 3.00 -
_________________________
Income tax expense 0.00% -%
_________________________
The temporary differences and carryforwards gave rise to the
following deferred tax asset (liability) at December 31, 1995
and 1994:
1995 1994
__________ __________
Excess of book over tax accounting
depreciation $ (844) $ -
State NOL carryforwards $ (52) $ -
Compensation - APB 25 $ (844,673) $ -
Federal NOL carryforwards $3,429,451 $1,937,000
NOTE 9 - CONTINGENCIES
The Company from time to time is involved in litigation as part
of its normal business operations. In management's opinion,
the ultimate resolution of these cases will not have a material
adverse effect on the Company's financial position.
Prior to the merger, the former attorney of the Company caused
the transfer agent to issue a certificate for 138,389 shares
of common stock. The Company never properly authorized the
issuance of this certificate or the shares represented by the
certificate nor received consideration for the shares. The
Company is attempting to resolve this problem with its former
attorney. These shares are not included as issued and
outstanding in the accompanying financial statements.
F-16
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - GOING CONCERN
The accompanying consolidated financial statements of fonix
corporation have been prepared on a going-concern basis, which
contemplates profitable operations and the satisfaction of
liabilities in the normal course of business. There are
uncertainties that raise substantial doubt about the ability
of the Company 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 $6,315,349 during 1995.
As of December 31, 1995, the Company has working capital of
$1,238,156, which may not be adequate to finish the
development of the technology. These items raise substantial
doubt about the ability of the Company to continue as a going
concern.
Management presently believes that the Company is in the final
development stage of its voice-activated computer software and
hardware. Although there has been substantial progress in the
development of this technology, the Company does not have a
viable product, and has not had any sales and there can be no
assurance that the Company will develop a viable product or
have any sales. Management plans to continue financing the
development of the Company's technology through additional
loans and/or sales of the Company's equity securities.
The Company's continuation as a going concern is dependent
upon its ability to satisfactorily meet its debt obligations,
meet its product development goals, secure adequate new
financing and generate sufficient cash flows from operations.
The financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
NOTE 11 - SUBSEQUENT EVENTS
Issuance of Stock - Subsequent to December 31, 1995, the
Company issued an additional 726,000 shares of common stock to
private investors pursuant to various stock purchase
agreements for net cash proceeds of $1,393,763. In connection
with the 726,000 shares issued, the Company issued 200,000
shares of common stock valued at $304,000 in finders fee.
The Company also received in January, February and March of
1996 an additional $340,000, $350,000 and $510,000 in
connection with the funding arrangement with a private
investment entity [See Note 4], in exchange for which the
Company issued 708,333, 729,167 and 1,062,500 shares of common
stock, respectively.
F-17
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RESTATEMENT OF FINANCIAL STATEMENTS
As discussed in Note 4, the company issued 3,700,000 shares of
common stock to an affiliated corporation upon exercise of
stock warrants. The exercise price was paid through the
cancellation of debt which had previously been accrued for
management fees by the corporation. In retrospect, Management
believes that the provisions of APB Opinion No. 25, which
applies to stock issued to employees for services, should be
extended to cover this transaction. Accordingly, the Company
has recorded an additional compensation expense of $2,282,900
and adjusted additional paid in capital on the financial
statements for 1995. Management believes these adjustments
are necessary to be consistent with current attitudes and
policies in effect in subsequent years. The affiliated
Company also forgave debt and related interest in the amount
of $506,874 which now has been accounted for as a contribution
to additional paid in capital. These adjustments have no
effect on total stockholders' equity but do result in an
increase to net loss in 1995. The accompanying financial
statements and notes to financial statements have been updated
to reflect these items.
F-18
<PAGE>
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<PERIOD-END> DEC-31-1995
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