As filed with the Securities and Exchange Commission on November 19, 1997
Registration Statement No. 333-_________
============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
----------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
fonix corporation
(Exact name of registrant as specified in its charter)
----------------------
DELAWARE 22-2994719
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
(801) 328-0161
(Address, including zip code, and
telephone number, including area code,
of registrant's principal
executive offices)
----------------------
JEFFREY N. CLAYTON, ESQ.
VICE PRESIDENT/LEGAL
fonix corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
(801) 328-0161
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
COPY TO:
JEFFREY M. JONES, ESQ.
DURHAM, EVANS, JONES & PINEGAR, P.C.
50 SOUTH MAIN STREET, SUITE 850
SALT LAKE CITY, UTAH 84111
Approximate date of commencement of proposed sale to the public: from
time to time after the effective date of this Registration Statement as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______.
If this Form is a post-effective amendment filed pursuant to Rule
462(c)under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________.
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Proposed Proposed
Maximum Maximum
Amount Aggregate Aggregate Amount of
Title of Class of Securities To be Price Offering Registration
to be Registered Registered Per Share Price Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 1,657,000 shares(1) $6.844 (2) $ 11,340,508 (2) $ 3,436.52
$.0001 par value per share
Common Stock, 200,000 shares(3) $7.18 (4) $ 1,436,000 (4) $ 435.15
$.0001 par value per share
Common Stock, 175,000 shares(5) $7.48 (4) $ 1,309,000 (4) $ 396.67
$.0001 par value per share
Common Stock, 220,338 shares(6) $6.844 (2) $ 1,507,993 (2) $ 456.97
$.0001 par value per share
=================== ================ ============
Totals 2,252,338 shares $ 15,593,501 $ 4,725.31
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes (i) 1,379,361 shares, representing 200% of the shares
issuable upon a hypothetical conversion of $3,750,000 stated principal
amount of 187,500 shares of 5% Series C Convertible Preferred Stock
(the "Series C Preferred"), assuming such a conversion occurred on
November 17, 1997, and (ii) up to 277,639 shares issuable upon payment
of accrued dividends on the Series C Preferred in stock. All included
amounts estimated solely for purposes of calculation of the fee. The
actual number of shares of Common Stock issuable upon conversion of
all or a portion of the Series C Preferred or of payment of a stock
dividend thereon may be more or less than such estimate based on a
variety of factors, including the date of conversion and the price of
the Common Stock on such date.
(2) The fee is estimated pursuant to Rule 457(c) under the Act on the
basis of the average of the bid and asked price of the Company's
Common Stock as reported on the Nasdaq SmallCap Market on November 14,
1997.
(3) Represents shares issuable upon exercise of warrants to purchase an
aggregate amount of 200,000 shares of the Company's Common Stock at
the exercise price of $7.18 per share expiring October 24, 2000, which
warrants were issued to the buyers of all of the Company's issued and
outstanding Series C Preferred [See Selling Stockholders].
(4) Fee calculated pursuant to Rule 457(g)(1).
(5) Represents shares issuable upon exercise of a warrant to purchase up
to 175,000 shares of the Company's Common Stock at the exercise price
of $7.48 per share, expiring October 24, 2002, which warrant was
issued to the holder of all of the Company's issued and outstanding
Series B Convertible Preferred Stock. [See Selling Stockholders].
(6) Includes (i) 186,441 shares constituting 200% of the shares issuable
upon a hypothetical conversion of $550,000 stated principal amount of
27,500 shares of Series B Convertible Preferred Stock (the "Series B
Preferred") issued and outstanding as of November 17, 1997, assuming
such a conversion occurred on November 17, 1997, (ii) 15,000 shares
issuable upon the exercise of warrants issuable on April 24, 1998 and
October 24 (collectively the 1998 warrants), 1998, and (iii) and
18,897 shares issuable as payment in stock of dividends accrued on the
Series B Preferred. Such amount is estimated solely for purposes of
calculation of the fee. The actual number of shares of Common Stock
issuable upon conversion of all or a portion of the Series B
Preferred, upon payment of stock dividends thereon, or upon exercise
of the 1998 Warrants may be more or less than such estimate based on a
variety of factors, including but not limited to the date of
conversion and the price of the Common Stock on such date.
Pursuant to Rule 416, there are also registered hereby such additional
indeterminate number of shares of such Common Stock as may become issuable
asdividends or to prevent dilution resulting from stock splits, stock
dividends or similar transactions or to provide for changes in the number of
shares of Common Stock as are issuable upon conversion of the Series B
Preferred or the Series C Preferred as a result in fluctuations in the
market price of the Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a) OF THE ACT, MAY DETERMINE.
============================================================================
<PAGE>
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+ REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH +
+ THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE +
+ SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE +
+ REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT +
+ CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR +
+ SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH +
+ OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR +
+ QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion Dated November 19, 1997
[LOGO]
[TECHNOLOGY ICON]
fonix corporation
2,252,338 Shares
Common Stock, par value $.0001 per share
This Prospectus relates to 2,252,338 shares of Common Stock, $.0001
par value, (the "Shares") of fonix corporation, a Delaware corporation (the
"Company", the "Registrant" or "fonix") consisting of: (i) 1,379,361 shares
issuable upon conversion of 187,500 shares of 5% Series C Convertible
Preferred Stock (the "Series C Preferred"), (ii)277,639 shares issuable upon
payment of stock dividends on the Series C Preferred, (iii) 200,000 shares
underlying Common Stock Purchase Warrants exercisable at any time before
October 24, 2000 at the per share exercise price of $7.18 (the "Series C
Warrants"), (iv) 175,000 shares underlying a Common Stock Purchase Warrant
exercisable at any time before October 24, 2002 at the per share exercise
price of $7.48 (the "Series B Warrant") (the Series C Warrants and the Series
B Warrant are referred to collectively herein as the "Warrants"), (v) 186,441
shares issuable upon conversion of 27,500 shares of the Company's Series B
Convertible Preferred Stock (the "Series B Preferred") issued and outstanding
as of November 17, 1997, (vi) 15,000 shares issuable upon exercise of Common
Stock purchase warrants issuable on April 24, 1998 and October 24, 1998 (the
"1998 Warrants"), and (vii) 18,897 shares issuable upon payment in stock of
dividends accrued on the Series B Preferred, all of which convertible
securities are owned of record by three selling stockholders (the "Selling
Stockholders") and are convertible or exercisable as described in the
"Selling Stockholders" and "Plan of Distribution" sections of the Prospectus.
The Series C Preferred, the Series C Warrants, the Series B 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 C Preferred, the Series C Warrants and the Series B
Warrant 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 Registration Rights Agreements between the Company and the
Selling Stockholders as a condition to the Selling Stockholders' acquisition
of the Series C Preferred and/or the Company's Series B Preferred Stock (the
"Series B Preferred"), the Series C Warrants and the Series B Warrant. All
Shares to be registered hereby are to be offered by the Selling
Stockholders, and the Company will receive no proceeds from the sale of such
Shares. The Company will, however, receive the amount of any cash exercise
of the Warrants and the 1998 Warrants. The Shares may be offered by the
Selling Stockholders, or by their 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 Stockholders" and "Plan
of Distribution." The Company has agreed to indemnify the Selling
Stockholders against certain liabilities, including certain liabilities
under the Securities Act, or to contribute to payments which such Selling
Stockholders 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 Stockholders have 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 November 14, 1997
was $6.6875 per share.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders 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.
<PAGE>
THE SHARES HAVE NOT BEEN REGISTERED FOR SALE BY THE SELLING STOCKHOLDERS
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 7.
______________________
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.
_____________________
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Price to Public Underwriting Discounts and Proceeds to Issuer or
Commissions (1) Other Persons
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit $ 6.6875 (2) 0 0 (3)
Total $ 15,062,510 (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 November 14, 1997.
Represents estimate of price to public, assuming sales of all
Shares at closing bid price as of November 14, 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 Stockholders".
(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 Stockholders would
receive upon sales of the securities offered by this Prospectus.
See "Selling Stockholders" and "Plan of Distribution".
The date of this Prospectus is November 19, 1997.
2
<PAGE>
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 STOCKHOLDERS. 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;
3
<PAGE>
(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 Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, filed with the Commission on November 14, 1997;
(viii) The Company's Current Report on Form 8-K, dated March 13, 1997, filed
with the Commission on March 19, 1997;
(ix) The Company's Current Report on Form 8-K, dated March 24, 1997, filed
with the Commission on March 31, 1997;
(x) The Company's Current Report on Form 8-K, dated October 27, 1997,
filed with the Commission on October 27, 1997;
(xi) The Company's Definitive Proxy Statement on Schedule 14A filed with
the Commission on May 15, 1997;
(xii) 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;
(xiii) 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;
(xiv) 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;
(xv) 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;
(xvi) 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
(xvii) 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.
4
<PAGE>
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.
_____________________
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 21E 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
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..................2,252,338 shares of the Company's Common
Stock, par value $.0001 per share, that
are issuable by the Company to the
Selling Stockholders upon the conversion
of the Series C Preferred, the Series B
Preferred, the exercise of the Warrants
or the payment in stock of dividends on
the Series C Preferred or the Series B
Preferred.
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 Stockholders 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 STOCKHOLDERS................The Shares being offered hereby are
being offered for the account of the
Selling Stockholders specified under the
caption "Selling Stockholders".
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"
6
<PAGE>
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 applicable to Common Stock of $15,515,709 for the nine
months ended September 30, 1997. 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 September 30, 1997, the
Company's accumulated deficit was $35,357,516. 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 or preclude the Company from
receiving necessary additional capital when and as needed. 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 September 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 revenue-generating licensing and co-development
arrangements or strategic alliances with third parties. On November 14,
1997, the Company entered into a Master Agreement for Joint Collaboration
(the "Siemens Agreement") with Siemens Aktiengesellschaft ("Siemens") pursuant
to which the Company and Siemens have agreed to pursue research and
development of certain technologies related to the ASRT and the
commercialization of such technologies for the telecommunications industry
through a strategic alliance. The Siemens Agreement calls for the payment
to the Company of royalty revenues when the Company and Siemens have entered
into a further agreement or agreements for the development of specific
technologies, although there can be no assurance that such
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additional agreement or agreements will be entered into by the Company and
Siemens. Other than the arrangement with Siemens, the Company has no
licensing or co-development agreements with any third party. 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 such as Siemens
and therefore has no plans to manufacture products incorporating the ASRT
for the foreseeable future. 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.
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 other than the Siemens Agreement. 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. To date, the
Company has formed only one strategic alliance, with Siemens, and the
Company's ability to generate revenue in association with that alliance is
subject to several factors, including the negotiation and execution of and
performance under additional agreements with Seimens pertaining to the
development and/or application of specific technologies. The Company
anticipates that, in addition to the arrangement with Siemens, it will need
to enter into additional strategic alliances or co-development arrangements
with other parties to fully implement its business strategy, although the
Company has not entered into any such additional arrangements to date.
There can be no assurance that the strategic alliance with Seimens will
generate substantial royalty or license agreements or that the Company will
be able to establish additional strategic alliance or licensing
arrangements, or if established that any such additional arrangements or
licenses will be on terms favorable to the Company, or that any strategic
alliances or licensing arrangements ultimately will be successful.
Moreover, even under the Siemens arrangement or any additional licensing or
co-development arrangements, if any are signed, the extent of revenues to
the Company resulting from such agreements will depend on factors beyond the
Company's control such as the timing and extent of manufacture of products
incorporating the Company's Core Technologies, the scope of the marketing
effort related to such products, the price of any product or products
incorporating the Company's Core Technologies, and competition from new or
existing products. Moreover, disputes may arise
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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 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 nine months ended
September 30, 1997, the Company incurred total research and development
expenses of $4,715,650. 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 revenue-generating 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
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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
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
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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 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 and the proposed settlement is
subject to the approval of the court. Limited discovery to provide a
factual basis for the court's consideration of the proposed settlement has
been completed, and the settlement proposal will be submitted to 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
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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.
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,
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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.
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. The Company
recently has entered into the Siemens Agreement, under which the Company and
Siemens will conduct joint research and development for applications in the
telecommunications industry of certain technologies related to the ASRT.
The Company anticipates that it will enter into additional strategic
alliances and co-
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development agreements. 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 Stockholders or by their 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.
SELLING STOCKHOLDERS
The Selling Stockholders are three separate investment entities that
are not affiliated in any way with the Company or any of its affiliates, and
neither the Selling Stockholders nor any of their affiliates have any
relationship of any type with the Company and its affiliates other than the
presently established investment relationships between the Selling
Stockholders, on the one hand, and the Company, on the other hand, which
relationships may be summarized as follows:
Southbrook International Investments, Ltd.
On June 18, 1997, the Company and one of the Selling Stockholders,
Southbrook International Investments, Ltd. ("Southbrook"), entered into that
certain Convertible Debenture Purchase Agreement (the "Debenture Purchase
Agreement") pursuant to which the Company agreed to sell and issue and
Southbrook agreed to acquire, the Company's Series B 5% Convertible
Debentures (the "Series B Debentures") having an aggregate principal amount
of up to $10,000,000 and a warrant to purchase 250,000 shares of Common
Stock at the per share exercise price of $8.28 (the "Debenture Warrant"). On
June 18, 1997, and in connection with the closing of the Debenture Purchase
Agreement, Southbrook paid the Company $3,000,000 in return for which the
Company issued a corresponding principal amount of Series B Debentures and
the Debenture Warrant. Under the Debenture Purchase Agreement, Southbrook
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 Southbrook executed
simultaneously with the Debenture Purchase Agreement, the Company filed a
registration statement on Form S-3 (File No. 333-31425), which subsequently
was amended twice and became effective such that Southbrook could resell
shares of Common Stock issued upon conversion of the Series B Debentures or
the Debenture Warrants as of September 29, 1997. Prior to September 30,
1997 $850,000 face value of the Series B 5% Convertible Debenture was
converted into 145,747 shares of Common Stock, all of which was covered for
resale pursuant to the previously filed registration statement..
Pursuant to a memorandum of understanding between the Company and
Southbrook dated as of September 30, 1997 (the "MOU") the parties agreed to
modify the Debenture Purchase Agreement to convert all then outstanding
Series B Debentures in the aggregate principal amount of $2,150,000 into
107,500 shares of Series B Preferred, convertible into Common Stock on terms
essentially identical to the Series B Debentures. Each share of Series B
Preferred has a "stated" or principal value of $20, on which amount dividends
accrue at the rate of 5% per annum and are payable quarterly in cash or
Common Stock at the option of the Company. The Series B Preferred is
convertible into Common Stock at anytime after issuance at the holder's
option. 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 $5.9813 or the average
of the five lowest closing bid prices for the 5 trading days preceding the
date of any conversion notice multiplied by 90% for any conversion on or
prior to the 120th day after the original issue date and 87.5% for any
conversion thereafter. Also in connection with this modification, the
Company agreed to issue the Series B Warrant. Furthermore, the Company
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 by Southbrook 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,
14
<PAGE>
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") (the "Six Month Warrants and the Twelve Month Warrants are
collectively referred to herein as the "1998 Warrants"). Additionally, the
Company entered into an amended and restated registration rights agreement
with Southbrook under which the Company is obligated to register the Common
Stock issuable upon conversion of the Series B Preferred, payment of stock
dividends on the Series B Preferred and exercise of the Series B Warrant to
the extent any of such shares of Common Stock are not already covered by an
effective registration statement. The Company also covenanted to reserve
out of its authorized and unissued shares of Common Stock no less than that
number of shares that would be issuable upon the conversion of the Series B
Preferred and any dividends then payable in stock on the preferred stock and
the exercise of the Series B Warrant.
Notwithstanding the agreement of the parties under the MOU to exchange
shares of Series B Preferred for the Series B Debentures outstanding as of
September 30, 1997, prior to the actual issuance of Series B Preferred in
furtherance of such exchange, Southbrook converted the balance of $2,150,000
into 431,619 shares of Common Stock, all of which Common Stock was covered
by a previously filed, effective registration statement. Subsequent to
September 30, 1997, the Company completed the documentation anticipated by
the MOU, and received payment from Southbrook in the amount of $2,500,000 in
exchange for which the Company issued to Southbrook 125,000 shares of Series
B Preferred. As of November 19, 1997, 97,500 of these preferred shares,
together with dividends accrued thereon have been converted into 355,188
shares of Common Stock, all of which shares of Common Stock are covered by a
previously filed, effective registration statement.
On November 17, 1997, the Company filed the registration statement
(the "Registration Statement") of which this Prospectus is a part. The
Registration Statement covers the 175,000 shares of Common Stock issuable to
Southbrook upon exercise of the Series B Warrant, 186,441 shares of Common
Stock issuable upon conversion of the 27,500 shares of Series B Preferred
outstanding as of the date of this Prospectus to the extent such shares are
not covered by previously filed and effective registration statements,
15,000 shares of Common Stock issuable upon exercise of the 1998 Warrants,
and 18,897 shares of Common Stock issuable as payment in stock of dividends
accrued on the Series B Preferred..
JNC Opportunity Fund Ltd. and Diversified Strategies Fund, L.P.
The Company entered into a Memorandum of Understanding ("MOU2") dated
as of September 30, 1997, with JNC Opportunity Fund, Ltd. ("JNC") and
Diversified Strategies Fund, L.P. ("DSF") (JNC and DSF are collectively
referred to in this Prospectus as the "Series C Investors"). The Series C
Investors each are investment entities that have no prior affiliation or
relationship of any kind with the Company or its affiliates prior to the
course of financing described in this Prospectus. Under the MOU2, the
Series C Investors agreed to subscribe for the purchase of 187,500 shares of
Series C Preferred for a purchase price of $3,750,000. Each share of Series
C Preferred has a "stated" or principal value of $20, on which amount
dividends accrue at the rate of 5% per annum and are payable quarterly in
cash or Common Stock at the option of the Company. The Series C Preferred
is convertible into Common Stock at anytime after issuance at the holder's
option. The Series C Preferred is convertible into that number of shares of
Common Stock as is determined by dividing the aggregate stated value of the
Series C Preferred to be converted by the lesser of $5.9813 or the average
of the five lowest closing bid prices for the 15 trading days preceding the
date of any conversion notice multiplied by 91% for any conversion on or
prior to the 120th day after the original issue date, 90% for any conversion
between 121 and 180 days and 88% for any conversion thereafter. Subsequent
to September 30, 1997, the Company and the Series C Investors executed
definitive documents in connection with the transactions described in the
MOU2, which documents included, among others, a Convertible Preferred Stock
Purchase Agreement (the "Series C Agreement") and a Registration Rights
Agreement (the "Series C Registration Rights Agreement") . Also in
connection with the issuance of the Series C Preferred as described in the
MOU2 and the Series C Agreement, the Series C Investors received the Series
C Warrants. Under the Series C Registration Rights Agreement, the Company
is obligated to register the Common Stock issuable upon conversion of the
Series C Preferred, payment of dividends thereon and exercise of the Series
C Warrants. The Company has covenanted to reserve out of its authorized and
unissued shares of Common Stock no less than that number of shares that
would be issuable upon the total conversion of the Series C Preferred, any
dividends then payable on the Series C Preferred, and the exercise of the
Series C Warrants. Subsequent to September 30, 1997, and in connection with
the closing described in the Series C Agreement, the Company received the
entire purchase price of the Series C Preferred, $3,750,000. As required by
the Series C Registration Rights Agreement, the Registration Statement of
which this Prospectus is part covers
15
<PAGE>
the shares of Common Stock issuable upon conversion of the Series C
Preferred, payment in stock of any dividends accrued thereon, and the
exercise of the Series C Warrants.
To the best of the Company's knowledge, except as stated in this
Prospectus, none of the Selling Stockholders have 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
Stockholders reserve 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 Stockholders as of the
date of this Prospectus 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 Stockholders Offering(1)(2) Offered Hereby After Offering After Offering
- -------------------------------- -------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Southbrook International 673,075 (1) 395,338 (2) (3) (3)
Investments, Ltd.
JNC Opportunity Fund, Ltd. 711,744 (4) 1,485,600 (2) (3) (3)
Diversified Strategic Fund, L.P. 177,,936 (5) 371,400 (2) (3) (3)
_________________________
</TABLE>
(1) Includes (i) 154,854 shares of Common Stock owned by Southbrook as of
November 19, 1997, (ii) 250,000 shares issuable upon exercise of the
Debenture Warrant, (iii) 175,000 shares issuable upon exercise of the
Series B Warrant, and (iv) approximately 93,221 shares of Common Stock
issuable upon a hypothetical conversion of 27,500 shares of Series B
Preferred owned by Southbrook as of November 17. 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 (A)$5.9813 and (B) 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 Southbrook as set forth in (iv) above, the
Company and Southbrook have assumed a hypothetical conversion of all
of the 27,500 shares of presently issued and outstanding Series B
Preferred on November 17, 1997, which assumed conversion would yield a
per share conversion price of $5.90 per share applying the formula
described above. The actual conversion price and the number of Shares
issuable upon such conversion could differ substantially.
(2) Pursuant to the terms of the Debenture Purchase Agreement and the
documentation executed in connection with the MOU and the MOU2, the
conversion and exercise rights of Southbrook and each Series C
Investor are limited to the extent such conversion or exercise, as
the case may be, by such investor would result in that investor
beneficially owning more than 4.999% of the then outstanding shares of
Common Stock following such conversion and/or exercise, as the case
may be.
(3) There is no assurance that the Selling Stockholders will sell any or
all of the Shares offered hereby.
(4) Includes (i)160,000 shares issuable upon exercise of the Series C
Warrant owned by JNC, and (ii) approximately 551,744 shares of Common
Stock issuable upon a hypothetical conversion of the 150,000 shares of
Series C Preferred owned by JNC as of November 17. As described above
in this Section, the number of shares of Common Stock issuable upon
conversion of the Series C Preferred varies according to
16
<PAGE>
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 JNC as set forth in (iii) above, the Company and
JNC have assumed a hypothetical conversion of all of the 150,000
shares of Series C Preferred issued to JNC as of November 17, 1997,
which assumed conversion would yield a per share conversion price of
$5.4373 per share applying the formula described above. The actual
conversion price and the number of Shares issuable upon such
conversion could differ substantially.
(6) Includes (i) 40,000 shares issuable upon exercise of the Series C
Warrant owned by DSF, and (ii) approximately 137,936 shares of Common
Stock issuable upon a hypothetical conversion of the 37,500 shares of
Series C Preferred owned by DSF as of November 17. As described above
in this Section, the number of shares of Common Stock issuable upon
conversion of the Series C 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 DSF as set forth in (iii) above, the Company and
DSF have assumed a hypothetical conversion of all of the 37,500 shares
of Series C Preferred issued to DSF as of November 17, 1997, which
assumed conversion would yield a per share conversion price of $5.4373
per share applying the formula described above. The actual conversion
price and the number of Shares issuable upon such conversion could
differ substantially.
PLAN OF DISTRIBUTION
Pursuant to the Amended and Restated Registration Rights Agreement
between the Company and Southbrook dated as of October 24, 1997, and the
Registration Rights Agreement between the Company and the Series C Investors
dated as of October 24, 1997 (collectively the "Registration Rights
Agreement"), the Company agreed to file with the Commission a registration
statement covering resales of the Shares by the date hereof, 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
December 23, 1997. Upon and after the effectiveness of the Registration
Statement, the Selling Stockholders may sell all or a portion of the Shares
held by them 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 its best 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(k) under the
Securities Act prior to the expiration of the three-year period). The
aggregate proceeds to the Selling Stockholders from the sale of Shares
offered by the Selling Stockholders hereby will be the prices at which such
securities are sold, less any commissions. There is no assurance that the
Selling Stockholders will sell any or all of the Shares offered hereby.
The Selling Stockholders and their 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 Stockholders 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 Stockholders may arrange for other brokers or dealers to
participate. Brokers or dealers may receive commissions or discounts from
the Selling Stockholders (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
Stockholders 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 Stockholders to purchase as principal any unsold
Shares at the price required to fulfill the broker-dealer commitment to the
Selling Stockholders. 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
17
<PAGE>
such resales, may pay to or receive from the purchasers of such Shares
commissions as described above. The Selling Stockholders may also sell the
Shares in accordance with Rule 144 under the Securities Act rather than
pursuant to this Prospectus.
The Selling Stockholders and any broker-dealers or agents that
participate with the Selling Stockholders 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 Stockholders 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 Stockholders engage in
such transactions, the conversion price of the Series B Preferred or the
Series C Preferred may be affected. From time to time the Selling
Stockholders may pledge their shares pursuant to the margin provisions of
its customer agreements with its brokers. Upon a default by the Selling
Stockholders, the broker may offer and sell the pledged shares of Common
Stock from time to time.
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 each of the Selling Stockholders in some
circumstances. The Company has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
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 Stockholders are not restricted as to the price or prices
at which they 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 Stockholders are not restricted as to the number of
Shares which may be sold at any one time. The Selling Stockholders and
their 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 Stockholders 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 Stockholders with a copy of such rules. The Company has also
advised the Selling Stockholders 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.
18
<PAGE>
TABLE OF CONTENTS
--------------------
PAGE
----------
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......................................................14
The Selling Stockholders.............................................14
Plan of Distribution.................................................17
Legal Matters........................................................18
Experts..............................................................18
----------------------
fonix corporation
2,252,338 SHARES
COMMON STOCK
____________________
PROSPECTUS
___________________
November 19, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, all of which will be borne by the Company. All amounts shown are
estimates except the Securities and Exchange Commission registration fee.
Filing Fee - Securities and Exchange $ 4,725.31
Commission
Legal fees and expenses of the 35,000
Company
Accounting fees and expenses 10,000
Blue Sky fees and expenses --
Printing expenses --
Miscellaneous expenses 5,000
============
Total Expenses $ 54,725.31
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of the
State of Delaware empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative
or investigative (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by right of the corporation
to procure a judgment in its favor by reason of the fact that such person
acted in any of the capacities set forth above, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made in
respect to any claim issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
II-1
<PAGE>
Section 145 further provides that to the extent a director or officer
of a corporation has been successful on the merits or otherwise in the
defense of any such action, suit or proceeding referred to in subsections
(a) and (b) of Section 145 or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; that
the indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights which the indemnified party may be entitled;
that indemnification provided by Section 145 shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit
of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law or the State of
Delaware provides that a certificate of incorporation may contain a
provision eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of the director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit.
Article Ninth of the registrant's Charter provides that, the
registrant shall, "to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and
the indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any By-Law,
agreement, vote of stockholders or disinterested Directors or otherwise,
both as to action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who
has ceased to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person."
Article VII, Section 7 of the registrant's Bylaws further provides
that the registrant "shall indemnify its officers, directors, employees and
agents to the extent permitted by the General Corporation Law of Delaware."
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
II-2
<PAGE>
ITEM 16. LIST OF EXHIBITS.
5 Opinion of Durham, Evans, Jones & Pinegar, P.C.
23.1 Consent of Durham, Evans, Jones & Pinegar, P.C., included in Exhibit 5
filed herewith.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Pritchett, Siler & Hardy, P.C.
24 Power of Attorney (See page II-5 of this Registration Statement).
- -------------------
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Securities
Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in the
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any derivation from the low or high and of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such
information in this Registration Statement; provided, however,
that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports
filed by the Company pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), that are incorporated by reference in this Registration
Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Exchange Act) that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of
such securities at the time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Corporation pursuant to the indemnification provisions
described herein, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE> SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Salt Lake City, State of Utah, on
this 19th day of November, 1997.
fonix corporation
By: /s/ Stephen M. Studdert
---------------------------
Stephen M. Studdert
Chairman,
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of fonix corporation hereby
severally constitute Stephen M. Studdert and Thomas A. Murdock, and each of
them singly, our true and lawful attorneys with full power to any of them,
and to each of them singly, to sign for us and in our names in the
capacities indicated below the Registration Statement on Form S-3 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement and generally to do all such things in our name and
behalf in our capacities as officers and directors to enable fonix
corporation to comply with the provisions of the Securities Act and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or
any of them, to said Registration Statement and any and all amendments
thereto.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------ ---------------------- ------
<S> <C> <C>
/s/ Stephen M. Studdert Chairman and Chief Executive Officer November 19, 1997
- -------------------------- (Principal Executive Officer)
Stephen M. Studdert
/s/ Roger D. Dudley Executive Vice President Finance November 19, 1997
- -------------------------- (Principal Financial Officer)
Roger D. Dudley
/s/ Douglas L. Rex Chief Financial Officer (Principal November 19, 1997
- -------------------------- Accounting Officer)
Douglas L. Rex
Director
- --------------------------
Alan C. Ashton, Ph.D.
/s/ Joseph Verner Reed Director November 18. 1997
- --------------------------
Ambassador Joseph Verner Reed
/s/ John A. Oberteuffer Director November 18, 1997
- --------------------------
John A. Oberteuffer, Ph.D.
/s/ Rick D. Nydegger Director November 18, 1997
- --------------------------
Rick D. Nydegger
/s/ James B. Hayes Director November 18, 1997
- --------------------------
James B. Hayes
/s/ Thomas A. Murdock Director November 19, 1997
- --------------------------
Thomas A. Murdock
/s/ Reginald Brack Director November 18, 1997
__________________________
Reginald Brack
</TABLE>
II-6
Exhibit 5
Durham, Evans, Jones & Pinegar
Attorneys & Counselors at Law
Key Bank Tower
50 South Main, Suite 850
Salt Lake City, Utah 84144
Telephone
(801) 538-2424
November 17, 1997 Facsimilie Number
(801) 538-2425
Board of Directors
fonix corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
Gentlemen:
We have assisted in the preparation of the Registration Statement on
Form S-3 (the "Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the registration for resale by
three Selling Stockholders of the Company of 2,252,338 shares of common
stock, $0.0001 par value per share, of fonix corporation, a Delaware
corporation (the "Company"), consisting of (i) 1,379,361 shares issuable
upon conversion of 187,500 shares of 5% Series C Convertible Preferred
Stock (the "Series C Preferred") assuming a hypothetical conversion of the
Series B Preferred on November 17, 1997, (ii)up to 277,639 shares issuable
upon payment of stock dividends on the Series C Preferred, (iii) 200,000
shares underlying Common Stock Purchase Warrants exercisable at any time
before October 24, 2000 at the per share exercise price of $7.18 (the
"Series C Warrants"), (iv) 175,000 shares underlying a Common Stock Purchase
Warrant exercisable at any time before October 24, 2002 at the per share
exercise price of $7.48 (the "Series B Warrant"), (v) 186,441 shares
issuable upon conversion of 27,500 shares of the Company's Series B
Convertible Preferred Stock (the "Series B Preferred") issued and
outstanding as of November 17, 1997, assuming such shares of Series B
Preferred were hypothetically converted on Novmeber 17, 1997, (vi) 15,000
shares issuable upon exercise of Common Stock purchase warrants issuable on
April 24, 1998 and October 24, 1998 (the "1998 Warrants")(the Series C
Warrants, the Series B Warrant and the 1998 Warrants are referred to
collectively herein as the "Warrants"), and (vii) 18,897 shares issuable
upon payment in stock of dividends accrued on the Series B Preferred
(collectively the shares covered by the Registration Statement as
enumerated above are referred to herein as the "Shares").
We have examined the Company's Certificate of Incorporation, as
amended to date, and the Company's By-Laws, as amended to date, and have
examined and relied on the originals, or copies certified to our
satisfaction, of such records of meetings, written actions in lieu of
meetings, or resolutions adopted at meetings, of the directors and
stockholders of the Company, all as provided to us by the Company, and such
<PAGE>
fonix corporation
November 19, 1997
Page 2
_____________________
other documents and instruments as in our judgment are necessary or
appropriate to enable us to render the opinions expressed below.
In our examination of the foregoing documents, we have assumed (i)
the genuineness of all signatures and the authenticity of all documents
submitted to us as originals, (ii) the conformity to the originals of all
documents submitted to us as certified or photostatic copies, (iii) the
authenticity of the originals of the latter document, and (iv) the legal
competence of all signatures to such documents.
We express no opinion herein as to the laws of any state or
jurisdiction other than the state laws of the State of Utah, and the
federal laws of the United States of America.
Based upon and subject to the foregoing, we are of the opinion that
the Shares, when issued and paid for upon the conversion of the Series B
and Series C Preferred, or issued as a dividend thereon, or issued upon
exercise of the Warrants in accordance with the terms thereof, will be duly
authorized and validly issued, fully paid and non-assessable.
It is our understanding that this opinion is to be used only in
connection with the offer and sale of the Shares while the Registration
Statement is in effect.
We hereby consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement in accordance with the
requirements of Item 601(b)(5) of Regulation S-K under the Securities Act
and to the use of our name therein and in the related Prospectus under the
caption "Legal Matters." In giving such consent, we do not hereby admit
that we are in the category of persons whose consent is required under
Section 7 of the Securities Act or the rules and regulations of the
Commission.
Very truly yours,
/S/ Durham, Evans, Jones & Pinegar, P.C.
----------------------------------------
DURHAM, EVANS, JONES & PINEGAR, P.C.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of fonix(TM) corporation on Form S-3 of our report dated March 28, 1997,
appearing in the Annual Report on Form 10-K, as amended, of fonix(TM)
corporation for the year ended December 31, 1996 and to the reference to us
under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
November 17, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement of fonix corporation on Form S-3 of our report dated March 4,
1996, except as to note 12, as to which the date is March 28, 1997, filed as
an exhibit to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996.
/s/ PRITCHETT, SILER & HARDY, P.C.
Pritchett, Siler & Hardy, P.C.
(formerly Peterson, Siler & Stevenson, P.C.)
Salt Lake City, Utah
November 18, 1997
