<PAGE>
As filed with the Securities and Exchange Commission on April 15, 1998
Registration Statement No. 333-_________
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
----------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
FONIX CORPORATION
(Exact name of registrant as specified in its charter)
----------------------
DELAWARE 22-2994719
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1225 EAGLE GATE TOWER
60 EAST SOUTH TEMPLE STREET
SALT LAKE CITY, UTAH 84111
(801) 328-0161
(Address, including zip code, and
telephone number, including area code,
of registrant's principal
executive offices)
----------------------
JEFFREY N. CLAYTON, ESQ.
VICE PRESIDENT/LEGAL
FONIX CORPORATION
1225 EAGLE GATE TOWER
60 EAST SOUTH TEMPLE STREET
SALT LAKE CITY, UTAH 84111
(801) 328-0161
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
COPY TO:
JEFFREY M. JONES, ESQ.
DURHAM, EVANS, JONES & PINEGAR, P.C.
50 SOUTH MAIN STREET, SUITE 850
SALT LAKE CITY, UTAH 84111
-i-
<PAGE>
Approximate date of commencement of proposed sale to the public: from time
to time after the effective date of this Registration Statement as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _______.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ________.
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT AGGREGATE AGGREGATE AMOUNT OF
TITLE OF CLASS OF SECURITIES TO BE PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE PRICE FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 6,666,666 shares(1) $4.71875 (2) $31,458,330 (2) $ 9,280
$.0001 par value per share
Common Stock, 4,410,256 shares(3) $4.71875 (2) $20,810,896 (2) $ 6,139
$.0001 par value per share
================= =========== =======
Totals 11,076,922 shares $52,269,225 $15,419
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) All shares offered for resale by the Selling Stockholders.
(2) The fee is estimated pursuant to Rule 457(c) under the Act on the basis of
the average of the bid and asked price of the Company's Common Stock as
reported on the Nasdaq SmallCap Market on April 13, 1998.
(3) Represents estimate of number of shares ("Reset Shares") issuable by the
Company pursuant to a "reset adjustment" in connection with which the
Company has agreed with the Selling Shareholders that the Company will
issue additional shares of Common Stock for no additional consideration in
certain circumstances. [See Selling Stockholders--Reset Provision]
-ii-
<PAGE>
Pursuant to Rule 416, there are also registered hereby such additional
indeterminate number of shares of such Common Stock as may become issuable as
dividends or to prevent dilution resulting from stock splits, stock dividends or
similar transactions or to provide for changes in the number of shares of Common
Stock as are issuable as Reset Shares.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
OF THE ACT, MAY DETERMINE.
==============================================================================
-iii-
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION DATED APRIL 15, 1998
[LOGO OF FONIX CORPORATION]
FONIX CORPORATION
11,076,922 SHARES
COMMON STOCK, PAR VALUE $.0001 PER SHARE
This Prospectus relates to 11,076,922 shares of Common Stock, $.0001 par
value, (the "Shares") of fonix corporation, a Delaware corporation (the
"Company", the "Registrant" or "fonix") consisting of: (i) 6,666,666 shares of
stock issued or issuable pursuant to a private placement of the Company's Common
Stock in March 1998, and (ii) 4,410,256 shares of Common Stock that may be
issuable by the Company pursuant to a "reset" agreement with the seven selling
shareholders (the "Selling Shareholders") as part of the March 1998 private
placement in connection with which the Company has agreed to issue additional
shares of Common Stock for no additional consideration if the average market
price of the Company's Common Stock is less than $5.40 per share during two 60-
day periods the first of which will end, at the earliest, 60 days after the
effectiveness of this registration statement (the "First Reset Period"), and the
second of which will end, at the earliest, 61 days after the end of the First
Reset Period (the "Second Reset Period"). See "The Company" and "Selling
Stockholders." All of the securities registered hereby are, or will be as of
the time issued, owned of record by seven selling stockholders (the "Selling
Stockholders") and are hereby offered for resale by such Selling Stockholders.
The Company will receive no proceeds from the sale of such Shares. To the extent
the Shares were issued as of the date hereof, and if any of the Shares are
issued after the date hereof, such issuances will be pursuant to an exemption
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act"), provided by Section 4(2) thereof and the rules and
regulations promulgated thereunder. The Shares are being registered by the
Company pursuant to Registration Rights Agreements between the Company and the
Selling Stockholders as a condition to the Selling Stockholders' acquisition of
the Shares in the March 1998 private placement.
The Shares may be offered, without limitation, by the Selling Stockholders,
or by their pledgees, donees, transferees or other successors in interest, from
time to time on the Nasdaq SmallCap Market, in ordinary brokerage transactions,
in negotiated transactions, or otherwise, at market prices prevailing at the
time of sale, at prices related to such market prices or at negotiated prices.
See "Selling Stockholders" and "Plan of Distribution." The Company has agreed
to indemnify the Selling Stockholders against certain liabilities, including
certain liabilities under the Securities Act, or to contribute to payments
which such Selling Stockholders may be required to make in respect thereof. See
"Plan of Distribution". The Company will bear certain expenses incurred in
effecting the registration of the Shares. Notwithstanding the inclusion in this
Prospectus of the Shares, the Selling Stockholders have no obligation to sell
any or all of the Shares.
The Company's Common Stock, par value $.0001 per share, is listed on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
and traded on the Nasdaq SmallCap Market. The last reported bid price of the
Common Stock on the Nasdaq SmallCap Market on April 13, 1998 was $4.6875 per
share.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.
<PAGE>
THE SHARES HAVE NOT BEEN REGISTERED FOR SALE BY THE SELLING STOCKHOLDERS UNDER
THE SECURITIES LAWS OF ANY STATE AS OF THE DATE OF THIS PROSPECTUS. BROKERS OR
DEALERS EFFECTING TRANSACTIONS IN THE SHARES SHOULD CONFIRM THE REGISTRATION
THEREOF UNDER THE SECURITIES LAWS OF THE STATES IN WHICH SUCH TRANSACTIONS
OCCUR, OR THE EXISTENCE OF AN EXEMPTION FROM REGISTRATION.
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
______________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
_____________________
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
PRICE TO PUBLIC UNDERWRITING DISCOUNTS AND PROCEEDS TO ISSUER OR
COMMISSIONS (1) OTHER PERSONS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit $ 4.6875 (2) 0 0 (3)
Total $ 51,923,072 (2) 0 0 (3)
- -----------------------------------------------------------------------------------
</TABLE>
(1) None, to the Company's knowledge.
(2) Based on the closing bid price of the Company's Common Stock as
reported on the Nasdaq SmallCap Market on April 13, 1998. Represents
estimate of price to public, assuming sales of all Shares at closing
bid price as of April 13, 1998. The actual price at which the
securities covered by this Prospectus may be offered to the public may
vary and could be substantially different. See "Selling
Stockholders".
(3) The Company will receive none of the proceeds of sales of the
securities offered by this Prospectus. The Company can provide no
estimate of the proceeds the Selling Stockholders would receive upon
sales of the securities offered by this Prospectus. See "Selling
Stockholders" and "Plan of Distribution".
The date of this Prospectus is April ___, 1997.
2
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission
pursuant to the informational requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials also may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, the Company is
required to file electronic versions of these documents through the Commission's
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). The
Commission maintains a World Wide Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants filed electronically with the Commission. The Common Stock of the
Company is traded on the Nasdaq SmallCap Market. Reports and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments, supplements, exhibits and schedules thereto,
the "Registration Statement") under the Securities Act with respect to the
Shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, as certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information pertaining to the Company and the Shares, reference is made
to the Registration Statement. Statements contained in this Prospectus
regarding the contents of any agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such agreement
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including all exhibits and schedules thereto, may be inspected
without charge at the office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from the Commission at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and materials filed by the Company with the
Commission are incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, filed with the Commission on April 13, 1998;
(ii) The Company's Current Report on Form 8-K, dated January 28, 1998,
filed with the Commission on February 3, 1998;
(iii) The Company's Current Report on Form 8-K, dated February 11, 1998,
filed with the Commission on February 17, 1998;
(iv) The Company's Current Report on Form 8-K, dated February 23, 1998,
filed with the Commission on March 2, 1998, and Amendment No. 1
thereto filed with the Commission on March 5, 1998;
3
<PAGE>
(v) The Company's Current Report on Form 8-K, dated March 13, 1998, filed
with the Commission on March 30, 1998; and
(vi) The description of the Company's Common Stock included in the
Company's Registration Statement on Form 8-A, as filed with the
Commission on April 1, 1994.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the termination of the offering of the Shares registered hereby shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated by reference into this
Prospectus (without exhibits to such documents other than exhibits specifically
incorporated by reference into such documents). All such requests shall be
directed to: fonix corporation, 1225 Eagle Gate Tower, 60 East South Temple
Street, Salt Lake City, Utah 84111, Attention: Jeffrey N. Clayton, Esq.,
Telephone: (801) 328-0161. Certain of the documents incorporated herein by
reference are available at the Commission's World Wide Web site at
http://www.sec.gov.
_____________________
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this Prospectus and in the documents incorporated
herein constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. For this purpose,
any statements contained herein or incorporated herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "plans," "anticipates," "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the results of the
Company to differ materially from those indicated by such forward-looking
statements. These factors include those set forth in "Risk Factors" herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus or incorporated
herein by reference and the financial statements which are incorporated herein
by reference.
THE COMPANY.................fonix corporation (the "Company") is a development
stage company engaged in research and development of
certain proprietary automated computer voice
recognition technologies and related technologies.
The Company's present marketing direction is to
focus on licensing its technologies to and entering
into co-development relationships and strategic
alliances with third parties that are participants
in the horizontal computer industry (including
producers of application software, operating
systems, computers and microprocessor chips) or that
are research and development entities, including
academia, government, industry and commercial speech
product developers. The Company intends for the
foreseeable future to generate revenues from such
licensing fees and strategic partnerships and
alliances, rather than from the direct manufacture
of products incorporating the Company's proprietary
technologies. The Company to date has generated only
limited revenues from operations. It has entered
into one strategic alliance and licensing
arrangement and one collaborative research
arrangement. See "The Company".
RISK FACTORS................Any investment in the Shares involves substantial
risk. See "Risk Factors".
SECURITIES OFFERED..........11,076,922 shares of the Company's Common Stock, par
value $.0001 per share, that are issued or issuable
by the Company to the Selling Stockholders. See
"Selling Stockholders."
OFFERING PRICE..............All or part of the Shares offered hereby may be sold
from time to time in amounts and on terms to be
determined by the Selling Stockholders at the time
of sale. See "Plan of Distribution".
USE OF PROCEEDS.............The Company will receive no part of the proceeds
from the sale of the Shares registered pursuant to
this Registration Statement.
SELLING STOCKHOLDERS........The Shares being offered hereby are being offered
for the account of the Selling Stockholders
specified under the caption "Selling Stockholders".
ADDRESS AND TELEPHONE NUMBER
OF THE COMPANY..............1225 Eagle Gate Tower, 60 East South Temple Street,
Salt Lake City, Utah 84111. Tel. (801) 328-0161
NASDAQ SMALLCAP MARKET
TRADING SYMBOL.............."FONX"
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND
SHOULD NOT BE MADE BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. IN CONNECTION WITH THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY IS HEREBY IDENTIFYING
IMPORTANT FACTORS THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS OF THE COMPANY
MADE BY OR ON BEHALF OF THE COMPANY. THE COMPANY ADVISES READERS NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS IN LIGHT OF THE RISKS AND
UNCERTAINTIES TO WHICH THEY ARE SUBJECT. THE FOLLOWING FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS.
Limited Revenues; Substantial and Continuing Losses; Accumulated Deficit;
Future Dilution. Since commencing its business of developing its automatic
speech recognition technologies ("ASRT") and certain other proprietary
technologies, including data compression and neural network design technologies
(collectively the ASRT and such other related technologies are referred to in
this Prospectus as the "Core Technologies") until February 1998, the Company had
no revenues from operations. In February 1998, the Company received its first
revenue under a license granted to Siemens Aktiengesellschaft ("Siemens")
related to integrated circuits suitable for certain telecommunications
applications. Since its inception, however, the Company has sustained ongoing
losses associated with its research and development costs. The Company incurred
a net loss of $7,829,508 for the year ended December 31, 1996 and a net loss
attributable to Common Stockholders of $25,175,939 for the year ended December
31, 1997. The auditors' reports for the Company's financial statements for
fiscal years 1997, 1996 and 1995 include an explanatory paragraph regarding
substantial doubt about the Company's ability to continue as a going concern.
Losses of this magnitude are expected to continue for the near term and until
such time as the Company is able to complete additional licensing or co-
development arrangements with third parties which produce revenues sufficient to
offset losses associated with the Company's ongoing operating expenses, and
there can be no assurance that the Company will achieve profitable operations or
that profitable operations will be sustained if achieved. At December 31, 1997,
the Company's accumulated deficit was $45,017,476. fonix anticipates incurring
additional research and development expenses for the foreseeable future, which
will require substantial amounts of additional cash on an ongoing basis. fonix
must continue to secure additional financing to complete its research and
development activities, and to seek and engage in negotiations with potential
strategic alliance partners and otherwise market its technology to industry
segments that can incorporate the Company's technologies into their products.
fonix believes that the cash generated to date from its financing activities and
the Company's ability to raise cash in future financing activities will be
sufficient to satisfy its working capital requirements through at least the next
twelve-month period. However, there can be no assurance that this assumption
will prove to be accurate or that events in the future will not require the
Company to obtain additional financing sooner than presently anticipated or
preclude the Company from receiving necessary additional capital when and as
needed. Furthermore, to the extent that the Company's future financing
activities involve the issuance of equity securities or securities convertible
into equity securities, additional, and possibly substantial, dilution to the
interests of the Company' stockholders will result. Although the Company
continues to investigate several financing alternatives, including strategic
partnerships, private, debt and equity financing and other sources in relation
to its ongoing and research and development activities, there can be no
assurance that the current levels of funding or additional funding will be
available when needed, or if available will be on terms satisfactory to the
Company. Failure to obtain additional financing could have a material adverse
effect on the Company, including possibly requiring it to significantly curtail
its operations. See December 31, 1997 Form 10-K "Item 1. Description of
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Development Stage of fonix's Core Technologies. While the Company
generally is pleased with the progress made to date with respect to the research
and development of its Core Technologies, at December 31, 1997, there were no
products incorporating the Core Technologies. As a development stage company,
the Company continues its efforts to enter into revenue-generating licensing and
co-development arrangements or strategic alliances with third parties. Other
than the arrangements with Siemens and a collaborative research agreement with
OGI, the Company has no licensing or co-development agreements with any third
party and, other than the non-refundable license fee paid by Siemens, the
Company has received no revenue to date from its ASRT. fonix presently
anticipates that any products incorporating the Company's Core Technologies
would be manufactured and marketed by such third party licensees and co-
development and strategic alliance partners such as Siemens, and therefore has
no plans to manufacture products incorporating the ASRT for the foreseeable
future. There can be no assurance
6
<PAGE>
that the Company will be able to license its Core Technologies to third parties
other than Siemens or enter into additional co-development or strategic alliance
agreements.
Implementation of Business Strategy. fonix's business strategy is to
achieve revenues through appropriate strategic alliances, co-development
arrangements and license agreements. To date, the Company has entered into one
revenue-generating license and a strategic alliance with Siemens, a strategic
collaborative alliance with OGI, and the acquisition of AcuVoice, Inc. Although
the Company will receive revenues from the sale of AcuVoice products and
technology, only the Siemens agreement has produced revenue to date from the
Company's Core Technologies. fonix's ability to implement its strategy fully
over the long term, and the ultimate success of this strategy, are subject to a
broad range of uncertainties and contingencies, many of which are beyond the
Company's control. fonix may not be able to achieve the revenue growth it is
seeking as a result of incompatibilities between its Core Technologies and the
needs of third-party developers and manufacturers or an unwillingness of
companies with existing voice recognition products to integrate the Company's
technologies. In addition, there can be no assurance that the Company will be
able to enter into revenue-generating licensing or co-development arrangements
or to implement strategic relationships, or, if entered into, that such
strategic relationships will in fact further the implementation of the Company's
business strategy.
Management of Expanded Operations. The Company may not be equipped to
successfully manage any future periods of rapid growth or expansion, which could
be expected to place a significant strain on the Company's managerial,
operating, financial and other resources. The Company is highly dependent upon
the efforts of management, and the Company's future performance will depend, in
part, upon the ability of management to manage growth effectively (including the
growth resulting from the recent acquisition of AcuVoice), which will require
the Company to implement additional financial control systems and management
information systems capabilities, to further develop its operating,
administrative, financial and accounting systems and controls, to maintain close
coordination among engineering, accounting, finance, marketing, sales and
operations, and to hire and train additional technical and marketing personnel.
There is intense competition for management, technical and marketing personnel
in the areas of the Company's activities. The loss of the services of any of
the Company's management or the failure to attract and retain additional key
employees could have a material adverse effect on the Company's business,
operating results and financial condition.
Budget and Cost Overruns; Production Delays. The Company budgets the cost
of each project, reviews cost reports and updates its cost projections
regularly. However, there can be no assurance that the actual production costs
for its projects will remain within budget. Risks such as production delays,
higher talent costs, increased subcontractor costs, and other unanticipated
events may substantially increase production costs and delay or even prevent
completion of the production of any one or more of the Company's projects now or
in the future. The failure to remain within budget and timely complete a
production may have a material adverse effect on the Company's operations.
Unproven Market; Risks of New Technology. The market for speech
recognition technologies is relatively new. fonix's Core Technologies are new
and represent a significant departure from technologies which have already found
a degree of acceptance in the nascent voice recognition marketplace. The
financial performance of the Company will depend, in part, on the future
development, growth and ultimate size of the market for voice recognition
products generally, and products incorporating the Company's Core Technologies
specifically. Products, if any, incorporating the Company's Core Technologies
will compete with more conventional means of information processing (e.g., data
entry or access by keyboard or touch-tone phone). fonix believes that there is
a substantial potential market for products incorporating speaker-independent,
natural language, continuous speech recognition technology with vocabulary
contextually sufficient to be useful for general purpose consumer, commercial
and industrial use, and capable of operating in real time with acceptable levels
of accuracy. Nevertheless, there can be no assurance that any market for the
Company's Core Technologies or for products incorporating the Company's Core
Technologies will develop, or that the Company's technology will find general
acceptance in the marketplace, or that sales of products incorporating the Core
Technologies will be profitable. Accordingly, the Company is subject to all of
the risks inherent in developing and marketing new products based on new
technology, together with the risks associated with market acceptance of such
technology, technological obsolescence, inappropriate and/or illegal
intellectual property appropriation and inadequate funding to commence and/or
sustain operations. Even if the Core Technologies are licensed and products
incorporating such technologies are manufactured and marketed, the occurrence of
warranty or product liability, or retraction of market acceptance due to product
failure, excess product returns or failure of the products to meet market
expectations could prevent the Company from achieving or sustaining profitable
operations.
7
<PAGE>
Reliance on Strategic Partners fonix's strategy for commercialization of
its Core Technologies depends, in material part, upon the formation of strategic
alliances and licensing arrangements and, ultimately, the marketing of a suite
of fonix-branded products. To date, the Company has formed only two strategic
alliances, with Siemens and OGI, and the Company's ability to generate revenue
in association with those alliances is subject to several factors, including the
negotiation and execution of and performance under additional agreements with
Siemens pertaining to the development and/or application of specific
technologies and the joint development of commercially viable technologies under
the OGI Agreement and the successful licensing of such technologies to third
parties. fonix anticipates that, in addition to the arrangement with Siemens,
it will need to enter into additional revenue-generating strategic alliances or
co-development arrangements with other parties to fully implement its business
strategy, although the Company has not entered into any such additional
arrangements to date. There can be no assurance that the strategic alliances
with Siemens or OGI will generate substantial royalty or license fees or that
the Company will be able to establish additional strategic alliance or licensing
arrangements, or if established that any such additional arrangements or
licenses will be on terms favorable to the Company, or that any strategic
alliances or licensing arrangements ultimately will be successful. Moreover,
even under the Siemens or OGI arrangements or any additional licensing or co-
development arrangements, if any are signed, the extent of revenues to the
Company resulting from such agreements will depend on factors beyond the
Company's control such as the timing and extent of manufacture of products
incorporating the Company's Core Technologies, the scope of the marketing effort
related to such products, the price of any product or products incorporating the
Company's Core Technologies, and competition from new or existing products.
Additionally, disputes may arise with respect to the ownership of and royalty or
other payments for rights to any technology developed with strategic partners.
These and other possible disagreements between strategic partners and the
Company could lead to delays in the collaborative research, development or
commercialization of certain product candidates, or could require or result in
litigation or arbitration, which could be time consuming and expensive, and
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition and Technological Change. The computer hardware and software
industries are highly and intensely competitive. In particular, the speech
recognition field and the computer voice and communications industries are
characterized by rapid technological change. Competition in the field of speech
recognition is based largely on marketing ability and resources and
technological superiority. The development of new technology or material
improvements to existing technologies by the Company's competitors may render
the Company's technology obsolete. Accordingly, the success of the Company will
depend upon its ability to continually enhance its Core Technologies to keep
pace with or ahead of technological developments and to address the changing
needs of the marketplace. Although the Company expects to continue to devote
significant resources to research and development activities, there can be no
assurance that these activities will allow the Company's Core Technologies to
successfully be incorporated into marketable products or to keep pace with
changing demands and needs of the marketplace. In addition, there can be no
assurance that the introduction of products or technological developments by
others will not have a material adverse effect on the Company's operations.
Although the Company believes that its Core Technologies could beneficially be
incorporated into most existing computer speech recognition applications based
on traditional Hidden Markov Models ("HMMs") technology, several companies
already manufacture and market computer speech recognition products against
which products incorporating the Core Technologies would compete. Some, if not
all, of those companies have greater experience in manufacturing and marketing
speech recognition products, and some have far greater financial and other
resources than the Company and/or its potential licensees and co-developers, as
well as broader name-recognition, more-established technology reputations, and
mature distribution channels for their products. Multiple computer speech
recognition products are presently available that provide continuous speech
dictation capabilities. Such products could have the effect of desensitizing
the market to new dictation products and increasing the installed base of
products incorporating traditional voice recognition technologies.
Additionally, as the market for automatic speech recognition expands and
matures, the Company expects more entrants into this already competitive arena.
There can be no assurance that the distinguishing characteristics of the Core
Technologies as completed and/or as may be enhanced in the future and any
products employing such technology will be sufficient to allow the Company to
successfully compete in the marketplace.
Need for Additional Financing. The development of the Company's Core
Technologies has required that the Company establish a substantial research and
scientific infrastructure consisting of teams of experts in, among others, the
fields of computer programming and design, electrical engineering and
linguistics, as well as the assembly of certain specialized equipment and
developmental and diagnostic software and hardware, some of which has been
designed and built exclusively by the Company. fonix has consumed substantial
amounts of cash to date in developing this infrastructure and in developing and
refining its Core Technologies. During the year ended December 31, 1996, the
Company incurred total research and development expenses in the amount of
$4,758,012. During 1997, the Company incurred total research and development
expenses of $7,066,294. fonix anticipates that its research and development
expenditures will continue at present rates or increased rates for the
foreseeable
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future. fonix's actual future capital requirements, however, will depend on many
factors, including further development of its Core Technologies, the Company's
ability to enter into additional revenue-generating strategic alliance, co-
development and licensing arrangements, the progress of the development,
manufacturing and marketing efforts of the Company's strategic partners, if any,
the level of the Company's activities relating to commercialization rights it
may retain in its strategic alliance arrangements, competing technological and
market developments, and the costs involved in enforcing patent claims and other
intellectual property rights. In the event that substantial amounts of
additional financing are required, the Company does not believe it will be able
to obtain such financing from traditional commercial lenders. Rather, the
Company likely will have to conduct additional sales of its equity and/or debt
securities. There can be no assurance that such additional financing will be
available if and when, and in the amounts required, by the Company. Moreover,
even if such financing is available if and when required, there can be no
assurance that such financing will be obtained on terms that are favorable to
the Company, and substantial and immediate dilution to existing stockholders
likely would result from any sales of equity securities or other securities
convertible into equity securities. To the extent that the Company raises
additional funds through strategic alliance and licensing arrangements, the
Company may be required to relinquish rights to certain of its technologies, or
to grant licenses on terms that are not favorable to the Company, either of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In the event that adequate funds are not
available when and as needed, the Company's business would be adversely
affected.
Nasdaq Stock Market Listing Requirements. The Company's Common Stock
presently is listed on the Nasdaq SmallCap Market under the symbol "FONX." In
order to maintain the continued listing on such market, the Company, like all
companies listed on the Nasdaq SmallCap Market, is subject to certain
maintenance standards. Since February 23, 1998, companies with securities
listed on the Nasdaq SmallCap market are able to satisfy continued listing
requirements by reference, among other factors, to their total market
capitalization. If the Company fails to meet any of such requirements, there
can be no assurance that the Company's Common Stock will not be delisted from
the Nasdaq SmallCap Market. If delisted, the Company's Common Stock would
likely continue to be traded in the over-the-counter market. Nevertheless, in
such event, there can be no assurance that such delisting would not adversely
affect the prevailing market price of the Common Stock or the general liquidity
of an investment in the Company's Common Stock.
Intellectual Property Protection. On June 17, 1997, the United States
Patent and Trademark Office issued U.S. Patent No. 5,640,490 entitled "A User
Independent, Real-time Speech Recognition System and Method." The patent has a
20-year life running from the November 4, 1994 filing date, and has been
assigned to the Company. However, there can be no assurance that such patent
will be incontestable to a user with prior rights. fonix is unaware of any
facts or circumstances suggesting that the Core Technologies or the Company's
anticipated use thereof infringes or will infringe any third party intellectual
property rights. Regardless of the foregoing, there can be no assurance that
the Core Technologies will not infringe upon third party intellectual property
rights, nor can there be any assurance that a third party will not assert that
the Company has infringed its intellectual property rights, in which case the
Company could be involved in protracted and costly litigation which could
seriously impede the Company's development or otherwise adversely affect its
operations. Additionally, attempts may be made to copy or reverse engineer
aspects of the Core Technologies, or to obtain, use or exploit information or
methods which the Company deems proprietary. Policing the use of the Core
Technologies and perhaps infringing technology is difficult and expensive.
Litigation or other action may be necessary in the future to protect the
Company's proprietary rights and to determine the validity and scope of the
proprietary rights of others. Such litigation or proceedings could result in
substantial costs and diversions of resources and management's attention, and
could have a material adverse impact upon the Company's business, operating
results and financial condition. In addition to patents, the Company relies on
proprietary technology that it closely guards as trade secrets. The Company has
required nondisclosure and confidentiality agreements to be executed by its
employees, potential licensees, and potential strategic alliance and co-
development partners, and the Company expects to continue this requirement.
However, there can be no assurance that such non-disclosure and confidentiality
agreements will be legally enforceable or sufficient to maintain the secrecy of
the Company's proprietary technology. Moreover, although the Company presently
is seeking patent protection for certain additional technologies, there can be
no assurance that such patents will issue or that the Company will be able to
sufficiently protect any technologies developed by it in the future.
Controlling Interest of Related Parties. Thomas A. Murdock, a director,
executive officer and founding shareholder of the Company is the trustee of a
voting trust into which is deposited a majority of the Company's issued and
outstanding Common Stock, which effectively gives Mr. Murdock control of the
Company. fonix believes that it will be controlled by Mr. Murdock, as the
trustee of the voting trust and one of its founding shareholders, for the
foreseeable future.
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Dependence on Key Personnel. fonix is dependent on the knowledge, skill
and expertise of several key scientific employees and consultants, including but
not limited to John A. Oberteuffer, Ph.D., C. Hal Hansen, Dale Lynn Shepherd, R.
Brian Moncur, Tony R. Martinez, Ron Cole, Caroline Henton and E. David Barton,
and its executive officers, Messrs. Studdert, Murdock and Dudley. The loss of
any of such personnel could materially and adversely affect the Company's future
business efforts. Moreover, although the Company has taken reasonable steps to
protect its intellectual property rights including obtaining non-competition and
non-disclosure agreements from all of its employees, if one or more of the
Company's key scientific employees or consultants resigns from the Company to
join a competitor (to the extent not prohibited by such person's non-competition
and non-disclosure agreement), the loss of such personnel and the employment of
such personnel by a competitor could have a material adverse effect on the
Company. In the event of loss of any of the Company's key employees or
consultants, there can be no assurance that the Company would be able to prevent
the unauthorized disclosure or use of its proprietary technology by such former
employees or consultants, although the Company's employees and consultants have
entered into confidentiality agreements with the Company. fonix does not
presently have any key man life insurance on any of its employees.
Other Demands on Management. In addition to occupying positions as the
Company's Chief Executive Officer, President and Chief Operating Officer, and
Executive Vice President, respectively, Messrs. Stephen M. Studdert, Thomas A.
Murdock and Roger D. Dudley are executive officers and owners of Studdert
Companies Corp. ("SCC"), an international investment, finance and management
firm based in Salt Lake City, Utah. SCC engages in a variety of commercial
activities unrelated to the Company, including but not limited to its present
performance under a management services contract with K.L.S. Enviro Resources,
Inc.("KLSE"), a Nevada corporation with a class of securities registered under
the Exchange Act. Under the agreement there is no specific amount of time
required of the SCC principals in connection with SCC's services to KLSE. Since
SCC executed the management services contract, there has been no material
reduction in the amount of time spent by Messrs. Studdert, Murdock and Dudley in
the performance of their duties as executive officers of the Company. fonix
estimates that, since January 1, 1997, Messrs. Studdert, Murdock and Dudley, on
average, have worked more than 40 hours per week in their respective capacities
as executive officers of the Company. Further, in addition to serving as Vice
President, Technology for the Company, Dr. John A. Oberteuffer is the sole
shareholder and President of Voice Information Associates, Inc. ("VIA"), a
company which publishes ASRNews, and provides marketing consulting and other
related services to other ASR companies, groups and associations. Under the
terms of his employment agreement with fonix, executed in February 1998, Dr.
Oberteuffer is not required to devote more than 4 days per week to the business
of fonix. Although the Company anticipates that Dr. Oberteuffer can fully
discharge all of his duties and responsibilities to the Company by working 4
days per week, the Company has no comparable prior experience with such an
arrangement. fonix does not expect there to be in the foreseeable future any
material change in the amount of time spent by those persons in their capacities
as executive officers of the Company or in the Company's overall operations as a
result of the management services contract between SCC and KLSE, or as a result
of any other activities of SCC or VIA. However, there can be no assurance that
the outside activities of Messrs. Studdert, Murdock, Dudley or Oberteuffer, in
connection with SCC, KLSE, VIA or otherwise, will not materially impede their
ability to perform as executive officers of the Company, in which case the
Company's operations and financial condition could be adversely affected.
Assets Consisting Primarily of Intangible Intellectual Property Rights.
fonix's assets consist primarily of intangible assets, principally intellectual
rights such as patents, trademarks and trade secrets, the value of which will
depend significantly upon the success of the Company's development of the Core
Technologies and its ability to enter into licensing and co-development
arrangements with third parties. In the event of default on indebtedness or
liquidation of the Company, there can be no assurance that the value of these
assets will be sufficient to satisfy its obligations.
Risks Associated With Pending Litigation. The Company has been named as a
defendant in two civil actions. See Annual Report on Form 10-K for the Fiscal
Year Ended December 31, 1997, Part I, Item 3, "Legal Proceedings." After
consideration of the nature of the claims and the facts relating to these
actions, the Company believes that the resolution of them will not have a
material effect on the Company's business, financial condition and results of
operations; however, the results of these actions, including any potential
settlements, are uncertain and there can be no assurance to that effect. At a
minimum these actions will result in some diversion of management time and
effort from the operation of the business.
Potential Adverse Effect of Anti-Takeover Provisions. fonix is subject to
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which prohibits the Company from engaging in a "business combination" with an
"interested shareholder" for a period of three years after the date of the
transaction in which the person first becomes an "interested shareholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or preventing
changes of control or management of the Company, which could adversely affect
the market
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price of the Company's Common Stock. These provisions, and other provisions of
the Company's Certificate of Incorporation, may have the effect of deterring
hostile takeovers or delaying or preventing changes in control or management of
the Company, including transactions in which shareholders might otherwise
receive a premium for their shares over then current market prices. In addition,
these provisions may limit the ability of shareholders to approve transactions
that they may deem to be in their best interests.
Possible Volatility of Stock Price. The trading price of the Company's
Common Stock has been characterized by wide fluctuations and the Common Stock
must be considered a speculative investment. Persons should not invest in fonix
Common Stock unless they can bear the economic risks thereof, including the
possibility of losing their entire investment. fonix believes that factors such
as announcements of developments related to the Company's business,
announcements by competitors, the issuance of patents, financings, and other
factors have caused the price of the Company's stock and its trading volume to
fluctuate, in some cases substantially, and could continue to do so in the
future. In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market price for many
technology companies and that have often been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Company Common Stock. The trading prices of many
technology companies' stocks are at or near their historical highs, and reflect
price/earnings ratios substantially above historical norms. In the Company's
case the absence of revenues from operations before February 1998 indicates that
the market price of the Company's Common Stock fluctuates as a result of highly
speculative factors.
Absence of Dividends. fonix has never paid dividends on or in connection
with its Common Stock and does not intend to pay any dividends to common
shareholders for the foreseeable future.
Year 2000 Risks. Since its inception, the Company has attempted to
leverage technology, including increasingly sophisticated computer hardware and
software, in managing the Company's business and operations. Historically, the
Company has implemented computer systems for accounting and financial
management, purchasing, research, development and design, and other purposes.
The computer industry recently has recognized that many existing computer
programs, many of which are large, custom-programmed mainframe applications that
have continuously been written and amended over a long time period and by a
variety of different programmers, use only two digits to identify a year in the
date field. Such programs were designed, developed and modified without
considering the impact of the upcoming change in the century. If not corrected,
many such computer applications could fail or create erroneous results by or at
the Year 2000 by erroneously identifying the year "00" as 1900, rather than
2000. Correcting a Year 2000 problem on a large mainframe or network
application, however, can be difficult and expensive. In many cases, the
original developer of the subject software is either defunct or otherwise unable
or unwilling to address the problem. Moreover, because many individuals may
have programmed different pieces of a program, and some of them may have died or
cannot be located, many companies will be forced to review the code comprising
their software on a line-by-line basis, which can take enormous amounts of time
and significant financial resources. The Year 2000 issue affects virtually all
companies and organizations, including the Company. If a company does not
successfully address its Year 2000 issues, it may face material adverse
consequences. The Company is in the process of insuring that its internal
computer systems are Year 2000 compliant. The Company's own Core Technologies
are designed to be Year 2000 compliant. With respect to third-party providers
whose services are critical to the Company, the Company intends to monitor the
efforts of such providers as they become Year 2000 compliant. Management is
presently not aware of any Year 2000 issues that have been encountered by any
such third-party which could materially affect the Company's operations.
Notwithstanding the foregoing, there can be no assurance that the Company will
not experience operational difficulties as a result of Year 2000 issues, either
arising out of internal operations, or caused by third-party service providers,
which individually or collectively could have an adverse impact on business
operations or require the Company to incur unanticipated expenses to remedy any
problems.
Risks Associated with AcuVoice. The business of AcuVoice recently acquired
by the Company is also subject to many of the same risks and uncertainties
discussed above, including, but not limited to the risks associated with
intense competition for text-to- speech products, technological obsolescence and
the acceptance of new technologies, the need for additional capital, and
introduction of new and unproven technologies. In addition, there are risks to
the Company associated with the AcuVoice acquisition. This is the first such
acquisition completed by the Company. Accordingly, there may be difficulties
and inefficiencies encountered in the process of integrating the business,
products and personnel of AcuVoice with those of the Company. It may be some
time before any inefficiencies or difficulties are overcome and the Company
begins to benefit from economies of scale, synergies from the combination of the
business, technology and personnel, and the addition of new products to the
Company's business. There can be no assurance that the transition will not
involve significant additional expense or result in delays in the expected
completion of on-going development products or other business objectives of the
Company.
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Furthermore, as management of the Company seeks to supervise and manage the
activities of AcuVoice, which are conducted at some distance from the primary
corporate offices and research facilities of the Company, there may be
considerable increase in expense and management time spent in administration of
the combined businesses.
THE COMPANY
The following summary information about the Company should be read in
conjunction with the more detailed information contained in Part I, Item 1 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1997
and incorporated herein by reference.
fonix, a development stage company, is a Delaware corporation engaged in
research and development of certain proprietary automatic speech recognition,
text-to-speech (speech synthesis), compression and neural network technologies
and other human-computer interface technologies and products. fonix licenses
its technologies to and has entered into co-development relationships and
strategic alliances with third parties that are participants in the horizontal
computer industry (including producers of application software, operating
systems, computers and microprocessor chips) or are research and development
entities, including academia and industry and commercial speech product
developers. fonix intends for the foreseeable future to continue this practice
and will seek to generate revenues from its proprietary speech recognition
technologies from licensing royalties and strategic partnerships and alliances.
To date, the Company has entered into two strategic partnerships and one license
agreement relating to its automatic speech recognition technologies. The
Company received its first revenue from its automatic speech recognition
technologies in February 1998.
The Company created a wholly owned subsidiary in January 1998 for the
purpose of acquiring AcuVoice, Inc., a California corporation ("AcuVoice"), in
March 1998. AcuVoice has developed and markets text-to-speech or speech
synthesis technologies and products directly to end-users, systems integrators
and original equipment manufacturers (OEMs) for use in the telecommunications,
multi-media, education and assistive technology markets. To date, 96 companies
have purchased AcuVoice text-to-speech developer kits and many now have
introduced products utilizing AcuVoice technologies. The acquisition of
AcuVoice by the Company provides an opportunity to introduce fonix-branded
products into the market for the first time in the Company's history.
The executive offices of the Company are located at 1225 Eaglegate Tower,
60 East South Temple Street, Salt Lake City, Utah 84111, and its telephone
number is (801) 328-0161. The executive offices of AcuVoice are located at 84
West Santa Clara Street, Suite 720, San Jose, CA 95113, and its telephone number
is (408) 289-1661. The Company also maintains offices in Lexington,
Massachusetts and a research facility in Draper, Utah.
Technology Overview
Automatic Speech Recognition
Presently available traditional voice recognition technologies have been
used in a variety of products for industrial, telecommunications, business and
personal applications. Speech recognition algorithms in software have been
developed and refined over the past ten years. However, the increase in
processing speed and memory capacity of personal computers has accounted for
much of the improvement in traditional speech recognition systems during that
period. This improvement includes vocabulary size, recognition accuracy and
continuous speech recognition ability. Currently available speech recognition
systems for personal computers include speech command systems for navigating the
Windows(R) interface and inexpensive, discrete word dictation systems offered by
Dragon Systems, IBM, and Lernout & Hauspie. Recently, general and specific
vocabulary continuous speech dictation systems also have been introduced by
Philips, IBM, Dragon Systems and others. In addition, telephony applications
with menu choice systems and small vocabulary dialogue systems have been
demonstrated by Nuance, Nortel, and others.
Despite the nominal advances in performance of such presently available
systems, there are significant limitations inherent in all of these systems,
each of which continue to use traditional approaches generally based on Hidden
Markov Models ("HMMs") technology. These traditional approaches have not
appreciably advanced since the late 1980's. Applications based on such
traditional speech recognition systems for personal computers all require close-
talking microphones in relatively low noise environments and a formal speaking
style to achieve acceptable accuracy. In so-called continuous dictation
systems, significant adaptation to user speech, speaking style, and content area
also are required. These traditional systems are generally
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restricted to speech recognition for a single individual dictating in a quiet
environment; presently available telephony-based systems are even more limited
in general functionality.
The present industry standard methodology, the HMMs, use a general template
or pattern matching technique based on statistical language models.
Massachusetts Institute of Technology researcher, Dr. Victor Zue, has noted that
speech-recognition systems based on such technology
"utilize little or no specific-speech knowledge, but rely instead primarily
on general-purpose pattern-recognition algorithms. While such techniques
are adequate for a small class of well- constrained speech recognition
problems, their extendibility to multiple speakers, large vocabularies,
and/or continuous speech is highly questionable. In fact, even for the
applications that these devices are designed to serve, their performance
typically falls far short of human performance."
HMMs' widely recognized weaknesses are many: (i) they do not meet the needs for
many mass market implementations, (ii) they have limited input feature types,
(iii) they account for only limited context, (iv) they have limited ability to
generalize acoustic and language structure, (v) they require training data from
the end-user for acceptable performance, (vi) models become extremely large and
complex as vocabulary grows, and (vii) there is a lack of hardware parallel
processing capability.
In contrast to HMMs, fonix researchers have developed what the Company
believes to be a fundamentally new approach to the analysis of human speech
sounds and the contextual recognition of speech. The core fonix automatic
speech recognition technologies (the "ASRT" or "Core Technologies") attempt to
approximate the techniques employed by the human auditory system and language
understanding centers in the human brain. The ASRT use information in speech
sounds perceptible to humans but not discernible by current automatic speech
recognition systems. They also employ neural net technologies (artificial
intelligence techniques) for identifying speech components and word sequences
contextually, similar to the way in which scientists believe information is
processed by the human brain. As presently developed, the ASRT are comprised of
several components including a phonetic sound representation recognition engine,
audio signal processing, a feature extraction process, a phoneme estimation
process, and a linguistic process consisting of two components, one of which is
expert-or rule-based and one of which is based on proprietary neural net
technologies (artificial intelligence), that are designed to interpret human
speech contextually.
fonix believes the reliable recognition of natural, spontaneous speech
spoken by one or more individuals in a variety of common environments by means
of a conveniently placed microphone, all based on its ASRT, will significantly
improve the performance, utility and convenience of applications currently based
on traditional HMMs technology such as computer interface navigation, data
input, text generation, telephony transactions, continuous dictation and other
applications. Additionally, the Company believes that its ASRT will make
possible major new speech recognition applications such as the transcription of
business meetings and conversations, real-time speech-to-speech language
translation, natural dialogues with computers for information access and
consumer electronic devices controlled by natural language.
Thus, in the near term, the Company believes that its ASRT will initially
offer unique speech processing techniques that will be both complementary and
significantly enhancing to currently available speech recognition systems.
fonix intends to continue to license its ASRT, to continue to co-develop the
ASRT with research and development groups in government, industry, and academia
and ultimately to market a suite of fonix-branded products. As discussed more
fully below, fonix recently entered into the Siemens Agreement to conduct joint
research and development for applications in the telecommunications industry of
certain technologies related to the ASRT. fonix anticipates that it will enter
into additional strategic alliances and co-development agreements in other
industry segments. In the long term, the Company anticipates that automatic
speech recognition systems employing the Company's unique new ASRT will dominate
the market and set the industry standard for all automatic speech recognition
applications because of its anticipated capacities to overcome the weaknesses of
HMMs. In addition, the Company expects that certain elements of its Core
Technologies will have industry-leading applications in such non-speech
recognition industries, market segments and disciplines as artificial
intelligence and data compression. Although these plans represent management's
belief and expectation based on its current understanding of the market and its
experience in the industry, there can be no assurance that actual results will
meet these expectations. See "Certain Significant Risk Factors." In the last
two fiscal years, the Company has expended $7,066,294 and $4,758,012 on research
and development activities. Since its inception (October 1, 1993), the Company
has spent $17,937,293 on research and development of the ASRT. The Company
expects that a substantial part of its capital resources will continue to be
devoted to research and development of the ASRT and other proprietary
technologies for the foreseeable future.
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Text-to-Speech (Speech Synthesis)
In March 1998, a wholly-owned subsidiary of the Company acquired AcuVoice
in a statutory merger. The subsidiary will change its name to AcuVoice, Inc. in
the near future and will continue the business of AcuVoice using that name.
AcuVoice began in 1986 to develop and market a new approach to synthesized
speech, a system using actual recordings of "units" of human speech , i.e., the
sound pulsation. Since the unit of speech consists of more than one phoneme
(i.e., sound), AcuVoice's approach has been called a "large segment
concatenative speech synthesis" approach. Other companies such as DEC and AT&T
began in the early 1960s and continue until the present to use a system called
"parametric speech synthesis." Parametric systems continue to be plagued with
problems of speech quality, because their unit is not an actual recording, but a
computer's version of what a human voice sounds like. Poor speech quality also
occurs because the parametric unit consists, for the most part, of a single
phoneme, such as the "t" in the word "time."
Although as early as 1994 AcuVoice released versatile prototypes of its
system, it was not until early 1996 that the AcuVoice Speech Synthesizer was
ready for sale into the telecommunications, multi-media, educational and
assistive technology markets. In 1997 AcuVoice won awards as "best text-to-
speech" product at the Computer Technology Expo '97 and AVIOS '97. Presently
AcuVoice products are being sold to a fast-growing body of end- users, systems
integrators and OEMs.
Employees
As of March 24, 1998, the Company employed 94 persons. Of this total, 7
persons are employed at AcuVoice.
Recent Developments
Consistent with the objectives, vision and strategy of the Company outlined
above, fonix has entered into several key transactions in recent months. These
are discussed briefly in the following section.
The Siemens Transaction
On November 14, 1997, the Company entered into a Master Agreement for Joint
Collaboration (the "Siemens Agreement") with Siemens Aktiengesellschaft
("Siemens") pursuant to which the Company and Siemens have agreed to pursue
through a strategic alliance, research and development of certain technologies
related to the ASRT and the commercialization of such technologies for the
telecommunications industry. On February 11, 1998, the Company and Siemens
entered into the First Statement of Work and License Agreement contemplated by
the Siemens Agreement, pursuant to which Siemens paid the Company a non-
refundable license fee (for which the Company has no further obligation)
relating to the development and production of the fonix ASRT in integrated
circuits suitable for certain telecommunications applications. Siemens also
purchased warrants to purchase 1,000,000 shares of Common Stock and was granted
an option to purchase Common Stock. The Siemens Agreement provides for the
payment to the Company of additional license fees when the Company and Siemens
have entered into a further agreement or agreements for the development of
specific technologies, although there can be no assurance that such additional
agreement or agreements will be entered into by the Company and Siemens.
The OGI Master Technology Collaboration Agreement
On October 14, 1997, the Company entered into a Master Technology
Collaboration Agreement (the "OGI Agreement") with the Oregon Graduate Institute
of Science and Technology ("OGI"), pursuant to which the Company and OGI have
agreed to pursue research and development of certain aspects of the Company's
ASRT. Under the terms of the first statement of work between the Company and
OGI entered into pursuant to the OGI Agreement, the parties are collaborating on
advanced ASRT applications for entry in the 1999 DARPA competition. The Defense
Advanced Research Projects Agency, or DARPA, has been a major supporter of
speech technology research. The OGI Agreement contemplates that the Company and
OGI will enter into additional agreements to pursue research and development of
other aspects of the ASRT. There can be no assurance that such additional
agreements will be entered into by the Company and OGI. OGI is a major academic
research and development facility for speech technology and provides fonix with
access to leading speech researchers such as Dr. Ron Cole, the director of OGI's
Center for Spoken Language Understanding.
14
<PAGE>
Acquisition of AcuVoice
On March 13, 1998, the Company acquired AcuVoice. The transaction
described below by which the Company acquired AcuVoice is referred to herein as
the "Merger." AcuVoice was incorporated in 1984, and since that time has been
engaged in the development of a software only text-to-human-speech synthesis
technology called "concatenative speech synthesis," now recognized in the speech
technology industry as a leading method of achieving natural sounding speech
from a computer.
The Merger was effected by an exchange of restricted shares of fonix Common
Stock for the issued and outstanding Common Stock of AcuVoice and a cash
payment. A total of 2,692,218 shares of fonix Common Stock were issued in
exchange for AcuVoice Common Stock and a total of $8,000,232 was paid in cash,
(including amounts paid in lieu of fractional shares). The Closing was deemed to
have occurred on March 13, 1998, notwithstanding the fact that certain
ministerial acts remain to be completed following that date.
The Merger will become effective at such time as the Certificate of Merger
required under Utah law is filed with the Utah Division of Corporations and
Commercial Code and the Secretary of State of California.
In the fall of 1997, John A. Oberteuffer, Ph.D., a leading expert in the
field of speech recognition and speech synthesis technologies, who since March
1997 has served on the fonix Board, and who presently is employed as Vice
President--Technology of the Company, introduced the Company to AcuVoice. Dr.
Oberteuffer originally met E. David Barton, the Chairman, President and a
substantial shareholder of AcuVoice in 1992, but neither Dr. Oberteuffer nor any
other officer or director of fonix had any affiliation with or interest in
AcuVoice prior to the completion of the Merger.
AcuVoice released the first versatile prototypes of its system in 1994. By
early 1996, the AcuVoice Speech Synthesizer was ready for sale into the
telecommunications, multi-media, educational and assistive technology markets.
Companies which have purchased developer kits from AcuVoice and are now
developing products for the market include IBM, General Motors, Kurzweil
Educational Systems, Pratt & Whitney, Octel Communications, Andersen Consulting,
NEC, Dialogic, and Bell Atlantic. Companies which have developed products using
AcuVoice developer kits, and now are selling or using products containing
AcuVoice text-to-speech include AT&T, Motorola, Northern Telecom, Lucky Goldstar
(Korea), Aumtech Inc., Mail Call, Inc., IMG, Hurdman Communications (Better
Business Bureau), SmartDial, Signet, Concierge, Ultimate Technology, FirstCall,
XL Vision, Applied Future Technologies and Productivity Works.
To the Company's knowledge, no other company has succeeded in developing a
versatile system of large segment concatenative synthesis. However, the
AcuVoice speech synthesis products compete with other concatenative and
parametric speech synthesis products. AcuVoice's main competitors are Lernout
&Hauspie, Lucent Technologies, Eloquent Technologies and Apple.
AcuVoice's competitors offer a range of voices (male, female, child) and
languages. AcuVoice is accelerating its current development of a female voice,
and is actively pursuing strategic alliances in order to develop synthesis
products for major languages other than English.
fonix believes that the AcuVoice text-to-speech technologies will be an
important and complementary addition to the suite of Core Technologies the
Company has developed to date and will develop in the future. For example,
because both voice synthesis and voice recognition technologies are dependent
upon the analysis of human speech patterns, those technologies share many
similar challenges, and a solution in one arena often will be portable to the
other. Additionally, the Company believes that a state-of-the-art voice
synthesis technology, coupled with the Company's Core Technologies, will
substantially increase the marketability of both technologies by broadening the
potential product applications, thereby increasing the pool of potential
licensees of the technologies.
15
<PAGE>
March 1998 Private Placement
In March 1998, the Company completed a private placement (the "Offering")
of 6,666,666 shares of its restricted common stock to seven separate investment
funds which are the Selling Stockholders. The total purchase price to be paid
by the Selling Stockholders pursuant to the Offering 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 shares of Common Stock, pro rata
to the Selling Stockholders in proportion to the amount of the purchase price
paid by them. The remainder of the purchase price is to be paid by the Selling
Stockholders pro rata according to the amount of their initial installment on
the business day (the "Second Tranche Date") following the expiration of the 60-
day period following the effectiveness of the registration statement of which
this Prospectus is part, provided that, as of such 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 Common Stock for the
five trading days immediately preceding such date shall exceed $4.50 per share,
(iv) the dollar volume of trading in the Common Stock for the 10-trading-day
period preceding such date shall equal or exceed $1,000,000, (v) there shall be
at least 18 market makers for the Common Stock, (vi) there shall be no material
adverse change in the Company's business or financial condition, and (vii) the
Company shall have complied with all of its obligations under the Common Stock
Purchase Agreement.
At the Second Tranche Date and 60 days thereafter, the investors in the
Offering will have certain "reset" rights pursuant to which the investors will
receive additional shares of Common Stock ("Reset Shares") if the average market
price of the Common Stock for the 60-day periods following the registration
statement effectiveness date and the Second Tranche Date does not equal or
exceed $5.40 per share. The number of Reset Shares that will be issued pursuant
to such reset provisions 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 of Common Stock issued to the investor, by (y) the 60-day
average price. The Selling Stockholders also have certain rights of first
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 Synergetics Transaction
Prior to March 1997, the Company's scientific research and development
activities were conducted by an unaffiliated third party, Synergetics, Inc.
("Synergetics"), pursuant to product development and assignment contracts.
Under that arrangement, Synergetics provided personnel and facilities, and the
Company financed such scientific research and development activities on an as-
required basis. There was no minimum requirement or maximum limit with respect
to the amount of funding the Company was obligated to provide to Synergetics and
the Company was obligated to use its best efforts in raising all of the
necessary funding for the development of the ASRT. Moreover, under the
Agreement, the Company, if and when the Company began receiving revenue from
sales of the ASRT or products incorporating the ASRT, was obligated to pay a
royalty of 10% of such revenues to Synergetics. Synergetics compensated its
developers and others contributing to the development effort by granting project
shares to share in royalty payments received by Synergetics ("Project Shares").
On March 13, 1997, the Company and Synergetics reached an agreement in principle
to modify the Synergetics Agreement ( the "Modification Terms") with regard to
the development and assignment of the ASRT. On April 6, 1998, the Company and
Synergetics entered into a Royalty Modification Agreement to finalize the
Modification Terms. Under the terms of the Royalty Modification Agreement, the
Company agreed to offer an aggregate of 4,800,000 Common Stock purchase warrants
to the holders of the Project Shares in consideration for which Synergetics
agreed to cancel any further obligation on the part of the Company to pay
royalties to Synergetics. The exercise price of the warrants is $10 per share.
The Company has agreed to register the shares of Common Stock underlying the
warrants and no warrants will be offered to the holders of the Project Shares
until such time as the registration statement relating to such shares has been
declared effective by the Securities and Exchange Commission. After issuance,
the warrants will not be exercisable until the first to occur of (i) the date
that the per share closing bid price of the Common Stock is equal to or greater
than $37.50 per share for a period of 15 consecutive trading days, or (ii)
September 30, 2000. In addition, the warrants will become immediately
exercisable in the event of a merger or similar transaction in which the Company
is not the surviving entity or the sale of substantially all of the Company
assets.
16
<PAGE>
USE OF PROCEEDS
All of the Shares, if and when sold, are being offered and sold by the
Selling Stockholders or by their pledgees, donees, transferees or other
successors in interest, and the Company will not receive any proceeds from the
sale of such Shares.
SELLING STOCKHOLDERS
The Selling Stockholders are the seven entities who acquired the Shares
pursuant to the Offering in March 1998. None of the Selling Stockholders are
affiliated in any way with the Company or any of its affiliates, and neither the
Selling Stockholders nor any of their affiliates have any relationship of any
type with the Company and its affiliates other than the presently established
investment relationships between the Selling Stockholders, on the one hand, and
the Company, on the other hand. To the best of the Company's knowledge, except
as stated in this Prospectus, none of the Selling Stockholders have held any
office or maintained any material relationship with the Company or any of its
predecessors or affiliates over the past three years. The Selling Stockholders
reserve the right to reduce the number of shares offered for sale or to
otherwise decline to sell any or all of the Shares registered hereunder.
The following table sets forth information concerning the beneficial
ownership of shares of Common Stock by the Selling Stockholders as of the date
of this Prospectus and the number of such shares included for sale in this
Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK
BENEFICIALLY NUMBER OF PERCENTAGE OF SHARES OF
OWNED SHARES OF OF COMMON STOCK COMMON
NAME OF PRIOR TO COMMON STOCK BENEFICIALLY OWNED STOCK OWNED
SELLING STOCKHOLDERS OFFERING OFFERED HEREBY AFTER OFFERING AFTER OFFERING
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dominion Capital Fund, Ltd. 944,444 3,138,462 (1)(2) (3) (3)
Sovereign Partners, LP 666,666 2,215,384 (1)(2) (3) (3)
Excalibur Limited Partnership 155,556 516,923 (1)(2) (3) (3)
Canadian Advantage Limited Partnership 166,667 553,846 (1)(2) (3) (3)
Endeavor Capital Fund, S.A. 288,889 960,000 (1)(2) (3) (3)
JNC Opportunity Fund Ltd. 1,000,000 3,323,077 (1)(2) (3) (3)
Diversified Strategic Fund, L.P. 111,111 369,231 (1)(2) (3) (3)
_________________________
</TABLE>
(1) Includes shares issuable on the Second Tranche Date, assuming the
satisfaction or waiver by the Selling Stockholders of certain
conditions and the payment by the respective Selling Stockholders of
the corresponding installment of the purchase price, in the following
amounts to the following persons: (i) Dominion Capital Fund, Ltd.--
944,444 shares; (ii) Sovereign Partners, LP--666,666 shares; (iii)
Excalibur Limited Partnership--155,556 shares; (iv) Canadian Advantage
Limited Partnership--166,667 shares; (v) Endeavor Capital Fund, S.A.--
288,889 shares; (vi) JNC Opportunity Fund, Ltd.--1,000,000 shares; and
(vii) Diversified Strategies Fund, L.P.--111,111 shares.
(2) Includes Reset Shares that could be issuable at the Second Tranche Date
and/or on that date which shall be the first day after the expiration
of the 60-day period following the Second Tranche Date to the following
Selling Stockholders in the following amounts: (i) Dominion Capital
Fund, Ltd.-- 1,249,573 shares; (ii) Sovereign Partners, LP--882,051
shares; (iii) Excalibur Limited Partnership--205,812 shares; (iv)
Canadian Advantage Limited Partnership--220,513 shares; (v) Endeavor
Capital Fund, S.A.--382,222 shares; (vi) JNC Opportunity Fund, Ltd.--
1,323,077 shares; and (vii) Diversified Strategies Fund, L.P.--147,009
shares. The actual number of Reset Shares that may be issued pursuant
to the Offering is dependent upon the market price of the Common Stock
during the two relevant 60-day average measuring periods, and will
therefore vary according to actual market conditions prevailing during
those time periods. Solely for purposes of estimating the number of
shares
17
<PAGE>
of Reset Shares to be included in the registration statement of which
this Prospectus is part, the Company and the Selling Stockholders have
assumed a hypothetical average market price during the 60-day measuring
periods of $3.25 per share, which price when used in the formula for
calculating the number of Reset Shares issuable as described above,
yields the number of Reset Shares for each of the Selling Shareholders
as is set forth in this Note (2). The actual number of Reset Shares
issued could differ substantially, or no Reset Shares could be issued.
Also includes, pursuant to Rule 416, such additional indeterminate
number of shares of such Common Stock as may become issuable as
dividends or to prevent dilution resulting from stock splits, stock
dividends or similar transactions or to provide for changes in the
number of shares of Common Stock as are issuable as Reset Shares.
(3) There is no assurance that the Selling Stockholders will sell any or
all of the Shares offered hereby.
PLAN OF DISTRIBUTION
Pursuant to registration rights agreements between the Company and the
Selling Stockholders executed in connection with the Offering (collectively the
"Registration Rights Agreement"), the Company agreed to file with the Commission
a registration statement covering resales of the Shares by the date hereof, and
to use its best efforts to cause such registration statement to be declared
effective as promptly as possible after the filing thereof, but in any event
prior to June 10, 1998. Upon and after the effectiveness of the Registration
Statement, the Selling Stockholders may sell all or a portion of the Shares held
by them from time to time while the Registration Statement of which this
Prospectus is a part remains effective. The Company has agreed that it will use
its best efforts to keep the Registration Statement effective for a period of
two years commencing on the effective date of the Registration Statement (or a
shorter period if all of the Shares have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) under the Securities Act prior to the
expiration of the three-year period). The aggregate proceeds to the Selling
Stockholders from the sale of Shares offered by the Selling Stockholders hereby
will be the prices at which such securities are sold, less any commissions.
There is no assurance that the Selling Stockholders will sell any or all of the
Shares offered hereby.
The Selling Stockholders and their pledgees, donees, transferees and
successors-in-interest may from time to time, sell all or a portion of the
Shares on the NASDAQ SmallCap Market, in privately negotiated transactions or
otherwise, at fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Shares may be sold by the Selling Stockholders by one or more of the
following methods, without limitation: (a) block trades in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction, (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus, (c) exchange distribution in
accordance with the rules of such exchange, (d) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, (e) privately
negotiated transactions, (f) short sales, including short sales against the box,
and (g) a combination of any such methods of sale. In effecting sales, brokers
and dealers engaged by the Selling Stockholders may arrange for other brokers or
dealers to participate. Brokers or dealers may receive commissions or discounts
from the Selling Stockholders (or, if any such broker-dealer acts as agent for
the purchaser of such shares, from such purchaser) in amounts to be negotiated
which are not expected to exceed those customary in the types of transactions
involved. Broker-dealers may agree with the Selling Stockholders to sell a
specified number of such Shares at a stipulated price per share, and, to the
extent such broker-dealer is unable to do so acting as agent for a Selling
Stockholders to purchase as principal any unsold Shares at the price required to
fulfill the broker-dealer commitment to the Selling Stockholders. Broker-dealers
who acquire Shares as principal may thereafter resell such Shares from time to
time in transactions (which may involve block transactions and sale to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market or otherwise at prices and on terms then
prevailing at the time of sale, at prices then related to the then-current
market price or in negotiated transactions and, in connection with such resales,
may pay to or receive from the purchasers of such Shares commissions as
described above. The Selling Stockholders may also sell the Shares in
accordance with Rule 144 under the Securities Act rather than pursuant to this
Prospectus.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commissions received by such broker-dealers or agents
and any profit on the resale of the Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
18
<PAGE>
From time to time the Selling Stockholders may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith. If the Selling Stockholders engage in such transactions,
the determination of the number of Reset Shares the Company may issue in
connection with the Offering may be affected. From time to time the Selling
Stockholders may pledge their shares pursuant to the margin provisions of its
customer agreements with its brokers. Upon a default by the Selling
Stockholders, the broker may offer and sell the pledged shares of Common Stock
from time to time.
The Company is required to pay all fees and expenses incident to the
offering and sale of the Shares, including fees and disbursements of up to
$3,500 of counsel to the Selling Stockholders in some circumstances. The
Company has agreed to indemnify the Selling Stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities Act.
In order to comply with the securities laws of certain states, the Shares
will be sold in such jurisdictions only through registered or licensed brokers
or dealers. In addition, the sale and issuance of Shares may be subject to the
notice filing requirements of certain states.
The Selling Stockholders are not restricted as to the price or prices at
which they may sell the Shares. Sales of such Shares at less than market prices
may depress the market price of the Company's Common Stock. Moreover, the
Selling Stockholders are not restricted as to the number of Shares which may be
sold at any one time. The Selling Stockholders and their pledgees, donees,
transferees and successors in interest are acting independently of the Company
in making decisions with respect to the timing, manner and size of each sale.
The Company has advised the Selling Stockholders that the anti-manipulative
rules under the Exchange Act, including Regulation M, may apply to sales in the
market of the Shares offered hereby and has furnished the Selling Stockholders
with a copy of such rules. The Company has also advised the Selling
Stockholders of the requirement for the delivery of this Prospectus in
connection with resales of the Shares offered hereby.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the
Company by Durham, Evans, Jones & Pinegar, P.C., 50 South Main Street, Suite
850, Salt Lake City, Utah 84144.
EXPERTS
The consolidated financial statements of fonix corporation and subsidiary
as of December 31, 1997 and for the year then ended and for the period from
inception (October 1, 1993) to December 31, 1997, included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated by reference in this Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report with
respect thereto, and is incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report. Reference is made to said report which includes an explanatory
paragraph regarding the Company's ability to continue as a going concern.
The consolidated financial statements of fonix corporation and subsidiary
as of December 31, 1996 and for the year then ended and for the period from
inception (October 1, 1993) to December 31, 1996, included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated by reference in this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report with respect
thereto, and is incorporated by reference herein (which report expresses an
unqualified opinion and includes an explanatory paragraph regarding the
Company's ability to continue as a going concern) in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of fonix corporation and subsidiary
for the year ended December 31, 1995 and for the period from inception (October
1, 1993) to December 31, 1995, included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and incorporated by reference
in this Prospectus, have been audited by Pritchett, Siler & Hardy, P.C.,
independent auditors, as stated in their report with respect thereto, and is
incorporated by reference herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report. Reference is made to
said report which includes an explanatory paragraph regarding the Company's
ability to continue as a going concern.
19
<PAGE>
TABLE OF CONTENTS
PAGE
____________________
Available Information............................................. 3
Incorporation of Certain Documents By Reference................... 3
Special Note Regarding Forward-Looking Information................ 4
Prospectus Summary................................................ 5
Risk Factors...................................................... 6
The Company....................................................... 12
Use of Proceeds................................................... 17
The Selling Stockholders.......................................... 17
Plan of Distribution.............................................. 18
Legal Matters..................................................... 19
Experts........................................................... 19
================================================================================
FONIX CORPORATION
11,076,922 SHARES
COMMON STOCK
____________________
PROSPECTUS
___________________
APRIL __, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, all of which will be borne by the Company. All amounts shown are
estimates except the Securities and Exchange Commission registration fee.
Filing Fee - Securities and Exchange Commission $15,266
Legal fees and expenses of the Company 35,000
Accounting fees and expenses 20,000
Blue Sky fees and expenses --
Printing expenses --
Miscellaneous expenses 5,000
=======
Total Expenses $75,266
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
II-1
<PAGE>
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
such action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that the indemnification provided for
by Section 145 shall not be deemed exclusive of any other rights which the
indemnified party may be entitled; that indemnification provided by Section 145
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of such person's heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law or the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of the
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
Article Ninth of the registrant's Charter provides that, the registrant
shall, "to the fullest extent permitted by Section 145 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person."
Article VII, Section 7 of the registrant's Bylaws further provides that
the registrant "shall indemnify its officers, directors, employees and agents to
the extent permitted by the General Corporation Law of Delaware."
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
II-2
<PAGE>
ITEM 16. LIST OF EXHIBITS.
5 Opinion of Durham, Evans, Jones & Pinegar, P.C.
23.1 Consent of Durham, Evans, Jones & Pinegar, P.C., included in Exhibit 5
filed herewith.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Pritchett, Siler & Hardy, P.C.
24 Power of Attorney (See page II-5 of this Registration Statement).
- -------------------
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
derivation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are incorporated by reference in this
Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the
II-3
<PAGE>
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Corporation pursuant to the indemnification provisions described herein, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Salt Lake City, State of Utah, on this 13th day of
April, 1998.
fonix corporation
By: /s/ Stephen M. Studdert
---------------------------
Stephen M. Studdert
Chairman,
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of fonix corporation hereby
severally constitute Stephen M. Studdert and Thomas A. Murdock, and each of them
singly, our true and lawful attorneys with full power to any of them, and to
each of them singly, to sign for us and in our names in the capacities indicated
below the Registration Statement on Form S-3 filed herewith and any and all pre-
effective and post-effective amendments to said Registration Statement and
generally to do all such things in our name and behalf in our capacities as
officers and directors to enable fonix corporation to comply with the provisions
of the Securities Act and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorneys, or any of them, to said Registration Statement and any
and all amendments thereto.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------ ---------------------- ------
/s/ Stephen M. Studdert Chairman and Chief Executive Officer April 13, 1998
- ------------------------ (Principal Executive Officer)
Stephen M. Studdert
/s/ Roger D. Dudley Executive Vice President Finance April 13, 1998
- ------------------------ (Principal Financial Officer)
Roger D. Dudley
/s/ Douglas L. Rex Chief Financial Officer (Principal April 13, 1998
- ------------------------ Accounting Officer)
Douglas L. Rex
/s/ Alan C. Ashton Director April 13, 1998
- ------------------------
Alan C. Ashton, Ph.D.
/s/ Joseph Verner Reed Director April 13, 1998
- ------------------------
Ambassador Joseph Verner Reed
/s/ John A. Oberteuffer Director April 13, 1998
- ------------------------
John A. Oberteuffer, Ph.D.
/s/ Rick D. Nydegger Director April 13, 1998
- ------------------------
Rick D. Nydegger
Director April __, 1998
- ------------------------
James B. Hayes
/s/ Thomas A. Murdock Director April 13, 1998
- ------------------------
Thomas A. Murdock
/s/ Reginald Brack Director April 14, 1998
- ------------------------
Reginald Brack
II-6
<PAGE>
EXHIBIT INDEX
5 Opinion of Durham, Evans, Jones & Pinegar, P.C.
23.1 Consent of Durham, Evans, Jones & Pinegar, P.C., included in Exhibit 5
filed herewith.
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
23.3 Consent of Pritchett, Siler & Hardy, P.C.
24 Power of Attorney (See page II-5 of this Registration Statement).
II-7
<PAGE>
[LETTERHEAD OF DURHAM, EVANS, JONES & PINEGAR]
April 15, 1998
Board of Directors
fonix corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
Gentlemen:
We have assisted in the preparation of the Registration Statement on Form
S-3 (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the registration for resale by seven Selling
Stockholders of 11,076,922 shares (the "Shares") of common stock, $0.0001 par
value per share, of fonix corporation, a Delaware corporation (the "Company").
We have examined the Company's Certificate of Incorporation, as amended to
date, and the Company's By-Laws, as amended to date, and have examined and
relied on the originals, or copies certified to our satisfaction, of such
records of meetings, written actions in lieu of meetings, or resolutions adopted
at meetings, of the directors and stockholders of the Company, all as provided
to us by the Company, and such other documents and instruments as in our
judgment are necessary or appropriate to enable us to render the opinions
expressed below.
In our examination of the foregoing documents, we have assumed (i) the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, (ii) the conformity to the originals of all documents submitted
to us as certified or photostatic copies, (iii) the authenticity of the
originals of the latter document, and (iv) the legal competence of all
signatures to such documents.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the State of Utah, and the federal laws of the
United States of America.
<PAGE>
fonix corporation
April 13, 1998
Page 2
_____________________
Based upon and subject to the foregoing, we are of the opinion that the
Shares, when issued and paid for, will be duly authorized and validly issued,
fully paid and non-assessable.
It is our understanding that this opinion is to be used only in connection
with the offer and sale of the Shares while the Registration Statement is in
effect.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Durham, Evans, Jones & Pinegar P.C.
----------------------------------------
DURHAM, EVANS, JONES & PINEGAR, P.C.
<PAGE>
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-3 of our report dated April
8, 1998 included in fonix corporation's Form 10-K for the year ended December
31, 1997 and to all references to our Firm included in this registration
statement on Form S-3.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
April 8, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
fonix(TM) corporation on Form S-3 of our report dated March 28, 1997, appearing
in the Annual Report on Form 10-K of fonix(TM) corporation for the year ended
December 31, 1997 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
April 8, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the accompanying
registration statement on Form S-3, pursuant to Rule 415, of our report dated
March 4, 1996, except as to Note 12, as to which the date is March 28, 1997,
relating to the December 31, 1995 financial statements of fonix corporation,
appearing in the annual report of fonix corporation on Form 10-K for the year
ended December 31, 1997.
/s/ PRITCHETT, SILER & HARDY, P.C.
Pritchett, Siler & Hardy, P.C.
(formerly Peterson, Siler & Stevenson, P.C.)
Salt Lake City, Utah
April 13, 1998
