UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1997
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from___________to_______________
Commission file number 0-23862
fonix corporation
(Exact name of registrant as specified in its charter)
Delaware 22-2994719
(State of Incorporation) (I.R.S. Employer Identification No.)
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
(Address of principal executive offices and zip code)
(801) 328-0161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X]
or No [ ]
As of May 13, 1997, 41,731,563 shares of the issuer's Common Stock, par value
$.0001 per share, were issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim financial statements required by Rule 10-01 of Regulation
S-X follow immediately.
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,243,947 $ 22,805,786
Notes Receivable 1,883,600 1,000,000
Interest receivable 87,445 157,643
Prepaid Assets 39,792 4,172
-------------- --------------
Total Current Assets 23,254,784 23,967,601
Equipment, net of accumulated depreciation of $146,645 and $80,232 1,439,474 1,279,746
Intangible assets, net of accumulated amortization of $3,936 and $3,107 53,243 53,011
Other assets 39,647 30,912
-------------- --------------
$ 24,787,148 $ 25,331,270
============== ==============
LIABILITITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 235,406 $ 307,931
Accounts payable - related party 38,614 411,743
Accrued expenses 1,580,110 1,464,049
Convertible debenture 500,000 500,000
Notes payable 18,269,888 16,377,358
-------------- --------------
Total Current Liabilities 20,624,018 19,061,081
-------------- --------------
Stockholders' equity:
Preferred stock - -
Common stock 4,203 4,163
Additional paid-in capital 26,864,197 26,107,833
Accumulated deficit (22,705,270) (19,841,807)
-------------- --------------
Total stockholders' equity 4,163,130 6,270,189
-------------- --------------
$ 24,787,148 $ 25,331,270
============== ==============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Three months ended 1993
March 31, (inception) to
-------------------------------- March, 31
1997 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ - $ - $ -
-------------- -------------- --------------
Expenses:
General and administrative 1,293,391 363,202 10,592,949
Research and development 1,610,058 816,661 12,481,057
-------------- -------------- --------------
Total expenses 2,903,449 1,179,863 23,074,006
-------------- -------------- --------------
Loss from operations (2,903,449) (1,179,863) (23,074,006)
-------------- -------------- --------------
Other income (Expenses):
Interest income 305,549 126,614 1,698,006
Interest (expense) (265,563) (103,938) (1,359,818)
-------------- -------------- --------------
Total Other Income (Expenses) 39,986 22,676 338,188
-------------- -------------- --------------
Loss before extraordinary item (2,863,463) (1,157,187) (22,735,818)
Extraordinary item-
Forgiveness of debt - - 30,548
-------------- -------------- --------------
Net Loss $ (2,863,463) $ (1,157,187) $ (22,705,270)
============== ============== ==============
Loss per common share:
Loss before extraordinary items $ (0.07) $ (0.04) $ (0.93)
Extraordinary item Nil Nil Nil
-------------- -------------- --------------
Loss per common share $ (0.07) $ (0.04) $ (0.93)
============== ============== ==============
Weighted average shares 41,834,372 31,118,026 24,403,470
============== ============== ==============
See accompanying notes to condensed consolidated financial statements
</TABLE>
4
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Three months ended 1993
March 31, (inception) to
-------------------------------- March, 31
1997 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from development activities:
Net loss $ (2,863,463) $ (1,157,187) $ (22,705,270)
Adjustments to reconcile net loss to net cash
used in development activities:
Common stock issued for services 331,406 - 1,655,676
Additional compensation expense recorded in
accordance with APB Opinion No. 25 - - 2,282,900
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 66,178 4,999 150,578
Non cash gain on forgiveness of debt - - (30,548)
Changes in assets and liabilities:
(Increase) decrease in interest receivable 70,198 (28,152) (87,445)
(Increase) in prepaid assets (35,620) - (39,792)
(Increase) in other assets (8,735) (39,647)
Increase (decrease) in accounts payable (72,525) (97,212) 1,870,675
Increase (decrease) in accounts payable - related party (373,129) 38,614
Increase (decrease) in accrued expenses 116,061 (13,530) 1,672,028
-------------- -------------- --------------
Net cash used in operating activities (2,769,629) (1,291,082) (15,230,950)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of equipment (226,140) (74,393) (1,586,118)
Investment in intangible assets - (9,598) (57,179)
Investment in notes receivable (883,600) (800,000) (1,883,600)
Payment of notes receivable - - -
-------------- -------------- --------------
Net cash used in investing activities (1,109,740) (883,991) (3,526,897)
-------------- -------------- --------------
Cash flows from financing activities:
Net increase in revolving note payable 1,892,530 2,782,753 18,269,888
Proceeds from notes payable - - 2,351,667
Payment of notes payable - - (1,779,806)
Proceeds from issuance of convertible debenture - - 500,000
Proceeds from issuance of common stock 425,000 2,593,763 20,660,045
-------------- -------------- --------------
Net cash provided by financing activities 2,317,530 5,376,516 40,001,794
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (1,561,839) 3,201,443 21,243,947
Cash and cash equivalents at beginning of period 22,805,786 7,849,610 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 21,243,947 $ 11,051,053 $ 21,243,947
============== ============== ==============
</TABLE>
[Continued]
5
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Three months ended 1993
March 31, (inception) to
-------------------------------- March, 31
1997 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 247,785 $ 117,468 $ 1,136,251
Income taxes paid $ - $ - $ -
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the three months ended March 31, 1997:
The Company issued 155,000 shares of common stock to unrelated parties for consulting fees
valued at $331,406.
For the three months ended March 31, 1996:
The Company issued 220,000 shares of common stock to unrelated parties for finders fees
valued at $304,000.
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
Notes to Consolidated Financial Statements
[Unaudited]
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements have been
prepared by the Company without audit in accordance with generally
accepted accounting principles for interim information and pursuant to
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (which included only normal recurring
adjustments) necessary to present fairly the financial position, results
of operations and cash flows for all periods presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in the accompanying
interim financial statements. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December
31, 1996 audited financial statements. The results of operations for the
three months ended March 31, 1997 and 1996 are not necessarily indicative
of the operating results for the full year.
Research and Development - All payments for research and development are
charged to research and development expense as incurred. None of these
costs are capitalized since the Company does not have a product that
meets applicable capitalization requirements.
Recently Enacted Accounting Standards - In February 1997, SFAS Nos. 128,
"Earnings Per Share" and 129, "Disclosures of Information about Capital
Structure" were issued. SFAS No. 128 changes the computation,
presentation, and disclosure requirements of earnings per share (EPS) for
entities with publicly held common stock. SFAS No. 129 addresses
standards for disclosing information about an entity's capital structure.
Although such statements are not effective until December 31, 1997, had
such statements been adopted for the three months ended March 31, 1997,
the effect would not be significant.
2. CASH MANAGEMENT PROGRAM - NOTE RECEIVABLE
At March 31, 1997 the Company had an unsecured note receivable from an
unrelated third party in the amount of $1,000,000 which bears interest
at 12% per annum and is due and payable thirty days after written notice
from the Company. Subsequent to March 31, 1997, the Company received a
$500,000 payment, reducing the balance of the note receivable to
$500,000.
At March 31, 1997 the Company had a secured note receivable from an
unrelated third party in the amount of $700,000 which bears interest at
12% per annum and is due and payable on June 29, 1997.
At March 31, 1997 the Company had a secured note receivable from an
unrelated third party in the amount of $183,600 which bears interest at
12% per annum. The balance was paid in full when due on May 14, 1997.
3. EQUIPMENT
Equipment consists of the following at March 31, 1997:
Furniture and fixtures $ 617,279
Computer equipment 899,469
Leasehold improvements 69,370
---------------
Total 1,586,118
Less accumulated depreciation and amortization (146,644)
---------------
Total $ 1,439,474
==============
4. CONVERTIBLE DEBENTURE
During October 1995, the Company issued a Series A Subordinated
Convertible Debenture in the amount of $500,000 to a private investment
entity. The debenture is due October 23, 1997, has an annual interest
rate of 5% and may be converted to Series A Preferred Stock or into
common stock (see Note 6).
5. NOTE PAYABLE
At March 31, 1997, the Company had a revolving note payable to a bank in
the amount of $18,269,888 which bears interest at the rate of 5.8%.
This note payable was due April 30, 1997, and is secured by a
certificate of deposit in the amount of $20,000,000. Subsequently,
similar terms were negotiated to extend the maturity date of the note
for approximately 90 days.
6. STOCKHOLDERS' EQUITY
Issuance of Stock - During the three months ended March 31, 1997, the
Company issued 405,000 shares of common stock. 150,000 of such shares
were issued to an unrelated private investor, 250,000 of such
shares were issued upon the exercise of previously granted warrants,
and 5,000 of such shares were issued to an unaffiliated individual for
services rendered.
Preferred Stock - In 1994, the Company amended its articles of
incorporation to authorize the issuance of Series A Preferred stock. As
of March 31, 1997 the Company's board of directors and shareholders had
not yet authorized the issuance of preferred stock or determined the
dividend rate, liquidation preferences, participation rights, or
redemption requirements of the stock.
Funding Agreement - In October 1995, the Company entered into a funding
arrangement with a private investment entity. Under the terms of the
agreement, the investor agreed to invest $6,050,000 ("Funding
Commitment") over an 11 month period in return for which the Company
agreed to issue a total of 11,562,500 shares of the Company's common
stock, and a $500,000 debenture which is convertible into 166,667 Series
A Preferred Stock or 166,667 shares of common stock. The Company
received $3,945,000 (which included the $500,000 convertible debenture)
and $2,105,000 of the Funding Commitment in 1996 and 1995, respectively.
Stock Options and Warrants - On March 10, 1997, the Company's board of
directors approved a stock option plan for directors, employees and
other persons acting on behalf of the Company, under which the
aggregate number of shares available for issuance is 7,500,000. The
term of options granted under the plan is ten years from the date of
grant. On March 13, 1997, 300,000 shares were granted to certain
directors and officers of the Company with an exercise price of $7.13,
which is the closing market price of the stock on the date the options
were granted. None of these options have been exercised.
During 1996, employees were granted an aggregate of 71,000 stock options
as signing incentives. The exercise price of such options is the closing
market price of the stock on the date the options were granted. These
options are exercisable at any time beginning six months after the date
of grant and expire July 30, 2006.
In April 1996, the directors approved a directors' stock option plan,
under which the aggregate number of shares available for issuance is
5,400,000. The shareholders of the Company approved the plan at their
annual meeting in July 1996. The plan is administered by a committee
consisting of two or more directors of the Company. The plan provides
that each director shall receive options to purchase 200,000 shares of
common stock for services rendered as a director during each entire
calendar year or portion of a calendar year in excess of six months.
The exercise price of such options is the closing market price of the
stock on the date the options are granted. The option term is ten years
from the date of grant.
In April 1996, the directors approved an employee stock option plan
under which the aggregate number of shares available for issuance is
900,000 shares. The exercise price of such options is the closing market
price of the stock on the date the options are granted. The term of the
plan is 10 years and options are subject to a three year vesting
schedule, pursuant to which one-third of the total number of options
granted may be exercised each year.
In April 1996, the Company granted 100,000 warrants to an unrelated
individual to purchase 100,000 shares of the Company's common stock.
These warrants were granted in lieu of cash for services rendered the
Company in connection with the Funding Commitment.
In April 1995 three unrelated individuals were offered and purchased
120,000 warrants for common stock in connection with a stock purchase
agreement. The warrants are exercisable anytime prior to April 1998.
In April 1995, the disinterested directors of the Company approved the
issuance of warrants to purchase 3,700,000 shares of common stock to an
entity owned and controlled by three individuals who were then and are
now directors, executive officers and greater than 10% beneficial owners
of the Company, in lieu of payment of $1,417,100 in management fees for
services previously rendered, due from the Company to the entity
controlled by those individuals.
In November 1994, the Company granted warrants for the purchase of an
aggregate of 155,000 shares of common stock to certain individuals,
including warrants for 30,000 shares to three directors. In October
1995, certain of these individuals were granted the right to purchase
warrants to purchase an additional 185,000 shares of restricted common
stock. In order to preserve the Company's limited cash, warrants were
granted in lieu of cash for services rendered to the Company. The
warrants, as well as the right to purchase the warrants, expire between
April 1998 and October 1998.
In October 1994 the Company granted 150,000 warrants to purchase common
stock to an employee. Due to the limited cash funds of the Company,
these warrants were granted in lieu of cash for previous and future
services.
As part of a September 1994 restated stock purchase agreement, the
Company granted a shareholder the right to purchase 500,000 warrants at
$.10 for the purchase of common stock pursuant to Regulation S. In
December 1995 the 500,000 warrants were purchased for $50,000. At the
time of the purchase of said warrants, the rights were assigned to two
foreign entities which purchased the 500,000 shares for $500,000.
A summary of the status of the options granted under the Company's stock
option plan and employment agreements for the three months ended March
31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Stock Exercise
Options Price
-------------- --------------
<S> <C> <C>
Outstanding at beginning of period 4,626,000 $ 4.06
Granted 300,000 7.13
Exercised - -
Forfeited - -
Canceled ( 25,000) 5.00
-------------- --------------
Outstanding at end of period 4,901,000 $ 4.26
============== ==============
Exercisable at end of period 3,246,000 $ 4.06
============== ==============
Weighted average fair value of options
granted during the period $ .46
==============
</TABLE>
A summary of the status of the options outstanding under the Company's
stock option plans and employment agreements at March 31, 1997 is
presented below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$2.97 - 3.66 155,000 9.3 years $ 3.55 36,000 $ 3.18
4.06 4,400,000 9.1 years 4.06 3,200,000 4.06
5.00 - 5.06 26,000 9.6 years 5.00
7.13 - 9.31 320,000 9.9 years 7.24 10,000
------------- ----------- ----------- ---------- ------------- ------------
$2.97 - 9.31 4,901,000 9.20 years $ 4.26 3,246,000 $ 4.06
============= =========== =========== ========== ============= ============
</TABLE>
A summary of the status of the warrants granted by the Company during
the three months ended March 31, 1997 is presented below:
March 31, 1997
--------------------------
Weighted
Average
Exercise
Shares Price
------------ -----------
Outstanding at beginning of period 600,000 $ 1.63
Granted - -
Exercised (250,000) 1.40
Forfeited - -
Canceled - -
------------ -----------
Outstanding at end of period 350,000 $ 1.80
============ ===========
A summary of the status of the warrants outstanding from the Company at
March 31, 1997 is presented below:
<TABLE>
<CAPTION>
Warrants Outstanding Exercisable
------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ .5 130,000 1.2 years $ 0.50 130,000 $ 0.50
2.00 120,000 1.0 years 2.00 120,000 2.00
3.24 100,000 2.0 years 3.24 100,000 3.24
------------ ----------- ----------- ---------- ----------- ----------
$.50 - 3.24 350,000 1.4 years $ 1.80 350,000 $ 1.80
============ =========== =========== ========== =========== ==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
Related party transactions with a company owned by the majority
shareholders not otherwise disclosed for the three months ended
March 31, 1997 were as follows:
1997
------------
Expenses:
Management fees expense None
Interest expense None
Rent expense 19,300
Payables:
Accounts payable 38,614
Accrued expenses 1,350,000
The Company rents office space from a company owned by three individuals
who each are executive officers, directors and 10% beneficial owners
under a month-to-month lease. The lease to the company owned by these
individuals is guaranteed by them.
During 1996, the disinterested members of the Company's Board of
Directors authorized the Company to reimburse certain officers for any
taxes payable by the officers in conjunction with the exercise of
3,700,000 warrants in 1995 by a company owned by the officers.
Subsequent to March 31, 1997, the Company paid these officers $2,058,536
for such tax reimbursements.
8. RESEARCH AND DEVELOPMENT
In October 1993, the Company entered into an agreement (the "Synergetics
Agreement") with a research and development entity, Synergetics, Inc.
("Synergetics"), whereby Synergetics was to develop certain technologies
related to the Company's automated speech recognition technology
("ASRT"). The president of the Company is one of seven members of the
board of directors of Synergetics, and the majority shareholders of the
Company own less than five percent of the common stock of Synergetics.
The Synergetics Agreement was subsequently modified (the Synergetics
Agreement, together with any modifications thereto are referred to
herein as the "Synergetics Agreements"). Under the terms of the
Synergetics Agreements, the Company acquired intellectual property
rights, and technologies and technology rights that were developed by
Synergetics. The Company agreed to provide all funding assets necessary
for Synergetics to develop commercially viable technologies. There was
no minimum requirement or limit with respect to the amount of the
funding to be provided by the Company. However, under the terms of the
Synergetics Agreements the Company was obligated to use its best efforts
in raising the necessary funding for the engineering, development,
manufacturing and marketing of the ASRT. As part of the Synergetics
Agreements, the Company agreed to pay Synergetics a royalty of 10% of
gross revenues from sales of its ASRT. The R&D Agreement was restated
in March of 1995. The R&D Agreement and the Restated Agreement are
referred to collectively as the "Synergetics Agreements." The Company
has not yet licensed its technologies, and consequently, Synergetics has
not recorded any revenues from royalty payments. Under the terms of the
Synergetics Agreement, the Company paid to Synergetics $1,361,977 and
$816,661 for the three months ended March 31, 1997 and 1996,
respectively, for research and development efforts. The Company
incurred total research and development costs of $1,610,058 and $816,661
for the three months ended March 31, 1997 and 1996 respectively.
On March 13, 1997, the Company and Synergetics reached an agreement in
principle represented by a Memorandum of Understanding (the
"Memorandum") to modify the Synergetics Agreements with regard to the
development and assignment of the Company's ASRT. Until March 1997,
Synergetics had compensated engineers, employees, members of its
development team, and other financial backers, in part, with the
issuance of "Project Shares" granting the holders of such shares the
right, up to defined limits, to share pro rata in future royalty
payments. In addition to issuance of Project Shares, Synergetics had
made loans and advances to some members of its project team
(collectively, the "Advances") on a non-recourse basis. Repayment of
the Advances was secured by future disbursements under the Project
Shares.
The Memorandum modifies the Synergetics Agreements as follows:
* The rights and obligations of Synergetics under the R&D Agreement,
including the royalty, will be assigned to a newly created wholly-
owned subsidiary of the Company, fonix Acquisition
("Acquisition");
* Acquisition will also assume the obligations of Synergetics to all
holders of Project Shares;
* The Company and Acquisition will release Synergetics from any
further obligation or duty under the Synergetics Agreements;
* In consideration for the assignment of the rights to the royalty
by Synergetics to Acquisition, the Company will issue warrants to
Synergetics and the holders of Project Shares to acquire, in the
aggregate, up to 4,800,000 shares of the Company's common stock
at an exercise price of $10.00 per share (the Warrants). A holder
of Project Shares will be entitled to receive Warrants to purchase
800 shares of the Company's common stock for each Project Share
held; provided, however, that the number of Warrants to be issued
will be reduced by the amount of one Warrant for each $37.50 in
Advances;
* The Warrants will become exercisable subject to progress made in
further development of the ASRT Technology and the first to occur
of (i) a minimum daily closing bid price for shares of the
Company's common stock of $37.50 for a period of at least 15
consecutive trading days, or (ii) thirty months from the date the
Warrants are issued. The exercise date shall be accelerated upon
certain business combinations or reorganizations, such as a
merger, involving the Company. The terms relating to development
of the ASRT Technology will be subject to a confidentiality and
non-disclosure agreement and covenants;
* In consideration of the assumption by Acquisition of the
obligations of Synergetics, the release of Synergetics from its
further duties under the Synergetics Agreements, and the issuance
of the Warrants to Synergetics and holders of Project Shares, the
royalty and Project Shares tendered in exchange for Warrants will
be canceled;
* Effective March 1997, the Company employed certain former members
of the Synergetics project team as employees of the Company on
terms and conditions approximately equivalent to the terms and
conditions of their prior employment with Synergetics, and
including the right to participate in the Company's employee stock
option plans; and
* The Company engaged the founder and principal stockholder of
Synergetics as a full-time consultant to assist with the further
development of the ASRT.
The parties to the Memorandum have acknowledged the consummation of the
transactions described above will require, among other things, execution
of definitive agreements and compliance with applicable federal and
state laws, including securities laws. Those agreements will include
standard terms and provisions that are typical of such transactions,
including mutual releases and indemnification covenants. Synergetics
has other business interests and activities and will continue to
conduct its business in the usual course following the closing.
The Company presently anticipates that the U.S. Patent and Trademark
Office will issue the initial patent describing 36 claims on June 17,
1997. Assuming issuance of the patent, as described above, the Company
anticipates that it will thereafter enter into license and/or original
equipment manufacturer agreements with third parties, which could result
in revenues prior to the end of 1997.
9. INCOME TAXES
At March 31, 1997, net deferred tax assets, before considering the
valuation allowance, totaled approximately $8,800,000. The amount of
and ultimate realization of the benefits from the deferred tax assets
for income tax purposes is dependent, in part, upon the tax laws then in
effect, the Company's future earnings, and other future events, the
effects of which cannot presently be determined. Because of the
uncertainty surrounding the realization of the loss carryforwards the
Company has established a valuation allowance for all net deferred tax
assets. Accordingly, because of recurring losses and the valuation
allowance, there is no provision for income taxes in the accompanying
statements of operations. The net change in the valuation allowance was
approximately $997,224 for the three months ended March 31, 1997.
The Company has available at March 31, 1997, unused federal operating
loss carryforwards of approximately $19,700,000 and unused state
operating loss carryforwards of approximately $20,500,000, which may be
applied against future taxable income and which expire in various years
beginning in 2008 through 2011.
10. COMMITMENTS AND CONTINGENCIES
Employment Agreements - On November 1, 1996, the Company entered into
three employment contracts with executive officers which expire on
December 31, 2001. The minimum salary payments required on these
contracts are as follows:
Year Ending December 31:
1997 $ 787,500
1998 1,025,000
1999 1,337,500
2000 1,750,000
2001 1,875,000
---------------
Total $ 6,775,000
===============
Litigation - On February 10, 1997 an action (the "Palomba Action") was
filed against the Company and six of its directors. The Palomba Action
is a derivative action seeking relief on behalf of all shareholders for
the benefit of the Company. The Palomba Action alleges that certain
employee directors caused the Company to engage in a series of loan
transactions with K.L.S. Enviro Resources, Inc. and thereafter
appropriated for themselves certain corporate opportunities resulting
from such loan transactions. A settlement agreement in principle was
reached prior to service of the complaint and is currently being
documented. The settlement agreement will be subject to the approval of
the court and will not cost the Company anything except incidental
attorneys fees. The terms of the settlement are confidential until
approved by the court. Because of market factors, it is not presently
possible to predict the amount of benefit to the Company under the
settlement.
Lease Agreement - The Company has a long-term operating lease agreement
for office space with an unrelated party. The future aggregate minimum
obligations under this operating lease are as follows:
Years ending December 31:
1997 $ 340,672
1998 340,672
1999 340,672
2000 340,672
2001 340,672
Thereafter 958,549
--------------
Total $ 2,661,909
==============
11. SUBSEQUENT EVENTS
Subsequent to March 31, 1997 the Company paid $2,058,536 to reimburse
certain officers for any taxes payable by the officers in conjunction
with the exercise of 3,700,000 warrants in 1995 by a company owned by
the officers (See Note 7 - Related Party Transactions).
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED BY THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE
DISCUSSED BELOW IN THE SECTION ENTITLED "FACTORS AFFECTING FUTURE OPERATING
RESULTS."
Overview
fonix is a development-stage company engaged in scientific research and
development of proprietary Automated Speech Recognition Technologies
("ASRT") comprised of components which may be licensed in whole or in part.
The Company has completed the core technologies related to the ASRT such that
they are available for third-party licensing and co-development. Heretofore,
on advice of intellectual property counsel, the Company has not licensed the
ASRT to any third party vendor or co-developer pending receipt of formal
notice of allowance of its initial patent application. Having received such
notice of allowance, the Company is presently engaged in discussions with
potential licensees and co-developers. However, the Company has to date
received no revenues from operations, including licenses, and there can be no
assurance that revenues from operations will be received in the future.
The Company's primary development objective is to further develop the
main components of its ASRT and certain supplemental technologies. The
Company's initial marketing direction is to focus on licensing its ASRT to
third parties and co-developers. These licenses will be made broadly
available to many segments of the computer industry, including application
software, operating systems, computers and microprocessor chips, and research
and development entities worldwide, including academia, government, industry
and commercial speech product developers who may want to take advantage of
the Company's ASRT or related technologies in their existing products. The
Company will sell or license its ASRT or related technologies on terms
advantageous to the Company. Run-time product license royalty rates will
vary according to applications, sales volumes, and end-user pricing of
products using the ASRT. The Company will reserve exclusive rights in some
fields of use for the internal development of high value end-user products
and applications.
Results of Operations
Research and Development
The Company's scientific research and development activities
historically have been conducted by an unaffiliated third party, Synergetics,
Inc. ("Synergetics") pursuant to product development and assignment
contracts between the Company and Synergetics (the "Synergetics Agreements").
Under that arrangement, Synergetics provided personnel and facilities, and
the Company financed such scientific research and development activities on
an as-required basis. There was no minimum requirement or limit with respect
to the amount of funding the Company was obligated to provide to Synergetics
under the Synergetics Agreements, and the Company was obligated to use its
best efforts in raising all of the necessary funding for the development of
the ASRT. The amounts of payments to Synergetics pursuant to the Synergetics
Agreements were determined as Synergetics submitted weekly pre-authorized
work orders and budgets, which were then reviewed and approved by the
Company. All funds paid to Synergetics have been accounted for by the
Company as research and development expense. Moreover, under the Synergetics
Agreements, the Company, if and when the Company began receiving revenue from
sales of the ASRT or products incorporating the ASRT, was obligated to pay
the Royalty to Synergetics. On March 13, 1997, the Company and Synergetics
reached an agreement in principle represented by a Memorandum of
Understanding (the "Memorandum" ) to modify the Synergetics Agreements with
regard to the development and assignment of the Company's ASRT. Under the
Memorandum, and further assuming that the definitive agreements relating
thereto are executed and the other preconditions to the effectiveness of the
Memorandum are satisfied, of which there can be no assurance, the Company
will no longer have any obligation to pay to Synergetics the Royalty or any
percentage of the gross revenue received from entering into licensing and/or
co-development agreements or otherwise from the manufacture of products
incorporating the ASRT. The Company does not expect there to be a material
change to research and development spending as a result of the Memorandum.
As a development stage company which has not yet licensed its ASRT, the
Company has not received any revenues from operations. During the three
months ended March 31, 1997 the Company incurred research and development
expenses of $1,610,058 an increase of $793,397 or approximately 97 percent
over the three months ended March 31, 1996. This increase is due in part to
increases in research and development personnel. The Company anticipates
similar or increased research and development costs as it continues to
develop and market its technologies.
Operating Losses
General and administrative expenses were $1,293,391 and $363,202,
respectively, for the three months ended March 31, 1997 and March 31, 1996.
This increase over the comparable period was due primarily to increases in
salaries, rents, legal fees, accounting fees and other outside services. Due
to the lack of revenues and these general and administrative and research and
development expenses, the Company has incurred losses from operations of
$2,903,449 and $1,179,863 for the three months ended March 31, 1997 and 1996,
respectively. Income from other income and expenses was $39,986 for the
three months ended March 31, 1997, an increase of $17,310 over the three
months ended March 31, 1996. This increase was due primarily to increases in
interest income from the Company's cash management program . The Company has
not incurred any losses from its cash management program. At March 31, 1997,
the Company had an accumulated deficit of $22,705,270 and stockholders'
equity of $4,163,130. The Company anticipates that its investment in ongoing
scientific research and development of the ASRT and artificial intelligence
and compression/decompression technologies will continue at present or
increased levels for at least the remainder of fiscal 1997.
Liquidity and Capital Resources
The Company's current assets exceeded its current liabilities by
$2,630,766 at March 31, 1997 and $4,906,520 at December 31, 1996. The
current ratio of assets to liabilities was 1.12 at March 31, 1997 as compared
with 1.26 at December 31, 1996. Current assets decreased by $712,817 to
$23,254,784 from December 31, 1996 to March 31, 1997. Current liabilities
increased by $1,562,937 to $20,624,018 during the same period. The decrease
in working capital over this period is primarily attributable to minimal
sales of the Company's securities during the three months ended March 31,
1997. Total assets were $24,787,148 at March 31, 1997 as compared to
$25,331,270 at December 31, 1996.
From its inception, the Company's principal source of operating capital
has been private and other exempt sales of the Company's equity securities.
Private and other exempt sales of the Company's securities resulted in net
cash proceeds of $425,000 for the three months ended March 31, 1997.
Although the Company presently anticipates that it will enter into
third party license or co-development agreements for its ASRT by the end of
the first half of fiscal 1997, there can be no assurance that the Company
will be able to license the ASRT within that time frame. Even assuming that
the Company is able to begin licensing the ASRT during the first half of
1997, the Company may not receive revenues from operations until later in
1997. Accordingly, the Company expects to incur significant losses at least
through the end of fiscal 1997 and until such time as it is able to enter
into substantial licensing and co-development agreements and actually receive
substantial revenues from such arrangements.
The Company has an established relationship with a major regional
federally insured financial institution pursuant to which the Company has
entered into an agreement allowing it to borrow against its own funds on
deposit with the institution. As of December 31, 1996, the Company had funds
on deposit of $20,000,000, and the Company owed $16,377,358 to the
institution. As of March 31, 1997, the Company had funds on deposit of
$20,000,000, and the Company owed the institution $18,269,888, which
obligation matured on April 30, 1997. The relationship with the institution
is re-negotiated quarterly to enhance the earning potential to the Company of
that deposit. On April 30, 1997 the Company and the institution agreed to
extend the term of the borrowing relationship for an additional three-month
term on comparable competitive terms. The rate of interest paid by the
institution for the Company's funds on deposit at the institution and the
interest rate paid to the Company by the institution is a net difference of
1%. Interest income and expense is payable monthly and the principal amount
is payable in full at maturity.
Presently, the Company anticipates that it will need to raise
additional funds to be able to satisfy its cash requirements during the next
twelve months. The scientific research and development, corporate operations
and marketing expenses will continue to require additional capital. Because
the Company presently has no revenue from operations, the Company intends to
continue to rely primarily on financing through the sale of its equity and
debt securities to satisfy future capital requirements until such time as the
Company is able to enter into acceptable third party licensing or co-
development arrangements such that it will be able to finance ongoing
operations out of license, royalty and sales revenue. There can be no
assurance that the Company will be able to enter into acceptable third party
licensing or co-development agreements. Furthermore, the issuance of equity
securities or other securities which are or may become convertible to the
equity securities of the Company in connection with such financing would
result in dilution to the shareholders of the Company.
In connection with the Memorandum, 55 employees of Synergetics became
full-time or part-time employees of the Company. Taking account of these
employees, the Company presently employs 61 persons and has a need for
approximately 15 additional scientific professionals and 10 additional
technology asset managers.
The Company has no plans to purchase any new plants or expand beyond
any existing facility.
Factors Affecting Future Operating Results
Notwithstanding the Company's efforts and planning, any one or more of
several factors could delay, obstruct or otherwise hinder the Company's
ability to achieve its objectives or cause actual results of operations to
materially differ from expected or anticipated results including, without
limitation, those which are expressed in forward-looking statements contained
in this Report. Included among such factors could be the following:
Development Stage of Technology
While the Company generally is pleased with the progress made to date
with respect to the research and development of its ASRT, the Company
presently has no commercial "shrink wrapped" product incorporating its ASRT
and has not yet entered into revenue-generating third party licensing or co-
development contracts. Moreover, the Company has no present plans to
manufacture such a "shrink-wrapped" product. There can be no assurance that
the Company will ever be able to license its ASRT such that the ASRT or
products based thereon will be commercially viable.
Unproven Market; Risks of New Technology
The Company believes that there is a market for products incorporating
speaker-independent, natural language, continuous speech recognition
technology with vocabulary contextually sufficient to be useful for general
purpose consumer, commercial and industrial use, and capable of operating in
real time with acceptable levels of accuracy. Nevertheless, the Company is
subject to all of the risks inherent in developing and marketing a new
product with new technology, together with the risks associated with market
acceptance of such technology, technological obsolescence, inappropriate
intellectual property appropriation and inadequate funding to commence and/or
sustain operations. The Company's ASRT is new and represents a significant
departure from technologies which have already found a degree of acceptance
in the marketplace. There can be no assurance that the Company's ASRT will
receive similar acceptance. Even if the ASRT is licensed and products
incorporating such technology are manufactured and marketed, the occurrence
of warranty or product liability, or retraction of market acceptance due to
product failure, excess product returns or failure of the products to meet
market expectations could prevent the Company from achieving or sustaining
profitable operations.
Competition and Technological Change
The computer hardware and software industries into which the ASRT would
be introduced are highly competitive. Several companies already manufacture
and market computer speech recognition products against which products
incorporating the ASRT will compete. Some, if not all, of those companies
have greater experience in manufacturing and marketing speech recognition
technology and products, and many have far greater financial and other
resources than the Company and/or its potential licensees and co-developers,
as well as broader name-recognition, more-established technology reputations,
and mature distribution channels for their products. Additionally, as the
market for automatic speech recognition expands and matures, the Company
expects many more entrants into this already competitive arena. Computer
technologies historically have changed and evolved at a rapid pace.
Consequently, there can be no assurance that the Company will be able to keep
pace with such rapid evolution in the industry. There can be no assurance
that the distinguishing characteristics of the ASRT as completed and/or as
may be enhanced in the future, and any products employing such technology
will be sufficient to allow the Company to successfully compete in the
marketplace.
Ongoing Losses; Accumulated Deficit
Since commencing its business of developing its ASRT, the Company has
had no revenues from operations. Since inception, the Company has sustained
ongoing losses associated with its research and development costs. As of
March 31, 1997, the Company had an accumulated deficit of $22,468,174.
Additional losses will be incurred in the future until such time as the
Company is able to complete licensing or co-development arrangements with
third parties.
Need for Additional Financing
The Company has spent, and will continue to spend, substantial amounts
of money in connection with the research and development of its ASRT. During
the three months ended March 31, 1997, the Company incurred total general and
administrative and research and development expenses in the amount of
$2,903,449. It is not presently possible for the Company to predict whether
its present cash resources will be sufficient to enable the Company to
complete the development of its ASRT. In the event that substantial amounts
of additional financing are required, the Company does not believe it will be
able to obtain such financing from traditional commercial lenders. Moreover,
if additional funding is necessary, the Company likely will have to conduct
additional sales of its equity securities. There can be no assurance that
such additional equity financing will be available if and when, and in the
amounts required, by the Company. Moreover, even if such financing is
available if and when required, there can be no assurance that such financing
will be obtained on terms that are favorable to the Company, and substantial
and immediate dilution to existing shareholders likely would result.
Controlling Interest of Related Parties
Thomas A. Murdock, a director, executive officer and founding
shareholder of the Company is the trustee of a voting trust into which is
deposited a majority of the Company's issued and outstanding common stock
which effectively gives Mr. Murdock control of the Company. The Company
believes that it will be controlled by its founding shareholders for the
foreseeable future.
Lack of Diversification of the Company's Business
The Company is not engaged in and does not intend to engage in any
business other than the further development and marketing of its ASRT and
certain related technologies.
Intellectual Property Protection
The Company has received formal notice of allowance from the United
States Patent and Trademark Office for all 36 claims of its initial patent
application. The patent is now in the process of being prepared by the
Patent and Trademark Office for issuance. When a patent for such technology
subsequently issues, as is anticipated on June 17, 1997, the Company will own
such patent pursuant to the Synergetics Agreements and the Memorandum.
However, there can be no assurance that such patent, when issued, would be
incontestable to a user with prior rights. The Company is unaware of any
facts or circumstances suggesting that the ASRT or the Company's anticipated
use thereof infringes or will infringe any third party intellectual property
rights. Regardless of the foregoing, there can be no assurance that the ASRT
will not infringe upon third party intellectual property rights, nor can
there be any assurance that a third party will not assert that the Company
has infringed its intellectual property rights, in which case the Company
could be involved in protracted and costly litigation which could seriously
impede the Company's development or otherwise adversely affect its
operations. Additionally, attempts may be made to copy or reverse engineer
aspects of the ASRT, or to obtain, use or exploit information or methods
which the Company deems proprietary. Policing the use of the ASRT and
possible infringing technology is difficult and expensive. Litigation or
other action may be necessary in the future to protect the Company's
proprietary rights and to determine the validity and scope of the proprietary
rights of others. Such litigation or proceedings could result in substantial
costs and diversions of resources and management's attention, and could have
a material adverse impact upon the Company's business, operating results and
financial condition.
Dependence on Key Personnel
The Company is dependent on the knowledge, skill and expertise of
several key scientific employees and consultants, including but not limited
to C. Hal Hansen, Dale Lynn Shepherd, R. Brian Moncur, and Tony R. Martinez,
and its executive officers, Messrs. Studdert, Murdock and Dudley. The loss
of any of such personnel could materially and adversely affect the Company's
future business efforts. Moreover, although the Company has taken reasonable
steps to protect its intellectual property rights, if one or more of the
Company's key scientific employees or consultants resigns from the Company to
join a competitor, the loss of such personnel and the employment of such
personnel by a competitor could have a material adverse effect on the
Company. In the event of loss of any of the Company's key employees or
consultants, there can be no assurance that the Company would be able to
prevent the unauthorized disclosure or use of its proprietary technology by
such former employees or consultants, although the Company's employees and
consultants have entered into confidentiality agreements with the Company.
The Company does not presently have any key man life insurance on any of its
employees.
PART II
Item 1. Legal Proceedings.
On February 10, 1997, an action (the "Palomba Action") was filed in the
Delaware Chancery Court for New Castle County by Richard J. Palomba, the
owner of approximately 15,000 shares of the Company's common stock, against
the Company, six of its directors, and SMD, L.L.C. ("SMD"), a Utah limited
liability company owned and controlled by Stephen M. Studdert, Roger D.
Dudley and Thomas A. Murdock, each of whom is an executive officer and
director of the Company and beneficially owns more than 10% of the Company's
common stock. The complaint seeks no damages from the Company. The
complaint alleges that certain of the individual employee director defendants
wrongfully caused the Company to engage in a series of loan transactions with
K.L.S. Enviro Resources, Inc., a Nevada corporation ("KLSE"), and thereafter
appropriated to themselves certain corporate opportunities resulting from
such loan transactions. The Complaint further alleges that the non-employee
director defendants wrongfully acquiesced in or ratified the conduct of the
employee-directors, and that all of the individual defendants breached their
fiduciary duties to the Company. The Complaint seeks to compel an accounting
for any alleged profits earned by the employee director defendants, equitable
relief in the form of an order requiring certain of the employee director
defendants to forfeit certain securities of KLSE they allegedly acquired in
breach of their fiduciary duties to the Company, monetary damages in an
unspecified amount, and costs and legal fees. A settlement agreement in
principle was reached prior to service of the complaint and is currently
being documented. The settlement agreement will be subject to the approval
of the court and will not cost the Company anything except incidental
attorneys fees. The terms of the settlement are confidential until approved
by the court.
Item 2. Changes in Securities
c. Unregistered sales of equity securities during quarter (other
than in reliance on Regulation S).
Recent Sales of Unregistered Securities. During the quarterly period
ended March 31, 1997, the Company issued equity securities that were not
registered under the Securities Act of 1933, as amended (the "Act"), other
than unregistered sales made in reliance on Regulation S under the Act, as
follows:
On January 1, 1997, a former employee exercised options to purchase
150,000 shares of common stock for the exercise price of $300,000, which
amount was satisfied by cancellation of invoices due such employee for
services rendered. The Company issued such shares without registration under
the Act in reliance on Section 4(2) of the Act. All of such common stock
issued was issued as restricted securities and the certificates representing
such shares were stamped with a restrictive legend to prevent any resale
without registration under the Act or in compliance with an exemption.
On February 12, 1997, the Company issued 100,000 shares of common stock
to an individual upon the exercise of common stock purchase warrants
previously issued. The aggregate consideration received by the Company upon
the exercise of such warrants was $50,000. The Company issued such shares
without registration under the Act in reliance on Section 4(2) of the Act.
All of such common stock issued was issued as restricted securities and the
certificates representing such shares were stamped with a restrictive legend
to prevent any resale without registration under the Act or in compliance
with an exemption.
On March 13, 1997, the Company issued options to purchase 200,000
shares of common stock to a director and 100,000 shares of common stock to an
employee. All of such options were issued under the Company's 1997 Stock
Incentive Plan without registration under the Act in reliance on Sections
3(b) and 4(2) of the Act and the rules and regulations promulgated
thereunder. The exercise price of such options is $7.130 per share of common
stock, which was the closing market price on the date of grant.
On March 17, 1997, the Company offered and sold 100,000 shares of
common stock to an unaffiliated private investor for the aggregate purchase
price of $375,000. Such common stock was issued without registration under
the Act in reliance on Sections 3(b) and/or 4(2) of the Act and Regulation D
promulgated thereunder. All of such common stock was issued as restricted
securities and the certificates representing such shares were stamped with a
restrictive legend to prevent any resale without registration under the Act
or in compliance with an exemption.
On April 2, 1997, the Company granted options to purchase 25,000 shares
of common stock to an employee. All of such options were issued under the
Company's 1997 Stock Incentive Plan without registration under the Act in
reliance on Sections 3(b) and 4(2) of the Act and the rules and regulations
promulgated thereunder. The exercise price of such options is $6.250, which
was the closing market price on the date of grant.
On May 5, 1997, the Company granted options to purchase 10,000 shares
of common stock to an employee. All of such options were issued under the
Company's 1997 Stock Incentive Plan without registration under the Act in
reliance on Sections 3(b) and 4(2) of the Act and the rules and regulations
promulgated thereunder. The exercise price of such options is $7.150, which
was the closing market price on the date of grant.
Item 6. Exhibits and Reports on Form 8-K
a. Regulation S-K Exhibits.
Exhibit No. Description
(3)(i) Articles of Incorporation of the Company which are
incorporated by reference from the Company's
Registration Statement on Form S-18 dated as of
September 12, 1989
(3)(i) Certificate of Amendment of Certificate of
Incorporation dated as of March 21, 1994, which is
incorporated by reference from the Company's Annual
Report for the Fiscal Year Ended December 31, 1994
on Form 10-KSB
(3)(i) Certificate of Amendment of Certificate of
Incorporation dated as of May 13, 1994, which is
incorporated by reference from the Company's Annual
Report for the Fiscal Year Ended December 31, 1994
on Form 10-KSB
(3)(ii) The Company's Bylaws, as amended, which are
incorporated by reference from the Company's Annual
Report for the Fiscal Year Ended December 31, 1994
on Form 10-KSB
(4) Description of the Company's common stock and other
securities and specimen certificates representing
such securities which are incorporated by reference
from the Company's Registration Statement on Form S-
18 dated as of September 12, 1989, as amended
(10)(i) Product Development and Assignment Agreement dated
as of October 16, 1993 between Phonic Technologies,
Inc. and Synergetics, Inc., which is incorporated by
reference from the Company's Current Report on Form
8-K dated as of June 17, 1994
(10)(ii) Re-Stated Product Development and Assignment
Agreement dated as of March 30, 1995, between fonix
Corporation and Synergetics, Inc., which is
incorporated by reference from the Company's Annual
Report for the Fiscal Year Ended December 31, 1994
on Form 10-KSB
(10)(v) Memorandum of Understanding dated as of March 13,
1997, by and among the Company, Synergetics, Inc.
and C. Hal Hansen, which is incorporated by
reference from the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996
(10)(vi) Employment Agreement by and between the Company and
Stephen M. Studdert, which is incorporated by
reference from the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996
(10)(vi) Employment Agreement by and between the Company and
Thomas A. Murdock, which is incorporated by
reference from the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996
(10)(vi) Employment Agreement by and between the Company and
Roger D. Dudley, which is incorporated by reference
from the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996
(27) Financial Data Schedule, filed herewith.
b. Reports on Form 8-K
During the quarter ended March 31, 1997, the Company filed two Current
Reports on Form 8-K. The first such report, dated as of March 13, 1997,
contained Item 5 (Other Events) discussion of the Company's agreement in
principle with Synergetics to modify the product development and assignment
agreement pursuant to which Synergetics historically had conducted research
and development associated with the Company's ASRT. The second current
report was dated as of March 24, 1997 and contained Item 4 (Changes in
Registrant's Certifying Accountant) disclosure relating to the engagement by
the Company of Deloitte & Touche LLP as its certifying accountant, to replace
the accounting firm of Pritchett, Siler & Hardy, P.C.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
fonix corporation
Date: May 15, 1997 /s/ Thomas A. Murdock
-------------------- -----------------------------
Thomas A. Murdock, President
Date: May 15, 1997 /s/ Roger D. Dudley
-------------------- -----------------------------
Roger D. Dudley, Chief
Financial Officer
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