[DESCRIPTION] DEFINITIVE PROXY STATEMENT
<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY RULE
14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or 240.14a-12
FONIX CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously with preliminary materials
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form of Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
FONIX CORPORATION
1225 EAGLE GATE TOWER
60 EAST SOUTH TEMPLE STREET
SALT LAKE CITY, UTAH 84111
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 14 , 1998
----------------
To the Shareholders:
Notice is hereby given that the Annual Meeting of the Shareholders of FONIX
corporation ("the Company") will be held at the Marriott Hotel, 75 South West
Temple Street, Salt Lake City, Utah 84101, on Tuesday, July 14, 1998, at 10:00
a.m., M.D.T. for the following purposes, which are discussed in the following
pages and which are made part of this Notice:
1. To elect eight directors, each to serve until the next annual meeting of
shareholders and until his or her successor is elected and shall
qualify;
2. To approve the Company's 1998 Stock Option and Incentive Plan;
3. To ratify the Company's adoption of the 1997 Stock Option and Incentive
Plan;
4. To approve the issuance by the Company of up to 6,666,666 shares of
restricted common stock to private investors, together with such
additional amounts of common stock as may be issuable as a result of
certain "reset" and "reset adjustment" provisions applicable to such
shares;
5. To approve the Board of Directors' selection of Arthur Andersen LLP, as
the Company's independent public accountant for the fiscal year ended
December 31, 1998; and
6. To consider and act upon any other matters that properly may come before
the meeting or any adjournment thereof.
The Company's Board of Directors has fixed the close of business on Monday,
June 8, 1998 as the record date for the determination of shareholders having
the right to notice of, and to vote at, the Annual Meeting of Shareholders and
any adjournment thereof. A list of such shareholders will be available for
examination by a shareholder for any purpose germane to the meeting during
ordinary business hours at the offices of the Company at 1225 Eagle Gate
Tower, 60 East South Temple Street, Salt Lake City, Utah 84111, during the ten
business days prior to the meeting.
You are requested to date, sign and return the enclosed proxy which is
solicited by the Board of Directors of the Company and will be voted as
indicated in the accompanying proxy statement and proxy. Your vote is
important. Please sign and date the enclosed Proxy and return it promptly in
the enclosed return envelope whether or not you expect to attend the meeting.
The giving of your proxy as requested hereby will not affect your right to
vote in person should you decide to attend the Annual Meeting. The return
envelope requires no postage if mailed in the United States. If mailed
elsewhere, foreign postage must be affixed. Your proxy is revocable at any
time before the meeting.
By Order of the Board of Directors,
[Signature of Jeffrey N. Clayton]
Jeffrey N. Clayton,
Secretary
Salt Lake City, Utah
June 12, 1998
<PAGE>
FONIX CORPORATION
1225 EAGLE GATE TOWER
60 EAST SOUTH TEMPLE STREET
SALT LAKE CITY, UTAH 84111
(801) 328-0161
----------------
PROXY STATEMENT
----------------
ANNUAL MEETING OF SHAREHOLDERS
The enclosed proxy is solicited by the Board of Directors of FONIX
corporation ("fonix" or the "Company") for use in voting at the Annual Meeting
of Shareholders (the "Annual Meeting") to be held at the Marriott Hotel, 75
South West Temple Street, Salt Lake City, Utah 84101, on Tuesday, July 14,
1998, at 10:00 a.m., MDT, and at any postponement or adjournment thereof, for
the purposes set forth in the attached notice. When proxies are properly
dated, executed and returned, the shares they represent will be voted at the
Annual Meeting in accordance with the instructions of the shareholder
completing the proxy. If a signed proxy is returned but no specific
instructions are given, the shares will be voted (i) FOR the nominees for
directors set forth herein, (ii) FOR approval of the Company's 1998 Stock
Option and Incentive Plan, (iii) FOR the ratification of the Company's
adoption of the 1997 Stock Option and Incentive Plan, (iv) FOR approval of the
issuance by the Company of up to 6,666,666 shares of restricted common stock
to private investors, together with such additional amounts of common stock as
may be issuable as a result of "reset" or "reset adjustment" provisions
applicable to such shares as described herein; and (v) FOR approval of Arthur
Andersen LLP, as the Company's independent public accountant for the fiscal
year ended December 31, 1998. A SHAREHOLDER GIVING A PROXY HAS THE POWER TO
REVOKE IT AT ANY TIME PRIOR TO ITS EXERCISE BY VOTING IN PERSON AT THE ANNUAL
MEETING, BY GIVING WRITTEN NOTICE TO THE COMPANY'S SECRETARY PRIOR TO THE
ANNUAL MEETING OR BY GIVING A LATER DATED PROXY.
The presence at the meeting, in person or by proxy, of shareholders holding
in the aggregate a majority of the outstanding shares of the Company's common
stock entitled to vote shall constitute a quorum for the transaction of
business. The Company does not have cumulative voting for directors; a
plurality of the votes properly cast for the election of directors by the
shareholders attending the meeting, in person or by proxy, will elect
directors to office. A majority of votes properly cast upon any question
presented for consideration and shareholder action at the meeting, other than
the election of directors, shall decide the question. Abstentions and broker
non-votes will count for purposes of establishing a quorum, but will not count
as votes cast for the election of directors or any other questions and
accordingly will have no effect. Votes cast by shareholders who attend and
vote in person or by proxy at the Annual Meeting will be counted by inspectors
to be appointed by the Company (the Company anticipates that the inspectors
will be employees, attorneys or agents of the Company).
The close of business on Monday, June 8, 1998, has been fixed as the record
date for determining the shareholders entitled to notice of, and to vote at,
the Annual Meeting. Each share shall be entitled to one vote on all matters.
As of the record date there were 51,313,739 shares of the Company's common
stock outstanding and entitled to vote. For a description of the principal
holders of such stock, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT" below.
This Proxy Statement and the enclosed Proxy are being furnished to
shareholders on or about Friday, June 12, 1998.
----------------
<PAGE>
PROPOSAL 1--ELECTION OF DIRECTORS
The Company's Bylaws provide that the number of directors shall be
determined from time to time by the shareholders or the Board of Directors,
but that there shall be no less than three. Presently the Company's Board of
Directors consists of nine members, all but one of whom are nominees for
reelection at the Annual Meeting. Mr. James B. Hayes, who has served as a
director since June 1994, will not stand for reelection at the Annual Meeting.
Each director elected at the Annual Meeting will hold office until a successor
is elected and qualified, or until the director resigns, is removed or becomes
disqualified. Unless marked otherwise, proxies received will be voted FOR the
election of each of the nominees named below. If any such person is unable or
unwilling to serve as a nominee for the office of director at the date of the
Annual Meeting or any postponement or adjournment thereof, the proxies may be
voted for a substitute nominee, designated by the proxy holders or by the
present Board of Directors to fill such vacancy, or for the balance of those
nominees named without nomination of a substitute, or the Board may be reduced
accordingly. The Board of Directors has no reason to believe that any of such
nominees will be unwilling or unable to serve if elected as a director.
The following information is furnished with respect to the nominees. Stock
ownership information is shown under the heading "Security Ownership of
Certain Beneficial Owners and Management" and is based upon information
furnished by the respective individuals.
DIRECTOR NOMINEES
STEPHEN M. STUDDERT, Chairman and Chief Executive Officer. Mr. Studdert, 49,
is a co-founder of the Company and has been Chairman since the merger of
Phonic Technologies, Inc. ("PTI") and the Company in June 1994, and has been
the Company's Chief Executive Officer since May 1996. He also is the Chairman
of the Board of Directors of K.L.S. Enviro Resources, Inc. ("KLSE"), a company
with a class of securities registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Since 1992, Mr.
Studdert has been Chairman of Studdert Companies Corp. ("SCC"), an
international investment management company that is owned and controlled by
three individuals who each are executive officers and directors of the
Company. He served as a White House advisor to U.S. Presidents Bush, Reagan
and Ford. Mr. Studdert has served as a member of the President's Export
Council and the Foreign Trade Practices Subcommittee, and he is a director and
former chairman of the Federal Home Loan Bank of Seattle.
THOMAS A. MURDOCK, President, Chief Operating Officer and Director. Mr.
Murdock, 54, is a co-founder and has served as an executive officer and member
of the Company's Board of Directors since June 1994. Mr. Murdock also has
served as President of SCC since 1992 and Assistant to the Chairman and
Director of Synergetics, Inc., a research company located in Utah that
provides research and development services in connection with the Company's
automatic computer voice recognition and related technologies. For much of his
career, Mr. Murdock has been a commercial banker and a senior corporate
executive with significant international emphasis and experience. Mr. Murdock
also serves as a director of KLSE.
ROGER D. DUDLEY, Executive Vice President, Corporate Finance, and
Director. Mr. Dudley, 45, is a co- founder and has served as an executive
officer and member of the Company's Board of Directors since June 1994. Mr.
Dudley is also executive vice president of SCC, a position he has held since
1993. After several years at IBM in marketing and sales, he began his career
in the investment banking and asset management industry. He has extensive
experience in real estate asset management and in project development. He also
serves as an executive officer of an entity which manages a foreign investment
fund. He is also a director of KLSE.
JOHN A. OBERTEUFFER, Ph.D., Vice President Technology and Director. Dr.
Oberteuffer, 57, has been a Director of the Company since March 1997 and Vice
President Technology since January 1998. He is also the founder and president
of Voice Information Associates, Inc. ("VIA"). VIA is a consulting group
providing strategic technical, market evaluation, product development and
corporate information to the automatic speech recognition industry. In
addition, VIA publishes the monthly newsletter, ASRNews. Dr. Oberteuffer also
is
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<PAGE>
executive director of the American Voice Input/Output Society ("AVIOS"). He
was formerly vice president, personal computer systems, of Voice Processing
Corp. (now merged with Voice Control Systems, Inc.), and also was founder and
CEO of Iris Graphics, which was acquired by Seitex Corp. Dr. Oberteuffer
received his bachelor's and master's degrees from Williams College, and his
Ph.D. in Physics from Northwestern University, and he was a member of the
research staff at Massachusetts Institute of Technology for five years.
ALAN C. ASHTON, Ph.D., Director. Dr. Ashton, 54, has served on the Company's
Board of Directors since October 23, 1995. He conducted research and taught
computer science for more than 16 years before launching his own word-
processing computer software company, WordPerfect Corporation, where he also
served as an executive officer and director. WordPerfect employed more than
4,000 employees worldwide and realized annual revenues of more than $700
million before being acquired by Novell, Inc. in 1994. Dr. Ashton served as a
director of Novell from 1994 until 1996. He presently serves on the board of
directors of Geneva Steel and SkyMall, Inc. Novell, Geneva Steel and SkyMall
each have a class of securities registered under Section 12 of the Exchange
Act. Dr. Ashton also currently serves on the governing board of Utah Valley
State College.
JOSEPH VERNER REED, Director. Ambassador Reed, 61, has served as a director
of the Company since June 1994. He is President of the Secretariat and was
Under Secretary General of the United Nations in New York. Following a career
as a senior advisor to the Chairman of the Chase Manhattan Bank, Ambassador
Reed received several Presidential appointments in the United States
diplomatic service, including that of United States Ambassador to Morocco,
United States Ambassador to the United Nations, and Chief of Protocol of the
United States. He has extensive corporate experience and holds honorary
doctorates from several universities. Since December 31, 1996, Ambassador Reed
also has served as a director of KLSE, a company with a class of securities
registered under Section 12 of the Exchange Act.
RICK D. NYDEGGER, Director. Mr. Nydegger, 49, is a patent and trademark
attorney. Mr. Nydegger was a founder and, during the past five years, has been
a shareholder and director of the law firm Workman, Nydegger & Seeley in Salt
Lake City, Utah, a firm specializing in patent, trademark, copyright, trade
secret, unfair competition, licensing and intellectual property matters. Mr.
Nydegger received his law degree from the J. Reuben Clark Law School (cum
laude, 1974) in Provo, Utah. He has published numerous articles in trade
journals and law reviews on the subject of computer law and intellectual
property. Mr. Nydegger is registered to practice before the U.S. Patent and
Trademark Office and has been admitted to practice before the U.S. Court of
Appeals in the Federal Circuit and the Fifth and Tenth Circuits, as well as
the U.S. Supreme Court. Mr. Nydegger has been a member of the Company's Board
of Directors since December 1996. He also joined the Board of Directors of
KLSE in December 1996.
REGINALD K. BRACK, Director. Mr. Brack, 60, was named to the Board of
Directors in September 1997. He is the chairman emeritus of Time Inc., serving
as the CEO of Time Inc. from 1986 until 1994 and as chairman of the board
until 1997. Time Inc., a wholly owned subsidiary of Time Warner Inc., is the
world's largest book and magazine publishing company and the fastest growing
on-line media entity.
SIGNIFICANT EMPLOYEES AND CONSULTANTS
In addition to the officers and directors identified above, the Company
expects the following individuals (listed in alphabetical order) to make
significant contributions to the Company's business.
E. DAVID BARTON. Mr. Barton, 68, was a founder of AcuVoice and continues to
serve as its Chief Executive Officer. Before founding AcuVoice in 1985, Mr.
Barton was the founder and Chief Executive Officer of Bartco International,
Inc., a Texas corporation from 1976 to 1985. Since 1959, Mr. Barton has held a
number of executive positions with companies doing business in the U.S. and
abroad. He holds a BA in Psychology and an MA in Psychology and Language from
the Catholic University of America, an MA in Japanese Language, History and
Culture from the Institute of Oriental Languages in Tokyo, Japan, and an MS
(with credits in Linguistics, Phonology and Semantics) from the University of
New York.
3
<PAGE>
JEFFREY N. CLAYTON. Mr. Clayton, 51, has served as Vice President, Legal of
the Company since January, 1997. He graduated from the University of Utah
College of Law in 1972. From 1981 to 1983, he served as Administrator, Pension
and Welfare Benefit Programs, U.S. Department of Labor, a member of the
Pension Working Group, White House Council on Economic Affairs, and the
Chairman of the ERISA Advisory Council, U.S. Department of Labor. From 1981 to
1983, He was Chairman, Interagency Task Force on the Pension Benefit Guarantee
Corporation. From 1983 to the present, he has served on the Editorial Advisory
Board, Bureau of National Affairs Pension Reporter. He presently is a member
of the Subcommittee on Fiduciary Responsibility of the Tax Section Committee
on Employee Benefits and the Committee on Employee Benefits of the Labor Law
Section of the American Bar Association.
CARL HAL HANSEN. Mr. Hansen, 47, is co-inventor of the Company's automatic
speech recognition technologies ("ASRT"), and Chairman and CEO of Synergetics.
Mr. Hansen holds a degree in Electronics from the Utah Trade Technical
Institute of Provo, Utah. For approximately fourteen years, Mr. Hansen was
employed by Signetics, Inc. in various capacities, including Test Equipment
Engineer, Characterization Engineer, Product Engineer, and as an Electronic
Specialist. He was involved in the design, fabrication and release of layout
design for PC boards and interfaces. In 1991, Mr. Hansen founded Synergetics,
where he continues to have direct leadership with respect to new product
development and engineering. Since March 13, 1997, he has been a full-time
consultant to the Company.
CAROLINE HENTON, Ph.D. Dr. Henton, 43, is Vice President and Strategic
Technology Adviser of the Company since February 1998. Dr. Henton received a
masters degree in General Linguistics and a Doctorate in Acoustic Phonetics
from the University of Oxford. After an academic career in the UK and
California, she joined Apple Computer, Inc. to produce the high quality
synthetic speech available on all Apple platforms. For the past five years,
Dr. Henton has been Director of Language Development for Voice Processing
Corp. (Cambridge, MA) and Director of Linguistic Development for the DECtalk
speech synthesizer produced by Digital Equipment Corp. She has also acted as a
consultant in speech synthesis, linguistics, localization, speech interface
design and as a voice talent for Sun Microsystems, Inc., Claris Corp., Digital
Sound Corp., Lexicon naming Inc., Interval Research Inc., Apple Computer,
General Magic, Inc., and Digital Equipment Corp.
TONY R. MARTINEZ, Ph.D. Dr. Martinez, 38, is senior consulting scientist for
the Company's neural network development. He received his Ph.D. in computer
science at UCLA in 1986. He is an associate professor of Computer Science at
Brigham Young University and currently heads up the Neural Network and Machine
Learning Laboratory in the BYU Ph.D./MS program. His main research is in
neural networks, machine learning, ASOCS, connectionist systems, massively
parallel algorithms and architectures, and non-von Neuman computing methods.
He is associate editor of the Journal of Artificial Neural Networks.
R. BRIAN MONCUR. Mr. Moncur, 39, co-inventor of the Company's ASRT, was
employed by Synergetics from 1992 to March 13, 1997, when he became a full-
time employee of the Company. He graduated from Brigham Young University with
a Bachelor of Science degree in chemical engineering. Before his employment
with Synergetics, Mr. Moncur was employed by Signetics, Inc. and
Mentorgraphics, where he was a Senior Process Engineer and Software
Development Engineer.
DOUGLAS L. REX. Mr. Rex, 53, has served as the Chief Financial Officer of
the Company since May 1997. For seven years prior to joining the Company, Mr.
Rex was President of Tebbs & Smith P.C., a business consulting, tax planning,
accounting and auditing firm. Mr. Rex is a member of the Financial Executives
Institute, American Institute of Certified Public Accountants (AICPA) and the
Utah Association of Certified Public Accountants (UACPA). Mr. Rex is also the
Chief Financial Officer of KLSE. Mr. Rex is also a Vice President and the CFO
of SCC.
DALE LYNN SHEPHERD. Mr. Shepherd, 38, Senior Project Engineer and co-
inventor of the Company's ASRT, was employed by Synergetics from 1992 to March
13, 1997, when he became a full-time employee of the Company. He graduated
from Brigham Young University with a Bachelor of Science Degree in Electrical
Engineering. He also received a Masters of Business Administration from B.Y.U.
Before his employment with
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Synergetics, Mr. Shepherd was employed with Mentorgraphics where he acted as a
software systems architect in automatic semiconductor design. Before
Mentorgraphics, Mr. Shepherd worked on a contract basis with Signetics, Inc.
None of the executive officers or directors of the Company are related to
any other officer or director of the Company.
BOARD OF DIRECTORS MEETINGS, COMMITTEES AND DIRECTOR COMPENSATION
The Company's Board of Directors took action at 7 duly noticed meetings of
the Board during 1997. Each director attended (in person or telephonically) at
least 75% of the meetings of the Company's Board of Directors except Messrs.
Hayes and Reed, who attended or otherwise participated in 5 of the 7 meetings.
During 1997, the Company's Board of Directors had the following committees:
1996 Directors' Stock Option Plan Committee, comprised of Messrs. Ashton, Reed
and Studdert; 1997 Stock and Incentive Plan Committee, comprised of Messrs
Nydegger and Reed, Audit Committee, comprised of Messrs. Hayes, Reed and
Dudley, and Compensation Committee, comprised of Messrs. Studdert, Reed,
Ashton and Nydegger. These standing committees conducted meetings in
conjunction with meetings of the full Board of Directors.
Prior to April 1996, the Company's directors received no compensation for
their service as such, although the Company historically has reimbursed its
directors for actual expenses incurred in traveling to and participating in
director's meetings, and the Company intends to continue that policy for the
foreseeable future. On April 30, 1996, the Company's board of directors
adopted, and the Company's shareholders subsequently approved, the Company's
1996 Directors' Stock Option Plan (the "Directors Plan"). Under the Directors
Plan, members of the Board as constituted on the date of adoption received
options to purchase 200,000 shares of the Company's Common Stock for each year
(or any portion thereof consisting of at least six months) during which such
persons had served on the board for each of fiscal years 1994 and 1995 and
were granted 200,000 for each of fiscal 1996 and 1997 which options vest after
completion of at least six months' service on the Board during those fiscal
years. Such options have terms of 10 years. In addition to the Directors Plan,
in 1997, the Company adopted the 1997 Stock Option and Incentive Plan under
which stock options may be granted to directors, as well as other employees
and consultants. Thus, under the Directors Plan or the 1997 Stock Option Plan,
during the fiscal year ended December 31, 1997, the Company granted stock
options to members of the Board as follows:
STOCK OPTIONS GRANTED TO DIRECTORS DURING FISCAL YEAR 1997
<TABLE>
<CAPTION>
SHARES
SHARES EXERCISE VESTED
GRANTED DATE PRICE AT
NAME (#) GRANTED PER SHARE FY-END
---- ------- -------- --------- -------
<S> <C> <C> <C> <C>
Stephen M. Studdert....................... 200,000 10/28/97 $6.00 600,000
Alan C. Ashton............................ 200,000 10/28/97 $6.00 200,000
Joseph Verner Reed........................ 200,000 10/28/97 $6.00 600,000
James B. Hayes............................ 200,000 10/28/97 $6.00 600,000
Rick D. Nydegger.......................... 200,000 3/13/97 $7.13 200,000
200,000 10/28/97 $6.00 0
Reginald K. Brack......................... 200,000 10/28/97 $6.00 0
Thomas A. Murdock......................... 200,000 10/28/97 $6.00 600,000
Roger D. Dudley........................... 200,000 10/28/97 $6.00 600,000
</TABLE>
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Dr. John A. Oberteuffer received options to purchase 180,000 shares of the
Company's common stock on January 23, 1998, which options have an exercise
price of $3.34 per share and expire on January 23, 2008. Although Dr.
Oberteuffer serves on the Company's Board of Directors, such options were paid
in connection with his compensation as an employee of the Company, and were
granted under the Company's 1997 Stock Option and Incentive Plan rather than
the Director's Plan. He has received no other compensation for his service as
a director.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent shareholders are
required by regulation of the Securities and Exchange Commission to furnish
the Company with copies of all Section 16(a) forms which they file. Based
solely on its review of the copies of such forms furnished to the Company
during the fiscal year ended December 31, 1997, the Company is aware of the
following untimely filings: the grant of the options to each director in
October 1997 was reported on a Form 5 which was filed after the 45th day
following the fiscal year end. However, the Company believes that all other
transactions required to be reported under Section 16(a) of the Securities
Exchange Act were reported on timely filed reports by the affected
individuals.
EXECUTIVE COMPENSATION
The following tables set forth information concerning the compensation paid
to the Company's Chief Executive Officer and the Company's other executive
officers whose annual compensation exceeded $100,000 during the last fiscal
year (other than the Chief Executive Officer), collectively the "Named
Executive Officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
ANNUAL
COMPENSATION AWARDS
------------------ ----------------
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OPTIONS/SARS (#)
--------------------------- ------- -------- ------ ----------------
<S> <C> <C> <C> <C>
Stephen M. Studdert......... 1995 -- (2) --(2) 0
CEO (4/96--Present) 1996 $131,539 --(2) 400,000
1997 $305,385 --(2) 400,000
Thomas A. Murdock........... 1995 -- (2) --(2) 0
CEO (6/94 to 4/96) 1996 $131,539 --(2) 400,000
President, COO 1997 $305,385 --(2) 400,000
Roger D. Dudley............. 1995 -- (2) --(2) 0
Exec. VP 1996 $131,539 --(2) 400,000
1997 $305,385 --(2) 400,000
</TABLE>
- --------
(1) All options granted to named executive officers during fiscal 1996 were
granted under the Company's 1996 Director's Stock Option Plan as
compensation for their service on the Company's Board of Directors [See
Director Compensation, above]. All options granted in 1997 were granted
pursuant to the Company's 1997 Stock Option and Incentive Plan.
(2) During fiscal 1995 and part of 1996, the Named Executive Officers were not
compensated directly by the Company. During those periods, any
compensation received by the Named Executive Officers for any services
rendered by them to the Company was paid by SCC, an entity owned and
controlled by the Named Executive Officers. [See, "Certain Relationships
and Related Transactions."] Although the Company makes
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no representation about the compensation arrangements between SCC and its
employees, including the Named Executive Officers, the total compensation
paid by the Company to SCC during such periods is as follows:
<TABLE>
<CAPTION>
MANAGEMENT MANAGEMENT
YEAR FEE (CASH) FEE (STOCK)
---- ---------- ----------
<S> <C> <C>
1995.............................................. $111,339 3,699,900*
1996.............................................. $120,000 --
</TABLE>
During such periods, a management services contract between the Company and
SCC obligated the Company to pay SCC a monthly management fee of $50,000,
which amounts were invoiced monthly by SCC but often accrued due to the
Company's cash flow constraints. By July 1995, the Company owed SCC
approximately $1,417,000 of accrued but unpaid management fees. On November
16, 1994, the Company's Board of Directors approved the issuance of
warrants (the "SCC Warrants") to purchase up to 3,700,000 shares of the
Company's Common Stock to SCC. The authorized purchase price of the SCC
Warrants was $.033 per share, and the authorized exercise price for each
share of Common Stock underlying the SCC Warrants was $.35. The Board of
Directors' resolution authorizing the issuance of the SCC Warrants
specified that the purchase price for the SCC Warrants and the exercise
price for shares of Common Stock underlying the SCC Warrants could be
satisfied by canceling invoices for services previously rendered to the
Company under the Consulting Agreement or by cash payment. On July 31,
1995, the Company issued and SCC purchased the SCC Warrants. The purchase
price of the SCC Warrants was $.033 per share of Common Stock underlying
the SCC Warrants, or an aggregate of $122,100. On August 11, 1995, SCC
exercised the SCC Warrants at an exercise price of $.35 per share of Common
Stock underlying the SCC Warrants. Both the $122,100 purchase price and the
$1,295,000 aggregate exercise price for the SCC Warrants were satisfied by
the cancellation of amounts invoiced to the Company by SCC pursuant to the
SCC Agreement during the fiscal year ended December 31, 1994 and the period
between January 1, 1995 and August 11, 1995. Such cancellation was
accomplished on a dollar-for-dollar basis. The total dollar value of the
transaction subsequently was adjusted upward and expensed as compensation
paid by the Company in the amount of $3,699,900. [See, "Certain
Relationships and Related Transactions."]
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF ANNUAL RATES OF STOCK
UNDERLYING TOTAL OPTIONS EXERCISE PRICE APPRECIATION FOR
OPTIONS GRANTED TO OR BASE OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ---------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Studdert..... 200,000 4.2% $6.00 10/28/2007 $ 60,000 $ 120,000
Thomas A. Murdock....... 200,000 4.2% $6.00 10/28/2007 $ 60,000 $ 120,000
Roger D. Dudley......... 200,000 4.2% $6.00 10/28/2007 $ 60,000 $ 120,000
</TABLE>
No options were exercised by the Named Executive Officers during the fiscal
year and no options held by them were in the money as of December 31, 1997.
7
<PAGE>
EMPLOYMENT CONTRACTS
The Company presently has executive employment agreements with each of the
Named Executive Officers. The material terms of each executive employment
agreement with each executive officer are identical and are as follows: The
term of each employment contract is from November 1, 1996 through December 31,
2001. Annual base compensation for each executive for the first three years of
such term is $250,000 from November 1, 1996 through December 31, 1996;
$325,000 from January 1, 1997 through December 31, 1997; and $425,000 from
January 1, 1998 through December 31, 1999. The annual base compensation for
the final two years of the employment agreement is $550,000 from January 1,
2000 through December 31, 2000; and $750,000 from January 1, 2001 through
December 31, 2001. However, for these final two contract years, annual base
compensation and the performance-based incentive compensation will be subject
to review by the Company's Board of Directors based upon either or both of the
market price of the Company's Common Stock and profits derived by the Company
from annual revenues from operations. In addition, each executive officer is
entitled to annual performance-based incentive compensation payable on or
before December 31 of each calendar year during the contract term. During the
first three years of the contract term, the performance-based incentive
compensation is determined with relation to the market price of the Company's
Common Stock, adjusted for stock dividends and splits. If the price of the
Company's Common Stock maintains an average price equal to or greater than the
level set forth below over a period of any three consecutive months during the
calendar year, the performance-based incentive compensation will be paid in
the corresponding percentage amount of annual base salary for each year as
follows:
<TABLE>
<CAPTION>
QUARTERLY AVERAGE PERCENTAGE
STOCK PRICE BONUS
----------------- ----------
<S> <C>
$10.00..................................................... 30%
$12.50..................................................... 35%
$15.00..................................................... 40%
$20.00..................................................... 45%
$25.00+.................................................... 50%
</TABLE>
Each Named Executive Officer also is entitled to customary insurance
benefits, office and support staff and the use of an automobile. In addition,
if any of the Named Executive Officers is terminated without cause during the
contract term then all salary then and thereafter due and owing under the
executive employment agreement shall, at the executive's option, be
immediately paid in a lump sum payment to the executive officer and all stock
options, warrants and other similar rights granted by the Company and then
vested or earned shall be immediately granted to the executive officer without
restriction or limitation of any kind. Further, the Board of Directors
authorized the payment of a cash bonus to SCC in an amount sufficient to pay
all personal state and federal income taxes on the 3.7 million shares
purchased by SCC on August 11, 1995 and on the bonus amount. The amounts
allocated for this bonus was $2.5 million, of which $2,102,585 had been paid
out as of December 31, 1997.
Each executive employment agreement contains a non-disclosure,
confidentiality, non-solicitation and non-competition clause. Under the terms
of the non-competition clause, each executive has agreed that for a period of
one year after the termination of his employment with the Company that the
executive not engage in any capacity in a business which competes with or may
compete with the Company.
8
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1998, the number of shares
of Common Stock of the Company beneficially owned by all persons known to be
holders of more than 5 percent of the Company's Common Stock and by the
Executive Officers and Directors of the Company individually and as a group.
Unless indicated otherwise, the address of the shareholder is the Company's
offices, 60 East South Temple Street, Suite 1225, Salt Lake City, Utah 84111.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME AND ADDRESS OF 5% BENEFICIAL OWNERS, BENEFICIALLY PERCENT OF
EXECUTIVE OFFICERS AND DIRECTORS OWNED CLASS(1)
----------------------------------------- ------------ ----------
<S> <C> <C>
Thomas A. Murdock.......................... 26,947,981(2) 51.2%
President, COO and Director
Alan C. Ashton............................. 12,329,167(3)(4) 23.7%
Director
c/o Beesmark Investments, L.C.
261 East 1200 South
Orem, Utah 84097
Beesmark Investments, L.C.................. 11,729,167(4) 22.8%
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
Roger D. Dudley............................ 8,329,596(5) 15.9%
Executive Vice President
and Director
Stephen M. Studdert........................ 8,329,296(6) 15.9%
Chairman of the Board
Chief Executive Officer
Studdert Companies Corp.................... 3,700,000(7) 7.2%
5% Beneficial Owner
Joseph Verner Reed......................... 1,020,000(8) 2.0%
Director
73 Sterling Road
Greenwich, Connecticut 06831
James B. Hayes............................. 1,020,000(8) 2.0%
Director
One Education Way
Colorado Springs, Colorado 80906
Rick D. Nydegger........................... 400,000 1.0%
Director
10217 North Oak Creek Lane
Highland, Utah 84003
John A. Oberteuffer, Ph.D.................. 180,000 *
Voice Information Associates, Inc.
14 Glen Road South
Lexington, Massachusetts 02173
Reginald K. Brack.......................... 226,500(9) *
Director
Douglas L. Rex............................. 205,300(10) *
Chief Financial Officer
Officers and Directors as a Group (10
persons).................................. 33,086,587 56.4%
</TABLE>
- --------
* Less than 1 percent.
9
<PAGE>
(1) Percentages rounded to nearest 1/10th of one percent. Except as indicated
in the footnotes below, each of the persons listed exercises sole voting
and investment power over the shares of the Company's Common Stock listed
for each such person in the table.
(2) Includes 25,657,749 shares of Common Stock deposited in a voting trust
(the "Voting Trust") as to which Mr. Murdock is the sole trustee. Persons
who have deposited their shares of the Company's Common Stock into the
Voting Trust have dividend and liquidation rights in proportion to the
number of shares of the Company's Common Stock they have deposited in the
Voting Trust, but have no voting rights with respect to such shares. All
voting rights associated with the shares deposited into the Voting Trust
are exercisable solely and exclusively by the Trustee of the Voting
Trust. The Voting Trust expires, unless extended according to its terms,
on the earlier of September 30, 1999 or any of the following events: (i)
the Trustee terminates it; (ii) the participating shareholders
unanimously terminate it; or (iii) the Company is dissolved or
liquidated. Although as the sole trustee of the Voting Trust Mr. Murdock
exercises the voting rights of all of the shares deposited into the
Voting Trust, and accordingly has listed all shares in the Table above,
he has no economic or pecuniary interest in any of the shares deposited
into the Voting Trust except 3,465,083 shares as to which he directly
owns the economic interest, 3,700,000 shares the economic rights as to
which are owned by SCC, of which Mr. Murdock is a 1/3 equity owner and
11,400 shares the economic rights as to which are owned by a limited
liability company of which Mr. Murdock is a 1/3 equity owner. Also
includes 2,813 shares owned directly by Mr. Murdock, 140,232 shares
(including shares issuable upon the exercise of options) beneficially
owned by members of Mr. Murdock's immediate family and 1,150,000 shares
of Common Stock underlying stock options exercisable presently or within
60 days.
(3) Includes all Common Stock beneficially owned by Beesmark Investments,
L.C. ("Beesmark") but only to the extent that Dr. Ashton is one of two
managers of Beesmark, and, as such, is deemed to share investment power
with respect to shares beneficially owned by Beesmark. Also includes
600,000 shares of Common Stock underlying stock options exercisable by
Dr. Ashton presently or within 60 days.
(4) Beesmark's beneficial ownership includes 166,667 shares of Common Stock
presently issuable upon the conversion of shares of Series A Preferred
Stock. All shares of Common Stock are deposited into the Voting Trust.
The managers of Beesmark are Alan C. Ashton and Karen Ashton. As managers
of Beesmark, they each are deemed to share voting control over shares
beneficially owned by Beesmark. Mrs. Ashton beneficially owns no shares
other those deemed to be owned by her as a control person of Beesmark,
and consequently her beneficial ownership is not separately reported.
(5) Includes (i) 3,465,083 shares owned by Mr. Dudley and deposited into the
Voting Trust, (ii) 3,700,000 shares owned by SCC as to which Mr. Dudley
shares investment power because of his management position with and 1/3
ownership of SCC, which shares are deposited in the Voting Trust;
(iii) 2,813 shares owned directly by Mr. Dudley; (iv) 300 shares owned by
Mr. Dudley's minor children; (v) 11,400 shares owned by SMD, as to which
Mr. Dudley has 1/3 indirect equity ownership and control and that are
deposited into the Voting Trust; and (vi) 1,150,000 shares underlying
stock options exercisable presently or within 60 days.
(6) Includes (i) 3,465,083 shares owned by Mr. Studdert and deposited into
the Voting Trust, (ii) 3,700,000 shares owned by SCC as to which Mr.
Studdert shares investment power because of his management position with
and 1/3 ownership of SCC, which shares are deposited in the Voting Trust;
(iii) 2,813 shares owned directly by Mr. Studdert; (iv) 11,400 shares
owned by SMD, as to which Mr. Studdert has 1/3 direct equity ownership
and control and which are deposited in the Voting Trust; and
(v) 1,150,000 shares underlying stock options exercisable presently or
within 60 days.
(7) All shares deposited into the Voting Trust.
(8) Includes 1,000,000 shares of Common Stock underlying presently
exercisable stock options.
(9) Includes 26,000 shares owned directly by Mr. Brack and 500 shares owned
by Mr. Brack's son and 200,000 shares underlying options.
(10) Includes 2,400 shares owned directly by Mr. Rex, 2,400 shares owned by
his spouse, 500 shares owned by an entity owned and controlled by him,
and 200,000 shares underlying presently exercisable stock options.
10
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Studdert Companies Corp.
SCC is a Utah corporation that provides investment and management services.
The officers, directors and owners of SCC are Stephen M. Studdert, Thomas A.
Murdock and Roger D. Dudley, each of whom is a director and an executive
officer of the Company and each of whom beneficially owns more than ten
percent of the Company's issued and outstanding Common Stock. Between June
1994, when the Company commenced its present business of developing its ASRT,
and April 30, 1996, the Company did not pay or award any compensation in any
form directly to the Company's executive officers. Rather, in June 1994 the
Company entered into an Independent Consulting Agreement (the "SCC Agreement")
with SCC pursuant to which SCC, through Messrs. Studdert, Murdock and Dudley,
rendered certain management and financial services to the Company.
In 1993, SCC began to render management services to PTI, the Company's
predecessor in interest, with respect to PTI's business of developing the
ASRT. Those services included providing day-to-day administrative management
services, debt financing directly to PTI, procuring debt financing from third
parties, and commencing a search for a joint venture partner or merger
candidate at monthly charges ranging from $50,000 to $100,000. In June 1994,
PTI merged with and into a subsidiary of the Company, after which the Company
entered into the SCC Agreement with SCC dated as of June 22, 1994. Under the
SCC Agreement, SCC agreed that for a period of two years it would manage all
aspects of the Company's day-to-day business, have authority to engage on
behalf of the Company such employees, agents and professionals as it deemed
appropriate, and be reimbursed for its reasonable costs and expenses incurred
for and on behalf of the Company. In return for such services, the Company
agreed to compensate SCC in the amount of $50,000 per month, which monthly
amount was exclusive of (i) fees for capital raising activities by SCC on the
Company's behalf and (ii) actual expenses incurred by SCC.
Pursuant to the SCC Agreement, the Company paid to SCC $209,300 during the
year ended December 31, 1994. At December 31, 1994, the Company owed SCC
$1,164,200 for accrued management fees and $66,805 for expenses incurred.
Between January and July 1995, SCC continued to invoice the Company for
services rendered under the Consulting Agreement. By July 1995, the Company
owed SCC approximately $1,417,000 pursuant to the terms of the SCC Agreement.
On November 16, 1994, the Company's Board of Directors approved the issuance
of warrants to purchase up to 3,700,000 shares of the Company's Common Stock
to SCC (the "SCC Warrants"). The authorized purchase price of the SCC Warrants
was $.033 per share, and the authorized exercise price for each share of
Common Stock underlying the SCC Warrants was $.35. The Board of Directors'
resolution authorizing the issuance of the SCC Warrants specified that the
purchase price for the SCC Warrants and the exercise price for shares of
Common Stock underlying the SCC Warrants could be satisfied by canceling
invoices for services previously rendered to the Company under the Consulting
Agreement or by cash payment. The November 16, 1994 Board meeting was attended
by a quorum of the Board, but only one director who was not also a principal
of SCC was present. Subsequently, on April 11, 1995, pursuant to the unanimous
consent of all disinterested directors in lieu of a special Board meeting, all
of the Company's disinterested directors ratified the adoption of the
resolution authorizing the Company to offer the SCC Warrants. On July 31,
1995, the Company issued and SCC purchased the SCC Warrants. The purchase
price of the SCC Warrants was $.033 per share of Common Stock underlying the
SCC Warrants, or an aggregate of $122,100. On August 11, 1995, SCC exercised
the SCC Warrants at an exercise price of $.35 per share of Common Stock
underlying the SCC Warrants. Both the $122,100 purchase price and the
$1,295,000 aggregate exercise price for the SCC Warrants were satisfied by the
cancellation of amounts invoiced to the Company by SCC pursuant to the SCC
Agreement during the fiscal year ended December 31, 1994 and the period
between January 1, 1995 and August 11, 1995. Such cancellation was
accomplished on a dollar-for-dollar basis.
Between August 1995 and October 1995, SCC continued to invoice the Company
for its $50,000 monthly management fee under the Consulting Agreement,
portions of which amounts continued to accrue. On October 23, 1995, the
Company entered into an investment agreement (the "Beesmark Agreement") with
11
<PAGE>
Beesmark. In connection with the Company's execution of the Beesmark
Agreement, SCC and the Company collaterally agreed that any then accrued but
unpaid balance due to SCC for management services rendered under the SCC
Agreement would be placed on "conditional status" and deferred until the
Company successfully completed certain developmental milestones set forth in
the Beesmark Agreement, at which time such amounts would be due and payable in
full. With respect to management services to be rendered by SCC after the
closing of the Beesmark Agreement, SCC agreed that the Company would pay only
$30,000 of the monthly invoiced $50,000, the balance to be placed on
conditional status. Thus, of the total $600,000 invoiced to the Company by SCC
during the year ended December 31, 1995, the Company paid SCC $90,000 in cash;
$257,000 of accrued but unpaid amounts were placed on conditional status under
the Investment Agreement; and $253,000 was canceled in partial payment of the
exercise price of the SCC Warrants. In addition to the amounts invoiced by SCC
for management fees during the 1995 fiscal year, the Company also reimbursed
SCC for actual expenses incurred in the amount of $337,405. Thus, at December
31, 1995, the Company owed SCC $257,000 in management fees, all of which was
on conditional status under the terms of the Beesmark Agreement and was
payable to SCC only in the event that the Company achieved the developmental
milestones set forth in the Beesmark Agreement. At December 31, 1995, the
Company also owed SCC $3,825 for expenses incurred. Additionally, during the
year ended December 31, 1995, SCC charged a total of $70,915 in capital
raising fees to the Company. Of that amount, $49,576 was written off by SCC in
connection with the Beesmark Agreement, and $21,339 was paid to SCC.
Between January 1, 1996 and April 30, 1996, SCC invoiced the Company for
services under the SCC Agreement in the amount of $200,000. Of that amount,
$80,000 was placed on conditional status pursuant to the Beesmark Agreement
and $120,000 was paid to SCC. On April 30, 1996, the disinterested members of
the Company's Board of Directors authorized the Company to enter into an
agreement with SCC modifying the SCC Agreement effective May 1, 1996. Under
the SCC Agreement, as modified, SCC no longer invoices the Company for
management services, but continues to invoice the Company for reimbursement of
actual expenses incurred on the Company's behalf. SCC and the Company agreed
that any amounts invoiced under the SCC Agreement but placed on conditional
status pursuant to the Beesmark Agreement would remain outstanding obligations
of the Company payable only if the Company achieved the milestones specified
in the Beesmark Agreement. The Company further agreed to pay any then accrued
but unpaid amounts invoiced under the SCC Agreement, including amounts owed
and carried over from the year ended December 31, 1995, which amounts totaled
$5,862, as well as outstanding amounts for expenses incurred. In connection
with the modification of the SCC Agreement, the disinterested members of the
Company's Board of Directors approved base salaries for fiscal year 1996 for
each of the Company's executive officers, effective as of April 1996, as
follows: Stephen M. Studdert, Chief Executive Officer--$180,000; Thomas A.
Murdock, President and Chief Operating Officer--$180,000; and Roger D. Dudley,
Executive Vice President and Chief Financial Officer--$180,000. Effective
November 15, 1996, the disinterested members of the Company's Board of
Directors approved an increase in the base salaries of the executive officers
from $180,000 to $250,000 per annum for the remainder of fiscal 1996, with
base compensation increasing annually over the five-year term of those
persons' employment agreements. [See Item 10. Executive Compensation]. In
September 1996, Beesmark made the last of the funding payments provided for
under the terms of the Beesmark Agreement. On February 10, 1997, the Company
paid to SCC the entire balance due to SCC for accrued management fees in the
amount of $337,000. Thus, during the year ended December 31, 1996, the Company
paid to SCC a total of $120,000 for management fees and SCC was reimbursed for
actual expenses incurred on the Company's behalf in the amount of $740,052.
During 1996, the Company made no payments to SCC for capital raising
activities. The Company and SCC have agreed to extend the SCC Agreement, at
least insofar as the Company has agreed to reimburse SCC for actual expenses
incurred on behalf of the Company, until December 1998.
The Company paid no compensation in any form directly to any of its
executive officers during fiscal 1995 and until April 1, 1996. However, as the
principals of SCC, during such periods, the Company's executive officers
received a portion of the amounts paid by the Company to SCC under the SCC
Agreement. See "Executive Compensation."
12
<PAGE>
Cancellation of Debt By SCC and Thomas A. Murdock
In connection with the Beesmark Agreement, SCC and the Company entered into
a collateral agreement whereby SCC agreed that it would cancel principal debt
of $135,368 and accrued interest of $19,298 owed by the Company to SCC in
connection with a promissory note executed by PTI and assumed by the Company
at the time of the merger of PTI with and into a subsidiary of the Company. In
another collateral agreement, the Company and Thomas A. Murdock, a director
and executive officer of the Company, agreed that the Company would cancel
principal debt of $286,493 and accrued interest of $65,715 due to Mr. Murdock
under a promissory note initially made by PTI and assumed by the Company at
the time of the merger of PTI with and into a subsidiary of the Company.
Alan C. Ashton and Beesmark Investments, L.C.
On October 23, 1995, the Company, Beesmark and Dr. Ashton entered into the
Beesmark Agreement. Dr. Ashton is presently a director of the Company,
although he did not occupy such position when the Beesmark Agreement was
negotiated and executed. Dr. Ashton also is a co-manager of and has an
indirect pecuniary interest in a portion of Beesmark's assets. Pursuant to the
Beesmark Agreement, Beesmark agreed to provide a total of $6,050,000 of
funding to the Company over a period of approximately 11 months, provided that
during that time the Company was able to timely meet, to Beesmark's
satisfaction, specified developmental milestones. In return for the funding
provided to Beesmark, the Company issued 11,562,500 shares of Common Stock at
a price of $.48 per share and a $500,000 Series A Convertible Subordinated
Debenture. The Debenture was subsequently converted to 166,667 shares of
Series A Preferred Stock.
Synergetics
Thomas A. Murdock, a director and the Chief Operating Officer of the
Company, is also one of seven directors of Synergetics. In addition, Mr.
Murdock, Stephen M. Studdert and Roger D. Dudley, each of whom is an executive
officer and director of the Company, own shares of the Common Stock of
Synergetics, although such share ownership in the aggregate constitutes less
than 5% of the total shares of Synergetics common stock issued and
outstanding.
John A. Oberteuffer
Mr. Oberteuffer has been a director of the Company since March 1997 and an
executive officer of the Company since January 1998. Mr. Oberteuffer is also
the founder and president of Voice Information Associates, Inc. ("VIA"), a
consulting group providing strategic technical, market evaluation, product
development and corporate information to the speech recognition industry.
During fiscal year 1997, the Company paid approximately $110,000 in consulting
fees to VIA for services provided to the Company. In April 1998, the Company
entered into an agreement with Dr. Oberteuffer under which Dr. Oberteuffer
assigned certain patent and other rights to certain technology for 500,000
Common Stock purchase warrants. The exercise price of the warrants is $5.13
per share (the closing price of the Company's Common Stock on the date of the
agreement). 250,000 warrants are exercisable for a three-year period
commencing with the date of the agreement and the balance of the warrants
become exercisable at such time as a patent is issued relating to the
technology.
SMD
From September 4, 1997, through October 15, 1997 and again on December 31,
1997, the Company borrowed funds from SMD pursuant to a revolving, unsecured
promissory note, bearing interest at the rate of 12% per annum. The aggregate
of all amounts loaned under the note was $2,000,000 and the highest
outstanding balance at any one time was $1,550,000. All amounts have been
repaid, together with $5,542.14 in interest. The loan and its terms were
approved by the independent members of the board of directors of the Company.
On March 19, 1998, the Company granted an aggregate of 450,000 stock options
to the three executive officers who also own SMD. These options have a ten-
year life and an exercise price of $5.16 per share.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE DIRECTOR
----------------
13
<PAGE>
PROPOSAL 2--TO APPROVE THE COMPANY'S 1998 STOCK OPTION AND INCENTIVE PLAN
The Company's Board of Directors has approved and recommended that the
Company's shareholders adopt the fonix corporation 1998 Stock Option and
Incentive Plan (the "1998 Plan"). The Company's common stock is quoted on the
Nasdaq SmallCap Market. The rules of the Nasdaq Stock Market, as recently
amended to apply to companies listed on the SmallCap Market, require that
shareholder approval be obtained when a stock option or purchase plan is to be
established or other arrangement made pursuant to which stock may be acquired
by officers or directors. In compliance with this policy, at the Annual
Meeting, the Company's shareholders will be asked to approve the adoption of
the 1998 Plan, and the Board of Directors is soliciting the enclosed proxy as
to that decision. A brief description of the material provisions of the 1998
Plan follows.
The 1998 Plan provides for the award of incentive stock options to key
employees and the award of non-qualified stock options, stock appreciation
rights, cash and stock bonuses, and other incentive grants to directors,
employees and certain nonemployees who have important relationships with the
Company or its subsidiaries. The 1998 Plan was adopted by the Board of
Directors on June 1, 1998, which date is the effective date of the 1998 Plan.
The principal provisions of the 1998 Plan are summarized below.
Administration.
The 1998 Plan is administered by a committee of at least two non-employee
directors of the Company (the "1998 Plan Committee"). The 1998 Plan Committee
will determine and designate the individuals and classes of individuals to
whom awards under the 1998 Plan should be made and the amount, terms and
conditions of the awards. The 1998 Plan Committee may adopt and amend rules
relating to the administration of the 1998 Plan. The 1998 Plan Committee
presently is comprised of Messrs. Nydegger and Reed. The 1998 Plan is intended
to comply with Rule 16b-3 adopted under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations thereto.
Eligibility.
Awards under the 1998 Plan may be made to officers, directors or key
employees of the Company and its subsidiaries, and to nonemployee agents,
consultants, advisors, and other persons whom the 1998 Plan Committee believes
have made or will make an important contribution to the Company or any
subsidiary thereof, subject to Section 422 of the Code, which limits the grant
of "Incentive Stock Options" to executive officers and other senior managerial
and professional employees.
Shares Available.
Subject to adjustment as provided in the 1998 Plan, a maximum of 10,000,000
shares of the Company's common stock will be reserved for issuance thereunder.
If an option or stock appreciation right granted under the 1998 Plan expires
or is terminated or canceled, the unissued shares subject to such option or
stock appreciation right are again available under the 1998 Plan. In addition,
if shares sold or awarded as a bonus under the 1998 Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased are again available under the 1998 Plan. In the absence of an
effective registration statement under the Securities Act of 1933, as amended
(the "Act"), all shares granted under the 1998 Plan will be restricted as to
subsequent resales or transfer, pursuant to Rule 144 under the Act.
Term.
No awards shall be granted under the 1998 Plan after or on that date that
shall be ten years after the date the 1998 Plan was adopted by the Board of
Directors, although the 1998 Plan and all awards made under the 1998 Plan
prior to such termination date shall remain in effect until such awards have
been satisfied or terminated in accordance with the 1998 Plan and the terms of
such awards.
14
<PAGE>
Stock Option Grants (NSOs and ISOs).
The 1998 Plan Committee may grant Incentive Stock Options ("ISOs") and Non-
Statutory Stock Options ("NSOs") under the 1998 Plan. With respect to each
option grant, the 1998 Plan Committee will determine the number of shares
subject to the option, the option price, the period of the option, the time or
times at which the option may be exercised (including whether the option will
be subject to any vesting requirements and whether there will be any
conditions precedent to exercise of the option), and the other terms and
conditions of the option. Unless the Committee determines, in its sole
discretion, that there are circumstances which reasonably justify the
establishment of a lower option price, the option or exercise price per share
of NSOs shall be 100% of the fair market value of a share of the Company's
common stock on the date the NSOs are granted. The 1998 Plan specifies that
options granted thereunder may not be exercised at any time within six months
of the grant date of such options. Options granted under the plan expire six
months after the termination of the option holder's employment for reasons
other than permanent disability, retirement or death.
ISOs are subject to special terms and conditions. The aggregate fair market
value, on the date of the grant, of the common stock for which an ISO is
exercisable for the first time by the optionee during any calendar year may
not exceed $100,000. An ISO may not be granted to an employee who possesses
more than 10% of the total voting power of the Company's stock unless the
option price is at least 110% of the fair market value of the Common Stock
subject to the option on the date it is granted, and the option is not
exercisable for 5 years after the date of grant. No ISO may be exercisable
after 10 years from the date of grant. The option price may not be less than
100% of the fair market value of the Common Stock covered by the option at the
date of grant.
In connection with the grant of NSOs or ISOs, the 1998 Plan authorizes the
issuance of "Reload Options" which allow employees to receive options to
purchase that number of shares that shall equal (i) the number of shares of
common stock used to exercise underlying NSOs or ISOs, and (ii) if authorized
by the 1998 Plan Committee, the number of shares of common stock used to
satisfy any tax withholding requirement incident to the exercise of the
underlying NSOs or ISOs.
In general, no vested option may be exercised unless at the time of such
exercise the holder of such option is employed by or in the service of the
Company or any subsidiary thereof, within 36 months following termination of
employment by reason of death, 12 months following termination by reason of
permanent disability or retirement (or in the case of ISOs within 12 months of
termination for death or disability), or within six months following
termination for any other reason, except for cause, in which case all
unexercised options shall terminate forthwith. No shares may be issued
pursuant to the exercise of an option until full payment therefor has been
made. Upon the exercise of an option, the number of shares reserved for
issuance under the 1998 Plan will be reduced by the number of shares issued
upon exercise of the option.
Stock Appreciation Rights.
Two types of Stock appreciation rights ("SARs") may be granted under the
1998 Plan: "Alternate SARs" and "Limited Rights." Alternate SARs are granted
concurrently with or subsequent to stock options, and permit the option holder
to be paid, in common stock, the excess of the fair market value of each share
of common stock underlying the stock option at the date of exercise of the
Alternate SARs and the fair market value of each share of common stock
underlying the option at the grant date. The exercise of Alternate SARs shall
be in lieu of the exercise of the stock option underlying the SARs, and upon
such exercise a corresponding number of stock options shall be canceled.
Alternate SARs are exercisable upon the same terms and conditions as are
applicable to the options underlying them. Upon the exercise of an Alternate
SAR, the number of shares reserved for issuance under the 1998 Plan will be
reduced by the number of shares issued.
Limited Rights may be issued concurrently with or subsequent to the award of
any stock option or Alternate SAR under the 1998 Plan. Limited Rights allow
the holder thereof to be paid appreciation on the stock option or the amount
of appreciation receivable upon exercise of an Alternate SAR in cash and in
lieu of exercising such options or rights. Limited Rights are exercisable only
to the same extent and subject to the same conditions and
15
<PAGE>
within the same time periods as the stock options or Alternate SARs underlying
such Limited Rights. Limited Rights are exercisable in full for a period of
seven months following a change in control of the Company. Upon the exercise
of Limited Rights, the stock options or Alternate SARs underlying such Limited
Rights shall terminate. Cash payments upon the exercise of Limited Rights will
not reduce the number of shares of common stock reserved for issuance under
the 1998 Plan. No SARs have been granted under the 1998 Plan.
Stock Bonus Awards.
The 1998 Plan Committee may award shares of common stock as a stock bonus
under the 1998 Plan. The 1998 Plan Committee may determine the recipients of
the awards, the number of shares to be awarded, and the time of the award.
Stock received as a stock bonus is subject to the terms, conditions, and
restrictions determined by the 1998 Plan Committee at the time the stock is
awarded. No stock bonus awards have been granted under the 1998 Plan.
Cash Bonus Rights.
The 1998 Plan Committee may grant cash bonus rights under the 1998 Plan
either outright or in connection with (i) options granted or previously
granted, (ii) SARs granted or previously granted, (iii) stock bonuses awarded
or previously awarded, and (iv) shares issued under the 1998 Plan. Bonus
rights granted in connection with options entitle the optionee to a cash bonus
if and when the related option is exercised. The amount of the bonus is
determined by multiplying the excess of the total fair market value of the
shares acquired upon the exercise over the total option price for the shares
by the applicable bonus percentage. Bonus rights granted in connection with a
SAR entitle the holder to a cash bonus when the SAR is exercised, that is
determined by multiplying the amount received upon exercise of the SAR by the
applicable bonus percentage. Bonus rights granted in connection with stock
bonuses entitle the recipient to a cash bonus, in an amount determined by the
1998 Plan Committee, either at the time the stock bonus is awarded or upon the
lapse of any restrictions to which the stock is subject. No bonus rights have
been granted under the 1998 Plan.
Non-Assignability of 1998 Plan Awards.
No award under the 1998 Plan shall be assignable or transferable by the
recipient thereof, except by will or the laws of descent or pursuant to a
qualified domestic relations order as defined in the Code.
Changes in Capital Structure.
The 1998 Plan provides that if the outstanding common stock of the Company
is increased or decreased or changed into or exchanged for a different number
or kind of shares or other securities of the Company or of another corporation
by reason of any recapitalization, stock split or certain other transactions,
appropriate adjustment will be made by the 1998 Plan Committee in the number
and kind of shares available for grants under the 1998 Plan. In addition, the
1998 Plan Committee will make appropriate adjustments in the number and kind
of shares as to which outstanding options will be exercisable. In the event of
a merger, consolidation or other fundamental corporate transformation, the
Board may, in its sole discretion, permit outstanding options to remain in
effect in accordance with their terms; to be converted into options to
purchase stock in the surviving or acquiring corporation in the transaction;
or to be exercised, to the extent then exercisable, during a period prior to
the consummation of the transaction established by the 1998 Plan Committee or
as may otherwise be provided in the 1998 Plan.
Tax Consequences.
The following description addresses the federal income tax consequences of
the 1998 Plan. Although the Company believes the following statements are
correct based on existing provisions of the Code and legislative history and
administrative and judicial interpretations thereof, no assurance can be given
that changes will not occur which would modify such statements. Also, such
statements are intended only to provide basic
16
<PAGE>
information. Each 1998 Plan participant should consult his or her own tax
advisor concerning the tax consequences of participation in the 1998 Plan
because individual financial and federal tax situations may vary, and state
and local tax considerations may be significant.
Certain options authorized to be granted under the 1998 Plan are intended to
qualify as ISOs for federal income tax purposes. Under federal income tax law
currently in effect, the optionee will recognize no income upon grant or
exercise of the ISO. If an employee exercises an ISO and does not dispose of
any of the option shares within two years following the date of grant and
within one year following the date of exercise, then any gain realized upon
subsequent disposition of the shares will be treated as income from the sale
or exchange of a capital asset held for more than one year. If an employee
disposes of shares acquired upon exercise of an ISO before the expiration of
either the one-year holding period or the two-year waiting period, any amount
realized will be taxable as ordinary compensation income in the year of such
disqualifying disposition to the extent that the lesser of the fair market
value of the shares on the exercise date or the fair market value on the date
of disposition exceeds the exercise price. The Company will not be allowed any
deduction for federal income tax purposes at either the time of the grant or
the exercise of an ISO. Upon any disqualifying disposition by an employee, the
Company will generally be entitled to a deduction to the extent the employee
realized ordinary income.
Certain options authorized to be granted under the 1998 Plan will be treated
as NSOs for federal income tax purposes. Under federal income tax law
presently in effect, no income is realized by the grantee of an NSO until the
option is exercised. When the NSO is exercised, the optionee will realize
ordinary compensation income, and the Company will generally be entitled to a
deduction, in the amount by which the market value of the shares subject to
the option at the time of exercise exceeds the exercise price. Upon the sale
of shares acquired upon exercise of an NSO, the excess of the amount realized
from the sale over the market value of the shares on the date of exercise will
be taxable.
An employee who receives stock in connection with the performance of
services will generally realize income at the time of receipt unless the
shares are not substantially vested for purposes of Section 83 of the Code and
no election under Section 83(b) of the Code is filed within 30 days after the
original transfer. The Company generally will be entitled to a tax deduction
in the amount includable as income by the employee at the same time or times
as the employee recognizes income with respect to the shares. The Company is
required to withhold employment taxes on the amount of the income the employee
recognizes. A participant who receives a cash bonus right under the 1998 Plan
generally will recognize income equal to the amount of any cash bonus paid at
the time of receipt of the bonus, and the Company generally will be entitled
to a deduction equal to the income recognized by the participant.
Section 162(m) of the Code limits to $1 million per person the amount the
Company may deduct for compensation paid to any of its most highly compensated
officers. Compensation received through the exercise of an option or SAR will
not be subject to the $1 million limit if the option or SAR and the plan
pursuant to which it is granted meet certain requirements. The currently
applicable requirements are that the option or SAR be granted by a committee
of at least two disinterested directors and that the exercise price of the
option or the SAR be not less than fair market value of the Common Stock on
the date of grant. Accordingly, the Company believes compensation received on
exercise of options and SARs granted under the 1998 Plan in compliance with
the above requirements will not be subject to the $1 million deduction limit.
Amendments to 1998 Plan
The Committee may at any time and from time to time terminate or modify or
amend the 1998 Plan in any respect, including in response to changes in
securities, tax or other laws or rules, regulations or regulatory
interpretations thereof applicable to the 1998 Plan or to comply with stock
exchange rules or requirements.
No awards of any type have been made under the 1998 Plan as of the date of
this Proxy Statement.
THE BOARD RECOMMENDS APPROVAL OF THE 1998 STOCK OPTION AND INCENTIVE PLAN
----------------
17
<PAGE>
PROPOSAL 3--TO RATIFY THE ADOPTION OF THE 1997 STOCK OPTION AND INCENTIVE PLAN
The Company's Board of Directors approved and adopted the Company's 1997
Stock Option and Incentive Plan (the "1997 Plan") during the fiscal year ended
December 31, 1997. At the time the 1997 Plan was adopted, the Company was not
required under applicable securities laws or exchange rules to obtain
shareholder approval of the 1997 Plan. Effective January 26, 1998, the Company
became subject to Nasdaq Stock Market Rule 4310(c)(25)(H)(i)(a), which
requires shareholder approval "when a stock option or purchase plan is to be
established or other arrangement made pursuant to which stock may be acquired
by officers or directors." In compliance with this policy, at the Annual
Meeting, the Company's shareholders will be asked to ratify the adoption of
the 1997 Plan, and the Board of Directors is soliciting the enclosed proxy as
to that decision. A brief description of the material provisions of the 1997
Plan and a table summarizing the benefits to be conferred under the 1997 Plan
follows.
Administration.
The 1997 Plan is administered by a committee of at least two non-employee
directors of the Company (the "1997 Plan Committee"). The 1997 Plan Committee
will determine and designate the individuals and classes of individuals to
whom awards under the 1997 Plan should be made and the amount, terms and
conditions of the awards. The 1997 Plan Committee may adopt and amend rules
relating to the administration of the 1997 Plan. The 1997 Plan Committee
presently is comprised of Messrs. Nydegger and Reed. The 1997 Plan is intended
to comply with Rule 16b-3 adopted under the Exchange Act, and Section 162(m)
of the Code, and the regulations thereto.
Eligibility.
Awards under the 1997 Plan may be made to officers, directors or key
employees of the Company and its subsidiaries, and to nonemployee agents,
consultants, advisors, and other persons whom the 1997 Plan Committee believes
have made or will make an important contribution to the Company or any
subsidiary thereof, subject to Section 422 of the Code, which limits the grant
of "Incentive Stock Options" to executive officers and other senior managerial
and professional employees.
Shares Available.
Subject to adjustment as provided in the 1997 Plan, a maximum of 7,500,000
shares of the Company's common stock will be reserved for issuance thereunder.
As of the date hereof, 7,234,000 shares have been granted under the 1997 Plan.
If an option or stock appreciation right granted under the 1997 Plan expires
or is terminated or canceled, the unissued shares subject to such option or
stock appreciation right are again available under the 1997 Plan. In addition,
if shares sold or awarded as a bonus under the 1997 Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased are again available under the 1997 Plan. In the absence of an
effective registration statement under the Securities Act of 1933, as amended
(the "Act"), all shares granted under the 1997 Plan will be restricted as to
subsequent resales or transfer, pursuant to Rule 144 under the Act.
Term.
No awards shall be granted under the 1997 Plan after or on that date that
shall be ten years after the date the 1997 Plan was adopted by the Board of
Directors, although the 1997 Plan and all awards made under the 1997 Plan
prior to such termination date shall remain in effect until such awards have
been satisfied or terminated in accordance with the 1997 Plan and the terms of
such awards.
18
<PAGE>
Stock Option Grants (NSOs and ISOs).
The 1997 Plan Committee may grant Incentive Stock Options ("ISOs") and Non-
Statutory Stock Options ("NSOs") under the 1997 Plan. With respect to each
option grant, the 1997 Plan Committee will determine the number of shares
subject to the option, the option price, the period of the option, the time or
times at which the option may be exercised (including whether the option will
be subject to any vesting requirements and whether there will be any
conditions precedent to exercise of the option), and the other terms and
conditions of the option. Unless the Committee determines, in its sole
discretion, that there are circumstances which reasonably justify the
establishment of a lower option price, the option or exercise price per share
of NSOs shall be 100% of the fair market value of a share of the Company's
common stock on the date the NSOs are granted. The 1997 Plan specifies that
options granted thereunder may not be exercised at any time within six months
of the grant date of such options. Options granted under the plan expire six
months after the termination of the option holder's employment for reasons
other than permanent disability, retirement or death.
ISOs are subject to special terms and conditions. The aggregate fair market
value, on the date of the grant, of the common stock for which an ISO is
exercisable for the first time by the optionee during any calendar year may
not exceed $100,000. An ISO may not be granted to an employee who possesses
more than 10% of the total voting power of the Company's stock unless the
option price is at least 110% of the fair market value of the Common Stock
subject to the option on the date it is granted, and the option is not
exercisable for 5 years after the date of grant. No ISO may be exercisable
after 10 years from the date of grant. The option price may not be less than
100% of the fair market value of the Common Stock covered by the option at the
date of grant.
In connection with the grant of NSOs or ISOs, the 1997 Plan authorizes the
issuance of "Reload Options" which allow employees to receive options to
purchase that number of shares that shall equal (i) the number of shares of
common stock used to exercise underlying NSOs or ISOs, and (ii) if authorized
by the 1997 Plan Committee, the number of shares of common stock used to
satisfy any tax withholding requirement incident to the exercise of the
underlying NSOs or ISOs.
In general, no vested option may be exercised unless at the time of such
exercise the holder of such option is employed by or in the service of the
Company or any subsidiary thereof, within 36 months following termination of
employment by reason of death, 12 months following termination by reason of
permanent disability or retirement (or in the case of ISOs within 12 months of
termination for death or disability), or within six months following
termination for any other reason, except for cause, in which case all
unexercised options shall terminate forthwith. No shares may be issued
pursuant to the exercise of an option until full payment therefor has been
made. Upon the exercise of an option, the number of shares reserved for
issuance under the 1997 Plan will be reduced by the number of shares issued
upon exercise of the option.
Stock Appreciation Rights.
Two types of Stock appreciation rights ("SARs") may be granted under the
1997 Plan: "Alternate SARs" and "Limited Rights." Alternate SARs are granted
concurrently with or subsequent to stock options, and permit the option holder
to be paid, in common stock, the excess of the fair market value of each share
of common stock underlying the stock option at the date of exercise of the
Alternate SARs and the fair market value of each share of common stock
underlying the option at the grant date. The exercise of Alternate SARs shall
be in lieu of the exercise of the stock option underlying the SARs, and upon
such exercise a corresponding number of stock options shall be canceled.
Alternate SARs are exercisable upon the same terms and conditions as are
applicable to the options underlying them. Upon the exercise of an Alternate
SAR, the number of shares reserved for issuance under the 1997 Plan will be
reduced by the number of shares issued.
Limited Rights may be issued concurrently with or subsequent to the award of
any stock option or Alternate SAR under the 1997 Plan. Limited Rights allow
the holder thereof to be paid appreciation on the stock option or the amount
of appreciation receivable upon exercise of an Alternate SAR in cash and in
lieu of exercising such options or rights. Limited Rights are exercisable only
to the same extent and subject to the same conditions and
19
<PAGE>
within the same time periods as the stock options or Alternate SARs underlying
such Limited Rights. Limited Rights are exercisable in full for a period of
seven months following a change in control of the Company. Upon the exercise
of Limited Rights, the stock options or Alternate SARs underlying such Limited
Rights shall terminate. Cash payments upon the exercise of Limited Rights will
not reduce the number of shares of common stock reserved for issuance under
the 1997 Plan. No SARs have been granted under the 1997 Plan.
Stock Bonus Awards.
The 1997 Plan Committee may award shares of common stock as a stock bonus
under the 1997 Plan. The 1997 Plan Committee may determine the recipients of
the awards, the number of shares to be awarded, and the time of the award.
Stock received as a stock bonus is subject to the terms, conditions, and
restrictions determined by the 1997 Plan Committee at the time the stock is
awarded. No stock bonus awards have been granted under the 1997 Plan.
Cash Bonus Rights.
The 1997 Plan Committee may grant cash bonus rights under the 1997 Plan
either outright or in connection with (i) options granted or previously
granted, (ii) SARs granted or previously granted, (iii) stock bonuses awarded
or previously awarded, and (iv) shares issued under the 1997 Plan. Bonus
rights granted in connection with options entitle the optionee to a cash bonus
if and when the related option is exercised. The amount of the bonus is
determined by multiplying the excess of the total fair market value of the
shares acquired upon the exercise over the total option price for the shares
by the applicable bonus percentage. Bonus rights granted in connection with a
SAR entitle the holder to a cash bonus when the SAR is exercised, that is
determined by multiplying the amount received upon exercise of the SAR by the
applicable bonus percentage. Bonus rights granted in connection with stock
bonuses entitle the recipient to a cash bonus, in an amount determined by the
1997 Plan Committee, either at the time the stock bonus is awarded or upon the
lapse of any restrictions to which the stock is subject. No bonus rights have
been granted under the 1997 Plan.
Non-Assignability of 1997 Plan Awards.
No award under the 1997 Plan shall be assignable or transferable by the
recipient thereof, except by will or the laws of descent or pursuant to a
qualified domestic relations order as defined in the Code.
Changes in Capital Structure.
The 1997 Plan provides that if the outstanding common stock of the Company
is increased or decreased or changed into or exchanged for a different number
or kind of shares or other securities of the Company or of another corporation
by reason of any recapitalization, stock split or certain other transactions,
appropriate adjustment will be made by the 1997 Plan Committee in the number
and kind of shares available for grants under the 1997 Plan. In addition, the
1997 Plan Committee will make appropriate adjustments in the number and kind
of shares as to which outstanding options will be exercisable. In the event of
a merger, consolidation or other fundamental corporate transformation, the
Board may, in its sole discretion, permit outstanding options to remain in
effect in accordance with their terms; to be converted into options to
purchase stock in the surviving or acquiring corporation in the transaction;
or to be exercised, to the extent then exercisable, during a period prior to
the consummation of the transaction established by the 1997 Plan Committee or
as may otherwise be provided in the 1997 Plan.
Tax Consequences.
The following description addresses the federal income tax consequences of
the 1997 Plan. Although the Company believes the following statements are
correct based on existing provisions of the Code and legislative history and
administrative and judicial interpretations thereof, no assurance can be given
that changes will not
20
<PAGE>
occur which would modify such statements. Also, such statements are intended
only to provide basic information. Each 1997 Plan participant should consult
his or her own tax advisor concerning the tax consequences of participation in
the 1997 Plan because individual financial and federal tax situations may
vary, and state and local tax considerations may be significant.
Certain options authorized to be granted under the 1997 Plan are intended to
qualify as ISOs for federal income tax purposes. Under federal income tax law
currently in effect, the optionee will recognize no income upon grant or
exercise of the ISO. If an employee exercises an ISO and does not dispose of
any of the option shares within two years following the date of grant and
within one year following the date of exercise, then any gain realized upon
subsequent disposition of the shares will be treated as income from the sale
or exchange of a capital asset held for more than one year. If an employee
disposes of shares acquired upon exercise of an ISO before the expiration of
either the one-year holding period or the two-year waiting period, any amount
realized will be taxable as ordinary compensation income in the year of such
disqualifying disposition to the extent that the lesser of the fair market
value of the shares on the exercise date or the fair market value on the date
of disposition exceeds the exercise price. The Company will not be allowed any
deduction for federal income tax purposes at either the time of the grant or
the exercise of an ISO. Upon any disqualifying disposition by an employee, the
Company will generally be entitled to a deduction to the extent the employee
realized ordinary income.
Certain options authorized to be granted under the 1997 Plan will be treated
as NSOs for federal income tax purposes. Under federal income tax law
presently in effect, no income is realized by the grantee of an NSO until the
option is exercised. When the NSO is exercised, the optionee will realize
ordinary compensation income, and the Company will generally be entitled to a
deduction, in the amount by which the market value of the shares subject to
the option at the time of exercise exceeds the exercise price. Upon the sale
of shares acquired upon exercise of an NSO, the excess of the amount realized
from the sale over the market value of the shares on the date of exercise will
be taxable.
An employee who receives stock in connection with the performance of
services will generally realize income at the time of receipt unless the
shares are not substantially vested for purposes of Section 83 of the Code and
no election under Section 83(b) of the Code is filed within 30 days after the
original transfer. The Company generally will be entitled to a tax deduction
in the amount includable as income by the employee at the same time or times
as the employee recognizes income with respect to the shares. The Company is
required to withhold employment taxes on the amount of the income the employee
recognizes. A participant who receives a cash bonus right under the 1997 Plan
generally will recognize income equal to the amount of any cash bonus paid at
the time of receipt of the bonus, and the Company generally will be entitled
to a deduction equal to the income recognized by the participant.
Section 162(m) of the Code limits to $1 million per person the amount the
Company may deduct for compensation paid to any of its most highly compensated
officers. Compensation received through the exercise of an option or SAR will
not be subject to the $1 million limit if the option or SAR and the plan
pursuant to which it is granted meet certain requirements. The currently
applicable requirements are that the option or SAR be granted by a committee
of at least two disinterested directors and that the exercise price of the
option or the SAR be not less than fair market value of the Common Stock on
the date of grant. Accordingly, the Company believes compensation received on
exercise of options and SARs granted under the 1997 Plan in compliance with
the above requirements will not be subject to the $1 million deduction limit.
Amendments to 1997 Plan
The Committee may at any time and from time to time terminate or modify or
amend the 1997 Plan in any respect, including in response to changes in
securities, tax or other laws or rules, regulations or regulatory
interpretations thereof applicable to the 1997 Plan or to comply with stock
exchange rules or requirements.
21
<PAGE>
The following table summarizes certain information about options issued
under the 1997 Plan during 1997 and through March 31, 1998.
NEW PLAN BENEFITS
1997 STOCK OPTION AND INCENTIVE PLAN
<TABLE>
<CAPTION>
DOLLAR
NAME AND POSITION VALUE ($)(1) NO. OF UNITS
----------------- ------------ ------------
<S> <C> <C>
Stephen M. Studdert.......................... $ 0 350,000 Shares(2)
Chairman of the Board
Chief Executive Officer
Thomas A. Murdock............................ $ 0 350,000 Shares(2)
President, Chief Operating Officer
and Director
Roger D. Dudley.............................. $ 0 350,000 Shares(2)
Executive Vice President,
Director
Current Executive Officers as a Group........ $ 0 1,050,000 Shares
Current Directors who are not Executive
Officers as a Group......................... $ 0(1) 1,380,000 Shares(3)
All Employees who are not Executive Officers
as a Group.................................. $ 0 4,784,000 Shares(4)
</TABLE>
- --------
(1) Because the exercise price of such options is 100% of the closing market
price on the grant date, the options have no dollar value as of the grant
date. However, in the event the options are exercised when the market
price of the Company's common stock exceeds the option exercise price, the
difference between those prices will result in a gain to the exercising
option holder corresponding to the amount of such difference.
(2) Includes options to purchase 200,000 shares at exercise price of $6.00
granted October 28, 1997, and exercisable June 1, 1998, and 150,000 shares
at $5.156 granted March 18, 1998, and exercisable September 15, 1998.
(3) Includes options to purchase 200,000 shares at exercise price of $7.130
granted March 13, 1997 and exercisable September 13, 1998, 1,000,000
shares at exercise price of $6.00 granted October 28, 1997 and exercisable
June 1, 1998, and 180,000 shares at exercise price of $3.34 granted
January 23, 1998 and exercisable beginning July 23, 1998.
(4) Exercise prices range from $3.34 to $7.16 per share.
THE BOARD RECOMMENDS RATIFICATION OF THE 1997 STOCK OPTION AND INCENTIVE PLAN
----------------
PROPOSAL 4--APPROVAL OF THE ISSUANCE OF UP TO 6,666,666 SHARES OF RESTRICTED
STOCK TO PRIVATE INVESTORS, TOGETHER WITH SUCH ADDITIONAL AMOUNTS OF COMMON
STOCK AS MAY BE ISSUABLE AS A RESULT OF "RESET" AND "RESET ADJUSTMENT
PROVISIONS APPLICABLE TO SUCH SHARES.
In March 1998, the Company completed a private placement (the "Offering") of
up to 6,666,666 shares (the "Shares") of its restricted common stock to seven
separate investment funds. The total purchase price to be paid by the
investors for the Shares is $30,000,000. Of that amount, $15,000,000 was
provided to the Company on March 12, 1998, in return for which the Company
issued a total of 3,333,333 of the Shares, pro rata to the investors in
proportion to the total amount of the purchase price paid by them. The
remainder of the purchase price is to be paid by the investors on July 27,
1998, provided that, as of that date, certain conditions are satisfied.
Specifically, such conditions include the following: (i) that the registration
statement covering all of the Common Stock to be issued is effective as of
such date, (ii) the representations and warranties of the Company as set forth
in the documents underlying the Offering shall be correct in all material
respects, (iii) the market price of the Company's common stock shall exceed
$4.50 per share, (iv) the dollar volume of trading in the Company's common
stock for the 10-trading-day period preceding such date shall equal or exceed
$1,000,000, (v) that there
22
<PAGE>
shall be at least 18 market makers for the Company's common stock, and (vi)
there shall be no material adverse change in the Company's business or
financial condition.
Additionally, the investors in the Offering will have certain "reset" rights
pursuant to which the investors will receive additional shares of restricted
common stock ("Reset Shares") if the average market price of the Company's
Common Stock for the 60-day periods following the initial closing date and the
second funding date does not equal or exceed $5.40 per share. The number of
Reset Shares that will be issued, if any, will be determined by dividing (x)
the product of (A) the amount by which such 60-day average price is less than
$5.40 and (B) the number of Shares issued to the investor by (y) the 60-day
average price. The investors in the offering also have certain first rights of
refusal and other rights if the Company conducts other offerings in the near
future with other investors and the terms of such other offerings are more
advantageous to such other investors than the terms of the Offering.
The number of shares of common stock issued pursuant to the reset rights
described immediately above is subject to further adjustment if, at any time
prior to or on the 60th day following the date on which the reset amount for
the shares issued on the second funding date is calculated, the Company sells
common stock or securities convertible into common stock at a discount of
16.66% or more from the closing bid price of the common stock as reported on
the Nasdaq Stock Market as of the date of such other transaction (the
"Discount Percentage"). The number of additional shares of common stock issued
in respect of such adjustment is referred to herein as "Reset Adjustment
Shares". The number of Reset Adjustment Shares issuable shall be obtained by
multiplying (i) the number of Reset Shares issued by (ii) the quotient of (x)
the Adjusted Yield divided by (y) .20. "Adjusted Yield" shall for purposes of
this calculation be the quotient of (A) the Discount Percentage divided by (B)
the difference of 1 minus the Discount Percentage.
New Nasdaq SmallCap Market Rule 4310(c)(25)(H), which became effective as of
January 26, 1998 requires shareholder approval for the issuance of shares of
common stock in a transaction or series of transactions involving, among other
types of transactions, the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) equal to 20% or
more of the common stock or 20% or more of the voting power obtained before
the issuance for less than the greater of book or market value of the stock.
The number of Shares issued in connection with the Offering will not exceed
20% of the voting power outstanding before the issuance. However, it is
possible that the aggregate number of shares of common stock, including the
Shares, the Reset Shares and Reset Adjustment Shares, if any, could exceed 20%
of the voting power outstanding prior to the Offering. In such event, under
applicable Nasdaq Stock Market Rules, the approval of the Company's
shareholders would be necessary to issue the total number of Reset Shares and
Reset Adjustment Shares the Company is contractually obligated to issue.
In recognition of this possibility, the Company covenanted with the
investors who participated in the Offering that, not later than August 1,
1998, the Company would hold a regular or special meeting of its shareholders
at which the Board of Directors would recommend that the shareholders approve
the issuance of the Shares and any Reset Shares or Reset Adjustment Shares as
contemplated by the agreements executed in connection with the Offering to the
extent that such issuances could result in the issuance of more than 20% of
the Company's voting common stock outstanding immediately prior to the
Offering. Additionally, and as part of the Offering, Thomas A. Murdock, an
executive officer and director of the Company, and the sole trustee of a
voting trust into which is deposited a total of 25,657,749 shares of the
Company's common stock, covenanted that he would vote all of the shares of
common stock deposited into the voting trust in favor of this Proposal. The
Company's Board of Directors determined that the consummation of the
transactions contemplated by the Offering furthered the best interests of the
Company and therefore approved such transactions. The Company's Board of
Directors now recommends that the Company's shareholders vote to approve the
transactions contemplated by the Offering. Approval by a majority of the votes
cast by the holders of shares entitled to vote thereon will be required to
approve the proposal.
THE BOARD RECOMMENDS APPROVAL OF PROPOSAL 4
----------------
23
<PAGE>
PROPOSAL 5--APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of the Company has selected the international
certified public accounting firm of Arthur Andersen LLP ("Arthur Andersen") as
the independent public accountant for the Company for the fiscal year ending
December 31, 1998. Arthur Andersen audited the Company's financial statements
for the fiscal year ended December 31, 1997, and also has audited the
financial statements of AcuVoice, Inc., incident to the Company's acquisition
of AcuVoice in March 1998. Deloitte & Touche LLP ("Deloitte & Touche") was
appointed as the Company's independent accountant for the fiscal year ended
December 31, 1997. Pritchett, Siler & Hardy, P.C., served as the Company's
independent public accountant for the fiscal year ended December 31, 1995.
The Company engaged Pritchett, Siler & Hardy on February 9, 1995 to provide
outside accounting and auditing services for the Company related to the 1994
audit. At that time, the Pritchett, Siler & Hardy firm was named Peterson,
Siler & Stevenson. It subsequently changed its name to Pritchett, Siler &
Hardy, P.C., and that firm continued as the Company's independent accountant
until March 24, 1997, when the Company engaged Deloitte & Touche. Deloitte &
Touche audited the Company's financial statements for the fiscal year ended
December 31, 1996. On February 24, 1998 the Company appointed Arthur Andersen
to replace Deloitte & Touche as independent accountants of the Company for the
fiscal year ended December 31, 1997. Deloitte resigned as the Company's
independent auditors on February 23, 1998.
The report of Deloitte & Touche on the Company's consolidated financial
statements for the year ended December 31, 1996 contained no adverse opinion
or disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principle, except that Deloitte's report on the
consolidated financial statements for the year ended December 31, 1996
included an explanatory paragraph with respect to the Company being in the
development stage and its having suffered recurring losses which raise
substantial doubt about its ability to continue as a going concern. In
connection with the audit for the year ended December 31, 1996, and through
February 23, 1998, the Company has had no disagreements with Deloitte & Touche
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Deloitte would have caused it to make
reference thereto in its report on the consolidated financial statements for
such year. During the year ended December 31, 1996, and through February 23,
1998, there were no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K).
There were no disagreements between the Company and Pritchett, Siler &
Hardy. That firm did, however, include in its Independent Auditors' Report for
the 1995 fiscal year an explanatory paragraph with respect to the Company
being in the development stage and its having suffered recurring losses which
raise substantial doubt about its ability to continue as a going concern.
The Company's decision to engage Arthur Andersen was approved by the
Company's Board of Directors. At the Annual Meeting, shareholders will be
asked to ratify the selection by the Board of Directors of Arthur Andersen as
the Company's independent accountant for the 1998 fiscal year.
THE BOARD RECOMMENDS SHAREHOLDER APPROVAL OF THE SELECTION OF ACCOUNTANT
Representatives of Arthur Andersen are expected to attend the Annual Meeting
and will have an opportunity to make a statement if they desire to do so, and
they will be available to answer appropriate questions from shareholders.
----------------
24
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not intend to present and has not been informed that any other
person intends to present a matter for action at the Annual Meeting other than
as set forth herein and in the Notice of Annual Meeting. If any other matter
properly comes before the meeting, it is intended that the holders of proxies
will act in accordance with their best judgment.
The accompanying proxy is being solicited on behalf of the Board of
Directors of the Company. In addition to the solicitation of proxies by mail,
certain of the officers and employees of the Company, without extra
compensation, may solicit proxies personally or by telephone, and, if deemed
necessary, third party solicitation agents may be engaged by the Company to
solicit proxies by means of telephone, facsimile or telegram, although no such
third party has been engaged by the Company as of the date hereof. The Company
will also request brokerage houses, nominees, custodians and fiduciaries to
forward soliciting materials to the beneficial owners of Common Stock held of
record and will reimburse such persons for forwarding such material. The cost
of this solicitation of proxies will be borne by the Company.
----------------
ANNUAL REPORT
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K (INCLUDING FINANCIAL
STATEMENTS AND FINANCIAL STATEMENT SCHEDULES) FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO THE COMPANY--
ATTENTION: JEFFREY N. CLAYTON, VICE PRESIDENT/LEGAL, 1225 EAGLE GATE TOWER, 60
EAST SOUTH TEMPLE STREET, SALT LAKE CITY, UTAH 84111. A REQUEST FOR A COPY OF
THE COMPANY'S ANNUAL REPORT ON FORM 10-K MUST SET FORTH A GOOD-FAITH
REPRESENTATION THAT THE REQUESTING PARTY WAS EITHER A HOLDER OF RECORD OR A
BENEFICIAL OWNER OF COMMON STOCK OF THE COMPANY ON JUNE 8, 1998. Exhibits to
the Form 10-K, if any, will be mailed upon similar request and payment of
specified fees to cover the costs of copying and mailing such materials.
A Copy of the Company's 1997 Annual Report to Shareholders is being mailed
with this Proxy Statement, but is not deemed a part of the proxy soliciting
material.
----------------
SHAREHOLDER PROPOSALS
Any shareholder proposal intended to be considered for inclusion in the
proxy statement for presentation in connection with the 1999 Annual Meeting of
Shareholders must be received by the Company by December 31, 1998. The
proposal must be in accordance with the provisions of Rule 14a-8 promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934. The Company suggests that any such request be submitted by certified
mail--return receipt requested. The Board of Directors will review any
proposal which is received by December 31, 1998, and determine whether it is a
proper proposal to present to the 1999 Annual Meeting.
The enclosed Proxy is furnished for you to specify your choices with respect
to the matters referred to in the accompanying notice and described in this
Proxy Statement. If you wish to vote in accordance with the Board's
recommendations, merely sign, date and return the Proxy in the enclosed
envelope which requires no postage if mailed in the United States. A prompt
return of your Proxy will be appreciated.
By Order of the Board of Directors
[Signature of Jeffrey N. Clayton]
Jeffrey N. Clayton,
Secretary
Salt Lake City, Utah
June 12, 1998
25
<PAGE>
APPENDICES
1. FORM OF PROXY
2. fonix corporation 1998 STOCK OPTION AND INCENTIVE PLAN*
3. fonix corporation 1997 STOCK OPTION AND INCENTIVE PLAN*
* Copies of 1997 and 1998 Stock Option and Incentive Plans previously
submitted with Preliminary Proxy Materials.
26
<PAGE>
_______________________________________________________________________________
PROXY
fonix corporation
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas A. Murdock and Roger D. Dudley and
each of them as Proxies, with full power of substitution, and hereby authorizes
them to represent and vote, as designated below, all shares of Common Stock of
the Company held of record by the undersigned at the Annual Meeting of
Shareholders to be held at the Marriott Hotel, 75 South West Temple Street,
Salt Lake City, Utah 84101, on Tuesday, July 14, 1998, at 10:00 a.m., MDT, or
at any adjournment thereof.
1. Election of Directors.
[_] FOR [_] WITHHOLD AS TO ALL [_] FOR ALL EXCEPT
(INSTRUCTIONS: If you mark the "FOR ALL EXCEPT" category above, indicate the
nominee(s) as to which you desire to withhold authority by striking a line
through such nominee(s) name in the list below:)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Stephen M. Studdert Joseph Verner Reed Thomas A. Murdock Alan C. Ashton, Ph.D.
Reginal K. Brack Roger D. Dudley John A. Oberteuffer, Ph.D. Rick D. Nydegger
2. To approve the Company's 1998 Stock Option and Incentive Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
3. To ratify the Company's adoption of the 1997 Stock Option and Incentive
Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
4. To approve the issuance by the Company of up to 6,666,666 shares of
restricted common stock to private investors, together with such additional
amounts of common stock as may be issuable as a result of certain "reset" and
"reset adjustment" provisions applicable to such shares.
[_] FOR [_] AGAINST [_] ABSTAIN
5. To approve the Board of Directors' selection of Arthur Andersen LLP, as
the Company's independent public accountant for the fiscal year ended December
31, 1998.
[_] FOR [_] AGAINST [_] ABSTAIN
6. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Annual Meeting.
</TABLE>
_______________________________________________________________________________
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1 THROUGH 5.
Please sign and date this Proxy where shown below and return it promptly:
Date: _________________, 1998
_____________________________
(SIGNED)
_____________________________
(SIGNATURE(S))
_____________________________
PLEASE SIGN ABOVE EXACTLY AS THE SHARES ARE ISSUED. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, AS EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
_______________________________________________________________________________
