UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 13, 1998
---------------
fonix corporation
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware
- ---------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
0-23862 22-2994719
- --------------------------- ------------------------------------
(Commission file number) (I.R.S. Employer Identification No.)
1225 Eagle Gate Tower, 60 East South Temple Street
Salt Lake City, Utah 84111
--------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 328-0161
Not Applicable
- ---------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
EXPLANATORY NOTE
On March 30, 1998, fonix corporation, a Delaware corporation (the
"Company" or "fonix"), filed a Current Report on Form 8-K dated as of March
13, 1998, and pertaining to the Merger of AcuVoice, Inc., a California
corporation with and into fonix Acquisition Corporation, a wholly-owned
subsidiary of the Company. This Amendment No. 1 is filed to submit the
audited and unaudited financial statements of AcuVoice, Inc., and certain
pro forma financial information required by Item 7 of Form 8-K.
Item 7. Financial Statements and Exhibits. Page
-------
(a) Financial Statements of Business Acquired.
(1) Audited Financial Statements of AcuVoice, Inc.................F-1
Report of Independent Public Accountants..................... F-2
Audited Balance Sheets as of November 30, 1997
and 1996....................................................F-3
Audited Statements of Operations for the Years Ended
November 30, 1997, 1996 and 1995............................F-4
Audited Statements of Stockholders' Deficit for the
Years Ended November 30, 1997, 1996 and 1995................F-5
Audited Statements of Cash Flows for the Years Ended
November 30, 1997, 1996 and 1995............................F-6
Notes to Audited Financial Statements.........................F-8
(2) Unaudited Financial Statements of AcuVoice, Inc..............F-15
Unaudited Balance Sheet as of February 28, 1998..............F-16
Unaudited Statements of Operations for the Fiscal
Quarters Ended February 28, 1998 and 1997..................F-17
Unaudited Statements of Cash Flows for the Fiscal
Quarters Ended February 28, 1998 and 1997..................F-18
Notes to Unaudited Financial Statements......................F-19
(b) Pro Forma Financial Information.
Unaudited Pro Forma Condensed Consolidated
Statements of Operations For the Year Ended
December 31, 1997...........................................P-1
Unaudited Pro Forma Condensed Consolidated
Statements of Operations for the Quarter Ended
February 28, 1998...........................................P-2
2
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated
Statements of Operations....................................P-3
(c) Exhibits. The following are filed as exhibits to this Current
Report:
Exhibit
No. Description
________ ____________________________________
(2) Agreement and Plan of Reorganization among fonix,
FAC and AcuVoice, dated as of January 13, 1998,
incorporated by reference from the Company's
Current Report on Form 8-K, dated as of March 13,
1998
(23) Consent of Arthur Andersen LLP, filed herewith
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
fonix corporation
By: /s/ Douglas L. Rex
------------------------------------
Douglas L. Rex
Chief Financial Officer
Date: May 21, 1998
4
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
________ ____________________________________
(2) Agreement and Plan of Reorganization among fonix,
FAC and AcuVoice, dated as of January 13, 1998.
Pursuant to Item 601(b)(2) of Regulation S-K, the
exhibits and schedules to the Agreement and Plan of
Reorganization are not filed herewith. The
exhibits and schedules identified in the Agreement
and Plan of Reorganization, but that are not filed
herewith will be provided to the Commission upon
request therefor.
(23) Consent of Arthur Andersen LLP
5
<PAGE>
ACUVOICE, INC.
FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 1997 AND 1996 AND
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED NOVEMBER 30, 1997
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AcuVoice, Inc.:
We have audited the accompanying balance sheets of AcuVoice, Inc. (a
California corporation) as of November 30, 1997 and 1996, and the
related statements of operations, stockholders' deficit and cash flows
for each of the three years in the period ended November 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AcuVoice,
Inc. as of November 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period
ended November 30, 1997 in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
April 17, 1998
F-2
<PAGE>
ACUVOICE, INC.
BALANCE SHEETS
AS OF NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 803,087 $ 44,179
Accounts receivable 2,278 16,950
Prepaid expenses 800 800
-------------- --------------
Total current assets 806,165 61,929
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $18,003 and $10,143, respectively 11,867 13,397
Total assets $ 818,032 $ 75,326
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Note payable to fonix corporation $ 500,000 $ -
Note payable to stockholder and officer 135,328 76,150
Notes payable to stockholders 43,990 43,990
Other notes payable 146,673 146,673
Line of credit 49,250 -
Accounts payable 16,335 2,015
Accrued liabilities 88,133 371,388
-------------- --------------
Total current liabilities 979,709 640,216
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' DEFICIT:
Preferred stock, 4,450,000 shares authorized:
Series A, convertible; 2,000,000 shares issued and
outstanding (aggregate liquidation preference of
$1,000,000) 1,000,000 1,000,000
Series B, convertible; 50,000 shares issued and
outstanding (aggregate liquidation preference of
$300,000) 300,000 300,000
Series C, convertible; 1,846,000 shares issued and
outstanding (aggregate liquidation preference of
$230,750) 230,750 230,750
Series D, convertible; 200,000 shares issued and
outstanding (aggregate liquidation preference of
$100,000) 100,000 100,000
Series E, convertible; 200,000 shares issued and
outstanding (aggregate liquidation preference of
$400,000) 400,000 400,000
Common stock, no par value; 50,000,000 shares
authorized; 8,881,920 and 8,611,920 shares issued
and outstanding, respectively 1,042,437 797,412
Accumulated deficit (3,234,864) (3,393,052)
-------------- --------------
Total stockholders' deficit (161,677) (564,890)
-------------- --------------
Total liabilities and stockholders' deficit $ 818,032 $ 75,326
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
ACUVOICE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
______________ ______________ ______________
<S> <C> <C> <C>
REVENUES:
Software sales $ 141,627 $ 23,415 $ 6,975
License fees 625,000 350,000 -
______________ ______________ ______________
Total revenues 766,627 373,415 6,975
______________ ______________ ______________
OPERATING EXPENSES:
Research and development 332,809 818,247 180,475
General and administrative 242,289 145,032 148,690
______________ ______________ ______________
Total operating expenses 575,098 963,279 329,165
______________ ______________ ______________
OPERATING INCOME (LOSS) 191,529 (589,864) (322,190)
______________ ______________ ______________
OTHER INCOME (EXPENSE):
Interest income 4,716 - 14,321
Interest expense (38,057) (32,163) (23,678)
______________ ______________ ______________
Total other expense, net (33,341) (32,163) (9,357)
______________ ______________ ______________
NET INCOME (LOSS) $ 158,188 $ (622,027) $ (331,547)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ACUVOICE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Series A Preferred Series B Preferred
------------------------------- -------------------------------
Shares Amount Shares Amount
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, November 30, 1994 2,000,000 $ 1,000,000 50,000 $ 300,000
Issuance of common stock for cash - - - -
Issuance of common stock for services - - - -
Net loss - - - -
-------------- -------------- -------------- --------------
Balance, November 30, 1995 2,000,000 1,000,000 50,000 300,000
Issuance of common stock for services - - - -
Net loss - - - -
-------------- -------------- -------------- --------------
Balance, November 30, 1996 2,000,000 1,000,000 50,000 300,000
Issuance of common stock for services - - - -
Net income - - - -
------------- ------------- -------------- --------------
Balance, November 30, 1997 2,000,000 $ 1,000,000 50,000 $300,000
============= ============= ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Series C Preferred Series D Preferred Series E Preferred
--------------------------- ---------------------------- ----------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30, 1994 1,846,000 $ 230,750 200,000 $ 100,000 200,000 $ 400,000
Issuance of common stock for cash - - - - - -
Issuance of common stock for services - - - - - -
Net loss - - - - - -
------------ ------------ ------------- ------------ --------- ---------
Balance, November 30, 1995 1,846,000 230,750 200,000 100,000 200,000 400,000
Issuance of common stock for services - - - - - -
Net loss - - - - - -
------------ ------------ ------------- ------------ --------- ---------
Balance, November 30, 1996 1,846,000 230,750 200,000 100,000 200,000 400,000
Issuance of common stock for services - - - - - -
Net income - - - - - -
------------ ------------ ------------- ------------ --------- ---------
Balance, November 30, 1997 1,846,000 $ 230,750 200,000 $ 100,000 200,000 $ 400,000
============ ============ ============ ============ ========== =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
------------------------------- Accumulated
Shares Amount Deficit Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, November 30, 1994 7,693,800 $ 269,240 $ (2,439,478) $ (139,488)
Issuance of common stock for cash 22,000 10,000 - 10,000
Issuance of common stock for services 130,000 58,500 - 58,500
Net loss - - (331,547) (331,547)
-------------- -------------- -------------- --------------
Balance, November 30, 1995 7,845,800 337,740 (2,771,025) (402,535)
Issuance of common stock for services 766,120 459,672 - 459,672
Net loss - - (622,027) (622,027)
--------------- ------------ -------------- --------------
Balance, November 30, 1996 8,611,920 797,412 (3,393,052) (564,890)
Issuance of common stock for services 270,000 245,025 - 245,025
Net Income - - 158,188 158,188
---------------- ------------ -------------- --------------
Balance, November 30, 1997 8,881,920 $ 1,042,437 $ (3,234,864) $ (161,677)
================ ============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
ACUVOICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 158,188 $ (622,027) $ (331,547)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Issuance of common stock for services 15,428 459,672 3,000
Depreciation 12,754 10,889 7,187
Change in assets and liabilities:
Decrease (increase) in accounts receivable 14,672 (16,950) -
Increase (decrease) in accounts payable 14,320 (13,143) (14,177)
Increase (decrease) in accrued liabilities (53,658) 182,790 25,767
-------------- -------------- --------------
Net cash provided by (used in) operating
activities 161,704 1,231 (309,770)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,046) (11,125) (11,066)
Proceeds from notes receivable from stockholder - - 45,880
-------------- -------------- --------------
Net cash provided by (used in) investing
activities (5,046) (11,125) 34,814
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - - 10,000
Net borrowings under line of credit 49,250 - -
Proceeds from note payable to fonix corporation 500,000 - -
Proceeds from note payable to stockholder and officer 53,000 - 76,150
Proceeds from other notes payable - - 100,000
-------------- ------------- --------------
Net cash provided by financing activities 602,250 - 186,150
-------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 758,908 (9,894) (88,806)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 44,179 54,073 142,879
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 803,087 $ 44,179 $ 54,073
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ACUVOICE, INC.
STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED NOVEMBER 30, 1997, 1996 AND 1995
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Cash paid for interest $ 1,798 $ 10,000 $ -
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1997 and 1995, the Company issued 252,999 and 123,332 shares of
common stock, respectively, in lieu of cash payment for services rendered
and accrued of $229,597 and $55,500, respectively.
During 1997, the Company acquired $6,178 of property and equipment in
exchange for a note payable to a stockholder and officer.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ACUVOICE, INC.
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
AcuVoice, Inc. (the "Company") was a California corporation engaged in the
development and marketing of text-to-human speech synthesis technology known
as "concatenative speech synthesis." This is a software-only approach of
achieving natural sounding speech from a computer. The Company develops and
markets this technology and related products directly to end users, systems
integrators and original equipment manufacturers located primarily in the
western United States for use in the telecommunications, multi-media,
education and assistive technology markets.
On March 13, 1998, all of the Company's outstanding common stock was purchased
by fonix Acquisition Corporation, a wholly owned subsidiary of fonix
corporation, in a merger transaction. The consideration for the purchase was
2,692,216 shares of fonix corporation restricted common stock and a cash
payment of approximately $8,000,000. Subsequent to the merger, fonix
Acquisition Corporation changed its name to fonix/AcuVoice, Inc.
On March 9, 1998, all outstanding shares of all series of preferred stock were
converted into 4,608,049 shares of common stock. Subsequent to year-end and
prior to March 13, 1998, all outstanding notes payable, with the exception of
the line of credit and note payable to fonix corporation, were paid in full
together with related interest. On March 30, 1998, the outstanding balance on
the line of credit was paid in full together with related interest.
(2) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist of money market accounts at a bank. At November 30, 1997, the Company
had deposits totaling $686,202 at one bank which balance exceeded the
federally insured limit.
F-8
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the following estimated
useful lives of the related assets as follows:
Computer equipment 3 years
Office equipment 3 years
Maintenance and repairs are charged to expense as incurred. Gains or losses
on sales or retirements of property and equipment are included in the
determination of net income or loss in the year of disposition.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Statement
of Position 97-2, "Software Revenue Recognition." Revenue from software sales
is recognized when the product is shipped to the customer. Revenue from
license agreements is recognized as determined by the contract terms. The
Company has no further obligations for training, post contract services or
installation under its current software sales or license agreements.
Research and Development
Research and development costs include expenditures incurred to establish the
technological feasibility of new software products or enhancements to existing
software products and are expensed as incurred.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial and income tax bases of assets and liabilities using enacted tax
rates expected to apply when differences are expected to be settled or
realized.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies.
F-9
<PAGE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at November 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Computer equipment $ 23,340 $ 18,420
Office equipment 6,530 5,120
------------ -------------
Total 29,870 23,540
Less accumulated depreciation (18,003) (10,143)
------------ -------------
Net property and equipment $ 11,867 $ 13,397
============ =============
</TABLE>
(4) NOTES PAYABLE
Note Payable to fonix corporation
On November 30, 1997, the Company had a short-term, unsecured, non-interest
bearing note payable to fonix corporation in the amount of $500,000. This
loan was obtained in connection with fonix corporation's proposed acquisition
of the Company (see Note 1). Subsequent to November 30, 1997, the Company
borrowed an additional $50,000 from fonix corporation on the same terms.
Note Payable to Stockholder and Officer
On November 30, 1997 and 1996, the Company had unsecured borrowings from a
stockholder and officer of $135,328 and $76,150, respectively. Borrowings
were payable upon demand and bore interest at 8.5 percent. These borrowings
and related interest were repaid on February 27, 1998. The Company believes
the terms of the note payable were at least as favorable as the terms that
could have been obtained from an unrelated third party in a similar
transaction.
Notes Payable to Stockholders
On both November 30, 1997 and 1996, the Company had notes payable to
stockholders of $43,990. Borrowings were unsecured, payable upon demand and
bore interest at rates ranging from 10 to 12 percent. As of November 30, 1997,
$6,000 of these notes payable were in default. All of these notes payable to
stockholders and related interest were repaid prior to March 13, 1998. The
Company believes the terms of the notes payable to stockholders were at least
as favorable as the terms that could have been obtained from an unrelated
third party in similar transactions.
F-10
<PAGE>
Other Notes Payable
At November 30, 1997 and 1996, the Company had the following amounts
outstanding as notes payable:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Note payable to a corporation,
unsecured, payable upon demand,
interest at 12 percent $ 46,673 $ 46,673
Note payable to an individual,
unsecured, payable upon demand,
interest at 8.5 percent 100,000 100,000
------------ ------------
$ 146,673 $ 146,673
============ ============
</TABLE>
As of November 30, 1997, the $100,000 note payable to an individual was in
default. Prior to March 13, 1998, these notes payable balances and related
interest were paid in full.
Line of Credit
On April 11, 1997, the Company entered into a revolving line of credit
agreement (the "Line of Credit") with a bank. Borrowings under the Line of
Credit were limited to $50,000, unsecured and due April 1, 2007. The
weighted average outstanding balance during the period of availability in 1997
was $33,105. The weighted average interest rate during the period of
availability during 1997 was 10.5 percent. The Line of Credit bore an
interest rate of 10.5 percent as of November 30, 1997 and interest was payable
monthly. The Company had outstanding borrowings of $49,250 under the Line of
Credit at November 30, 1997. On March 30, 1998, fonix/AcuVoice, Inc. paid in
full the Line of Credit balance and related interest.
(5) PREFERRED STOCK
Preferred Stock Conversion - On March 9, 1998, all outstanding shares of all
series of preferred stock were converted into 4,608,049 shares of common stock
based upon the conversion rates described below.
Series A Preferred Stock - In August 1989, the Company authorized the issuance
of 2,000,000 shares of Series A Preferred Stock ("Series A") with a
liquidation preference of $0.50 per share for $1,000,000. Series A had a
stated annual dividend rate of $0.05 per share. Dividends were not cumulative
and did not have the right of accrual in the event that dividends were not
declared or paid in any prior year. Through March 9, 1998, no dividends were
declared or paid. Series A shares were convertible into common stock at a
conversion rate of approximately 1.14 common shares for each Series A share.
Series A shares had voting rights equal to one vote per share as calculated if
the Series A shares were converted to common stock.
Series B Preferred Stock - In November 1989, the Company authorized the
issuance of 50,000 shares of Series B Preferred Stock ("Series B") with a
liquidation preference of $6.00 per share
F-11
<PAGE>
for $300,000. Series B had a stated annual dividend rate of $0.60 per share.
Dividends were not cumulative and did not have the right of accrual in the
event that dividends were not declared or paid in any prior year. Through
March 9, 1998, no dividends were declared or paid. Series B shares were
convertible into common stock at a conversion rate of approximately 1.22 common
shares for each Series B share. Series B shares had voting rights equal to one
vote per share as calculated if the Series B shares were converted to common
stock.
Series C Preferred Stock - In September 1991, the Company authorized the
issuance of 2,000,000 shares of Series C Preferred Stock ("Series C"). Of the
authorized shares, 1,846,000 were issued with a liquidation preference of
$0.125 per share. Series C had a stated annual dividend rate of $0.20 per
share. Dividends were not cumulative and did not have the right of accrual in
the event that dividends were not declared or paid in any prior year. Through
March 9, 1998, no dividends were declared or paid. Series C shares were
convertible into common stock at a conversion rate of 1.02 common shares for
each Series C share. Series C shares had voting rights equal to one vote per
share as calculated if the Series C shares were converted to common stock.
Series D Preferred Stock - In August 1993, the Company authorized the
issuance of 200,000 shares of Series D Preferred Stock ("Series D") with a
liquidation preference of $0.50 per share for $100,000. Series D had a stated
annual dividend rate of $0.05 per share. Dividends were not cumulative and
did not have the right of accrual in the event that dividends were not
declared or paid in any prior year. Through March 9, 1998, no dividends were
declared or paid. Series D shares were convertible into common stock at a
conversion rate of one common share for each Series D share. Series D shares
had voting rights equal to one vote per share as calculated if the Series D
shares were converted to common stock.
Series E Preferred Stock - In January 1995, the Company authorized the
issuance of 200,000 shares of Series E Preferred Stock ("Series E") with a
liquidation preference of $2.00 per share for $400,000. These shares were
issued as consideration for the cancellation of a distributor agreement.
Series E had a stated annual dividend rate of $0.20 per share. Dividends were
not cumulative and did not have the right of accrual in the event that
dividends were not declared or paid in any prior year. Through March 9, 1998,
no dividends were declared or paid. Series E shares were convertible into
common stock at a conversion rate of one common share for each Series E share.
Series E shares had voting rights equal to one vote per share as calculated if
the Series E shares were converted to common stock.
(6) INCOME TAXES
There were no income tax provisions/benefits or net assets/liabilities
recorded for the year ended November 30, 1995 due to the Company incurring a
net operating loss for financial reporting and income tax purposes.
Management has provided a valuation allowance equal to the amount of the
deferred income tax assets related to the net operating loss carryforwards,
capital loss carryovers and research and development credits due to the
uncertainty of their realization.
There were no income tax provisions/benefits or net assets/liabilities
recorded for the years ended November 30, 1997 and 1996 due to the Company
utilizing net operating loss carryforwards to offset current year provisions.
The Company reduced the valuation
F-12
<PAGE>
allowance accordingly. Management provided an additional valuation allowance
against the increase in research and development credits in 1997 due to the
uncertainty of their realization.
As of November 30, 1997, the Company had net operating loss carryforwards and
research and development credits for income tax reporting purposes of
$1,961,823 and $63,948, respectively, which are scheduled to expire in the
years and in the amounts indicated below:
<TABLE>
<CAPTION>
Net Operating Research and
Year Loss Development Year of
Generated Carryforward Credits Expiration
- -------------- -------------- -------------- --------------
<S> <C> <C> <C>
1989 $ 322,845 $ - 2004
1990 492,731 - 2005
1991 329,096 - 2006
1992 163,140 4,285 2007
1993 28,190 - 2008
1994 327,089 19,727 2009
1995 298,732 7,580 2010
1997 - 32,356 2012
-------------- --------------
$ 1,961,823 $ 63,948
============== ==============
</TABLE>
In connection with the acquisition of the Company by fonix corporation, the
Company's net operating loss carryforwards will be limited under Section 382
of the Internal Revenue Code. The Company estimates that the net operating
loss carryforwards will be limited to approximately $1,275,000 per year.
(7) COMMITMENTS AND CONTINGENCIES
On November 14, 1997, the Company entered into an agreement with Cybernetics
InfoTech, Inc. ("Cybernetics") for the right to a use a nontransferable and
nonexclusive software license. This license was granted by Cybernetics solely
for the Company's own business purposes. The agreement required the Company
to make an initial payment of $10,000 due on November 17, 1997 and to make
additional payments of $25,000 during 1998.
On September 23, 1997, the Company entered into a license agreement with
General Magic, Inc. ("General Magic"). The Company granted to General Magic a
perpetual, irrevocable, worldwide license in a specific field of use to use,
reproduce, publicly display and distribute the Company's text-to-speech
software in connection with General Magic's voice accessed integrated network
service (the "Licensed Field of Use"). The license is exclusive for the
Licensed Field of Use for the first three years and non-exclusive thereafter.
Under the terms of the license agreement, the Company is entitled to royalty
payments based upon monthly subscriber revenue from the use of the integrated
network service. Additionally, the Company granted an option having an
indefinite term to General Magic to purchase (1) a copy of the then-current
text-to-speech source code and all source code documentation and (2) a license
to use, reproduce, modify and create derivative works from the source code and
documentation related solely to the Licensed Field of Use, for a cash payment
of $2,500,000 and $2,500,000 in General Magic common stock. If General Magic
exercises its purchase option, its obligation to pay royalties thereafter is
extinguished.
F-13
<PAGE>
fonix/AcuVoice, Inc. is involved with a certain dispute arising in the
ordinary course of business. Management, after consultation with legal
counsel, believes the outcome of this dispute will not have a material adverse
effect on the Company's financial position or results of operations.
(8) SIGNIFICANT CUSTOMERS
The license fees from General Magic represented approximately 78 percent of
total revenue recognized by the Company for the year ended November 30, 1997.
During 1996, the Company entered into a license agreement with an agent. This
agreement represented approximately 94 percent of the total revenue
recognized by the Company for the year ended November 30, 1996. This license
agreement allowed for the agent to market the Company's products in Taiwan.
Revenue from a single customer accounted for 67 percent of the total revenue
recognized by the Company for the year ended November 30, 1995.
F-14
<PAGE>
ACUVOICE, INC.
FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 1998
AND FOR THE QUARTERS ENDED
FEBRUARY 28, 1998 AND 1997
F-15
<PAGE>
ACUVOICE, INC.
BALANCE SHEET
AS OF FEBRUARY 28, 1998
(Unaudited)
<TABLE>
<CAPTION>
1998
--------------
<S> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 417,938
Accounts receivable 7,260
Prepaid expenses 800
--------------
Total current assets 425,998
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $19,968 9,902
--------------
Total assets $ 435,900
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Note payable to fonix corporation $ 500,000
Notes payable to stockholders 43,990
Other note payable 46,673
Line of credit 49,250
Accounts payable 80,279
Accrued liabilities 63,641
--------------
Total current liabilities 783,833
--------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' DEFICIT:
Preferred stock, 4,450,000 shares authorized:
Series A, convertible; 2,000,000 shares issued and
outstanding (aggregate liquidation preference of
$1,000,000) 1,000,000
Series B, convertible; 50,000 shares issued and
outstanding (aggregate liquidation preference of
$300,000) 300,000
Series C, convertible; 1,846,000 shares issued and
outstanding (aggregate liquidation preference of
$230,750) 230,750
Series D, convertible; 200,000 shares issued and
outstanding (aggregate liquidation preference of
$100,000) 100,000
Series E, convertible; 200,000 shares issued and
outstanding (aggregate liquidation preference of
$400,000) 400,000
Common stock, no par value; 50,000,000 shares authorized;
8,881,920 shares issued and outstanding 1,042,437
Accumulated deficit (3,421,120)
--------------
Total stockholders' deficit (347,933)
--------------
Total liabilities and stockholders' deficit $ 435,900
==============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-16
<PAGE>
ACUVOICE, INC.
STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED FEBRUARY 28, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
REVENUES:
Software sales $ 50,808 $ 17,249
OPERATING EXPENSES:
Research and development 60,774 65,073
General and administrative 176,115 40,330
-------------- --------------
Total operating expenses 236,889 105,403
-------------- --------------
OPERATING LOSS (186,081) (88,154)
-------------- --------------
OTHER INCOME (EXPENSE):
Interest income 7,766 56
Interest expense (7,941) (9,525)
-------------- --------------
Total other expense, net (175) (9,469)
-------------- --------------
NET LOSS $ (186,256) $ (97,623)
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
ACUVOICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED FEBRUARY 28, 1998 AND 1997
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (186,256) $ (97,623)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,965 1,965
Change in assets and liabilities:
Decrease (increase) in accounts receivable (4,982) 16,950
Increase (decrease) in accounts payable 63,944 (1,604)
Increase (decrease) in accrued liabilities (24,492) 24,953
-------------- --------------
Net cash used in operating activities (149,821) (55,359)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) note payable to
stockholder and officer (135,328) 18,000
Payments on notes payable (100,000) -
-------------- --------------
Net cash provided by (used in) financing activities (235,328) 18,000
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (385,149) (37,359)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 803,087 44,179
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 417,938 $ 6,820
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 32,492 $ -
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
ACUVOICE, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) NATURE OF OPERATIONS
AcuVoice, Inc. (the "Company") was a California corporation engaged in the
development and marketing of text-to-human speech synthesis technology known
as "concatenative speech synthesis." This is a software-only approach of
achieving natural sounding speech from a computer. The Company develops and
markets this technology and related products directly to end users, systems
integrators and original equipment manufacturers located primarily in the
western United States for use in the telecommunications, multi-media,
education and assistive technology markets.
The accompanying unaudited financial statements of the Company reflect all
adjustments (consisting only of normal recurring adjustments) that, in the
opinion of management, are necessary to present fairly the financial position
and results of operations of the Company for the periods presented. Operating
results for the three months ended February 28, 1998 are not necessarily
indicative of the results that may be expected for the year ending November
30, 1998. These financial statements should be read in conjunction with the
annual financial statements and the notes thereto included elsewhere in this
Form 8-K/A.
On March 13, 1998, all of the Company's outstanding common stock was purchased
by fonix Acquisition Corporation, a wholly owned subsidiary of fonix
corporation, in a merger transaction. The consideration for the purchase was
2,692,216 shares of fonix corporation restricted common stock and a cash
payment of approximately $8,000,000. Subsequent to the merger, fonix
Acquisition Corporation changed its name to fonix/AcuVoice, Inc.
On March 9, 1998, all outstanding shares of all series of preferred stock were
converted into 4,608,049 shares of common stock. Subsequent to February 28,
1998 and prior to March 13, 1998, all outstanding notes payable, with the
exception of the line of credit and note payable to fonix corporation, were
paid in full together with related interest. On March 30, 1998, the
outstanding balance on the line of credit was paid in full together with
related interest.
(2) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-19
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents. Cash equivalents
consist of money market accounts at a bank. At February 28, 1998, the Company
had deposits totaling $232,208 at one bank which exceeded the federally
insured limit.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are computed using the straight-line method over the following estimated
useful lives of the related assets as follows:
Computer equipment 3 years
Office equipment 3 years
Maintenance and repairs are charged to expense as incurred. Gains or losses
on sales or retirements of property and equipment are included in the
determination of net income or loss in the year of disposition.
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of Statement
of Position 97-2, "Software Revenue Recognition." Revenue from software sales
is recognized when the product is shipped to the customer. Revenue from
license agreements is recognized as determined by the contract terms. The
Company has no further obligations for training, post contract services or
installation under its current software sales or license agreements.
Research and Development
Research and development costs include expenditures incurred to establish the
technological feasibility of new software products or enhancements to existing
software products and are expensed as incurred.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for the
expected future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred income tax
assets or liabilities are determined based upon the difference between the
financial and income tax bases of assets and liabilities using enacted tax
rates expected to apply when differences are expected to be settled or
realized.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies.
F-20
<PAGE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at February 28, 1998:
1998
-----------------
Computer equipment $ 23,340
Office equipment 6,530
-----------------
Total 29,870
Less accumulated depreciation (19,968)
-----------------
Net property and equipment $ 9,902
=================
(4) NOTES PAYABLE
Note Payable to fonix corporation
At February 28, 1998, the Company had a short-term unsecured, non-interest
bearing note payable to fonix corporation in the amount of $500,000. This
loan was obtained in connection with fonix corporation's proposed acquisition
of the Company (see Note 1). Subsequent to February 28, 1998, the Company
borrowed an additional $50,000 from fonix corporation on the same terms.
Note Payable to Stockholder and Officer
At November 30, 1997, the Company had unsecured borrowings from a stockholder
and officer of $135,328. Borrowings were unsecured, payable upon demand and
bore interest at 8.5 percent. These borrowings and related interest were
repaid on February 27, 1998. The Company believes the terms of the note
payable were at least as favorable as the terms that could have been obtained
from an unrelated third party in a similar transaction.
Notes Payable to Stockholders
On February 28, 1998, the Company had notes payable to stockholders of
$43,990. Borrowings were unsecured, payable upon demand and bore interest at
rates ranging from 10 to 12 percent. As of February 28, 1998, $6,000 of these
notes payable were in default. All of these notes payable to stockholders and
related interest were repaid prior to March 13, 1998. The Company believes
the terms of the notes payable to stockholders were at least as favorable as
the terms that could have been obtained from an unrelated party in similar
transactions.
Other Note Payable
At February 28, 1998, the Company had a note payable due to a corporation of
$46,673. Borrowings were unsecured, payable upon demand and bore interest at
12 percent. This note payable and related interest was paid in full on March
9, 1998.
F-21
<PAGE>
Line of Credit
On April 11, 1997, the Company entered into a revolving line of credit
agreement (the "Line of Credit") with a bank. Borrowings under the Line of
Credit were limited to $50,000, unsecured and due April 1, 2007. The Line of
Credit bore an interest rate of 10.5 percent as of February 28, 1998 and
interest was payable monthly. The Company had outstanding borrowings of
$49,250 under the Line of Credit at February 28, 1998. On March 30, 1998,
fonix/AcuVoice, Inc. paid in full the Line of Credit balance and related
interest.
(5) PREFERRED STOCK
Preferred Stock Conversion - On March 9, 1998, all outstanding shares of all
series of preferred stock were converted into 4,608,049 shares of common stock
based upon the conversion rates described below.
Series A Preferred Stock - In August 1989, the Company authorized the issuance
of 2,000,000 shares of Series A Preferred Stock ("Series A") with a
liquidation preference of $0.50 per share for $1,000,000. Series A had a
stated annual dividend rate of $0.05 per share. Dividends were not cumulative
and did not have the right of accrual in the event that dividends were not
declared or paid in any prior year. Through March 9, 1998, no dividends were
declared or paid. As of February 28, 1998, Series A shares were convertible
into common stock at a conversion rate of approximately 1.14 common shares for
each Series A share. Series A shares had voting rights equal to one vote per
share as calculated if the Series A shares were converted to common stock.
Series B Preferred Stock - In November 1989, the Company authorized the
issuance of 50,000 shares of Series B Preferred Stock ("Series B") with a
liquidation preference of $6.00 per share for $300,000. Series B had a stated
annual dividend rate of $0.60 per share. Dividends were not cumulative and
did not have the right of accrual in the event that dividends were not
declared or paid in any prior year. Through March 9, 1998, no dividends were
declared or paid. As of February 28, 1998, Series B shares were convertible
into common stock at a conversion rate of approximately 1.22 common shares for
each Series B share. Series B shares had voting rights equal to one vote per
share as calculated if the Series B shares were converted to common stock.
Series C Preferred Stock - In September 1991, the Company authorized the
issuance of 2,000,000 shares of Series C Preferred Stock ("Series C"). Of the
authorized shares, 1,846,000 were issued with a liquidation preference of
$0.125 per share. Series C had a stated annual dividend rate of $0.20 per
share. Dividends were not cumulative and did not have the right of accrual in
the event that dividends were not declared or paid in any prior year. Through
March 9, 1998, no dividends were declared or paid. As of February 28, 1998,
Series C shares were convertible into common stock at a conversion rate of
1.02 common shares for each Series C share. Series C shares had voting rights
equal to one vote per share as calculated if the Series C shares were
converted to common stock.
Series D Preferred Stock - In August 1993, the Company authorized the
issuance of 200,000 shares of Series D Preferred Stock ("Series D") with a
liquidation preference of $0.50 per share for $100,000. Series D had a stated
annual dividend rate of $0.05 per share. Dividends were not cumulative and
did not have the right of accrual in the event that dividends were not
declared or paid in any prior year. Through March 9, 1998, no dividends were
declared or paid. As of
F-22
<PAGE>
February 28, 1998, Series D shares were convertible into common stock at a
conversion rate of one common share for each Series D share. Series D shares
had voting rights equal to one vote per share as calculated if the Series D
shares were converted to common stock.
Series E Preferred Stock - In January 1995, the Company authorized the
issuance of 200,000 shares of Series E Preferred Stock ("Series E") with a
liquidation preference of $2.00 per share for $400,000. These shares were
issued as consideration for the cancellation of a distributor agreement.
Series E had a stated annual dividend rate of $0.20 per share. Dividends were
not cumulative and did not have the right of accrual in the event that
dividends were not declared or paid in any prior year. Through March 9,1998,
no dividends were declared or paid. As of February 28, 1998, Series E shares
were convertible into common stock at a conversion rate of one common share
for each Series E share. Series E shares had voting rights equal to one vote
per share as calculated if the Series E shares were converted to common stock.
(6) INCOME TAXES
There were no income tax provisions/benefits or net assets/liabilities
recorded for the quarters ended February 28, 1998 and 1997 due to the Company
incurring a net operating loss for financial reporting and income tax
purposes. Management has provided a valuation allowance equal to the amount
of the deferred income tax assets related to the net operating loss
carryforwards, capital loss carryovers and research and development credits
due to the uncertainty of their realization.
As of February 28, 1998, the Company had net operating loss carryforwards and
research and development credits for income tax reporting purposes of
$2,148,079 and $63,948, respectively, which are scheduled to expire in varying
amounts in the years 2004 to 2013.
In connection with the acquisition of the Company by fonix corporation, the
Company's net operating loss carryforwards will be limited under Section 382
of the Internal Revenue Code. The Company estimates that the net operating
loss carryforwards will be limited to approximately $1,275,000 per year.
(7) COMMITMENTS AND CONTINGENCIES
On November 14, 1997, the Company entered into an agreement with Cybernetics
InfoTech, Inc. ("Cybernetics") for the right to a use a nontransferable and
nonexclusive software license. This license was granted by Cybernetics solely
for the Company's own business purposes. The agreement required the Company
to make an initial payment of $10,000 on November 17, 1997 and to make
additional payments of $25,000 during 1998. As of February 28, 1998, the
Company had paid $15,000 related to this license.
On September 23, 1997, the Company entered into a license agreement with
General Magic, Inc. ("General Magic"). The Company granted to General Magic a
perpetual, irrevocable, worldwide license in a specific field of use to use,
reproduce, publicly display and distribute the Company's text-to-speech
software in connection with General Magic's voice accessed integrated network
service (the "Licensed Field of Use"). The license is exclusive for the
Licensed Field of Use for the first three years and non-exclusive thereafter.
Under the terms of the license agreement, the Company is entitled to royalty
payments based upon monthly subscriber revenue from the use of the integrated
network service. Additionally, the Company
F-23
<PAGE>
granted an option having an indefinite term to General Magic to purchase (1) a
copy of the then-current text-to-speech source code and all source code
documentation and (2) a license to use, reproduce, modify and create derivative
works from the source code and documentation related solely to the Licensed
Field of Use, for a cash payment of $2,500,000 and $2,500,000 in General Magic
common stock. If General Magic exercises its purchase option, its obligation
to pay royalties thereafter is extinguished.
fonix/AcuVoice, Inc. is involved with a certain dispute arising in the
ordinary course of business. Management, after consultation with legal
counsel, believes the outcome of this dispute will not have a material adverse
effect on the Company's financial position or results of operations.
F-24
<PAGE>
fonix corporation and Subsidiaries
[A Development Stage Company]
Unaudited Pro Forma Condensed Consolidated Statements of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Pro Forma
fonix AcuVoice, Inc. Adjustments Consolidated
corporation (Note 1) (Note 2) Pro Forma
-------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Revenues $ - $ 766,627 $ - $ 766,627
-------------- -------------- ----------------- --------------
Expenses:
Research and development 7,066,294 332,809 937,500 (a) 8,336,603
General and administrative 12,947,112 242,289 - 13,189,401
-------------- -------------- ----------------- --------------
Total expenses 20,013,406 575,098 937,500 21,526,004
-------------- -------------- ----------------- --------------
Income (loss) from operations (20,013,406) 191,529 (937,500) (20,759,377)
-------------- -------------- ----------------- --------------
Other income (expense):
Interest income 1,199,610 4,716 - 1,204,326
Interest expense (2,758,288) (38,057) - (2,796,345)
-------------- -------------- ----------------- --------------
Total other expense, net (1,558,678) (33,341) - (1,592,019)
-------------- -------------- ----------------- --------------
Loss before extraordinary item (21,572,084) 158,188 (937,500) (22,351,396)
Extraordinary loss on extinguishment of debt (881,864) - - (881,864)
-------------- -------------- ----------------- --------------
Net income (loss) (22,453,948) 158,188 (937,500) (23,233,260)
Dividends on preferred stock 2,721,991 - - 2,721,991
-------------- -------------- ----------------- --------------
Net loss applicable to common stockholders $ (25,175,939) $ 158,188 $ (937,500) $ (25,955,251)
============== ============== ================= ==============
Basic and diluted net loss per common share $ (0.59) $ (0.58)
============== ==============
Weighted average common shares outstanding 42,320,188 2,692,216 (b) 45,012,404
============== ================= ==============
</TABLE>
P-1
<PAGE>
fonix corporation and Subsidiaries
[A Development Stage Company]
Unaudited Pro Forma Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Pro Forma
fonix AcuVoice, Inc. Adjustments Consolidated
corporation (Note 1) (Note 2) Pro Forma
-------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 1,295,785 $ 50,808 $ (4,073) (c) $ 1,342,520
-------------- -------------- ----------------- --------------
Expenses:
Purchased in-process research and development 17,839,840 - (17,839,840) (d) -
Research and development 2,701,203 60,774 234,375 (a) 2,977,590
(18,762) (c)
General and administrative 1,425,443 176,115 (19,614) (c) 1,581,944
-------------- -------------- ----------------- --------------
Total expenses 21,966,486 236,889 (17,643,841) 4,559,534
-------------- -------------- ----------------- --------------
Income (loss) from operations (20,670,701) (186,081) 17,639,768 (3,217,014)
-------------- -------------- ----------------- --------------
Other income (expense):
Interest income 271,477 7,766 - 279,243
Interest expense (311,924) (7,941) - (319,865)
-------------- -------------- ----------------- --------------
Total other expense, net (40,447) (175) - (40,622)
-------------- -------------- ----------------- --------------
Net income (loss) (20,711,148) (186,256) 17,639,768 (3,257,636)
Dividends on preferred stock 131,660 - - 131,660
-------------- -------------- ----------------- --------------
Net loss applicable to common stockholders $ (20,842,808) $ (186,256) $ 17,639,768 $ (3,389,296)
============== ============== ================= ==============
Basic and diluted net loss per common share $ (0.46) $ (0.07)
============== ==============
Weighted average common shares outstanding 45,740,942 2,153,773 (b) 47,894,715
============== ================= ==============
</TABLE>
P-2
<PAGE>
fonix corporation and Subsidiaries
[A Development Stage Company]
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Note 1. Basis of Presentation
The Company established a wholly owned subsidiary for the purpose of
acquiring AcuVoice, Inc., a California corporation, in a merger transaction.
After the acquisition, the subsidiary, which was the surviving entity,
changed its name to fonix/AcuVoice, Inc. ("fonix/AcuVoice"). fonix/AcuVoice
develops and markets text-to-speech or speech synthesis technologies and
products directly to end-users, systems integrators and original equipment
manufacturers for use in the telecommunications, multi-media, education and
assistive technology markets. The acquisition was completed on March 13,
1998. The Company exchanged 2,692,216 shares of restricted common stock
(having a market value of $16,995,972 on that date) and a cash payment of
approximately $8,000,000 for all of the then outstanding common shares of
AcuVoice, Inc. The AcuVoice, Inc. acquisition was accounted for as a
purchase.
The excess of the purchase price over the estimated fair market value of the
acquired tangible net assets of AcuVoice, Inc. was $25,339,840, of which
$6,750,000 was capitalized as purchased core technology, $750,000 was
capitalized as goodwill and $17,839,840 was expensed as purchased in-process
research and development.
The accompanying unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1997 and the three months ended
March 31, 1998, present the results of operations of the Company as if the
acquisition of AcuVoice, Inc. had occurred on January 1, 1997. AcuVoice,
Inc.'s fiscal year ended November 30 and fonix corporation's fiscal year
ended December 31. The pro forma results have been prepared for
illustrative purposes only and do not purport to be indicative of the
results which would have occurred had the acquisition been effected on
January 1, 1997, nor are they indicative of actual or future operating
results. These unaudited pro forma condensed consolidated statements of
operations should be read in conjunction with the condensed consolidated
financial statements and the notes thereto included in the Company's
Quarterly Report on Form 10-Q for the three months ended March 31, 1998 and
the historical financial statements of AcuVoice, Inc. and the notes thereto
included elsewhere in this report on Form 8-K/A.
Note 2. Pro Forma Adjustments
(a) Amortization of $6,750,000 in purchased core technology and
$750,000 in goodwill, which are being amortized on a straight-
line basis over eight years.
(b) Issuance of 2,692,216 shares of restricted common stock in
connection with the acquisition. The weighted average increase
in 1998 gives effect only to the period prior to the date of the
actual issuance of these restricted common shares.
(c) The historical operations of fonix/AcuVoice for the period from
March 14, 1998 to March 31, 1998 are included in the operating
results of fonix corporation for the three months ended March
31, 1998. The results of this 18-day period are eliminated from
the pro forma condensed consolidated statement of operations for
the three months ended March 31, 1998, so as not to be
duplicative when consolidating with the results from the three-
month period of AcuVoice, Inc.
(d) Purchased in-process research and development in the amount of
$17,839,840 was expensed at the date of the acquisition. This
expense is a non recurring charge directly attributable to the
acquisition and is therefore eliminated from the pro forma
condensed consolidated statement of operations for the three
months ended March 31, 1998.
P-3
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation of
our report included in this Amendment No. 1 to the Current Report on Form 8-K
dated as of March 13, 1998, into the Company's previously filed Registration
Statements File Nos. 333-31425, 333-40603 and 333-50267.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
May 21, 1998
