<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1998
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to ______.
Commission file number 0-23862
---------------
fonix corporation
(Exact name of registrant as specified in its charter)
Delaware 22-2994719
(State of Incorporation) (I.R.S. Employer Identification No.)
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
(Address of principal executive offices and zip code)
(801) 328-0161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] or
No [ ]
As of May 8, 1998, 51,313,739 shares of the issuer's Common Stock, par
value $.0001 per share, were issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim unaudited condensed consolidated financial statements
required by Rule 10-01 of Regulation S-X follow immediately.
2
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
- - ------
Current assets:
Cash and cash equivalents $ 20,212,465 $ 20,501,676
Notes receivable 250,000 600,000
Interest and other receivables 9,332 14,919
Prepaid assets 69,411 32,094
--------------- ---------------
Total current assets 20,541,208 21,148,689
Property and equipment, net of accumulated depreciation of
$612,314 and $464,100, respectively 1,704,194 1,567,279
Intangible assets, net of accumulated amortization of
$79,095 and $25,509, respectively 7,585,365 138,951
Other assets 39,647 39,647
--------------- ---------------
Total assets $ 29,870,414 $ 22,894,566
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Current liabilities:
Revolving note payable $ 14,157,257 $ 18,612,272
Revolving note payable - related party 36,909 551,510
Accounts payable 436,404 291,638
Accrued liabilities 431,375 505,619
Accrued liabilities - related party 221,147 459,502
Capital lease obligation - current portion 51,191 49,325
--------------- ---------------
Total current liabilities 15,334,283 20,469,866
Capital lease obligation, net of current portion 38,672 52,225
Advances (Note 9) 1,076,426 -
--------------- ---------------
Total liabilities 16,449,381 20,522,091
--------------- ---------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock 500,000 5,812,444
Common stock 5,130 4,358
Additional paid-in capital 75,517,409 38,637,059
Outstanding warrants 3,259,048 2,936,360
Deficit accumulated during the development stage (65,860,554) (45,017,746)
--------------- ---------------
Total stockholders' equity 13,421,033 2,372,475
--------------- ---------------
Total liabilities and stockholders' equity $ 29,870,414 $ 22,894,566
=============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
October 1,
Three Months Ended 1993
March 31, (Inception) to
-------------------------------- March 31,
1998 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 1,295,785 $ - $ 1,295,785
-------------- -------------- --------------
Expenses:
Purchased in-process research and development 17,839,840 - 17,839,840
Research and development 2,701,203 1,610,058 20,638,496
General and administrative 1,425,443 1,293,391 23,672,113
-------------- -------------- --------------
Total expenses 21,966,486 2,903,449 62,150,449
-------------- -------------- --------------
Loss from operations (20,670,701) (2,903,449) (60,854,664)
-------------- -------------- --------------
Other income (expense):
Interest income 271,477 305,549 2,863,544
Interest expense (311,924) (265,563) (4,164,467)
-------------- -------------- --------------
Total other income (expense), net (40,447) 39,986 (1,300,923)
-------------- -------------- --------------
Loss before extraordinary items (20,711,148) (2,863,463) (62,155,587)
Extraordinary items:
Loss on extinguishment of debt - - (881,864)
Gain on forgiveness of debt - - 30,548
-------------- -------------- --------------
Net loss $ (20,711,148) $ (2,863,463) $ (63,006,903)
============== ============== ==============
Basic and diluted net loss per common share $ (0.46) $ (0.07)
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
October 1,
Three Months Ended 1993
March 31, (Inception) to
------------------------------- March 31,
1998 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (20,711,148) $ (2,863,463) $ (63,006,903)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services - 331,406 5,437,240
Issuance of common stock for patent 100,807 - 100,807
Non-cash expense related to issuance of debentures,
warrants, preferred and common stock - - 3,967,337
Non-cash compensation expense related to issuance
of stock options - - 2,282,900
Non-cash portion of purchased in-process research and development 17,339,608 - 17,339,608
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 181,832 66,178 671,441
Extraordinary loss on extinguishment of debt - - 881,864
Extraordinary gain on forgiveness of debt - - (30,548)
Changes in assets and liabilities, net of acquisition:
Interest and other receivables 19,314 70,198 4,395
Prepaid assets (36,517) (35,620) (68,611)
Other assets - (8,735) (39,647)
Accounts payable 138,642 (72,525) 2,210,480
Accrued liabilities - related party (238,355) (373,129) 221,147
Accrued liabilities (90,817) 116,061 542,783
-------------- -------------- --------------
Net cash used in operating activities (3,296,634) (2,769,629) (29,484,426)
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of business (7,246,119) - (7,246,119)
Purchase of property and equipment, net of acquisition (255,259) (226,140) (2,286,638)
Investment in intangible assets, net of acquisition - - (164,460)
Issuance of notes receivable (200,000) (883,600) (2,683,600)
Payments received on notes receivable - - 1,883,600
-------------- -------------- --------------
Net cash used in investing activities (7,701,378) (1,109,740) (10,497,217)
-------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from (payments on) revolving note payable (4,504,265) 1,892,530 14,108,007
Net proceeds from (payments on) revolving note payable - related party (514,601) - 36,909
Proceeds from other notes payable - - 2,351,667
Payments on other notes payable - - (1,779,806)
Principal payments on capital lease obligation (11,687) - (55,068)
Proceeds from advances (Note 8) 1,076,426 - 1,076,426
Proceeds from issuance of convertible debentures, net - - 3,185,000
Proceeds from sale of warrants 322,928 - 922,928
Proceeds from sale of common stock, net 14,340,000 425,000 35,044,545
Proceeds from sale of Series B and C preferred stock, net - - 5,303,500
-------------- -------------- --------------
Net cash provided by financing activities 10,708,801 2,317,530 60,194,108
-------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents (289,211) (1,561,839) 20,212,465
Cash and cash equivalents at beginning of period 20,501,676 22,805,786 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 20,212,465 $ 21,243,947 $ 20,212,465
============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
<TABLE>
<CAPTION>
October 1,
Three Months Ended 1993
March 31, (Inception) to
-------------------------------- March 31,
1998 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 311,863 $ 247,785 $ 2,348,882
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the three months ended March 31, 1998:
Dividends of $131,660 were recorded related to the beneficial conversion
features of Series B and Series C Convertible Preferred Stock.
A total of 27,500 shares of Series B Preferred Stock and related
dividends of $8,531 were converted into 193,582 shares of common stock.
A total of 185,000 shares of Series C Preferred Stock and related
dividends of $123,129 were converted into 1,295,919 shares of common
stock.
The Company issued 2,692,216 shares of common stock (having a market
value of $16,995,972) in connection with the acquisition of AcuVoice,
Inc.
For the three months ended March 31, 1997:
The Company issued 155,000 shares of common stock to unrelated parties
for consulting fees valued at $730,975.
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements of fonix corporation and subsidiaries (collectively
the "Company") have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the following disclosures are adequate to make the
information presented not misleading.
These condensed financial statements reflect all adjustments (consisting
only of normal recurring adjustments) that, in the opinion of management,
are necessary to present fairly the financial position and results of
operations of the Company for the periods presented.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. The Company suggests that these condensed
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Recently Enacted Accounting Standards - Effective January 1, 1998, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income and its
components in financial statements. The adoption of this statement had no
effect on the Company's statements of operations presentation.
In June 1997, the Financial Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes new standards for public companies to report
information about their operating segments, products and services,
geographic areas and major customers. This statement is effective for
financial statements issued for periods beginning after December 15, 1997.
Accordingly, the Company will adopt SFAS No. 131 beginning with its
December 31, 1998 consolidated financial statements.
Net Loss Per Common Share - Basic and diluted net loss per common share are
calculated by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the
period. At March 31, 1998 and 1997, there were outstanding common stock
equivalents to purchase 13,951,667 and 5,417,667 shares of common stock,
respectively, that were not included in the computation of diluted net loss
per common share as their effect would have been anti-dilutive, thereby
decreasing the net loss per common share. Net loss per common share
amounts have been restated for all periods presented to reflect basic and
diluted per share presentations.
7
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
The following table is a reconciliation of the net loss numerator of basic
and diluted net loss per common share for the three months ended March 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------- ---------------------------
Per Share Per Share
Loss Amount Loss Amount
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(20,711,148) $ (2,863,463)
Preferred stock dividends (131,660) -
------------- -------------
Net loss attributable to common
stockholders $(20,842,808) $(0.46) $(2,863,463) $(0.07)
============= ======= ============ =======
Weighted average common shares
outstanding 45,740,942 41,834,372
============= ============
</TABLE>
2. ACQUISITION
The Company created a wholly-owned subsidiary for the purpose of acquiring
AcuVoice, Inc., a California corporation, in March 1998. After the
acquisition, the subsidiary changed its name to fonix/AcuVoice, Inc.
("fonix AcuVoice"). fonix AcuVoice develops and markets text-to-speech or
speech synthesis technologies and products directly to end-users, systems
integrators and original equipment manufacturers for use in the
telecommunications, multi-media, education and assistive technology
markets. The merger was closed on March 13, 1998, in connection with which
the Company exchanged 2,692,216 shares of restricted common stock (having a
market value of $16,995,972 on that date) and cash payment of approximately
$8,000,000 for all of the then outstanding common shares of AcuVoice, Inc.
The AcuVoice acquisition was accounted for as a purchase.
The excess of the purchase price over the estimated fair market value of
the acquired tangible net assets of AcuVoice, Inc. was $25,339,840, of
which $6,750,000 was capitalized as purchased core technology, $750,000 was
capitalized as goodwill and $17,839,840 was expensed as purchased in-
process research and development.
The following unaudited pro forma financial statement data for the three
months ended March 31, 1998 and March 31, 1997 present the results of
operations of the Company as if the acquisition of fonix AcuVoice had
occurred at the beginning of each three-month period. The pro forma
results have been prepared for comparative purposes only and do not purport
to be indicative of what would have occurred had the acquisition been made
at the beginning of the applicable period or of future results.
Three Months Ended March 31,
--------------------------------
1998 1997
-------------- --------------
Revenues $ 1,342,520 $ 17,249
Loss from operations (21,019,432) (21,075,343)
Net loss (21,052,113) (21,035,301)
Basic and diluted net loss
per common share (0.44) (0.47)
8
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
3. CERTIFICATE OF DEPOSIT
At March 31, 1998, the Company had a $20,000,000 short-term certificate of
deposit at a bank which amount is included in cash and cash equivalents.
The certificate bore interest at 5.50 percent per annum at March 31, 1998.
Interest is payable monthly. This certificate is pledged as collateral on
a revolving note payable (see Note 6).
4. NOTES RECEIVABLE
At March 13, 1998, the Company had a short-term unsecured, non-interest
bearing note receivable from AcuVoice, Inc. in the amount of $550,000.
AcuVoice, Inc. was merged with a wholly-owned subsidiary of the Company
effective March 13, 1998. At March 31, 1998, this note receivable was
eliminated in consolidation.
At March 31, 1998, the Company had a short-term, unsecured, demand note
receivable from an unrelated entity in the amount of $250,000 which was
issued in connection with the Company's intended acquisition of that
entity. Interest begins to accrue at six percent per annum on the date
which is 90 days after the Company demands payment, which the Company may
do in the event both parties agree that the acquisition will not proceed.
Subsequent to March 31, 1998, the Company has advanced an additional
$171,139 to the same entity under similar terms.
5. INTANGIBLE ASSETS
Intangible assets consist of purchased core technology and goodwill in
connection with the acquisition of AcuVoice, Inc. and direct costs incurred
by the Company in applying for patents covering its technologies.
Amortization is computed on a straight-line basis over the estimated useful
life of five to eight years. Total accumulated amortization was $79,095 at
March 31, 1998.
6. REVOLVING NOTES PAYABLE
At March 31, 1998, the Company had a revolving note payable to a bank in
the amount of $14,157,257. Loaned amounts under the revolving note payable
are limited, in the aggregate at any time, to $20,000,000. The weighted
average outstanding balance during the three months ended March 31, 1998
was $17,465,681. This note was due April 29, 1998, bore an interest rate
of 6.50 percent per annum, and was secured by a certificate of deposit in
the amount of $20,000,000 (see Note 3). This revolving note is
renegotiated quarterly and interest is payable monthly. Subsequent to
March 31, 1998, similar terms were negotiated to extend the maturity date
of the note to August 4, 1998. The Company plans to continue renewing the
note indefinitely.
The Company has an unsecured revolving note payable to a company owned by
three individuals who are executive officers and directors of the Company
and who each beneficially own more than ten percent of the Company's common
stock. At March 31, 1998, $36,909 in principal and $129,004 in accrued
interest and loan fees were outstanding under this revolving note payable.
The weighted average balance outstanding during the three months ended
March 31, 1998 was $214,219. This revolving note is payable on demand and
bears interest at an annual rate of 12 percent. The maximum amount
outstanding under this revolving note was $551,510 during the three months
ended March 31, 1998. As of March 31, 1998, no interest or loan fees had
been paid related to the note. Subsequent to March 31, 1998, the
outstanding principal, accrued interest and loan fees were paid in full.
The Company believes the terms of the related-party revolving note payable
were at least as favorable as the terms that could have been obtained from
an unrelated third party in a similar transaction.
9
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
7. STOCKHOLDERS' EQUITY
Common Stock - During the three months ended March 31, 1998, the Company
issued 7,719,864 shares of common stock. Of such shares, 3,333,333 shares
were issued in connection with a private placement (see below), 2,692,216
shares were issued in connection with the acquisition of AcuVoice, Inc.
(see Note 2), 1,489,501 shares were issued upon the conversion of
convertible preferred stock and related dividends, 180,000 shares were
issued upon the exercise of previously granted warrants and 24,814 shares
were issued for the purchase of a patent.
Private Placement - On March 12, 1998, the Company completed a private
placement (the "Offering") of up to 6,666,666 shares of its restricted
common stock to seven separate accredited investors. The total purchase
price to be paid by the investors pursuant to the Offering is $30,000,000.
Of that amount, $15,000,000 was received by the Company on March 12, 1998,
in return for which the Company issued a total of 3,333,333 shares of
restricted common stock. Finders' fees of $870,000 were paid in connection
with the $15,000,000 received. The remainder of the purchase price is to
be paid by the investors 60 days after the effectiveness of a registration
statement that the Company filed with the Securities and Exchange
Commission on April 16, 1998 (the "Second Funding Date"), provided that, as
of such date, certain conditions are satisfied. Specifically, as of the
Second Funding Date: (i) the registration statement covering all of the
common stock to be issued must be effective, (ii) the representations and
warranties of the Company as set forth in the documents underlying the
Offering shall be correct in all material respects, (iii) the market price
of the Company's common stock shall exceed $4.50 per share, (iv) the dollar
volume of trading in the Company's common stock for the 10-trading day
period preceding such date shall equal or exceed $1,000,000, (v) there
shall be at least 18 market makers for the Company's common stock, and (vi)
there shall be no material adverse change in the Company's business or
financial condition.
Additionally, the investors in the Offering have certain "reset" rights
pursuant to which the investors will receive additional shares of
restricted common stock if the average market price of the Company's common
stock for the 60-day periods following the initial closing date and the
Second Funding Date does not equal or exceed $5.40 per share. The
investors in the Offering also have certain first rights of refusal and
other rights if the Company conducts other offerings in the near future
with other investors and the terms of such other offerings are more
advantageous to such other investors than the terms of the Offering.
Series B Preferred Stock - In January 1998, 27,500 shares of Series B
Preferred Stock and related dividends were converted into 193,582 shares of
common stock. At March 31, 1998, no shares of Series B Preferred Stock
were outstanding.
Series C Preferred Stock - During the three months ended March 31, 1998,
185,000 shares of Series C Preferred Stock and related dividends were
converted into 1,295,919 shares of the Company's common stock. At March
31, 1998, no shares of Series C Preferred Stock were outstanding.
Common Stock Options - During the three months ended March 31, 1998, the
Company granted 1,225,000 stock options. 450,000 of such options having an
exercise price of $5.16 per share were granted to three individuals who are
executive officers and directors of the Company and who each beneficially
own more than 10 percent of the Company's common stock. 355,000 and
420,000 of such options were granted to various employees at exercise
prices of $3.34 and $6.50 per share, respectively. The term of all options
granted during such three month period is ten years from the date of grant.
As of March 31, 1998, the Company had a total of 11,790,000 options
outstanding.
10
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
<PAGE>
8. RELATED-PARTY TRANSACTIONS
Related-party transactions with entities owned by three individuals who are
directors and executive officers of the Company and each of whom
beneficially own more than ten percent of the Company's issued and
outstanding common stock not otherwise disclosed herein for the three
months ended March 31, 1998 and 1997 were as follows:
1998 1997
-------------- --------------
Expenses:
Base rent $ 23,130 $ 19,300
Liabilities:
Accrued liabilities 221,147 1,388,614
During 1996, disinterested members of the Company's Board of Directors
authorized the Company to reimburse three executive officers for all taxes
payable by them in conjunction with the 1995 exercise of 3,700,000 warrants
by a company owned by them. The total authorized reimbursement was
$1,150,000 in 1997 and $1,350,000 in 1996. As of March 31, 1998, the
Company had paid $2,407,857 of the authorized reimbursement. The unpaid
balance of the authorized reimbursement is included in accrued expenses-
related party in the accompanying condensed consolidated balance sheet as
of March 31, 1998.
9. STATEMENTS OF WORK
On February 11, 1998, the Company entered into a Statement of Work
agreement with Siemens Semiconductor Group of Siemens Aktiengesellschaft
("Siemens") pursuant to which the Company and Siemens will jointly pursue
the development of Siemens' integrated circuits incorporating the Company's
technologies for use in certain telecommunications applications. During
the three months ended March 31, 1998, the Company received $2,691,066 in
cash from Siemens. Of that amount: (1) $1,291,712 was paid to the Company
as a non-refundable payment to license certain automatic speech
recognition technologies for which the Company has no further obligation;
(2) $322,928 was paid to purchase warrants to acquire 1,000,000 shares of
fonix restricted common stock at an average exercise price of $20 per share
with expiration dates ranging from December 31, 1998 to December 31, 1999;
and (3) $1,076,426 was paid to the Company to acquire, if Siemens so
elects, shares of the Company's restricted common stock (the "Shares") at
any time prior to March 12, 1998, (this exercise period subsequently was
extended to May 31, 1998). The purchase price of the Shares, if purchased
by Siemens, shall be the closing price of the common stock on the day
preceding the day on which Siemens notifies the Company of its election to
purchase the Shares. If Siemens elects not to acquire all or a part of the
Shares on or prior to May 31, 1998, the $1,076,426 or any portion thereof
not used to purchase all or a portion of the Shares will become a non-
refundable royalty payment, unless the Company and Siemens mutually agree
to extend that deadline.
10. RESEARCH AND DEVELOPMENT
In October 1993, the Company entered into an agreement with Synergetics,
Inc. (the "Synergetics Agreement"), an unaffiliated research and
development entity, whereby Synergetics was to develop certain technologies
related to the Company's automated speech recognition ("ASR") technologies.
The president of the Company is one of seven members of the board of
directors of Synergetics, and three executive officers, directors and ten
percent beneficial owners of the Company own less than five percent of the
common stock of Synergetics. Under the terms of the Synergetics Agreement,
as subsequently modified, the Company acquired intellectual property
rights, technologies and technology rights that were developed by
Synergetics and that pertained to the ASR technologies. The Company agreed
to provide all funding necessary for Synergetics to develop commercially
viable technologies. There was no minimum requirement or maximum limit
with respect to the amount of the funding to be provided by the Company.
However,
11
<PAGE>
fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
under the terms of the Synergetics Agreement, the Company was obligated to
use its best efforts in raising the necessary funding for the engineering,
development and marketing of the ASR technologies. As part of the
Synergetics Agreement, the Company agreed to pay Synergetics a royalty of
ten percent of gross revenues from sales of its ASR technologies (the
"Royalty"). Under the terms of the Synergetics Agreement, the Company paid
to Synergetics $935,957 and $1,361,977 for the three months ended March 31,
1998 and 1997, respectively, for research and development efforts.
Until March 1997, Synergetics had compensated its engineers, employees,
members of its development team, and other financial backers (collectively,
the "Developers"), in part, with the issuance of "Project Shares" granting
the holders of such shares the right, within limits, to share pro rata in
future Royalty payments by the Company. In addition to issuance of Project
Shares, Synergetics had made cash advances to some members of its project
team on a non-recourse basis. Repayment of those advances was secured by
future disbursements, if any, under the borrower's Project Shares.
On April 6, 1998, the Company and Synergetics entered into a Royalty
Modification Agreement, under which the Company agreed, subject to its
compliance with applicable securities laws, to make an offer to exchange
common stock purchase warrants having an exercise price of $10 per share
for the Project Shares at the rate of one warrant to purchase 800 fonix
common shares for each Project Share. The warrants, if and when issued,
will not exercisable until the earlier of (1) the date the Company's common
stock has traded for a period of 15 consecutive trading days at a minimum
of $37.50 per share or (2) September 30, 2000. The offer of warrants to
holders of Project Shares cannot be made by the Company until a
registration statement covering the total number of warrants issuable upon
the exercise of the warrants has been declared effective by the U.S.
Securities and Exchange Commission. Upon the tender to the Company of any
Project Shares a corresponding percentage of the Royalty will be canceled.
11. COMMITMENTS AND CONTINGENCIES
Employment Agreements - In January 1998, the Company entered into
employment contracts with two executives which expire in January 2001. The
minimum annual salary payments required by these contracts total $405,000.
In connection with those agreements, the executives were granted options to
purchase an aggregate of 355,000 shares of the Company's common stock at
$3.34 per share. The options have a ten-year term and are subject to a
two-year vesting schedule, pursuant to which one-third of the total number
of options vested on the grant date, and one third vest on the following
two anniversaries of the grant date. If, during the contract term, both a
change of control of the Company occurs, and within six months after such
change in control occurs, the executive's employment is terminated by the
Company for any reason other than cause, death or retirement, the executive
shall be entitled to receive an amount in cash equal to all base salary
then and thereafter payable within thirty days of termination.
Professional Services Agreement - On February 23, 1998, the Company entered
into a two-year professional services agreement with Meridian Speech
Technology, Inc. ("Meridian"), whereby Meridian agreed to provide
consulting services in connection with the research and development of the
ASR technologies. The minimum monthly fee payable to Meridian is $30,000
per month for the first six months and $10,000 per month for the remaining
eighteen months of the agreement. The agreement may be terminated by
either party if the other party has not performed any material covenant or
has otherwise breached any material term of the agreement.
Litigation - On March 11, 1998, an action (the "J&L Action") was filed
against the Company in the Supreme Court of the State of New York for the
County of New York by Jesup & Lamont Securities Corporation. The J&L
Action alleges that the Company must pay a fee in excess of $1,200,000 plus
30,000 shares of the Company's restricted common stock in connection with
the Offering (see Note 7). An answer has been filed by the Company and
limited discovery has taken place. The Company's Board of Directors and
its management believe that the J&L Action is without merit, and the
Company intends to vigorously defend the action. There can be no assurance
that the Company will prevail in the J&L
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fonix corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
Action, or that the pendency of the lawsuit will not adversely affect the
Company's operations. As the outcome of this matter cannot be reasonably
determined, the Company has not accrued any reserve to cover potential
losses.
In addition to the J&L action, the Company from time to time is or may be
involved in various lawsuits, claims and actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters will not
materially affect the consolidated financial position or results of
operations of the Company.
License Agreement - On September 23, 1997, AcuVoice, Inc., fonix AcuVoice's
predecessor-in-interest, entered into a license agreement with General
Magic, Inc. ("General Magic"). Under that agreement, General Magic was
granted a perpetual, irrevocable, worldwide license in a specific field of
use to use, reproduce, publicly display and distribute fonix AcuVoice's
text-to-speech software in connection with General Magic's voice accessed
integrated network service. The license is exclusive for the first three
years and non-exclusive thereafter. Under the license agreement, the
Company is entitled to royalty payments based upon monthly subscriber
revenue from the use of the integrated network service. Additionally,
AcuVoice, Inc. granted an option to General Magic to purchase the then-
current text-to-speech source code and all source code documentation for a
cash payment of $2,500,000 and $2,500,000 in General Magic common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED BY THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE
DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997.
Overview
fonix is a development-stage company engaged in scientific research and
development of proprietary automatic speech recognition ("ASR")
technologies comprised of components that may be licensed in whole or in
part to third parties. The Company also has developed, and seeks to
license, certain other technologies related to the ASR technologies such as
data compression and neural network design technologies (collectively the
ASR technologies and such other related technologies are referred to in
this report as the "Core Technologies"). The Company has completed the
Core Technologies such that they are available for third-party licensing
and co-development.
In November 1997, the Company entered into an agreement (the "Siemens
Agreement") with the Siemens Semiconductor Group of Siemens
Aktiengesellschaft ("Siemens") pursuant to which the Company and Siemens
agreed to pursue research and development of certain technologies related
to ASR and the commercialization of such technologies for the
telecommunications industry through a strategic alliance. Pursuant to the
terms of the Siemens Agreement, the Company and Siemens entered into the
First Statement of Work and License Agreement (see Note 9 to the condensed
consolidated financial statements) pursuant to which Siemens paid the
Company a license fee for the development and production of fonix Core
Technologies in integrated circuits suitable for certain telecommunications
applications. The Siemens Agreement calls for the payment to the Company of
additional license fees when the Company and Siemens have entered into
further agreements for the development of specific technologies, although
there can be no assurance that the parties will enter into such additional
agreements.
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") under which the Company and OGI
have agreed to pursue research and development of certain Core
Technologies. In furtherance of the OGI Agreement, the Company and OGI
have entered into the first Statement of Work, under which the parties are
collaborating on advanced ASR applications for entry in the 1999 DARPA
competition. The OGI Agreement contemplates that the Company and OGI will
enter into other agreements to pursue research and development of certain
technologies related to the Core Technologies, although there can be no
assurance that such additional agreements will be entered into by the
Company and OGI.
Other than the arrangements with Siemens and 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. fonix presently anticipates that any products
incorporating the Company's Core Technologies would be manufactured and
marketed by third-party licensees and co-development and strategic alliance
partners such as Siemens and therefore has no plans to manufacture products
incorporating the Core Technologies for the foreseeable future. The
Company is presently engaged in discussions with numerous potential
licensees and co-developers. There can be no assurance 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.
The Company's primary development objective is to further develop, refine
and enhance the main components of its Core Technologies. The Company's
initial marketing direction is to focus on licensing its Core Technologies
to third parties and co-developers. These licenses will be made broadly
available to many segments of the computer industry, including application
software, operating systems, computers and microprocessor chips, and
research and development entities worldwide, including academia,
government, industry and commercial speech product developers who may want
to take advantage of the Company's Core Technologies in their existing
products. The Company anticipates that it will sell or license its Core
Technologies on terms advantageous to the Company, and that run-time
product license royalty
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rates will vary according to applications, sales volumes, and end-user
pricing of products using the Core Technologies. The Company may reserve
exclusive rights in some fields of use for the internal development of high
value end-user products and applications.
The Company's Board of Directors has determined that the Company's ability
to enter into profitable licensing arrangements with third parties could be
enhanced by the Company's acquisition of other technologies complementary
to the ASR technologies. The Company believes such acquisitions would
allow the Company to substantially increase the pool of potential licensees
of the Company's technologies by offering a more comprehensive suite of
computer voice recognition, voice synthesis and other advance human
computer interface technology solutions. Furthermore, because many such
complementary technologies involve research and development challenges
similar in nature to those involved in the development of the Core
Technologies, the Company believes that developmental efficiencies can be
achieved by coordinating new development among a variety of applications
(see "Outlook" below).
In furtherance of this strategy, in March 1998, the Company acquired the
award-winning voice synthesis technologies of AcuVoice, Inc. That
acquisition was accomplished through a merger of AcuVoice, Inc. into a
wholly-owned subsidiary of the Company now known as fonix/AcuVoice, Inc.
AcuVoice, Inc. was incorporated in 1984 and since that time has been
engaged in 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. Beginning in early 1996, AcuVoice, Inc.
began selling developer kits based on its technology, and companies that
presently are believed to be developing marketable products based on the
fonix AcuVoice technologies include IBM, General Motors, Kurzweil
Educational Systems, Pratt & Whitney, Octel Communications, Andersen
Consulting, NEC, Dialogic and Bell Atlantic. Companies that have developed
products using fonix AcuVoice developer kits, and now are selling or using
products containing fonix AcuVoice text-to-speech technologies include
AT&T, Motorola, Northern Telecom, Lucky Goldstar (Korea), Smart Dial,
Signet, Concierge, Ultimate Technology, First Call, XL Vision, Applied
Future Technologies and Productivity Works.
In addition to fonix AcuVoice, the Company is presently considering other
mergers and acquisitions involving additional complementary technologies.
There can be no assurance that any other acquisitions will be consummated,
or that the AcuVoice merger, or any other acquisition or merger
consummated, will result in increased opportunities for the Company to
enter into profitable licensing arrangements or that such additional
technologies can be successfully integrated with the Core Technologies. To
the extent the Company finances such acquisitions by issuances of its
capital stock, additional, and possibly substantial dilution will result to
existing shareholders.
Results of Operations
Three months ended March 31, 1998 compared with three months ended March
31, 1997
During the three months ended March 31, 1998, the Company recorded its
first revenues of $1,295,785, of which, $1,291,712 was paid by Siemens as a
non-refundable license fee, for which the Company has no further
obligation.
Prior to March 1997, the Company conducted its scientific research and
development activities through Synergetics, Inc., an unaffiliated research
and development entity ("Synergetics"), pursuant to product development and
assignment contracts between the Company and Synergetics (collectively the
"Synergetics Agreement"). Under that arrangement, Synergetics provided
personnel and facilities and the Company financed scientific research and
development of the ASR technologies 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 under the Synergetics
Agreement, and the Company was obligated to use its best efforts in raising
all of the necessary funding for the development of the ASR technologies.
Synergetics submitted pre-authorized work orders and budgets, which were
then reviewed and approved by the Company. All funds paid to Synergetics
have been accounted for by the Company as research and development expense.
Under the Synergetics Agreement, the Company had also agreed to pay a
royalty to Synergetics equal to ten percent of revenues from sales of the
ASR technologies or products incorporating the ASR technologies (the
"Royalty"). On March 13, 1997, the Company and Synergetics reached an
agreement in principle to modify the Synergetics Agreement with regard to
the development and assignment of the Company's ASR technologies. Most
research and development activities previously conducted by Synergetics
were moved in-house to the Company in or about March 1997. On April 6,
1998, the parties finalized their understanding in a written Royalty
Modification Agreement (the
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"Modification Agreement"). Under the Modification Agreement, the Company,
to the extent Project Shares are exchanged for warrants, will not have any
obligation to pay the Royalty or any percentage of the revenues received
from entering into licensing or co-development agreements or otherwise from
the manufacture of products incorporating the ASR technologies. Assignment
to the Company of all technology relating to the ASR technologies is
confirmed by the Modification Agreement.
From inception on October 1, 1993 through March 31, 1998, the Company has
invested $20,487,690 in research and development relating to its Core
Technologies. During the three months ended March 31, 1998, the Company
incurred research and development expenses of $2,701,203, an increase of
$1,091,145 over the same period in the previous year. This increase is due
primarily to the addition of research and development personnel, equipment
and facilities. The Company anticipates similar or increased research and
development costs as it expands and continues to develop and market its
Core Technologies. Additionally, the Company purchased in-process research
and development totaling $17,839,840 during the three months ended March
31, 1998 in connection with the acquisition of AcuVoice, Inc.
General and administrative expenses were $1,425,443 and $1,293,391,
respectively, for the three months ended March 31, 1998 and 1997. This
increase over the previous period was due primarily to increases in
salaries. Salaries were $687,930 and $375,497 for the three months ended
March 31, 1998 and 1997, respectively, an increase of $312,433 over the
three months ended March 31, 1997. Additionally, the Company incurred
increased expenses in legal, accounting and travel of $246,271 and a
decrease in consulting and outside services of $421,968.
Due to minimal revenues and significant research and development and
general and administrative expenses, the Company has incurred losses from
operations since inception totaling $60,854,664, of which $20,670,701 and
$2,903,449 were incurred during the three months ended March 31, 1998 and
1997, respectively. At March 31, 1998, the Company had an accumulated
deficit of $65,860,554 and stockholders' equity of $13,421,033. The
Company anticipates that its investment in ongoing scientific research and
development of the Core Technologies will continue at present or increased
levels for at least the remainder of fiscal 1998.
Net other expense was $40,447 for the three months ended March 31, 1998, an
increase in net expense of $80,433 over the three months ended March 31,
1997. This increase was due to increased interest expense and reduced
interest income from notes receivable.
Liquidity and Capital Resources
The Company's current assets exceeded its current liabilities by $5,206,925
at March 31, 1998 compared to $678,823 at December 31, 1997. The current
ratio was 1.34 at March 31, 1998, compared to 1.03 at December 31, 1997.
Current assets decreased by $607,481 to $20,541,208 from December 31, 1997
to March 31, 1998. Current liabilities decreased by $5,135,583 to
$15,334,283 during the same period. The increase in working capital from
December 31, 1997 to March 31, 1998 is primarily attributable to a decrease
in the Company's revolving note payable of $4,455,015 due to the sale of
common stock. Total assets were $29,870,414 at March 31 ,1998 compared to
$22,894,566 at December 31, 1997.
From its inception, the Company's principal source of capital has been
private and other exempt sales of the Company's debt and equity securities.
During the three months ended March 31, 1998, the Company issued 7,719,864
shares of common stock for net cash proceeds of $14,340,000. Of such
amount, 3,333,333 shares were issued in connection with a private placement
(see below), 2,692,216 shares were issued in connection with the
acquisition of AcuVoice, Inc., 1,489,501 shares were issued upon the
conversion of convertible preferred stock and related dividends, 180,000
shares were issued upon the exercise of previously granted warrants and
24,814 shares were issued for the purchase of a patent.
On March 12, 1998, the Company completed a private placement (the
"Offering") of up to 6,666,666 shares of its restricted common stock to
seven separate accredited investors. The total purchase price to be paid
by the investors pursuant to the Offering is $30,000,000. Of that amount,
$15,000,000 was received by the Company on March 12, 1998, in return for
which the Company issued a total of 3,333,333 shares of restricted common
stock. Finders' fees of $870,000 were paid in connection with the
$15,000,000 received. The remainder of the purchase price is to be paid by
the investors 60 days after the effectiveness of a registration statement
that the Company filed with the Securities and Exchange Commission on April
16, 1998 (the "Second Funding Date"), provided that, as of such date,
certain conditions
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are satisfied. Specifically, as of the Second Funding Date: (i) the
registration statement covering all of the common stock to be issued must
be effective, (ii) the representations and warranties of the Company as set
forth in the documents underlying the Offering shall be correct in all
material respects, (iii) the market price of the Company's common stock
shall exceed $4.50 per share, (iv) the dollar volume of trading in the
Company's common stock for the 10-trading day period preceding such date
shall equal or exceed $1,000,000, (v) there shall be at least 18 market
makers for the Company's common stock, and (vi) there shall be no material
adverse change in the Company's business or financial condition.
Additionally, the investors in the Offering have certain "reset" rights
pursuant to which the investors will receive additional shares of
restricted common stock if the average market price of the Company's common
stock for the 60-day periods following the initial closing date and the
Second Funding Date does not equal or exceed $5.40 per share. The number
of additional 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 investors in the Offering also have certain first rights of refusal and
other rights if the Company conducts other offerings in the near future
with other investors and the terms of such other offerings are more
advantageous to such other investors than the terms of the Offering.
In January 1998, 27,500 shares of Series B Preferred Stock and related
dividends were converted into 193,582 shares of common stock. At March 31,
1998, no shares of Series B Preferred Stock were outstanding.
During the three months ended March 31, 1998, 185,000 shares of Series C
Preferred Stock and related dividends were converted into 1,295,919 shares
of the Company's common stock. At March 31, 1998, no shares of Series C
Preferred Stock were outstanding.
During the three months ended March 31, 1998, the Company granted 1,225,000
stock options. 450,000 of such options having an exercise price of $5.16
per share, were granted to three individuals who are executive officers and
directors of the Company and who each beneficially own more than ten
percent of the Company's common stock. 355,000 and 420,000 of such options
were granted to various employees at an exercise price per share of $3.34
and $6.50, respectively. These options have a ten-year term.
Although the Company has signed its first Statement of Work with Siemens
and the Company anticipates that it will enter into additional third-party
license or licenses or co-development agreements for its Core Technologies
with Siemens and other parties during fiscal year 1998, there can be no
assurance that this will occur. Even with the Siemens Agreement in place
and taking into account expected revenues from the AcuVoice merger, the
Company's ongoing operating expenses remain higher than revenues from
operations. Accordingly, the Company expects to incur significant losses
at least through the end of fiscal year 1998 and until such time as it is
able to enter into substantial licensing and co-development agreements and
receive substantial revenues from such arrangements, of which there can be
no assurance.
The Company has established a relationship with a major regional federally
insured financial institution pursuant to which the Company is permitted to
borrow against its own funds on deposit with the institution. As of March
31, 1998, the Company had funds on deposit of $20,000,000. As of March
31, 1998, the Company owed $14,157,257 to the institution, compared with
$18,612,272 as of December 31, 1997. The weighted average outstanding
balance during the three months ended March 31, 1998 was $17,465,681. This
note was due April 29, 1998 and bore an interest rate of 6.50 percent per
annum at March 31, 1998. This note has been renewed through August 4,
1998. This revolving note is renegotiated quarterly and the Company plans
to continue renewing the note indefinitely. The net difference between the
rate of interest paid by the institution for the Company's funds on deposit
at the institution and the interest rate paid to the Company by the
institution is approximately one percent. Interest income and expense is
payable monthly and the principal amount is payable in full at maturity.
The Company anticipates that it will need to raise additional funds to
satisfy its cash requirements during the next twelve months. Scientific
research and development, corporate operations and marketing expenses will
continue to require additional capital. In addition, the Company has
recently acquired AcuVoice, Inc. and is actively seeking additional
complementary acquisition opportunities. These transactions will require
additional capital resources, even if the Company uses its securities in
payment of all or part of the purchase price of such acquisitions, because
AcuVoice, Inc.
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and certain acquisition targets presently do not have monthly income to
provide sufficient revenue to finance such acquisitions. Because the
Company presently has only limited revenue from operations, the Company
intends to continue to rely primarily on financing through sales of its
equity and debt securities to satisfy future capital requirements until
such time as the Company is able to enter into additional acceptable third-
party licensing or co-development arrangements such that it will be able to
finance ongoing operations out of license, royalty and sales revenues.
There can be no assurance that the Company will be able to sell its equity
and debt securities or enter into such arrangements, or both such that
sufficient operating capital will be available when and in the amounts
needed. Furthermore, the issuance of equity securities or other securities
which are or may become convertible to the equity securities of the Company
in connection with such financing (or in connection with acquisitions) will
result in dilution to the stockholders of the Company which could be
substantial.
The Company presently has no plans to purchase any new plants or office
facilities. The Company is currently planning to lease a larger office
facility in the San Jose, California area to house a growing fonix AcuVoice
staff and anticipates that it will incur approximately $950,000 in capital
expenditures for equipment Company-wide over the next twelve months.
Outlook
Corporate Objectives, Technology Vision and Acquisition Strategy
The Company has positioned itself as a developer of "next generation"
speech and human-computer interface technologies that will provide multiple
product solutions for business, consumer and service applications. The
fonix management team has assembled leading talents in the speech
recognition, speech synthesis and other arenas related to its Core
Technologies. The Board of Directors and management have developed a
business strategy that identifies the Company's strengths and objectives,
outlines a vision of the next major market opportunities in the computer,
telephony and electronics industries and articulates a corporate and
technology strategy that includes strategic alliances, collaborative
development agreements, strategic acquisitions and, ultimately, marketing a
suite of fonix-branded products.
Management believes the primary strengths of fonix include:
* Next generation Core Technologies
* Growing suite of complementary advanced speech and human-
computer interface technologies
* Strong Board of Directors and management team with experience in
industry and finance sectors
* Inclusive, open, supportive corporate culture
* Depth of technological expertise, including product engineering
teams in Salt Lake City, Silicon Valley and Boston
* Reasoned global market strategy
Management believes that these strengths can be used by the Company to
provide added access to capital markets, facilitate accomplishment of the
objectives of the Company and position the Company as an attractive
investment and development partner.
The Company believes that its Core Technologies will be the platform for
the next generation of automatic speech technology and products. Most
speech recognition products offered by other companies are based on
technologies such as HMMs, that are largely in the public domain and
represent nothing particularly "new" or creative. The fonix Core
Technologies are based on proprietary, patented technology. The Company
will continue to seek patent protection of the Core Technologies and will
seek to add, including through acquisitions such as the AcuVoice merger,
products and technologies that are either patented or unique in the
marketplace. Management believes this strategy will set the Company's
advanced speech products apart from the competition.
The Company is determined to become a multi-market, multi-product
enterprise offering advanced speech and human-computer interface
technologies for business, consumer and service applications. Advance
human-computer interface technologies and multi-modal systems include:
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* speech recognition
* speech synthesis
* speaker identification and verification
* handwriting recognition
* pen and touch screen input
* facial and gesture input and output
* natural language understanding
Products anticipated to incorporate such advanced multi-modal human
computer interface technologies include, among others, the following:
* PC's and cellular phones
* automotive and home environment speech controls
* automated information and transaction kiosks
* telephone systems with natural dialogue and gesture controls
* medical reporting systems
* smart consumer appliances and electronics
* speech and pen-based computers
* interactive education and entertainment systems
* interactive advertising
* real-time translation systems
This next generation technology presents important product and service
opportunities for fonix in a variety of industry segments, including:
* semiconductors
* telecommunications
* computers
* software
* consumer electronics
* entertainment
fonix is a technology company. Since its inception, the Company has
focused on the development of its Core Technologies and related
complementary technologies. The Company will pursue the development and
acquisition of advanced speech and computer-interface technologies that
will enhance or may be enhanced by its own Core Technologies. fonix will
pursue this development through strategic alliances, such as the Siemens
agreement in the telecommunications industry, and through collaborative
research arrangements such as its agreement with OGI.
Acquisition targets will (i) have technologies that are complementary to
the Core Technologies, (ii) offer existing products and marketing strengths
that provide immediate revenues to the Company, (iii) open new marketing
channels for existing technologies or products of the Company, (iv) provide
new product vehicles for the Core Technologies and (v) possess vertical
market applications expertise that can be leveraged by the Company in
further product development and marketing opportunities. The Company has
observed that there are numerous small "boutique" speech technology
vendors. An alliance with or acquisition of such vendors by the Company
can offer these small companies greater access to human and financial
resources which, it is hoped, will lead to greater market share, improved
product development and support, and creation of additional applications.
The Company believes that the ideal candidates will be involved in one or
more of these categories:
* Core speech and language technology, which would include
companies with speech products or technology involving text-to-
speech, multiple languages, natural language processing,
translation, speaker identification, and microphone design.
* Speech products and applications, such as interactive natural
dialogue systems, telephone systems, large vocabulary medical,
legal systems, compression, and chip-based systems.
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* Other computer interface technologies, such as pen input and
handwriting recognition, haptic (manual) input and output, face
and gesture recognition, pentop and wearable computers.
The strategy described above is not without risk, and shareholders and
others interested in the Company and its common stock should carefully
consider the risks contained the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Special Note Regarding Forward-Looking Statements
Certain statements contained herein under, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Outlook,"
including statements concerning (i) the Company's strategy, (ii) the
Company's expansion plans, (iii) the market for and potential applications
of the Company's technologies, (iv) the results of research and development
efforts, and (v) the growth of the Company's business contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Because such statements involve risks
and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that
could cause such differences include, but are not necessarily limited to,
those discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Polomba Action
As previously reported, the Company was named as a defendant in a
shareholder derivative action brought by a shareholder of the Company
against certain directors of the Company and a third party affiliated with
certain of the director-defendants. The parties have executed settlement
documents and are awaiting a court hearing for preliminary approval of the
settlement and approval of the form of notice to be sent to the
shareholders. If the settlement and notice are approved, notice of the
content of the settlement together with notice of a hearing to approve the
settlement will be provided to shareholders of record. Regardless of the
outcome of the settlement or the commencement of litigation proceedings, if
the settlement is not consummated, the Company believes that the claims
asserted against the Company in this action are entirely without merit.
After consideration of the nature of the claims and the facts relating to
this action, the Company believes that the resolution of this action will
not have a material effect on the Company's business, financial condition
and results of operations; however, the ultimate effect of this action,
including any potential settlement on the business and financial condition
of the Company, are uncertain and there can be no assurance to that effect.
Item 2. Changes in Securities
c. Unregistered sales of equity securities during the quarter
(other than in reliance on Regulation S).
Recent Sales of Unregistered Securities. During the quarter ending
March 31, 1998, the Company issued equity securities that were not
registered under the Securities Act of 1933, as amended (the "Act"), other
than unregistered sales in reliance on Regulation S under the Act as
follows:
On February 24, 1998 the Company issued 24,814 shares of common stock
to an unaffiliated entity as payment for certain intellectual property.
The Company issued such shares without registration under the Act in
reliance on Section 4(2) of the Act. Such shares of common stock were
issued as restricted securities and the certificates representing such
shares were stamped with a restrictive legend to prevent any resale without
registration under the Act or pursuant to an exemption.
On March 5, 1998 the Company issued 80,000 shares of common stock to
unaffiliated individuals upon the exercise by them of warrants at a per
share price of $2.00. The Company issued such shares without
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registration under the Act in reliance on Section 4(2) of the Act or
Regulation D. Such shares of common stock were issued as restricted
securities and the certificates representing such shares were stamped with
a restrictive legend to prevent any resale without registration under the
Act or pursuant to an exemption.
On March 12, 1998, the Company issued 3,333,333 shares of common stock
as part of the Offering. The consideration received by the Company for
these shares was $15,000,000 ($4.50 per share). As part of those same
transactions, the Company agreed to issue 3,333,333 additional shares on
the same terms, subject to the fulfillment on certain conditions by the 60
days after the effectiveness of a registration statement which the Company
filed on April 16, 1998 covering all of the common stock issued as part of
the Offering. This second payment of $15,000,000 is subject to fulfillment
of certain conditions by the Company. Additionally the investors have
certain "reset" rights pursuant to which the investors will receive
additional shares of common stock if the average market price of the
Company's common stock for the 60 day periods following the effective date
of the registration statement and the second funding date does not equal or
exceed $5.40 per share. The Company issued such shares without
registration under the Act in reliance on Section 4(2) of the Act or
Regulation D. Such shares of common stock were issued as restricted
securities and the certificates representing such shares were stamped with
a restrictive legend to prevent any resale without registration under the
Act or pursuant to an exemption.
On March 13, 1998 the Company issued 100,000 shares of common stock to
unaffiliated individuals upon the exercise of warrants. The exercise price
was $0.50 per share. The Company issued such shares without registration
under the Act in reliance on Section 4(2) of the Act or Regulation D. Such
shares of common stock were issued as restricted securities and the
certificates representing such shares were stamped with a restrictive
legend to prevent any resale without registration under the Act or pursuant
to an exemption.
On March 13, 1998 the Company issued 2,692,216 shares of common stock
to various shareholders of AcuVoice, Inc. as part of the consideration for
the merger of AcuVoice, Inc. with and into a subsidiary of the Company.
The common stock was valued at $6.31 per share. The Company issued such
shares without registration under the Act in reliance on Section 4(2) of
the Act or Regulation D. Such shares of common stock were issued as
restricted securities and the certificates representing such shares were
stamped with a restrictive legend to prevent any resale without
registration under the Act or pursuant to an exemption.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits: The following Exhibits are filed with this Form 10-K
pursuant to Item 601(a) of Regulation S-K:
Exhibit
No. Description of Exhibit
------- ---------------------------------------
(2) Agreement and Plan of Reorganization among the Company,
fonix Acquisition Corporation and AcuVoice dated as of
January 13, 1998, incorporated by reference from the
Company's Current Report on Form 8-K, filed March 20,
1998
(3)(i) Articles of Incorporation of the Company which are
incorporated by reference from the Company's Registration
Statement on Form S-18 dated as of September 12, 1989
(3)(ii) Certificate of Amendment of Certificate of Incorporation
dated as of March 21, 1994, which is incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(3)(iii) Certificate of Amendment of Certificate of Incorporation
dated as of May 13, 1994, which is incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(3)(iv) Certificate of Amendment of Certificate of Incorporation
dated as of September 24, 1997, which is incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997
21
<PAGE>
(3)(v) The Company's Bylaws, as amended, which are incorporated
by reference from the Company's Annual Report for the
Fiscal Year Ended December 31, 1994 on Form 10-KSB
(4)(i) Description of the Company's common stock and other
securities and specimen certificates representing such
securities which are incorporated by reference from the
Company's Registration Statement on Form S-18 dated as of
September 12, 1989, as amended
(4)(ii) Certificate of Designation of Rights and Preferences of
Series A Preferred Stock, filed with the Secretary of
State of Delaware on September 24, 1997, which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1997
(4)(iii) Certificate of Designation of Rights and Preferences of
Series B Convertible Preferred Stock, filed with the
Secretary of State of Delaware on October 27, 1997, which
is incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1997
(4)(iv) Certificate of Designation of Rights and Preferences of
5% Series C Convertible Preferred Stock, filed with the
Secretary of State of Delaware on October 24, 1997, which
is incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1997
(10)(i) Product Development and Assignment Agreement dated as of
October 16, 1993 between Phonic Technologies, Inc. and
Synergetics, Inc., which is incorporated by reference
from the Company's Current Report on Form 8-K dated as
of June 17, 1994
(10)(ii) Re-Stated Product Development and Assignment Agreement
dated as of March 30, 1995, between fonix Corporation and
Synergetics, Inc., which is incorporated by reference
from the Company's Annual Report for the Fiscal Year
Ended December 31, 1994 on Form 10-KSB
(10)(iii) Memorandum of Understanding dated as of March 13, 1997,
by and among the Company, Synergetics, Inc. and C. Hal
Hansen, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996
(10)(iv) Employment Agreement by and between the Company and
Stephen M. Studdert, which is incorporated by reference
from the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996
(10)(v) Employment Agreement by and between the Company and
Thomas A. Murdock, which is incorporated by reference
from the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996
(10)(vi) Employment Agreement by and between the Company and Roger
D. Dudley, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996
(10)(vii) Convertible Debenture Purchase Agreement dated as of June
18, 1997 between the Company and Southbrook International
Investments, Ltd., incorporated by reference from
Amendment No. 1 to the Quarterly Report on Form 10-Q for
the period ended June 30, 1997
(10)(viii) Amended and Restated Purchase Agreement effective as of
September 30, 1997 and dated as of October 24, 1997 by
and between the Company and Southbrook International
22
<PAGE>
Investments, Ltd., which is incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
period ended September 30, 1997
(10)(ix) Convertible Preferred Stock Purchase Agreement effective
as of September 30, 1997 and dated as of October 24, 1997
by and among the Company and JNC Opportunity Fund Ltd.
and Diversified Strategies Fund, L.P., which is
incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the period ended September 30,
1997
(10)(x) Restated Master Agreement for Joint Collaboration between
the Company and Siemens, dated November 14, 1997, as
revised, which is incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997
(10)(xi) Restated First Statement of Work and License Agreement
between the Company and Siemens, dated February 11, 1998,
as revised, which is incorporated by reference from the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997
(10)(xii) Master Technology Collaboration Agreement between the
Company and OGI, dated October 14, 1997, which is
incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
(10)(xiii) Common Stock Purchase Agreement among the Company and JNC
Opportunity Fund Ltd. and Diversified Strategies Fund,
LP, dated as of March 9, 1998, which is incorporated by
reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997
(10)(xiv) Common Stock Purchase Agreement between the Company and
Thomson Kernaghan & Co., dated as of March 9, 1998, which
is incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
(10)(xv) Royalty Modification Agreement among the Company and
Synergetics, dated as of April 6, 1998, which is
incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
(10)(xvi) Purchase Agreement with John Oberteuffer and the Company
dated April 9, 1998, which is incorporated by reference
from the Company's Annual Report on Form 10-K for the
year ended December 31, 1997
(10)(xvii) Employment Agreement by and between the Company and John
A. Oberteuffer, which is incorporated by reference from
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997
(10)(xviii)First Amendment to Master Agreement for Joint
Collaboration between the Company and Siemens, dated
February 13, 1998, which is incorporated by reference
from the Company's Annual Report on Form 10-K for the
year ended December 31, 1997
(10)(xix) Second Amendment to Master Agreement for Joint
Collaboration between the Company and Siemens, dated
March 13, 1998, which is incorporated by reference from
the Company's Annual Report on Form 10-K for the year
ended December 31, 1997
(27) Financial Data Schedule
23
<PAGE>
b. Reports filed on Form 8-K during the three month period ended March
31, 1998:
(i) On February 3, 1998, the Company filed a Current Report on Form
8-K, dated January 28, 1998, which report contained item 5
disclosure pertaining to the engagement by the Company of John
A. Oberteuffer, Ph.D., as the Company's Vice President of
Technology.
(ii) On February 17, 1998, the Company filed a Current Report on Form
8-K, dated February 11, 1998, containing item 5 disclosure
pertaining to the Company's execution of the first Statement of
Work agreement with Siemens.
(iii) On March 5, 1998, the Company filed a Current Report on Form 8-
K, dated February 23, 1998, containing item 4 disclosure about
the a change in the Company's certifying accountants from
Deloitte & Touche LLP to Arthur Andersen LLP. That report was
subsequently amended by the filing of a Form 8-K/A on March 5,
1998, which amendment was filed to submit the required letter
regarding change of certifying accountant -- Exhibit 16.
(iv) On March 30, 1998, the Company filed a Current Report on Form 8-
K, dated March 13, 1998, containing item 2 disclosure pertaining
to the Company's acquisition by merger of AcuVoice, Inc.
Although audited financial statements of AcuVoice, Inc. and pro
forma financial information was required to be filed by the
Company in connection with that Current Report, pursuant to item
7(a)(4) of Form 8-K, the Company has not yet filed such audited
and pro forma financial information.
24
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
fonix corporation
Date: May 15, 1998 /s/ Douglas L. Rex
------------- ------------------------------------
Douglas L. Rex, Chief Financial Officer
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