<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or 240.14a-12
Fonix Corporation
...............................................................................
(Name of Registrant as Specified in Charter)
...............................................................................
(Name of Person(s) Filing Proxy Statement If Other Than The Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
...........................................................
2) Aggregate number of securities to which transaction applies:
...........................................................
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined): .............
4) Proposed maximum aggregate value of transaction:
...........................................................
5) Total fee paid:
...........................................................
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the For of Schedule and the date of its filing.
1) Amount Previously Paid:....................................
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3) Filing Party:..............................................
4) Date Filed:................................................
<PAGE>
Fonix Corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 29, 1999
To the Shareholders:
Notice is hereby given that the Annual Meeting of the Shareholders of
Fonix Corporation ("the Company") will be held at the New York Hilton Hotel,
1335 6th Avenue, New York, New York 10019 on Friday, October 29, 1999, at 9:00
a.m., E.D.T. for the following purposes, which are discussed in the following
pages and which are made part of this Notice:
1. To elect four directors, each to serve until the next
annual meeting of shareholders and until his or her
successor is elected and shall qualify;
2 To approve a series of transactions pursuant to which the
Company has issued its Series D 4% Convertible Preferred
Stock and Series E 4% Convertible Preferred Stock to seven
institutional investors, which preferred stock may be
convertible into more than 20% of the total number of
shares of the Company's common stock, par value $.0001 per
share ("Common Stock"), issued and outstanding prior to the
commencement of such series of transactions;
3. To consider and act upon a proposed amendment to the
Company's certificate of incorporation that would (A)
create a new class of Common Stock designated as Class B
Non-Voting Common Stock; and (B) redesignate the
Corporation's current Common Stock as Class A Common Stock
and change each share of existing Common Stock into a share
of Class A Common Stock;
4. To consider and act upon a proposed amendment to the
Company's certificate of incorporation that would increase
the authorized capital of the Company to include
300,000,000 shares of Common Stock, and 50,000,000 shares
of Preferred Stock; and
5. To approve the Board of Directors' selection of Arthur
Andersen LLP, as the Company's independent public
accountant for the fiscal year ended December 31, 1999; and
6. To consider and act upon any other matters that properly
may come before the meeting or any adjournment thereof.
The Company's Board of Directors has fixed the close of business on
Thursday, September 16, 1999, as the record date for the determination of
shareholders having the right to notice of, and to vote at, the Annual Meeting
of Shareholders and any adjournment thereof. A list of such shareholders will be
available for examination by a shareholder for any purpose germane to the
meeting during ordinary business hours at the offices of the Company at 1225
Eagle Gate Tower, 60 East South Temple Street, Salt Lake City, Utah 84111,
during the ten business days prior to the meeting.
You are requested to date, sign and return the enclosed proxy which
is solicited by the Board of Directors of the Company and will be voted as
indicated in the accompanying proxy statement and proxy. Your vote is important.
Please sign and date the enclosed Proxy and return it promptly in the enclosed
return envelope whether or not you expect to attend the meeting. The giving of
your proxy as requested hereby will not affect your right to vote in
<PAGE>
person should you decide to attend the Annual Meeting. The return envelope
requires no postage if mailed in the United States. If mailed elsewhere, foreign
postage must be affixed. Your proxy is revocable at any time before the meeting.
By Order of the Board of Directors,
/s/ Thomas A. Murdock
Thomas A. Murdock, Chief Executive Officer
Salt Lake City, Utah
October 7, 1999
<PAGE>
Fonix Corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
(801) 328-8700
--------------------------------------------------------------
PROXY STATEMENT
--------------------------------------------------------------
ANNUAL MEETING OF SHAREHOLDERS
The enclosed proxy is solicited by the Board of Directors of Fonix Corporation
("Fonix" or the "Company") for use in voting at the Annual Meeting of
Shareholders (the "Annual Meeting") to be held at the
New York Hilton Hotel, 1335 6th Avenue, New York, New York 10019, on Friday,
October 29, 1999, at 9:00 a.m., EDT, and at any postponement or adjournment
thereof, for the purposes set forth in the attached notice. When proxies are
properly dated, executed and returned, the shares they represent will be voted
at the Annual Meeting in accordance with the instructions of the shareholder
completing the proxy. If a signed proxy is returned but no specific instructions
are given, the shares will be voted (i) FOR the nominees for directors set forth
herein, (ii) FOR approval of a series of transactions pursuant to which the
Company has issued its Series D 4% Convertible Preferred Stock and Series E 4%
Convertible Preferred Stock to seven institutional investors, which preferred
stock may be convertible into more than 20% of the total number of shares of the
Company's Common Stock issued and outstanding prior to the commencement of such
series of transactions; and (iii) FOR approval of a proposed amendment to the
Company's certificate of incorporation that would: (A) create a new class of
Common Stock designated as Class B Non-Voting Common Stock; and (B) redesignate
the Company's current Common Stock as Class A Common Stock and change each share
of existing Common Stock into a share of Class A Common Stock; and (iv) FOR
approval of a proposed amendment to the Company's certificate of incorporation
that would increase the authorized capital of the Company to include 300,000,000
shares of Common Stock and 50,000,000 shares of Preferred Stock; and (v) FOR
approval of Arthur Andersen LLP, as the Company's independent public accountant
for the fiscal year ended December 31, 1999. A shareholder giving a proxy has
the power to revoke it at any time prior to its exercise by voting in person at
the Annual Meeting, by giving written notice to the Company's Secretary prior to
the Annual Meeting or by giving a later dated proxy.
The presence at the meeting, in person or by proxy, of shareholders holding in
the aggregate a majority of the outstanding shares of the Company's common stock
entitled to vote shall constitute a quorum for the transaction of business. The
Company does not have cumulative voting for directors; a plurality of the votes
properly cast for the election of directors by the shareholders attending the
meeting, in person or by proxy, will elect directors to office. A majority of
votes properly cast upon any question presented for consideration and
shareholder action at the meeting, other than the election of directors, shall
decide the question. Abstentions and broker non-votes will count for purposes of
establishing a quorum, but will not count as votes cast for the election of
directors or any other questions and accordingly will have no effect. Votes cast
by shareholders who attend and vote in person or by proxy at the Annual Meeting
will be counted by inspectors to be appointed by the Company (the Company
anticipates that the inspectors will be employees, attorneys or agents of the
Company).
The close of business on Thursday, September 16, 1999, has been fixed as the
record date for determining the shareholders entitled to notice of, and to vote
at, the Annual Meeting. Each share shall be entitled to one vote on all matters.
As of the record date there were 74,020,809 shares of the Company's common stock
outstanding and entitled to vote. For a description of the principal holders of
such stock, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"
below.
This Proxy Statement and the enclosed Proxy are being furnished to shareholders
on or about Friday, October 8, 1999.
--------------------------------------------------------------
-1-
<PAGE>
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Company's Bylaws provide that the number of directors shall be
determined from time to time by the shareholders or the Board of Directors, but
that there shall be no less than three. Presently the Company's Board of
Directors consists of four members, all of whom are nominees for reelection at
the Annual Meeting. Each director elected at the Annual Meeting will hold office
until a successor is elected and qualified, or until the director resigns, is
removed or becomes disqualified. Unless marked otherwise, proxies received will
be voted FOR the election of each of the nominees named below. If any such
person is unable or unwilling to serve as a nominee for the office of director
at the date of the Annual Meeting or any postponement or adjournment thereof,
the proxies may be voted for a substitute nominee, designated by the proxy
holders or by the present Board of Directors to fill such vacancy, or for the
balance of those nominees named without nomination of a substitute, or the Board
may be reduced accordingly. The Board of Directors has no reason to believe that
any of such nominees will be unwilling or unable to serve if elected as a
director.
The following information is furnished with respect to the nominees.
Stock ownership information is shown under the heading "Security Ownership of
Certain Beneficial Owners and Management" and is based upon information
furnished by the respective individuals.
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
THOMAS A. MURDOCK, Chairman of the Board and Chief Executive Officer. Mr.
Murdock, 57, is a co-founder and has served as an executive officer
and member of the Company's Board of Directors since June 1994. Mr.
Murdock was elected Chief Executive Officer in February 1999, and
became Chairman of the Board of Directors in March 1999. Mr. Murdock
also has served as President of Studdert Companies Corp. ("SCC"), an
investment, finance, and management firm based in Salt Lake City,
Utah, since 1992. Prior to 1999, Mr. Murdock served as Assistant to
the Chairman and a director of Synergetics, Inc., a research company
located in Utah that provides research and development services in
connection with the Company's automatic voice recognition and related
technologies. For much of his career, Mr. Murdock has been a
commercial banker and a senior corporate executive with significant
international emphasis and experience. Mr. Murdock also serves as a
director of K.L.S. Enviro Resources, Inc. ("KLSE"), a company with a
class of securities registered under Section 12 of the Securities
Exchange Act of 1934 ("1934 Act").
ROGER D. DUDLEY, Executive Vice President, Corporate Finance, and Director. Mr.
Dudley, 47, is a co- founder and has served as an executive officer
and member of the Company's Board of Directors since June 1994. Mr.
Dudley is also executive vice president of SCC, a position he has held
since 1993. After several years at IBM in marketing and sales, he
began his career in the investment banking and asset management
industry. He has extensive experience in real estate asset management
and in project development. He also serves as an executive officer of
an entity which manages a foreign investment fund. He is also a
director of KLSE.
JOHN A. OBERTEUFFER, Ph.D., Vice President Technology and Director. Dr.
Oberteuffer, 57, has been a Director of the Company since March 1997
and Vice President Technology since January 1998. He is also the
founder and president of Voice Information Associates, Inc. ("VIA").
VIA is a consulting group providing strategic technical, market
evaluation, product development and corporate information to the
automatic speech recognition industry. In addition, VIA publishes the
monthly newsletter, ASRNews. Dr. Oberteuffer also is executive
director of the American Voice Input/Output Society ("AVIOS"). He was
formerly vice president, personal computer systems, of Voice
Processing Corp. (now merged with Voice Control Systems, Inc.), and
also was founder and CEO of Iris Graphics, which was acquired by
Seitex Corp. Dr. Oberteuffer received his bachelor's and master's
degrees from Williams College, and his Ph.D. in Physics from
Northwestern University, and he was a member of the research staff at
Massachusetts Institute of Technology for five years.
WILLIAM A. MAASBERG, JR. Mr. Maasberg, 59, became a member of the Company's
Board of Directors in September 1999. From December 1997 through
February 1999, Mr. Maasberg was a Vice President and
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<PAGE>
General Manager of the AMS Division of Eyring Corporation ("Eyring").
AMS is Eyring's multi-media electronic work instruction software
application. He was also a co-founder and principal in Information
Enabling Technologies, Inc.("ETI"), and LIBRA Corporation ("LIBRA"),
two companies focusing on software application, and served in several
key executive positions with both ETI and LIBRA from May 1976 through
November 1997. Mr. Maasberg worked for IBM Corporation from July 1965
through May 1976 in various capacities. He received his BS Degree
from Stanford University in Electrical Engineering, and his MS in
Electrical Engineering from the University of Southern California.
DOUGLAS L. REX. Mr. Rex, 54, has served as the Chief Financial Officer of the
Company since May 1997. For seven years prior to joining the Company,
Mr. Rex was president of a business consulting, tax planning,
accounting and auditing firm. Mr. Rex is a member of the Financial
Executives Institute, American Institute of Certified Public
Accountants (AICPA) and the Utah Association of Certified Public
Accountants (UACPA). Mr. Rex is also a Vice President and the CFO of
SCC.
Messrs. Murdock, Dudley, Oberteuffer, and Maasberg are nominees for
election to the Company's Board of Directors.
SIGNIFICANT EMPLOYEES AND CONSULTANTS
In addition to the officers and directors identified above, the Company expects
the following individuals (listed in alphabetical order) to make significant
contributions to the Company's business:
CARL HAL HANSEN. Mr. Hansen, 49, is co-inventor of the Company's automatic
speech recognition technologies ("ASRT"), and Chairman and CEO of
Synergetics, IMC2 and Adiva Corporation. Mr. Hansen holds a degree in
Electronics from the Utah Trade Technical Institute of Provo, Utah.
For approximately fourteen years, Mr. Hansen was employed by
Signetics, Inc. in various capacities, including Test Equipment
Engineer, Characterization Engineer, Product Engineer, and as an
Electronic Specialist. He was involved in the design, fabrication and
release of layout design for PC boards and interfaces. In 1991, Mr.
Hansen founded Synergetics, where he continues to have direct
leadership with respect to new product development and engineering.
IMC2 and Adiva provide consulting and research and development
services. Since March 13, 1997, he has been a full-time consultant to
the Company.
CAROLINE HENTON, Ph.D. Dr. Henton, 45, is Vice President and Strategic
Technology Adviser of the Company since February 1998. Dr. Henton
received a masters degree in General Linguistics and a Doctorate in
Acoustic Phonetics from the University of Oxford. After an academic
career in the UK and California, she joined Apple Computer, Inc. to
produce the high quality synthetic speech available on all Apple
platforms. For the past five years, Dr. Henton has been Director of
Language Development for Voice Processing Corp. (Cambridge, MA) and
Director of Linguistic Development for the DECtalk speech synthesizer
produced by Digital Equipment Corp. She has also acted as a
consultant in speech synthesis, linguistics, localization, speech
interface design and as a voice talent for Sun Microsystems, Inc.,
Claris Corp., Digital Sound Corp., Lexicon naming Inc., Interval
Research Inc., Apple Computer, General Magic, Inc., and Digital
Equipment Corp.
TONY R. MARTINEZ, Ph.D. Dr. Martinez, 41, is senior consulting scientist
for the Company's neural network development. He received his Ph.D.
in computer science at UCLA in 1986. He is an associate professor of
Computer Science at Brigham Young University and currently heads up
the Neural Network and Machine Learning Laboratory in the BYU
Ph.D./MS program. His main research is in neural networks, machine
learning, ASOCS, connectionist systems, massively parallel algorithms
and architectures, and non-von Neuman computing methods. He is
associate editor of the Journal of Artificial Neural Networks.
R. BRIAN MONCUR. Mr. Moncur, 38, co-inventor of the Company's ASRT, was
employed by Synergetics from 1992 to March 13, 1997, when he became a
full-time employee of the Company. He graduated from Brigham
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<PAGE>
Young University with a Bachelor of Science degree in chemical
engineering. Before his employment with Synergetics, Mr. Moncur was
employed by Signetics, Inc. and Mentorgraphics, where he was a Senior
Process Engineer and Software Development Engineer.
DALE LYNN SHEPHERD. Mr. Shepherd, 40, Senior Project Engineer and co-inventor
of the Company's ASRT, was employed by Synergetics from 1992 to March
13, 1997, when he became a full-time employee of the Company. He
graduated from Brigham Young University with a Bachelor of Science
Degree in Electrical Engineering. He also received a Masters of
Business Administration from B.Y.U. Before his employment with
Synergetics, Mr. Shepherd was employed with Mentorgraphics where he
acted as a software systems architect in automatic semiconductor
design. Before Mentorgraphics, Mr. Shepherd worked on a contract basis
with Signetics, Inc.
None of the executive officers or directors of the Company are related to any
other officer or director of the Company.
BOARD OF DIRECTORS MEETINGS, COMMITTEES AND DIRECTOR COMPENSATION
The Company's Board of Directors took action at seven duly noticed
meetings of the Board during 1998. Each director attended (in person or
telephonically) at least 75% of the meetings of the Company's Board of
Directors. During 1998, the Company's Board of Directors had the following
committees: 1996 Directors' Stock Option Plan Committee, comprised of Messrs.
Alan Ashton, Joseph V. Reed and Stephen M. Studdert; 1997 Stock and Incentive
Plan Committee, comprised of Messrs Nydegger and Reed; 1998 Stock and Incentive
Plan Committee, comprised of Messrs. Nydegger and Reed; Audit Committee,
comprised of Messrs. Reginald Brack , Reed and Dudley; and Compensation
Committee, comprised of Messrs. Studdert, Reed and Nydegger. These standing
committees conducted meetings in conjunction with meetings of the full Board of
Directors. The Company has no standing nominating committee.
Prior to April 1996, the Company's directors received no compensation
for their service. The Company historically has reimbursed its directors for
actual expenses incurred in traveling to and participating in directors'
meetings, and the Company intends to continue that policy for the foreseeable
future. On April 30, 1996, the Company's board of directors adopted, and the
Company's shareholders subsequently approved, the Company's 1996 Directors'
Stock Option Plan (the "Directors Plan"). Under the Directors Plan, members of
the Board as constituted on the date of adoption received options to purchase
200,000 shares of the Company's common stock for each year (or any portion
thereof consisting of at least six months) during which such persons had served
on the board for each of fiscal years 1994 and 1995 and were granted 200,000
shares for each of fiscal years 1996 through 1999, which options vest after
completion of at least six months' service on the Board during those fiscal
years. These options have terms of 10 years and terminate six months after the
resignation of an optionee. Similar grants have been made to the Company's
directors under the Company's 1998 Stock Option Plan. Thus, under the Directors
Plan and the 1998 Stock Option Plan, during 1998, the Company granted stock
options to members of the Board as follows:
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<PAGE>
<TABLE>
<CAPTION>
Stock Options Granted to Directors During Fiscal Year 1998
Shares Date Exercise Shares Vested
Name Granted Granted Price Per Share at FY-End
- ------- ------- ------- --------------- -------------
<S> <C> <C> <C> <C>
Joseph Verner Reed 400,000 12/1/98 $1.18 800,000
Rick D. Nydegger 400,000 12/1/98 $1.18 400,000
Reginald K. Brack 400,000 12/1/98 $1.18 200,000
- ----------------------
</TABLE>
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
regulation of the Securities and Exchange Commission to furnish the Company with
copies of all Section 16(a) forms which they file. Based solely on its review of
the copies of such forms furnished to the Company during the fiscal year ended
December 31, 1998, the Company is aware of the following untimely filings:
Roger D. Dudley, Stephen M. Studdert, and Joseph V. Reed each filed year-end
Forms 5 as required by Section 16(a). The Forms 5 were filed on April 15, 1998.
James B. Hayes, Rick D. Nydegger, Thomas A. Murdock, and Reginald K. Brack each
filed year-end Forms 5 as required by Section 16(a). The Forms 5 were filed on
April 17, 1998.
Alan C. Ashton filed a year-end Form 5 as required by Section 16(a). The Form 5
was filed on May 11, 1998.
John A. Oberteuffer acquired options to purchase up to 180,000 shares of common
stock of the Company on January 23, 1998. Mr. Oberteuffer filed a Form 4
reporting the transaction on May 8, 1998.
Thomas A. Murdock, Roger D. Dudley, Stephen M. Studdert, and SCC filed amended
Forms 4 for the month of October 1998 on December 9, 1998.
All such untimely filings reflected transactions based on grants of
converted stock options. The Company believes that all other transactions
required to be reported under Section 16(a) of the Securities Exchange Act were
reported in a timely manner on reports filed by the affected individuals.
EXECUTIVE COMPENSATION
Compensation Committee Report on Executive Compensation
This Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Named
Executive Officers, including the persons serving as its Chief Executive Officer
during the year ended December 31, 1998.
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<PAGE>
Compensation Policy. The Committee's policy with respect to executive
compensation has been designed to:
o Adequately and fairly compensate executive
officers in relation to their responsibilities,
capabilities and contributions to the Company and
in a manner that is commensurate with
compensation paid by companies of comparable size
or within the Company's industry;
o Reward executive officers for the achievement of
short-term operating goals and for the
enhancement of the long-term value of the
Company; and
o Align the interests of the executive officers
with those of the Company's shareholders with
respect to short-term operating goals and
long-term increases in the price of the Company's
common stock.
The components of compensation paid to executive officers consist of: (a) base
salary, (b) incentive compensation in the form of annual bonus payments and
stock options awarded by the Company under the Company's Stock Incentive Plans
and (c) certain other benefits provided to the Company's executive officers. The
Company's Compensation Committee is responsible for reviewing and approving cash
compensation paid by the Company to its executive officers and members of the
Company's senior management team, including annual bonuses and stock options
awarded under the Company's Stock Incentive Plans, selecting the individuals who
will be awarded bonuses and stock options under the Stock Incentive Plans, and
for determining the timing, pricing and amount of all stock options granted
thereunder, each within the terms of the Company's Stock Incentive Plans.
The Company's executive compensation program historically has emphasized the use
of incentive-based compensation to reward the Company's executive officers and
members of senior management for the achievement of goals established by the
Board of Directors. The Company uses stock options to provide an incentive for a
substantial number of its officers and employees, including selected members of
management, and to reward such officers and employees for achieving goals that
have been established for the Company. The Company believes its incentive
compensation plan rewards management when the Company and its shareholders have
benefitted from achieving the Company's goals and targeted research and
development objectives, all of which the Compensation Committee feels will
dictate, in large part, the Company's future operating results. The Compensation
Committee believes that its policy of compensating officers and employees with
incentive-based compensation fairly and adequately compensates those individuals
in relation to their responsibilities, capabilities and contribution to the
Company, and in a manner that is commensurate with compensation paid by
companies of comparable size or within the Company's industry.
Components of Compensation. The primary components of compensation paid by the
Company to its executive officers and senior management personnel, and the
relationship of such components of compensation to the Company's performance,
are discussed below:
o Base Salary. The Compensation Committee
periodically reviews and approves the base salary paid by
the Company to its executive officers and members of the
senior management team. Adjustments to base salaries are
determined based upon a number of factors, including the
Company's performance (to the extent such performance can
fairly be attributed or related to each executive's
performance), as well as the nature of each executive's
responsibilities, capabilities and contributions. In
addition, the Compensation Committee periodically reviews
the base salaries of its senior management personnel in an
attempt to ascertain whether those salaries fairly reflect
job responsibilities and prevailing market conditions and
rates of pay. The Compensation Committee believes that base
salaries for the Company's executive officers have
historically been reasonable in relation to the Company's
size and performance in comparison with the compensation
paid by similarly sized companies or companies within the
Company's industry.
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<PAGE>
o Incentive Compensation. As discussed above, a substantial
portion of each executive officer's compensation package is
in the form of incentive compensation designed to reward the
achievement of short-term operating goals and long-term
increases in shareholder value. The Company's Stock
Incentive Plans allow the Board of Directors or the
Compensation Committee to grant stock options to executive
officers and employees for the purchase of shares of the
Company's common stock. Under the terms of the Stock
Incentive Plans, the Board of Directors and the Compensation
Committee have authority, within the terms of the Stock
Incentive Plans, to select the executive officers and
employees who will be granted stock options and to determine
the timing, pricing and number of stock options to be
awarded. The Compensation Committee believes that the stock
options granted under the Stock Incentive Plans reward
executive officers only to the extent that shareholders have
benefitted from increases in the value of the Company's
common stock.
o Other Benefits. The Company maintains certain other plans
and arrangements for the benefit of its executive officers
and members of senior management. The Company believes these
benefits are reasonable in relation to the executive
compensation practices of other similarly sized companies or
companies within the Company's industry.
Compensation of the Chief Executive Officer. As described elsewhere in this
Proxy, the Company has entered into executive employment agreements with Messrs.
Murdock and Dudley and a Separation Agreement with Mr. Studdert. The material
terms of each executive employment agreement with each executive officer are
identical and are described below. (See Footnote 1 to the Summary Compensation
Table below.) The Compensation Committee believes that the monthly compensation
under such contracts adequately and fairly compensates these executive officers
in relation to their respective responsibilities, capabilities, contributions
and dedication to the Company and secures for the Company the benefit of their
leadership, management and financial skills and capabilities. Moreover, the
Compensation Committee believes that the salary and other benefits are
reasonable in relation to the responsibilities, capabilities, contributions and
dedication of these men to the Company and are warranted to keep them in line
with the compensation earned by chief executive officers employed by companies
of comparable size or within the Company's industry.
Conclusion. The Compensation Committee believes that the concepts discussed
above further the shareholders' interests because a significant part of
executive compensation is based upon the Company achieving its research and
development goals and other specific goals set by the Board of Directors. At the
same time, the Compensation Committee believes that the program encourages
responsible management of the Company in the short-term. The Compensation
Committee regularly considers plan design so that the total program is as
effective as possible in furthering shareholder interests.
The Compensation Committee bases its review on the experience of its own
members, on information requested from management personnel, and on discussions
with and information compiled by various independent consultants retained by the
Company.
Respectfully submitted,
Compensation Committee:
Stephen M. Studdert
Joseph Verner Reed
Rick D. Nydegger
The following table sets forth information concerning the compensation paid to
all persons serving as the Company's Chief Executive Officer and the Company's
four most highly compensated executive officers other than its Chief Executive
Officer who were serving as executive officers at December 31, 1998, and whose
annual compensation exceeded $100,000 during such year (collectively the "Named
Executive Officers"):
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<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities
Other Underlying
Annual Options/
Name and Principal Position Year Salary(1) Bonus SARs(2)
- --------------------------- ---- --------- ------ -----------
<S> <C> <C> <C> <C>
Stephen M. Studdert
CEO (4/96-1/26/99) 1996 $131,539 - 400,000/0
1997 $305,385 - 400,000/0
1998 $425,000 - 550,000/0
Thomas A. Murdock
CEO (6/94 to 4/96 and 1996 $131,539 - 400,000/0
1/26/99 - present) and 1997 $305,385 - 400,000/0
President 1998 $425,000 - 550,000/0
Roger D. Dudley
Executive Vice President 1996 $131,539 - 400,000/0
1997 $305,385 - 400,000/0
1998 $425,000 - 550,000/0
Douglas L. Rex
Chief Financial Officer 1998 $157,685 - 200,000/0
John A. Oberteuffer
Vice President Technology 1998 $203,941 - 580,000/0
- -------------------------------
</TABLE>
(1) During fiscal year 1995 and part of 1996, these executive
officers were not compensated directly by the Company.
During those periods, any compensation received by Messrs.
Studdert, Murdock and Dudley for any services rendered by
them to the Company was paid by SCC, an entity owned and
controlled by those individuals. [See "Certain
Relationships and Related Transactions."] Although the
Company makes no representation about the compensation
arrangements between SCC and its employees, including
Messrs. Studdert, Murdock and Dudley, the total
compensation paid by the Company to SCC during such periods
is as follows:
<TABLE>
<CAPTION>
Management Fee Management Fee
Year (Cash) (Stock)
- ---- -------------- ---------------
<S> <C> <C>
1995 $111,339 3,699,900
1996 $120,000 --
</TABLE>
The management services contract between the Company and
SCC obligated the Company to pay SCC a monthly management
fee of $50,000, which amounts were invoiced monthly by SCC
but often accrued due to the Company's cash flow
constraints. By July 1995, the Company owed SCC
approximately $1,417,000 of accrued but unpaid management
fees. On November 16, 1994, the Company's Board of
Directors approved the issuance of warrants (the "SCC
Warrants") to purchase
-8-
<PAGE>
up to 3,700,000 shares of the Company's common stock to
SCC. The authorized purchase price of the SCC Warrants was
$.033 per share, and the authorized exercise price for each
share of common stock underlying the SCC Warrants was $.35.
The board resolution authorizing the issuance of the SCC
Warrants specified that the purchase price for the SCC
Warrants and the exercise price for shares of common stock
underlying the SCC Warrants could be satisfied by canceling
invoices for services previously rendered to the Company
under the Consulting Agreement or by cash payment. On July
31, 1995, the Company issued and SCC purchased the SCC
Warrants. The purchase price of the SCC Warrants was $.033
per share of common stock underlying the SCC Warrants, or
an aggregate of $122,100. On August 11, 1995, SCC exercised
the SCC Warrants at an exercise price of $.35 per share of
common stock underlying the SCC Warrants. Both the $122,100
purchase price and the $1,295,000 aggregate exercise price
for the SCC Warrants were satisfied by the cancellation of
amounts invoiced to the Company by SCC pursuant to the SCC
Agreement during the fiscal year ended December 31, 1994
and the period between January 1, 1995 and August 11, 1995.
Such cancellation was accomplished on a dollar-for-dollar
basis. The total dollar value of the transaction
subsequently was adjusted upward and expensed as
compensation paid by the Company in the amount of
$3,699,900. [See "Certain Relationships and Related
Transactions."]
The Company presently has executive employment agreements
with Messrs. Murdock and Dudley. The material terms of each
executive employment agreement with Messrs. Murdock and
Dudley are identical and are as follows: The term of each
employment contract is from November 1, 1996 through
December 31, 2001. Annual base compensation for each
executive for the first three years of such term is
$250,000 from November 1, 1996 through December 31, 1996;
$325,000 from January 1, 1997 through December 31, 1997;
and $425,000 from January 1, 1998 through December 31,
1999. The annual base compensation for the final two years
of the employment agreement is $550,000 from January 1,
2000 through December 31, 2000; and $750,000 from January
1, 2001 through December 31, 2001. However, for these final
two contract years, annual base compensation and the
performance-based incentive compensation will be subject to
review by the Company's Board of Directors based upon
either or both of the market price of the Company's common
stock and profits derived by the Company from annual
revenues from operations. Notwithstanding the foregoing,
Messrs. Murdock and Dudley voluntarily reduced their
compensation to $297,500 commencing January 1, 1999 as part
of the Company's overall efforts to reduce expenses. In
addition, each executive officer is entitled to annual
performance-based incentive compensation payable on or
before December 31 of each calendar year during the
contract term. During the first three years of the contract
term, the performance-based incentive compensation is
determined with relation to the market price of the
Company's common stock, adjusted for stock dividends and
splits. To date, no bonus has been paid, and the Company
does not anticipate paying a bonus for fiscal year 1999. If
the price of the Company's common stock
maintains an average price equal to or greater than the
level set forth below over a period of any three
consecutive months during the calendar year, the
performance-based incentive compensation will be paid in
the corresponding percentage amount of annual base salary
for each year as follows:
<TABLE>
<CAPTION>
Quarterly Average Stock Price Percentage Bonus
----------------------------- ----------------
<S> <C> <C>
$10.00 30%
$12.50 35%
$15.00 40%
$20.00 45%
$25.00+ 50%
</TABLE>
Each such executive officer also is entitled to customary
insurance benefits, office and support staff and the use of
an automobile. In addition, if any executive is terminated
without cause during the contract term then all salary then
and thereafter due and owing under the executive employment
-9-
<PAGE>
agreement shall, at the executive's option, be immediately
paid in a lump sum payment to the executive officer and all
stock options, warrants and other similar rights granted by
the Company and then vested or earned shall be immediately
granted to the executive officer without restriction or
limitation of any kind. Further, the Board of Directors
authorized the payment of a cash bonus to SCC in an amount
sufficient to pay all personal state and federal income
taxes on the 3.7 million shares purchased by SCC on August
11, 1995 and on the bonus amount. The amount allocated for
this bonus was approximately $2.5 million, all of which had
been paid out as of December 31, 1998.
Each executive employment agreement contains a
non-disclosure, confidentiality, non-solicitation and
non-competition clause. Under the terms of the
non-competition clause, each executive has agreed that for
a period of one year after the termination of his
employment with the Company that the executive not engage
in any capacity in a business which competes with or may
compete with the Company.
During the entirety of the year ended December 31, 1998,
Stephen M. Studdert had an employment agreement identical
in material terms to the agreements of Messrs. Murdock and
Dudley described above. In January 1999, in conjunction
with his resignation as the Company's Chief Executive
Officer, Mr. Studdert entered into a Separation Agreement
with the Company. Under that Separation Agreement, Mr.
Studdert's employment agreement was terminated. The Company
agreed to pay Mr. Studdert severance pay consisting of
$250,000 for the last 11 months of 1999, $250,000 during
2000 and $100,000 during 2001. Additionally, the Company
agreed to continue to pay for Mr. Studdert's health
insurance coverage until such time as he obtains coverage
from another employer or ceases to be a director of the
Company, which event occurred effective July 15, 1999, and
to pay for an automobile for Mr. Studdert until June 30,
1999.
The Company also has an executive employment contract with
Dr. Oberteuffer, the material terms of which are as
follows: The term of the employment contract is from
January 26, 1998, through January 31, 2001. Annual base
salary is $225,000, with an annual performance review at
which time the Company's board of directors may elect to
increase Dr. Oberteuffer's annual base salary for the next
12-month period. Dr. Oberteuffer is entitled to
participate, during the term of the employment agreement,
in all incentive, savings and retirement plans, practices,
policies, and programs available to other senior executives
of the Company. Dr. Oberteuffer is also entitled to be
reimbursed for certain living accommodation, commuting, and
relocation expenses. Dr. Oberteuffer's employment agreement
contains restrictive clauses relating to confidential and
proprietary business information and trade secrets and
non-competition and non-solicitation agreements.
(2) All options granted to named executive officers during
fiscal 1996 were granted under the Company's 1996
Director's Stock Option Plan as compensation for their
service on the Company's Board of Directors. All options
granted in 1997 were granted pursuant to the Company's 1997
Stock Option Plan. All options granted in 1998 were granted
pursuant to the Company's 1998 Stock Option Plan.
-10-
<PAGE>
<TABLE>
<CAPTION>
Option Grants in Fiscal Year 1998
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Individual Grants Appreciation for Option Term
- ---------------------------------------------------------------------------------------------- -----------------------------
(a) (b) (c) (d) (e) (f) (g)
Number of
Securities % of Total
Underlying Options Exercise
Options Granted to or Base
Granted Employees Price Expiration
Name (#) in Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -------------------- ------------ -------------- ------------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Studdert 150,000 2% $5.16 3/18/2008 $38,700 $77,400
400,000 6% $1.18 11/30/2008 $23,600 $47,200
Thomas A. Murdock 150,000 2% $5.16 3/18/2008 $38,700 $77,400
400,000 6% $1.18 11/30/2008 $23,600 $47,200
Roger D. Dudley 150,000 2% $5.16 3/18/2008 $38,700 $77,400
400,000 6% $1.18 11/30/2008 $23,600 $47,200
Douglas L. Rex 200,000 2% $1.18 11/30/2008 $11,800 $23,600
John A. Oberteuffer 400,000 6% $1.18 12/1/2008 $23,600 $47,200
180,000 2% $5.16 3/19/2008 $46,440 $92,880
</TABLE>
No options were exercised by the Named Executive Officers during the
fiscal year and no options held by them were in the money as of December 31,
1998.
EMPLOYMENT CONTRACTS
The Company presently has executive employment agreements with each
of Messrs. Murdock and Dudley. The material terms of each executive employment
agreement with each executive officer are identical and are as follows: The term
of each employment contract is from November 1, 1996 through December 31, 2001.
Annual base compensation for each executive for the first three years of such
term is $250,000 from November 1, 1996 through December 31, 1996; $325,000 from
January 1, 1997 through December 31, 1997; and $425,000 from January 1, 1998
through December 31, 1999. The annual base compensation for the final two years
of the employment agreement is $550,000 from January 1, 2000 through December
31, 2000; and $750,000 from January 1, 2001 through December 31, 2001. However,
for these final two contract years, annual base compensation and the
performance-based incentive compensation will be subject to review by the
Company's Board of Directors based upon either or both of the market price of
the Company's Common Stock and profits derived by the Company from annual
revenues from operations. Notwithstanding the foregoing, Messrs. Murdock and
Dudley voluntarily reduced their compensation to $297,500 commencing January 1,
1999, as part of the Company's overall efforts to reduce expenses. In addition,
each executive officer is entitled to annual performance-based incentive
compensation payable on or before December 31 of each calendar year during the
contract term. During the first three years of the contract term, the
performance-based incentive compensation is determined with relation to the
market price of the Company's Common Stock, adjusted for stock
-11-
<PAGE>
dividends and splits. If the price of the Company's Common Stock maintains an
average price equal to or greater than the level set forth below over a period
of any three consecutive months during the calendar year, the performance-based
incentive compensation will be paid in the corresponding percentage amount of
annual base salary for each year as follows:
<TABLE>
<CAPTION>
Quarterly Average Stock Price Percentage Bonus
<S> <C> <C>
$10.00 30%
$12.50 35%
$15.00 40%
$20.00 45%
$25.00+ 50%
</TABLE>
Messrs. Murdock and Dudley also are entitled to customary insurance
benefits, office and support staff and the use of an automobile. In addition, if
either of Messrs. Murdock or Dudley is terminated without cause during the
contract term then all salary then and thereafter due and owing under the
executive employment agreement shall, at the executive's option, be immediately
paid in a lump sum payment to the executive officer and all stock options,
warrants and other similar rights granted by the Company and then vested or
earned shall be immediately granted to the executive officer without restriction
or limitation of any kind. Further, the Board of Directors authorized the
payment of a cash bonus to SCC in an amount sufficient to pay all personal state
and federal income taxes on the 3.7 million shares purchased by SCC on August
11, 1995 and on the bonus amount. The amounts allocated for this bonus was $2.5
million, all of which had been paid out as of December 31, 1998.
Each executive employment agreement contains a non-disclosure,
confidentiality, non-solicitation and non-competition clause. Under the terms of
the non-competition clause, each executive has agreed that for a period of one
year after the termination of his employment with the Company that the executive
not engage in any capacity in a business which competes with or may compete with
the Company.
The Company also has an executive employment contract with Dr.
Oberteuffer, the material terms of which are as follows: The term of the
employment contract is from January 26, 1998, through January 31, 2001. Annual
base salary is $225,000, with an annual performance review at which time the
Company's board of directors may elect to increase Dr. Oberteuffer's annual base
salary for the next 12-month period. Dr. Oberteuffer is entitled to participate,
during the term of the employment agreement, in all incentive, savings and
retirement plans, practices, policies, and programs available to other senior
executives of the Company. Dr. Oberteuffer is also entitled to be reimbursed for
certain living accommodation, commuting, and relocation expenses. Dr.
Oberteuffer's employment agreement contains restrictive clauses relating to
confidential and proprietary business information and trade secrets and
non-competition and non-solicitation agreements.
-12-
<PAGE>
Stock Performance Graph
The graph above compares the yearly cumulative total returns from the Company's
common stock during the five fiscal year period ended December 31, 1998, with
the cumulative total return on the Media General Index and the Standard
Industrial Classification (SIC) Code Index for that same period. The comparison
assumes $100 was invested on January 1, 1994, in the Company's common stock and
in the common stock of the companies in the referenced Indexes and further
assumes reinvestments of dividends. [GRAPHIC OMITTED]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
FONIX CORPORATION 100.00 91.54 216.92 482.97 169.47 72.67
SIC CODE INDEX 100.00 66.46 60.56 62.86 84.03 79.56
NASDAQ MARKET INDEX 100.00 104.99 136.18 169.23 207.00 291.96
</TABLE>
-13-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 16, 1999, the number
of shares of Common Stock of the Company beneficially owned by all persons known
to be holders of more than five percent (5%) of the Company's Common Stock and
by the executive officers and directors of the Company individually and as a
group. Unless indicated otherwise, the address of the stockholder is the
Company's principal executive offices, 60 East South Temple Street, Suite 1225,
Salt Lake City, Utah 84111.
<TABLE>
<CAPTION>
Number of
Shares
Name and Address of 5% Beneficial Owners, Beneficially Percent of
Executive Officers and Directors Owned Class(1)
----------------------------------------- ------------- -----------
<S> <C> <C>
Thomas A. Murdock 11,799,084(2) 15.7%
Chairman of the Board and Chief
Executive Officer
Alan C. Ashton, Ph.D. 12,329,167(3)(4) 16.5%
c/o Beesmark Investments, L.C.
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
Beesmark Investments, L.C. 11,729,167(4) 15.8%
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
Roger D. Dudley, 4,965,389(5) 6.6%
Executive Vice President,
Director
Stephen M. Studdert, 4,940,819(6) 6.6%
10252 Oak Creek Lane
Highland, Utah 84003
Joseph Verner Reed, Director 1,220,000(7) 1.6%
73 Sterling Road
Greenwich, Connecticut 06831
Rick D. Nydegger, Director 600,000 *
10217 North Oak Creek Lane
Highland, Utah 84003
John A. Oberteuffer, Ph.D., 380,000 *
Vice President, Director
600 West Cummings Park, Suite 4650
Woburn, MA 01801
Reginald K. Brack, Director 426,500(8) *
-14-
<PAGE>
Douglas L. Rex, Chief Financial Officer 402,900(9) *
Officers and Directors as a Group (8 persons) 19,782,473 25.1%
</TABLE>
* Less than 1 percent.
(1) Percentages rounded to nearest 1/10th of one percent. Except as
indicated in the footnotes below, each of the persons listed
exercises sole voting and investment power over the shares of Common
Stock listed for each such person in the table.
(2) Includes 10,406,772 shares of Common Stock deposited in a voting
trust (the "Voting Trust") as to which Mr. Murdock is the sole
trustee. Persons who have deposited their shares of Common Stock into
the Voting Trust have dividend and liquidation rights ("Economic
Rights") in proportion to the number of shares of Common Stock they
have deposited in the Voting Trust, but have no voting rights with
respect to such shares. All voting rights associated with the shares
deposited into the Voting Trust are exercisable solely and
exclusively by the Trustee of the Voting Trust. The Voting Trust
expires, unless extended according to its terms, on the earlier of
September 30, 1999 or any of the following events: (i) the Trustee
terminates it; (ii) the participating shareholders unanimously
terminate it; or (iii) the Company is dissolved or liquidated.
Although as the sole trustee of the Voting Trust Mr. Murdock
exercises the voting rights of all of the shares deposited into the
Voting Trust, and accordingly has listed all shares in the table
above, he has no economic or pecuniary interest in any of the shares
deposited into the Voting Trust except for 3,415,083 shares as to
which he directly owns Economic Rights, and 185,793 shares the
Economic Rights as to which are owned by Studdert Companies Corp.
("SCC"), a corporation of which Mr. Murdock is a 1/3 equity owner.
Also includes 2,813 shares owned directly by Mr. Murdock, 11,400
shares owned by a limited liability company of which Mr. Murdock is a
1/3 equity owner, 28,099 shares (including shares issuable upon the
exercise of options) beneficially owned by members of Mr. Murdock's
immediate family residing in the same household and 1,350,000 shares
of Common Stock underlying stock options owned by Mr. Murdock and
exercisable presently or within 60 days of September 16, 1999.
(3) Includes all Common Stock beneficially owned by Beesmark Investments,
L.C. ("Beesmark"), but only to the extent that Dr. Ashton is one of
three managers of Beesmark, and, as such, is deemed to share
investment power with respect to shares beneficially owned by
Beesmark. Also includes 600,000 shares of Common Stock underlying
stock options exercisable by Dr. Ashton presently or within 60 days
of September 16, 1999.
(4) Beesmark's beneficial ownership includes 166,667 shares of Common
Stock presently issuable upon the conversion of shares of Series A
Preferred Stock. The managers of Beesmark are Alan C. Ashton, Karen
Ashton, and Ralph Rasmussen. As managers of Beesmark, they each are
deemed to share voting control over shares beneficially owned by
Beesmark. Mrs. Ashton and Mr. Rasmussen beneficially own no shares
other those deemed to be owned by them her as control persons of
Beesmark, and, consequently, their beneficial ownership is not
separately reported.
(5) Includes (i) 3,415,083 shares owned by Mr. Dudley and deposited into
the Voting Trust, (ii) 185,793 shares owned by SCC as to which Mr.
Dudley shares investment power because of his management position
with and 1/3 ownership of SCC, which shares are deposited into the
Voting Trust; (iii) 2,813 shares owned directly by Mr. Dudley; (iv)
300 shares owned by Mr. Dudley's minor children; (v) 11,400 shares
owned by a limited liability company of which Mr. Dudley is a 1/3
equity owner; and (vi) 1,350,000 shares underlying stock options
exercisable presently or within 60 days of September 16, 1999.
-15-
<PAGE>
(6) Includes (i) 3,390,813 shares owned by Mr. Studdert and deposited
into the Voting Trust, (ii) 185,793 shares owned by SCC as to which
Mr. Studdert shares investment power because of his management
position with and 1/3 ownership of SCC, which shares are deposited
into the Voting Trust; (iii) 2,813 shares owned directly by Mr.
Studdert; (iv) 11,400 shares owned by a limited liability company of
which Mr. Studdert is a 1/3 equity owner and controls; and (v)
1,350,000 shares underlying stock options exercisable presently or
within 60 days of September 16, 1999.
(7) Includes 1,200,000 shares of Common Stock underlying presently
exercisable stock options.
(8) Includes (i) 26,000 shares owned directly by Mr. Brack; (ii) 500
shares owned by Mr. Brack's son; and 400,000 shares underlying
presently exercisable stock options.
(9) Includes (i) 2,400 shares owned by Mr. Rex's spouse; (ii)500 shares
owned by an entity owned and controlled by him; and (iii) 400,000
shares underlying presently exercisable stock options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Studdert Companies Corp. (SCC)
SCC is a Utah corporation that provides investment and management services. The
officers, directors and owners of SCC are Stephen M. Studdert, Thomas A. Murdock
and Roger D. Dudley. Messrs. Murdock and Dudley are directors and executive
officers of the Company. During 1998, Mr. Studdert was an executive officer and
director of the Company. Between June 1994 and April 30, 1996, the Company did
not pay or award any compensation in any form directly to the Company's
executive officers. Rather, in June 1994 the Company entered into an Independent
Consulting Agreement (the "SCC Agreement") with SCC pursuant to which SCC,
through Messrs. Studdert, Murdock and Dudley, rendered certain management and
financial services to the Company.
Under the SCC Agreement, SCC agreed that for a period of two years it would
manage all aspects of the Company's day-to-day business. In return for such
services, the Company agreed to compensate SCC in the amount of $50,000 per
month, which monthly amount was exclusive of (i) fees for capital raising
activities by SCC on the Company's behalf and (ii) actual expenses incurred by
SCC.
On July 31, 1995, the Company issued and SCC purchased warrants to purchase
3,700,000 shares of common stock for $.35 per share (the "SCC Warrants"). On
August 11, 1995, SCC exercised the SCC Warrants. Both the $122,100 purchase
price and the $1,295,000 aggregate exercise price for the SCC Warrants were
satisfied by the cancellation of amounts invoiced to the Company by SCC pursuant
to the SCC Agreement.
In 1997, the Company's Board of Directors authorized the payment of a cash bonus
to SCC in an amount sufficient to pay all personal state and federal income
taxes on the 3,700,000 shares of common stock issued to SCC upon exercise of the
SCC Warrants, and on the bonus amount. Pursuant to that authorization $340,516
and $2,159,484 were paid to SCC in the years ended December 31, 1998 and 1997,
respectively.
On April 30, 1996, the disinterested members of the Company's Board of Directors
authorized the Company to enter into an agreement with SCC modifying the SCC
Agreement effective May 1, 1996. Under the SCC Agreement, as modified, SCC no
longer invoiced the Company for management services, but continued to invoice
the Company for reimbursement of actual expenses incurred on the Company's
behalf. On February 10, 1997, the Company paid to SCC the entire balance due to
SCC for accrued management fees in the amount of $337,000. During 1998, the
Company paid to SCC a total of $590,390 under the SCC Agreement, which
terminated in December 1998.
-16-
<PAGE>
The Company entered subleases from SCC its corporate headquarters located at 60
East South Temple Street, Salt Lake City, Utah. The sublease is from
month-to-month pursuant to which the Company has agreed to pay the actual
monthly rental of $10,369 and all common area charges payable under the lease
with SCC's landlord.
The Company has an unsecured revolving note payable to SCC. At December 31, 1998
and 1997, $0 and $551,510 in principal and $2,482 and $22,243in accrued
interest, respectively, were outstanding under this revolving note payable. The
weighted average balance outstanding during the borrowing period was $73,811 in
1998 and $555,407 in 1997. 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 in 1998 and $1,550,000 in 1997. The Company
believes the terms of the related-party revolving note payable are at least as
favorable as the terms that could have been obtained from an unrelated third
party in a similar transaction.
Indemnity Agreement Related to Debenture Offering
In connection with the Company's January and March 1999 offering of its
Debentures, Stephen M. Studdert, Thomas A. Murdock and Roger D. Dudley entered
into Stock Pledge Agreements, whereby each personally guaranteed the performance
and obligations of the Company under the Debentures, and pledged 6,000,000
shares of common stock of the Company owned by them as security for their
obligations under the guaranty. The Company entered into an Indemnity Agreement
under which it agreed that, in the event of a default by the Company under the
terms of the Debenture offering and any or all of Messrs. Studdert, Murdock, or
Dudley were required to pay money or forfeit any of their pledged shares, the
Company would reimburse and repay the obligation and liability of each of
Messrs. Studdert, Murdock, and Dudley by transferring shares of the Company's
common stock on a one-for-one basis and paying cash in amounts equal to the
out-of-pocket expenses of Messrs. Studdert, Murdock, and Dudley, including
without limitation any income tax liability they incur as a result of
foreclosure sales of the pledged shares. Additionally, the disinterested members
of the Company's Board of Directors agreed that, in consideration of the pledge,
the Company would issue to each of Messrs. Studdert, Murdock and Dudley warrants
to purchase 666,666 shares of common stock at an exercise price of $1.59 per
share. The warrants have a 10-year term. Messrs. Studdert, Murdock, and Dudley
subsequently declined the warrants.
Messrs. Studdert, Murdock, and Dudley also entered into agreements with the
purchasers of the Debentures whereby Messrs. Studdert, Murdock, and Dudley
agreed to deliver the pledged shares of stock for the use or benefit of the
investors. In the event that the shares are not returned to Messrs. Studdert,
Murdock, or Dudley, the Company's obligation under the associated Debentures
would be reduced accordingly.
Loans to the Company
During 1998, Messrs. Murdock and Dudley advanced funds in the aggregate amount
of $89,073 and $74,181, respectively, to pay certain operating expenses of the
Company. In addition, Mr. Dudley advanced funds in 1999 in the aggregate amount
of $68,691 to pay Company expenses. The Company recorded these advances as loans
from shareholders. The Company paid all advances by Messrs. Murdock and Dudley
out of the proceeds of the sale of the operations and a significant portion of
the assets of the Company's HealthCare Solutions Group to Lernout & Hauspie
Speech Products N.V. Certain additional advances resulted from margin account
pledges of Company common stock, the cash proceeds of which were used to pay
Company expenses. Upon the subsequent foreclosure of such pledged shares, the
Company incurred the obligation to repay Messrs. Studdert, Murdock and Dudley
for the value of the shares forfeited by them upon foreclosure, in the aggregate
amount of $234,316. This amount has not yet been paid.
Stock Pledges for Payment of Legal Fees
The Company and Messrs. Murdock and Dudley entered into an agreement with the
law firm of Davis Weber & Edwards, P.C., regarding payment of the Company's
legal fees owed to that firm. Under the agreement, Thomas A. Murdock, as
Trustee, entered into a Stock Pledge Agreement pledging 100,000 shares of the
Company's common stock
-17-
<PAGE>
beneficially owned by Messrs. Murdock and Dudley, and Messrs. Murdock and Dudley
guaranteed the full payment of the Company's legal fees to Davis Weber &
Edwards, P.C., together with any other indebtedness of the Company to Davis
Weber & Edwards, P.C. At the time Messrs. Murdock and Dudley agreed to guarantee
the payment, the Company owed fees in the approximate amount of $142,875 to
Davis Weber & Edwards, P.C. ("Davis, Webber"). Davis Weber subsequently sold the
pledged shares in order to pay the obligation of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE DIRECTOR
--------------------------------------------------------------
PROPOSAL NO. 2
TO APPROVE A SERIES OF TRANSACTIONS PURSUANT TO WHICH THE COMPANY HAS ISSUED ITS
SERIES D 4% CONVERTIBLE PREFERRED STOCK AND SERIES E 4% CONVERTIBLE PREFERRED
STOCK TO SEVEN INSTITUTIONAL INVESTORS, WHICH PREFERRED STOCK MAY BE CONVERTIBLE
INTO MORE THAN 20% OF THE TOTAL NUMBER OF SHARES OF COMMON STOCK ISSUED AND
OUTSTANDING PRIOR TO THE COMMENCEMENT OF SUCH SERIES OF TRANSACTIONS.
Introduction
In November 1998, the Company completed a series of transactions
constituting a private placement of shares of the Company's Series D 4%
Convertible Preferred Stock (referred to in this Proxy Statement as the "Series
D" preferred stock) and its Series E 4% Convertible Preferred Stock (referred to
in this Proxy Statement as the "Series E" preferred stock). The Series D and
Series E preferred stock are convertible into shares of Common Stock based upon
a conversion formula that is based, in part, on the market price of the Common
Stock during the several week period leading up to the conversion date. The
actual conversion formula is described in more detail below.
Given the structure of the conversion formula applicable to the
Series D and Series E preferred stock, there effectively is no limitation on the
number of shares of Common Stock into which the Series D and Series E preferred
stock can be converted. As the market price of the Common Stock decreases, the
number of shares of Common Stock underlying the Series D and Series E preferred
stock continues to increase.
The following table identifies the holders of the Series D and Series
E preferred stock, provides information about the ownership of the Series D and
Series E preferred stock as of September 9, 1999, the number of shares of Common
Stock issuable upon conversion of the Series D and Series E preferred stock
(based upon a hypothetical conversion of all of such preferred stock on
September 9, 1999) and the percentage of the Common Stock that would be held by
the holders of the Series D and Series E preferred stock assuming such a
hypothetical conversion.
The following table also provides information about the actual or
potential ownership of shares of Common Stock by the holders of the Series D and
Series E preferred stock as of September 9, 1999. The number of shares of Common
Stock issuable upon conversion of the Series D and E preferred stock varies
according to the market price at and immediately preceding the conversion date.
Solely for purposes of estimating the number of shares of Common Stock that
would be issuable to the holders of the Series D and E preferred stock as set
forth in the table below, the Company has assumed a hypothetical conversion of
all of the shares of Series D and shares of Series E preferred stock issued and
outstanding as of the date hereof by such holders as of September 9, 1999, on
which date the conversion price would have been $0.295, which would have been
the lowest conversion price alternative as of that date. Conversion amounts
include number of shares issuable as payment of accrued dividends in shares of
Common Stock. For these purposes, each share of Series D or Series E preferred
stock is multiplied by $20 (the stated dollar value of each such share), and
that amount is divided by the conversion price. The actual conversion price and
the number of shares of Common Stock issuable upon such conversion could differ
substantially. Under the terms and conditions of the Series D and Series E
preferred stock, as set forth in the certificates of designation for the Series
D and Series E preferred stock
-18-
<PAGE>
filed with the Secretary of State of Delaware, a holder of Series D or Series E
preferred stock is prohibited from converting such preferred stock to the extent
such conversion by such person would result in that person beneficially owning
more than 4.999% of the then outstanding shares of Common Stock following such
conversion. A separate but similar provision prohibits holders of Series D and
Series E preferred stock from converting such preferred stock to the extent such
conversion by such person would result in that person beneficially owning more
than 9.999% of the then outstanding shares of Common Stock following such
conversion. These restrictions may be waived by a holder of Series D or Series E
preferred stock as to itself, but not as to other holders of such preferred
stock, and only upon not less than 75 days' notice to the Company. These
restrictions does not prevent such holders from either waiving such limitations
or converting and selling some of their convertible security position and
thereafter converting or exercising the rest or another significant portion of
their holding. In this way, individual holders of Series D and Series E
preferred stock could sell more than 4.999% (or 9.999%) of the outstanding
Common Stock in a relatively short time frame while never beneficially owning
more than 4.999% (or 9.999%) of the outstanding Common Stock at a time. For
purposes of calculating the number of shares of Common Stock issuable to each
holder listed below assuming a full conversion of all the Series D and E
preferred stock held by it as set forth below, the effect of such 4.999% and
9.999% limitations has been disregarded. The number of shares issuable to each
of the holders as described in the table below therefore exceeds the actual
number of shares such holders may be entitled to beneficially own upon
conversion of the preferred stock. The following information is not
determinative of any person's beneficial ownership of Common Stock pursuant to
Rule 13d-3 or any other provision under the Securities Exchange Act of 1934, as
amended.
<TABLE>
<CAPTION>
Percent of
Shares of Shares of Total Shares Common
Common Common of Common Stock
Shares of Stock Stock Stock Owned
Common Stock Shares of Issuable Shares of Issuable Owned After After
Owned Series D Upon Series E upon Conver- Conver-
Name of Holder Presently Owned Conversion Owned Conversion sion (1) sion (1)
- --------------------------------- ------------ ---------- ----------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dominion Capital Fund, Ltd. 3,747,817 (2) 197,514 13,947,241 7,000 492,716 18,187,774 18.25%
Sovereign Partners, LP 4,003,154 (3) 244,709 17,279,866 0 0 21,283,020 20.72%
Canadian Advantage Limited
Partnership 1,554,023 (4) 16,111 1,137,661 0 0 2,691,684 3.20%
Endeavor Capital Fund, S.A. 386,242 (5) 46,583 3,289,409 0 0 3,675,651 4.32%
JNC Opportunity Fund Ltd. 527,306 (6) 422,500 29,834,388 0 0 30,361,694 27.15%
Diversified Strategies Fund, L.P. 159,709 (7) 17,778 1,255,375 0 0 1,415,084 1.71%
Totals 10,378,251 945,195 66,743,940 7,000 492,716 77,614,907 48.79%
============= ==== ========== ============ ========== =========== =============
- ------------------------
</TABLE>
(1) Assumes that 4.999% and 9.999% limitations otherwise
applicable to Series D and Series E preferred stock
conversion are waived
(2) Includes 3,747,817 shares of Common Stock issued upon the
conversion of 118,000 shares of Series E preferred stock
and as dividends accrued thereon as of September 9, 1999.
Excludes 4,252,031 shares of Common Stock issuable upon the
hypothetical conversion of $1,218,750 principal amount
-19-
<PAGE>
of Fonix's Series C 5% Convertible Debentures issued
January 29, 1999, and March 3, 1999, assuming such
principal amount were converted in full as of September 9,
1999; 120,675 shares of Common Stock issuable as interest
upon the hypothetical conversion of the entire principal
amount of Series C Debentures owned by the holder; and
75,000 shares of Common Stock issuable upon the
hypothetical exercise of a warrant issued in connection
with the sale of the Series C Debentures.
(3) Includes 4,003,154 shares of Common Stock issued upon the
conversion of 125,000 shares of Series E preferred stock
and as dividends accrued thereon as of September 9, 1999.
Excludes 5,508,475 shares of Common Stock issuable upon the
hypothetical conversion of $1,625,000 principal amount of
Fonix's Series C 5% Convertible Debentures issued January
29, 1999, and March 3, 1999, assuming such principal amount
were converted in full as of September 9, 1999; 160,900
shares of Common Stock issuable as interest upon the
hypothetical conversion of the entire principal amount of
Series C Debentures owned by the holder; and 100,000 shares
of Common Stock issuable upon the hypothetical exercise of
a warrant issued in connection with the sale of the Series
C Debentures.
(4) Includes 1,554,023 shares of Common Stock issued upon the
conversion of 41,000 shares of Series D preferred stock and
as dividends accrued thereon as of September 9, 1999.
(5) Includes 386,242 shares of common stock issued upon the
conversion of 6,139 shares of Series D preferred stock and
as dividends accrued thereon as of September 9, 1999.
(6) Includes 527,306 shares of common stock issued upon the
conversion of 10,000 shares of Series D preferred stock and
as dividends accrued thereon as of September 9, 1999.
(7) Includes 159,709 shares of common stock issued upon the
conversion of 2,500 shares of Series D preferred stock and
as dividends accrued thereon as of September 9, 1999.
Because the actual conversion price and the number of shares of
Common Stock issuable upon conversion of the Series D and Series E preferred
stock could differ substantially from the amounts set forth in the table above,
the following table describes the number of shares of Common Stock that would be
issuable assuming all of the presently issued and outstanding shares of Series D
and Series E preferred stock were converted at the following range of
hypothetical conversion prices (table excludes effect of shares of Common Stock
issuable upon exercise of warrants or as payment of accrued dividends):
<TABLE>
<CAPTION>
Hypothetical Series D Common Stock Series E Common Stock Total Common
Conversion Price Outstanding Issuable Outstanding Issuable Stock Issuable
- -------------------- ------------------ ------------------- --------------- ------------------ --------------
<S> <C> <C> <C> <C> <C> <C>
$0.25 945,195 75,615,600 7,000 560,000 76,175,600
$0.75 945,195 25,205,200 7,000 186,667 25,391,867
$1.50 945,195 12,602,600 7,000 93,333 12,695,933
$2.25 945,195 8,401,733 7,000 62,222 8,463,956
$3.00 945,195 6,301,300 7,000 46,667 6,347,967
</TABLE>
-20-
<PAGE>
Nasdaq SmallCap Market Shareholder Approval Requirement
The Common Stock is quoted on the Nasdaq SmallCap Market. Because of
that listing, the Company is contractually obligated to comply with applicable
rules of the Nasdaq Stock Market. Nasdaq Stock Market Rule 4310(c)(25)(H)
requires shareholder approval for the issuance of shares of common stock in a
transaction or series of transactions involving, among other types of
transactions, the sale or issuance by the issuer of common stock (or securities
convertible into or exercisable for common stock) equal to 20% or more of the
common stock or 20% or more of the voting power obtained before the issuance for
less than the greater of book or market value of the stock. As is described in
the table above, the conversion of all or substantially all of the issued and
outstanding Series D and Series E preferred stock (together with the exercise of
warrants and Common Stock issuances as payments for accrued dividends) could
result in the issuance by the Company of more than 20% of the Common Stock
outstanding before the sales of the Series D and Series E preferred stock.
In recognition of this possibility and the requirements of the Nasdaq
Stock Market, the Company covenanted, in connection with the sales of the Series
D and Series E preferred stock, that it would seek shareholder approval of the
Series D and Series E transactions to the extent such transactions could result
in the issuance of more than 20% of the Common Stock outstanding immediately
prior to such series of transactions. Thomas A. Murdock, the chief executive
officer and Chairman of the Board of Directors of the Company, and the sole
trustee of a voting trust into which is deposited a total of 10,406,772 shares
of Common Stock constituting approximately 14.06% of the total issued and
outstanding Common Stock as of the date of this proxy statement, has covenanted
with the holders of the Series D and Series E preferred stock that he would vote
all of the shares of Common Stock deposited into the voting trust to approve
such transactions. The Company's Board of Directors now solicits your proxy to
be voted to approve such transactions by approving this Proposal No. 2.
Risk Factors
In considering how to respond to the solicitation of your proxy for
this Proposal No. 2, you should carefully consider the following risks:
Introduction
The Company presently has three series of preferred stock
outstanding: Series A, Series D, and Series E. All of the Company's presently
outstanding preferred stock is convertible into shares of Common Stock. The
Series A was issued in October 1995 and is convertible, one-for-one into 166,667
shares of Common Stock at the option of the holder. The Series D and Series E
preferred stock is convertible into Common Stock according to one of three
separate conversion formulas, one of which is based, in part, on the market
price of Common Stock during the several week period leading up to the
conversion date.
Private Placement with Repricing Rights Shares
In addition to the Series D and E preferred stock, the Company has
other contractual obligations to issue additional shares of its common stock
that are dependent on the prevailing market price of Common Stock. Specifically,
on December 22, 1998, the Company completed a private placement of 1,801,802
shares of Common Stock. The investor that participated in that transaction also
acquired "Repricing Rights" that entitle the holder thereof to receive upon
exercise that number of additional shares of Common Stock for no additional
consideration as shall be determined by multiplying the number of Repricing
Rights exercised by the following fraction:
(Repricing Price - Market Price)
--------------------------------
Market Price
-21-
<PAGE>
The investor acquired one Repricing Right for each share of Common Stock
purchased. "Market Price" means the lowest closing bid price of Common Stock, as
quoted on the Nasdaq SmallCap Market, during the 15 consecutive trading days
immediately preceding the exercise date. "Repricing Price" means:
$1.3875 from March 22, 1999 to and including April 21, 1999,
$1.3986 from April 22, 1999 to and including May 21, 1999,
$1.4097 from May 22, 1999 to and including June 20, 1999,
$1.4208 from June 21, 1999 to and including July 20, 1999,and
$1.4319 at any time after July 20, 1999 until the
expiration of the Repricing Rights.
Series C 5% Convertible Debentures
In addition to the Repricing Rights, the Company has, since the
issuance of the Series D and Series E preferred stock, issued other securities
that are convertible into Common Stock according to a conversion formula that is
determined by reference to the market price of the Common Stock at and around
the time of conversion. Specifically, on January 29, 1999, the Company entered
into a Securities Purchase Agreement (the "Debenture Purchase Agreement") with
four investors, which subsequently was supplemented on March 3, 1999. Under the
Debenture Purchase Agreement, the Company agreed to issue its Series C 5%
Convertible Debentures ("Debentures") in the aggregate principal amount of
$6,500,000. Included among the investors that purchased the Debentures are some
of the holders of the Series D and Series E preferred stock and the Repricing
Rights.
The outstanding principal amount of the Debentures is convertible at
any time at the option of the holder into shares of Common Stock at a conversion
price equal to the lesser of the following:
1. $1.25; or
2. The average of the closing bid price of the Common Stock
for the five trading days immediately preceding the
conversion date multiplied by 80%.
In connection with the sale of the Debentures, the Company issued to the
investors a total of 400,000 Common Stock purchase warrants having an exercise
price of $1.25 per share and having a term of three years.
The following table identifies the total number of shares of all
series of preferred stock with floating conversion rates, the total number of
Repricing Rights outstanding and the total principal amount of the Debentures
outstanding, and the total number of shares of Common Stock issuable assuming
the hypothetical conversion or exercise of all such preferred stock, Repricing
Rights or Debentures as of September 9, 1999, and the percentage of Common Stock
that would be owned by the holders of such convertible securities assuming such
conversions or exercises. For purposes of this table, the Company has assumed
that the holders of the Series D and E preferred stock would have elected that
conversion price that would yield the greatest number of shares of common stock
upon conversion. All calculations exclude the issuance of shares of Common Stock
in payment for dividends accrued on the Series D and E preferred stock at the
time of conversion.
-22-
<PAGE>
<TABLE>
<CAPTION>
Number of Convertible Shares of Common Percent of Common
Securities Outstanding/ Stock Issuable Upon Stock Owned By
Principal Amount of Conversion or Holders After
Convertible Security Debentures Exercise Conversion
- ------------------------------- -------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Series D Preferred Stock 945,195 64,081,017 44.03%
Series E Preferred Stock 7,000 474,576 0.58%
Repricing Rights 1,801,802 5,703,653 6.54%
Debentures $6,500,000 22,033,898 21.29%
Total 92,293,145 53.12%
========================= ==========================
</TABLE>
The following table describes the number of shares of Common Stock
that would be issuable assuming all of the presently issued and outstanding
shares of Series D and Series E preferred stock were converted, the Repricing
Rights were exercised at the terms most beneficial to the holder, and the
Debentures were converted, and further assuming that the applicable conversion
or exercise prices at the time of such conversion or exercise were the following
amounts (the table excludes effect of the issuance of shares of common stock
upon payment of accrued interest or dividends and also excludes differences
among the various methods of calculating the applicable conversion or exercise
price):
<TABLE>
<CAPTION>
Shares of Common Stock Issuable Upon Conversion or Exercise of
- ------------------------- ----------------------------------------------------------------------------- -----------------------
Hypothetical Conversion/ Series D Series E Repricing Total Common
Exercise Price Preferred Stock Preferred Stock Rights Debentures Stock Issuable
- ------------------------- ------------------ ----------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
$0.25 75,615,600 560,000 8,518,199 26,000,000 110,693,799
$0.75 25,205,200 186,667 1,638,198 8,666,667 35,696,731
$1.50 12,602,600 93,333 0 4,333,333 17,029,267
$2.25 8,401,733 62,222 0 2,888,889 11,352,844
$3.00 6,301,300 46,667 0 2,166,667 8,514,633
</TABLE>
Overall Dilution to Market Price and Relative Voting Power of Previously Issued
Common Stock
The conversion of the Series D and Series E preferred stock and the
other convertible securities issued by the Company may result in substantial
dilution to the equity interests of other holders of the Common Stock.
Specifically, the issuance of a significant amount of additional Common Stock
would result in a decrease of the relative voting control of the Common Stock
issued and outstanding prior to the conversion of the Series D and Series E
preferred stock and the other convertible securities. Furthermore, public
resales of Common Stock following the conversion of the Series D and Series E
preferred stock and other convertible securities likely would depress the
prevailing market price of the Common Stock. Even prior to the time of actual
conversions or exercises and public resales, the market
-23-
<PAGE>
"overhang" resulting from the mere existence of the Company's obligation to
honor such conversions and exercises could depress the market price of the
Common Stock.
Increased Dilution With Decreases in Market Price of Common Stock
The outstanding shares of Series D and Series E preferred stock and
other securities issued by the Company are convertible or exercisable at a
floating price that may and likely will be below the market price of the Common
Stock prevailing at the time of conversion or exercise and, as a result, the
lower the market price of the Common Stock at and around the time the holder
converts or exercises, the more Common Stock the holder receives. Any increase
in the number of shares of Common Stock issued upon conversion or exercise would
magnify the risks of dilution described in the preceding risk factor.
Increased Potential for Short Sales
Downward pressure on the market price of the Common Stock that likely
would result from sales of Common Stock issued on conversion of the Series D and
Series E preferred stock and the Company's other convertible securities could
encourage short sales of Common Stock by the holders of the Series D and Series
E preferred stock or others. Material amounts of such short selling could place
further downward pressure on the market price of the Common Stock.
Limited Effect of Restrictions on Extent of Conversions
Even though the holders of the Series D and Series E preferred stock
are prohibited from converting their preferred stock into more than 4.999% of
the then outstanding Common Stock, this restriction does not prevent such
holders from either waiving such limitation or converting and selling some of
their preferred stock holding and thereafter converting the rest or another
significant portion of their holding. In this way, individual holders of Series
D and Series E preferred stock could sell more than 4.999% of the outstanding
Common Stock in a relatively short time frame while never holding more than
4.999% at a time.
Background of Series D and Series E Preferred Stock Transactions
Series D Preferred Stock
In March 1998, the Company sold 3,333,333 shares of Common Stock to
seven institutional investors (the "Investors') for a total of $15,000,000. In
connection with the sale of those shares, the investors acquired "reset" rights
obligating the Company to issue to them additional shares of Common Stock
("Reset Shares") for no additional consideration if the average market price of
the Company's Common Stock for the 60-day period preceding July 27, 1998 did not
equal or exceed $5.40 per share. In separate transactions in June and August
1998, certain of the Investors provided $3,000,000 of additional equity
financing to the Company, in return for which the Company issued to them 666,667
additional shares of Common Stock.
The Company and the Investors subsequently entered into a Series D
Preferred Stock Purchase Agreement dated as of August 31, 1998 ("Series D
Agreement"). Under the Series D Agreement, the Company issued a total of 500,000
shares of its newly authorized Series D preferred stock to five of the Investors
in return for the payment by them of a total of $10,000,000. Additionally, the
Company issued to all of the Investors, pro rata according to the number of
shares of Common Stock acquired by them in the March 1998 transaction, a total
of 608,334 shares of Series D preferred stock in return for their relinquishment
of their contractual right to receive Reset Shares as to the Common Stock
acquired in the March 1998 placement. The Company agreed to and did issue a
total of 1,390,476 Reset Shares in respect of the $3,000,000 invested in June
and August 1998. Subsequently, on November 13, 1998, the Company sold 50,000
additional shares of Series D Preferred Stock to two of the selling stockholders
on the same terms and conditions as the August 31, 1998 agreement.
-24-
<PAGE>
Each share of Series D preferred stock has a "stated" or principal
value of $20, on which amount dividends accrue at the rate of 4% per annum and
are payable annually or upon conversion in cash or Common Stock at the option of
the Company. The Series D preferred stock is presently convertible into Common
Stock. Holders of Series D preferred stock, however, may not convert during each
month more than 25% of the total number of shares of Series D preferred stock
originally issued to such holder on a cumulative basis. For example, during the
first month a holder may convert up to 25% of the total preferred stock issued
to it, and during the following month that same holder may convert, on an
aggregate to date basis, up to 50% of the total number of shares of Series D
Preferred Stock held by it. Additionally, any holder of Series D preferred stock
may convert up to 50% of the number of shares of Series D preferred stock
originally issued to it per month, on a cumulative basis, if both of the
following conditions are satisfied:
1. the average daily trading volume of the Company Common
Stock is more than 500,000 shares for the 10 trading-day
period before the conversion; and
2. the average per share closing bid price for such 10
trading-day period has not decreased by more than 5% from
the closing bid price on the trading day immediately
preceding the first day of such 10trading-day period.
Series E Preferred Stock
The Company and two of the Investors entered into a Series E
Preferred Stock Purchase and Exchange Agreement dated September 30, 1998
("Series E Agreement"). Under the Series E Agreement, the Company issued a total
of 100,000 shares of its newly authorized Series E preferred stock to two of the
Investors in return for the payment by them of a total of $2,000,000.
Additionally, the Company issued to the purchasers of the Series E preferred
stock a total of 150,000 additional shares of Series E preferred stock in
exchange for which those purchasers surrendered a total of 150,000 shares of
Series D preferred stock, which was canceled upon receipt.
Each share of Series E preferred stock has a "stated" or principal
value of $20, on which amount dividends accrue at the rate of 4% per annum and
are payable annually or upon conversion in cash or Common Stock at the option of
the Company. The Series E preferred stock is convertible, in whole or in part,
into Common Stock at anytime after its issuance.
Conversion of Series D and Series E Preferred Stock Into Common Stock
Each share of Series D and Series E preferred stock is convertible
into that number of shares of Common Stock as is determined by dividing $20 by
the lesser of any of the following (at the option of the converting holder):
1. $3.50, or
2. the lesser of
o $2.3375 (for the Series D) or $ $1.4369 (for the
Series E) which amounts constitute 110% of the
average per share closing bid prices for the 15
trading days immediately preceding the dates of
the Series D and Series E Agreements,
respectively; or
o 90% of the average of the three lowest per share
closing bid prices during the 22 trading days
immediately preceding the conversion date.
If the converting holder elects conversion option 1, in addition to the shares
of Common Stock issued upon the conversion, the converting holder will receive a
warrant to purchase 0.8 shares of Common Stock. Those warrants will have an
exercise price that will be 120% of the per share closing bid price of the
Common Stock on the date the warrants are issued and will have a three-year
term. Any shares of Series D or Series E preferred stock not converted as of
-25-
<PAGE>
August 31, 2001 will automatically be converted into Common Stock according to
whichever of the conversion formulas described above yields the greatest number
of shares of Common Stock.
As of September 9, 1999, 63,139 shares of Series D preferred stock
had been converted into 2,833,378 shares of Common Stock, including amounts
issued as payment of dividends accrued on the Series D preferred stock
converted.
As of September 9, 1999, 243,000 shares of Series E preferred stock
had been converted into 7,754,547 shares of Common Stock, including amounts
issued as payment of dividends accrued on the Series E preferred stock
converted.
The Company entered into a registration rights agreement with the
purchasers of the Series D and Series E preferred stock under which the Company
must register the Common Stock issuable upon conversion of the Series D and
Series E preferred stock, payment of stock dividends on the Series D and Series
E preferred stock and exercise of any warrants issued upon conversion of the
Series D and Series E preferred stock. The Company also covenanted to reserve
out of its authorized and unissued shares of Common Stock no less than that
number of shares that would be issuable upon the conversion of the Series D and
Series E preferred stock and any dividends payable in stock on the preferred
stock and the exercise of the warrants, if any.
The Company's Board of Directors has determined that the consummation
of the transactions contemplated by the Series D and Series E Agreements
furthered the best interests of the Company by providing necessary capital to
allow the Company to acquire Articulate Systems, Inc. and to provide additional
operating capital necessary to fund the Company's operations during the fourth
quarter of 1998. The Board of Directors therefore approved such transactions.
The Company's Board of Directors now recommends that the Company's shareholders
vote to approve the transactions contemplated by those Agreements.
Approval by a majority of the votes present and entitled to vote at
the Special Meeting will be required to approve the proposal. If such
shareholder approval is not obtained, the Series D and Series E Agreements, and
the documents executed by the Company in connection with those agreements, will
not be voided or voidable, but will remain legal obligations of the Company.
Consequently, if the Company's shareholders do not, by the requisite vote,
approve this Proposal No. 1, the Company will face the choice of either
defaulting on its contractual covenants with the Investors, giving rise to
claims for money damages for breach of contract, or by violating the applicable
Nasdaq Stock Market rule, which could result in a delisting of the Common Stock
from the Nasdaq SmallCap Market.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 2
----------------------------
PROPOSAL NO. 3
PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO AUTHORIZE
CLASS B COMMON STOCK AND TO REDESIGNATE THE COMPANY'S EXISTING COMMON STOCK AS
CLASS A COMMON STOCK.
The Company's Board of Directors has approved and recommends to the
shareholders the adoption of an amendment to Article Fourth of the Company's
certificate of incorporation. The amended Article Fourth would (a) redesignate
the existing Common Stock as Class A Common Stock, and (b) authorize the
issuance of 1,985,000 shares of new Class B Common Stock. The text of Article
Fourth, as proposed to be amended, is attached as Exhibit A-1, which exhibit
assumes Proposal No. 4 is approved by the shareholders. The text of Article
Fourth, as proposed to be amended assuming the shareholders do not approve
Proposal No. 4 is attached as Exhibit A-2. The summary of the amended Article
Fourth contained herein should be read in conjunction with, and is qualified in
its entirety by reference to, the full text of the proposed Article Fourth set
forth as Exhibits A-1 or A-2, as the case may be.
-26-
<PAGE>
Background of the Amendment
Authorization of Class B Common Stock
On July 31, 1998, the Company entered into an Agreement and Plan of
Merger by and among the Company, ASI Acquisition Corporation, a wholly owned
subsidiary of the Company, and Articulate Systems, Inc. The merger (the "ASI
Merger") closed on September 2, 1998. At closing, the parties executed Amendment
No. 1 to Agreement and Plan of Merger ("Amendment No. 1"). Under Amendment No.
1, and in order for the ASI Merger to constitute a tax-free reorganization
within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code of 1986,
as amended, the Company agreed to issue 1,985,000 additional shares of Common
Stock as consideration for the ASI Merger ("Exchange Shares"). The parties
further agreed, however, that such additional number of shares would be issued
to an escrow agent following the closing of the ASI Merger and could be
exchanged at any time during the 90-day period following the closing for an
equal number of shares of the Company's Class B Non-Voting Common Stock, subject
to the approval by the Company's shareholders of the authorization of such class
of Common Stock at the Special Meeting. The Company and the representatives of
the ASI shareholders subsequently have entered into an amendment agreement under
which the time period for obtaining shareholder approval for the authorization
and issuance of the Class B Common Stock has been extended to December 31, 1999.
Summary of the Terms of the Class B Non-Voting Common Stock (As
Compared to Class A Common Stock)
Voting Rights
Except as otherwise provided by law, the holders of the Class A
Common Stock will have full voting rights and powers to vote on all matters
submitted to shareholders of the Company for vote, consent or approval, and each
holder of Class A Common Stock shall be entitled to one vote for each share of
Class A Common Stock held of record by such holder. Except as otherwise provided
by law, the holders of Class B Common Stock shall have no right to vote on any
matter submitted to shareholders of the Company for vote, consent or approval,
and the Class B Common Stock shall not be included in determining the number of
shares voting or entitled to vote on such matters.
Dividend, Liquidation and Other Rights of Common Stock.
Except as specifically otherwise provided in the Amendment No. 1, all
shares of Common Stock shall be identical and shall entitle the holders thereof
to the same rights and privileges, including without limitation, the payment of
dividends and rights upon dissolution and liquidation of the Company. The
Company shall not subdivide or combine any shares of Common Stock, or pay any
dividend or retire any share or make any other distribution on any share of
Common Stock or accord any other payment, benefit or preference to any share of
Common Stock, except by extending such subdivision, combination, distribution,
payment, benefit or preference equally to all shares of Common Stock. If
dividends are declared which are payable in shares of Common Stock, such
dividends shall be payable in shares of Class A Common Stock to holders of Class
A Common Stock and in shares of Class B Common Stock to holders of Class B
Common Stock. Subject to the rights of the holders of the Company's preferred
stock, the holders of Common Stock will be entitled to dividends out of funds
legally available therefor, when declared by the Board of Directors in respect
of Common Stock, and, upon any liquidation of the Company, to share ratably in
the assets of the Company available for distribution to the holders of Common
Stock.
Redemption
Except as otherwise provided by law, the Company shall have no right
or obligation to redeem the Class A Common Stock. At any time after September 2,
2003, the Company shall have the right, exercisable at any time, to redeem from
funds legally available therefor all or any portion of the then outstanding
shares of Class B Common Stock at a per share price equal to the "Redemption
Price," provided that such redemption is made on a pro rata basis with
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respect to all holders of Class B Common Stock. "Redemption Price" shall be (i)
during the period between September 2, 2003 and that date 60 days thereafter,
$2.75 per share of Class B Common Stock redeemed, and (ii) at any time after the
61st day following September 2, 2003, the closing bid price per share of the
Class A Common Stock.
Effectiveness
Adoption of this Proposal No. 2 requires the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock on the Record
Date. Assuming such approval, upon the filing of Amendment No. 1 with the
Delaware Secretary of State, each outstanding share of Common Stock will be
reclassified as and changed into one share of Class A Common Stock. Shareholders
do not need to, and are requested not to, submit their certificates representing
Common Stock for reissuance as Class A Common Stock. Outstanding certificates
representing shares of Common Stock will be deemed to represent Class A Common
Stock following the effective date of the Amendment, assuming shareholder
approval. Certificates of Class A Common Stock will be issued in the normal
course as transfers occur. Assuming the Company's shareholders approve Amendment
No. 1, the Company will exchange the Exchange Shares, and shall issue the shares
of Class B Common Stock, pro rata, to the former shareholders of Articulate
Systems, Inc. If the Company's shareholders do not approve the Amendment No. 1,
the escrow pursuant to which the Exchange Shares are held will expire, and the
Exchange Shares shall be distributed, pro rata, to the former shareholders of
Articulate Systems, Inc.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 3
----------------------------------------
PROPOSAL NO. 4
PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED CAPITAL OF THE COMPANY TO INCLUDE 300,000,000 SHARES OF COMMON STOCK,
PAR VALUE $.0001 PER SHARE AND 50,000,000 SHARES OF PREFERRED STOCK, PAR VALUE
$.0001 PER SHARE.
The first sentence of Article Fourth of the Company's certificate of
incorporation, as amended to date, reads:
"FOURTH: The total number of shares of stock which the Company shall
have authority to issue is ONE HUNDRED MILLION (100,000,000) shares of
Common Stock and TWENTY MILLION (20,000,000) shares of Preferred
Stock."
The Company's Board of Directors has approved and recommends to the
shareholders the adoption of an amendment to this sentence of Article Fourth of
the Company's certificate of incorporation ("Amendment No. 2") that would
increase the number of shares of Common Stock that the Company is authorized to
issue from 100,000,000 shares to 300,000,000 shares, and the number of shares of
Preferred Stock that the Company is authorized to issue from 20,000,000 shares
to 50,000,000 shares. The first sentence of Article Fourth, as amended, would
read as follows:
"FOURTH: The total number of shares of stock which the Company shall
have authority to issue is THREE HUNDRED MILLION (300,000,000) shares
of Common Stock and FIFTY MILLION (50,000,000) shares of Preferred
Stock."
Except for this change, Amendment No. 2 would not affect any other provision of
the certificate of incorporation.
Background of the Proposed Amendment
As part of the Series D and Series E Agreements, the Company
covenanted that it would hold a special meeting of its shareholders and seek the
Company's shareholders' approval both with respect to the issues described in
Proposal
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No. 2, above, and to amend the Company's certificate of incorporation to
increase the authorized shares of Common Stock from 100,000,000 shares to no
less than 150,000,000 shares.
As of the Record Date, there were 74,020,809 shares of the Company's
Common Stock issued and outstanding. As of the Record Date, there were
18,907,582 shares of Common Stock are reserved for issuance pursuant to
presently issued and outstanding options, warrants and similar rights, including
shares that have been set aside for issuance under the Company's existing
incentive stock option plans. Depending on the market price for the Common Stock
as related to the conversion of the Series D and Series E preferred stock, the
Company may have to increase the number of shares of authorized Common Stock in
order to recognize the conversions of all of the issued and outstanding shares
of Series D and Series E preferred stock.
Management believes that, in addition to complying with the Company's
contractual obligations as set forth in the Series D and Series E Agreements,
the proposed Amendment No. 2 would benefit the Company by providing greater
flexibility to the Board of Directors to issue additional equity securities to
raise additional capital, to facilitate possible future acquisitions and to
provide stock-related employee benefits. To date, the Company's primary source
of financing has been private sales of Common Stock or other equity or debt
securities convertible into Common Stock. The Company presently is in immediate
need of additional capital and plans to seek additional capital through sales of
its securities during the fourth quarter of 1999. To facilitate such financing
transactions, the authorized capital of the Company will need to be increased
pursuant to a shareholder-approved amendment to the certificate of
incorporation.
During 1998, the Company acquired four companies that have
technologies complementary to the Company's core voice recognition and related
technologies. The purchase prices for three of those acquisitions was paid, in
part, through the issuance of Common Stock to the shareholders of the acquired
companies, and in part, through cash received from private sales to third
parties of Common Stock or securities convertible into Common Stock. The Company
previously has identified other companies with complementary technologies with
which the Company has had limited negotiations. Although the Company still
believes that some of such potential candidates could present excellent
opportunities for the Company, the Company is not presently engaged in any
active merger or acquisition negotiations with any party and does not presently
intend to consummate any merger or acquisition transaction in the near term.
Nevertheless, in the event the Company does determine to proceed with additional
mergers or acquisitions, the Company anticipates that it would issue shares of
Common Stock to finance all or part of such transactions. Additional authorized
capital would be necessary to pursue any such transactions.
For these reasons, the Company's Board of Directors is seeking
shareholder approval of the proposed Amendment No. 2.
If the Amendment No. 2 is approved at the Annual Meeting, generally,
no shareholder approval would be necessary for the issuance of all or any
portion of the additional shares of Common Stock unless required by law or any
rules or regulations to which the Company is subject. However, as long as the
Common Stock is quoted for trading on the Nasdaq SmallCap Market, the
flexibility that this amendment would provide the Board of Directors will be
limited by the rules of such market which, as presently in effect, would
generally require shareholder approval for the issuance of Common Stock when:
(i) a stock option or purchase plan is to be established or other arrangements
made pursuant to which Common Stock may be acquired by directors or officers,
except for warrants or rights issued generally to security holders of the
Company or broadly based plans or arrangements including other employees; (ii)
the issuance would result in a change in control of the Company; (iii) the stock
or assets of another company are acquired if any director, officer or
substantial shareholder of the Company has a 5% or greater interest (or such
persons collectively have a 10% or greater interest), directly or indirectly, in
the company or assets to be acquired or in the consideration to be paid in the
transaction or series of related transactions and the present or potential
issuance of Common Stock, or securities convertible into or exercisable for
Common Stock, could result in an increase in outstanding common shares or voting
power of 5% or more; or where, due to the present or potential issuance of
Common Stock, or securities convertible into or exercisable for Common Stock,
other than a public offering for cash: (A) the Common Stock has or will have
upon issuance voting power equal to or in excess of 20% of the voting power
outstanding before the
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issuance of stock or securities convertible into or exercisable for Common
Stock; or (B) the number of shares of Common Stock to be issued is or will be
equal to or in excess of 20% of the number of shares of Common Stock outstanding
before the issuance of the stock or securities; or (iv) in connection with a
transaction other than a public offering involving: (1) the sale or issuance by
the Company of Common Stock (or securities convertible into or exercisable for
Common Stock) at a price less than the greater of book or market value which
together with sales by officers, directors or substantial shareholders of the
company equals 20% or more of Common Stock or 20% or more of the voting power
outstanding before the issuance; or (2) the sale or issuance by the Company of
Common Stock (or securities convertible into or exercisable Common Stock) equal
to 20% or more of the Common Stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or market
value of the stock.
Depending upon the consideration per share received by the Company
for any subsequent issuance of Common Stock, such issuance could have a dilutive
effect on those shareholders who paid a higher consideration per share for their
stock. Also, future issuances of Common Stock will increase the number of
outstanding shares, thereby decreasing the percentage ownership in the Company
(for voting, distributions and all other purposes) represented by existing
shares of Common Stock. The availability for issuance of the additional shares
of Common Stock may be viewed as having the effect of discouraging an
unsolicited attempt by another person or entity to acquire control of the
Company. Although the Board of Directors has no present intention of doing so,
the Company's authorized but unissued Common Stock could be issued in one or
more transactions that would make a takeover of the Company more difficult or
costly, and therefore less likely. The Company is not aware of any person or
entity who is seeking to acquire control of the Company. Holders of Common Stock
do not have any preemptive rights to acquire any additional securities issued by
the Company.
If the Company's shareholders do not approve the Amendment No. 2, due
to changes in the market price of the Common Stock affecting conversion ratios
of presently outstanding convertible securities, the Company may be precluded
from satisfying its contractual obligations to issue shares of Common Stock. In
such event, the Company could be subject to material liabilities for money
damages that could adversely affect the Company's operations and financial
condition. Moreover, even if the Company were to negotiate additional merger or
acquisition transactions on terms acceptable to the Company, it would not be
able to complete such transactions without an increase in authorized capital.
Adoption of the proposal to approve the Amendment No. 2 requires the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock on the Record Date. If approved by the shareholders, Amendment No.
2 would become effective upon the filing with the Secretary of State of the
State of Delaware of a certificate of amendment to the certificate of
incorporation setting forth such increase.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 4
----------------------------------------
PROPOSAL 5 -- APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of the Company has selected the international
certified public accounting firm of Arthur Andersen LLP ("Arthur Andersen") as
the independent public accountant for the Company for the fiscal year ending
December 31, 1999. Arthur Andersen audited the Company's financial statements
for the fiscal years ended December 31, 1997 and 1998, and also has audited the
financial statements of AcuVoice, Inc., incident to the Company's acquisition of
AcuVoice in March 1998. Deloitte & Touche LLP ("Deloitte & Touche") was
appointed as the Company's independent accountant for the fiscal year ended
December 31, 1997. Pritchett, Siler & Hardy, P.C., served as the Company's
independent public accountant for the fiscal year ended December 31, 1995.
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The Company engaged Pritchett, Siler & Hardy on February 9, 1995 to
provide outside accounting and auditing services for the Company related to the
1994 audit. At that time, the Pritchett, Siler & Hardy firm was named Peterson,
Siler & Stevenson. It subsequently changed its name to Pritchett, Siler & Hardy,
P.C., and that firm continued as the Company's independent accountant until
March 24, 1997, when the Company engaged Deloitte & Touche. Deloitte & Touche
audited the Company's financial statements for the fiscal year ended December
31, 1996. On February 24, 1998 the Company appointed Arthur Andersen to replace
Deloitte & Touche as independent accountants of the Company for the fiscal year
ended December 31, 1997. Deloitte resigned as the Company's independent auditors
on February 23, 1998.
The report of Deloitte & Touche on the Company's consolidated
financial statements for the year ended December 31, 1996 contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle, except that Deloitte's report
on the consolidated financial statements for the year ended December 31, 1996
included an explanatory paragraph with respect to the Company being in the
development stage and its having suffered recurring losses which raise
substantial doubt about its ability to continue as a going concern. In
connection with the audit for the year ended December 31, 1996, and through
February 23, 1998, the Company has had no disagreements with Deloitte & Touche
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Deloitte would have caused it to make reference thereto
in its report on the consolidated financial statements for such year. During the
year ended December 31, 1996, and through February 23, 1998, there were no
reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
There were no disagreements between the Company and Pritchett, Siler
& Hardy. That firm did, however, include in its Independent Auditors' Report for
the 1995 fiscal year an explanatory paragraph with respect to the Company being
in the development stage and its having suffered recurring losses which raise
substantial doubt about its ability to continue as a going concern.
The Company's decision to engage Arthur Andersen was approved by the
Company's Board of Directors. At the Annual Meeting, shareholders will be asked
to ratify the selection by the Board of Directors of Arthur Andersen as the
Company's independent accountant for the 1998 fiscal year.
THE BOARD RECOMMENDS SHAREHOLDER APPROVAL OF THE SELECTION OF ACCOUNTANT
Representatives of Arthur Andersen are expected to attend the Annual
Meeting and will have an opportunity to make a statement if they desire to do
so, and they will be available to answer appropriate questions from
shareholders.
--------------------------------------------------------------
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors of the
Company does not intend to present and has not been informed that any other
person intends to present a matter for action at the Annual Meeting other than
as set forth herein and in the Notice of Annual Meeting. If any other matter
properly comes before the meeting, it is intended that the holders of proxies
will act in accordance with their best judgment.
The accompanying proxy is being solicited on behalf of the Board of
Directors of the Company. In addition to the solicitation of proxies by mail,
certain of the officers and employees of the Company, without extra
compensation, may solicit proxies personally or by telephone, and, if deemed
necessary, third party solicitation agents may be engaged by the Company to
solicit proxies by means of telephone, facsimile or telegram, although no such
third party has been engaged by the Company as of the date hereof. The Company
will also request brokerage houses, nominees, custodians and fiduciaries to
forward soliciting materials to the beneficial owners of Common Stock held of
record and will
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reimburse such persons for forwarding such material. The cost of this
solicitation of proxies will be borne by the Company.
--------------------------------------------------------------
ANNUAL REPORT
Copies of the Company's Annual Report on Form 10-K (including
financial statements and financial statement schedules) filed with the
Securities and Exchange Commission may be obtained without charge by writing to
the Company - Attention: Douglas L. Rex, 1225 Eagle Gate Tower, 60 East South
Temple Street, Salt Lake City, Utah 84111. A request for a copy of the Company's
Annual Report on Form 10-K must set forth a good-faith representation that the
requesting party was either a holder of record or a beneficial owner of common
stock of the Company on September 16, 1999. Exhibits to the Form 10-K, if any,
will be mailed upon similar request and payment of specified fees to cover the
costs of copying and mailing such materials.
A Copy of the Company's 1998 Annual Report to Shareholders is being
mailed with this Proxy Statement, but is not deemed a part of the proxy
soliciting material.
--------------------------------------------------------------
NOTICE REGARDING CLOSING OF SALE OF HEALTHCARE SOLUTIONS GROUP
By way of notice to the shareholders of the Company as required by
Delaware corporate law, on September 1, 1999, the Company closed its sale (the
"Sale") of the operations and a significant portion of the assets of the
Company's HealthCare Solutions Group to Lernout & Hauspie Speech Products N.V.,
a Belgian corporation with its principal place of business in Ieper, Belgium.
The Company solicited the written consent of the shareholders of the Company for
the Sale, and received the consent of approximately 57.36% of the shareholders
prior to the closing of the Sale.
--------------------------------------------------------------
SHAREHOLDER PROPOSALS
Any shareholder proposal intended to be considered for inclusion in
the proxy statement for presentation in connection with the 1999 Annual Meeting
of Shareholders must have been received by the Company by December 31, 1998. No
such proposals were received.
Any shareholder proposal intended to be considered for inclusion in
the proxy statement for presentation in connection with the 2000 Annual Meeting
of Shareholders must be received by the Company by December 31, 1999. The
proposal must be in accordance with the provisions of Rule 14a-8 promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934. The Company suggests that any such request be submitted by certified mail,
return receipt requested. The Board of Directors will review any proposal which
is received by December 31, 1999, and determine whether it is a proper proposal
to present to the 2000 Annual Meeting.
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The enclosed Proxy is furnished for you to specify your choices with
respect to the matters referred to in the accompanying notice and described in
this Proxy Statement. If you wish to vote in accordance with the Board's
recommendations, merely sign, date and return the Proxy in the enclosed envelope
which requires no postage if mailed in the United States. A prompt return of
your Proxy will be appreciated.
By Order of the Board of Directors
/s/ Thomas A. Murdock
Thomas A. Murdock, Chief Executive Officer
Salt Lake City, Utah
October 7, 1999
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APPENDICES
1. EXHIBIT A-1
2. EXHIBIT A-2
3. FORM OF PROXY
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Exhibit A-1
The text of the proposed Amendment No. 1 is as follows:
"FOURTH: The total number of shares of stock which the Company shall have
authority to issue is ONE HUNDRED MILLION (100,000,000) shares of Common Stock
and TWENTY MILLION (20,000,000) shares of Preferred Stock. All shares of stock
authorized hereunder shall have a par value of 1/100th of one cent ($.0001) per
share.
A. Common Stock. The Common Stock shall be of two classes, each
without cumulative voting rights and without any preemptive rights,
which classes shall be designated as Class A Common Stock and Class B
Common Stock.
1. Dividend and Other Rights of Common Stock.
a. Ratable Treatment. Except as specifically otherwise
provided herein, all shares of Common Stock shall be
identical and shall entitle the holders thereof to the same
rights and privileges. The Company shall not subdivide or
combine any shares of Common Stock, or pay any dividend or
retire any share or make any other distribution on any
share of Common Stock or accord any other payment, benefit
or preference to any share of Common Stock, except by
extending such subdivision, combination, distribution,
payment, benefit or preference equally to all shares of
Common Stock. If dividends are declared which are payable
in shares of Common Stock, such dividends shall be payable
in shares of Class A Common Stock to holders of Class A
Common Stock and in shares of Class B Common Stock to
holders of Class B Common Stock.
b. Dividends. Subject to the rights of the holders of
Preferred Stock, the holders of Common Stock shall be
entitled to dividends out of funds legally available
therefor, when declared by the Board of Directors in
respect of Common Stock, and, upon any liquidation of the
Company, to share ratably in the assets of the Company
available for distribution to the holders of Common Stock.
2. Voting Rights of Common Stock.
a. Class A Common Stock. Except as otherwise provided
by law, the holders of Class A Common Stock shall have full
voting rights and powers to vote on all matters submitted
to stockholders of the Company for vote, consent or
approval, and each holder of Class A Common Stock shall be
entitled to one vote for each share of Class A Common Stock
held of record by such holder.
b. Class B Common Stock. Except as otherwise provided
by law, the holders of Class B Common Stock shall have no
right to vote on any matter submitted to stockholders of
the Company for vote, consent or approval, and the Class B
Common Stock shall not be included in determining the
number of shares voting or entitled to vote on such
matters.
3. Redemption.
a. Class A Common Stock. Except as otherwise provided
by law, the Company shall have no right or obligation to
redeem the Class A Common Stock.
b. Class B Common Stock. At any time after September
2, 2003, the Company shall have the right, exercisable at
any time, to redeem from funds legally available therefor
all or any portion of the then outstanding shares of Class
B Common Stock at a per share price equal to the Redemption
Price (as herein defined); provided that such redemption is
made on a pro rata basis with respect to all
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holders of Class B Common Stock. Any redemption of the
Class B Common Stock shall be effected by the delivery of a
notice to each holder of Class B Common Stock, which notice
shall indicate the number of shares of Class B Common Stock
of each holder to be redeemed and the date that such
redemption is to be effected, which shall be the date (the
"Redemption Date") which is five (5) business days after
the date such notice is delivered. All redeemed shares of
Class B Common Stock shall cease to be outstanding and
shall have the status of authorized but undesignated common
stock, but may not be reissued as Class B Common Stock. The
entire Redemption Price payable to any holder shall be paid
in cash by the Redemption Date.
c. Definitions.
(i) "Redemption Price" shall be (i) during
the period between September 2, 2003 and that date
sixty (60) days thereafter, two and 75/100 dollars
($2.75) per share of Class B Common Stock redeemed,
and (ii) at any time after the sixty-first (61st) day
following September 2, 2003, the Fair Market Value (as
defined herein) of the Class A Common Stock on the
Redemption Date.
(ii) "Fair Market Value" shall mean, on any
particular date (a) the closing bid price per share of
the Class A Common Stock on the last trading day
immediately prior to such date on the Nasdaq SmallCap
Market or other principal stock exchange or quotation
system on which the Class A Common Stock is then
listed or quoted or if there is no such price on such
date, then the closing bid price on such exchange or
quotation system on the date nearest preceding such
date, or (b) if the Class A Common Stock is not listed
then on the Nasdaq SmallCap Market or any stock
exchange or quotation system, the closing bid price
for a share of Class A Common Stock in the
over-the-counter market, as reported by the Nasdaq
Stock Market or in the National Quotation Bureau
Incorporated or similar organization or agency
succeeding to its functions of reporting prices at the
close of business on such date, or (c) if the Class A
Common Stock is not then reported by the National
Quotation Bureau Incorporated or similar organization
or agency succeeding to its functions of reporting
prices, then the average of the "Pink Sheet" quotes
for the relevant conversion period, as determined in
good faith by the holder, or (d) if the Class A Common
Stock is not then publicly traded the fair market
value of a share of Class A Common Stock as determined
by an appraiser selected in good faith by the Company.
B. Preferred Stock. The Preferred Stock shall be issued from
time to time in one or more series, with such distinctive serial
designations as shall be stated and expressed in the resolution or
resolutions providing for the issuance of such shares as are from
time to time adopted by the Board of Directors. In such resolution or
resolutions providing for the issuance of shares of each particular
series of Preferred Stock, the Board of Directors is expressly
authorized, without further vote or action of the stockholders of the
Company and to the fullest extent allowed under Delaware law, to fix
the rights, preferences, privileges, and restrictions of such series
of Preferred Stock, including the annual rate or rates of dividends
for the particular series and whether such dividends shall be
cumulative or noncumulative; the redemption price or prices for the
particular series; the rights, if any, of holders of the shares of
the particular series to convert the same into shares of any other
series or class or other securities of the Company or any other
corporation, with any provisions for the subsequent adjustment of
such conversion rights; the voting rights; anti-dilution rights;
terms of redemption (including sinking fund provisions); the number
of shares constituting any series, and the designation of such
series; and to classify or reclassify any unissued Preferred Stock by
fixing or altering from time to time any of the foregoing rights,
privileges and qualifications. If pursuant to this Article FOURTH,
the Company's Board of Directors shall authorize the issuance of any
class or series of Preferred Stock, (i) such class or series of
Preferred Stock may be granted the right to elect one or more of the
Company's directors, as the Board of Directors shall prescribe, and
said directors shall have voting rights identical to the other
directors of the Company and shall serve until such time as their
successors are elected or until the class or series of Preferred
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Stock entitled to elect them shall cease to be outstanding; and (ii)
such class or series of Preferred Stock may be granted preemptive
rights to acquire additional issues of such Preferred Stock or any
other class or series of stock issued by the Company."
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Exhibit A-2
The text of the proposed Amendment No. 2 is as follows:
"FOURTH: The total number of shares of stock which the Company shall have
authority to issue is THREE HUNDRED MILLION (300,000,000) shares of Common Stock
and FIFTY MILLION (50,000,000) shares of Preferred Stock. All shares of stock
authorized hereunder shall have a par value of 1/100th of one cent ($.0001) per
share.
A. Common Stock. The Common Stock shall be of two classes, each
without cumulative voting rights and without any preemptive rights,
which classes shall be designated as Class A Common Stock and Class B
Common Stock.
1. Dividend and Other Rights of Common Stock.
a. Ratable Treatment. Except as specifically otherwise
provided herein, all shares of Common Stock shall be
identical and shall entitle the holders thereof to the same
rights and privileges. The Company shall not subdivide or
combine any shares of Common Stock, or pay any dividend or
retire any share or make any other distribution on any
share of Common Stock or accord any other payment, benefit
or preference to any share of Common Stock, except by
extending such subdivision, combination, distribution,
payment, benefit or preference equally to all shares of
Common Stock. If dividends are declared which are payable
in shares of Common Stock, such dividends shall be payable
in shares of Class A Common Stock to holders of Class A
Common Stock and in shares of Class B Common Stock to
holders of Class B Common Stock.
b. Dividends. Subject to the rights of the holders of
Preferred Stock, the holders of Common Stock shall be
entitled to dividends out of funds legally available
therefor, when declared by the Board of Directors in
respect of Common Stock, and, upon any liquidation of the
Company, to share ratably in the assets of the Company
available for distribution to the holders of Common Stock.
2. Voting Rights of Common Stock.
a. Class A Common Stock. Except as otherwise provided
by law, the holders of Class A Common Stock shall have full
voting rights and powers to vote on all matters submitted
to stockholders of the Company for vote, consent or
approval, and each holder of Class A Common Stock shall be
entitled to one vote for each share of Class A Common Stock
held of record by such holder.
b. Class B Common Stock. Except as otherwise provided
by law, the holders of Class B Common Stock shall have no
right to vote on any matter submitted to stockholders of
the Company for vote, consent or approval, and the Class B
Common Stock shall not be included in determining the
number of shares voting or entitled to vote on such
matters.
3. Redemption.
a. Class A Common Stock. Except as otherwise provided
by law, the Company shall have no right or obligation to
redeem the Class A Common Stock.
b. Class B Common Stock. At any time after September
2, 2003, the Company shall have the right, exercisable at
any time, to redeem from funds legally available therefor
all or any portion of the then outstanding shares of Class
B Common Stock at a per share price equal to the Redemption
Price (as herein defined); provided that such redemption is
made on a pro rata basis with respect to all
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holders of Class B Common Stock. Any redemption of the
Class B Common Stock shall be effected by the delivery of a
notice to each holder of Class B Common Stock, which notice
shall indicate the number of shares of Class B Common Stock
of each holder to be redeemed and the date that such
redemption is to be effected, which shall be the date (the
"Redemption Date") which is five (5) business days after
the date such notice is delivered. All redeemed shares of
Class B Common Stock shall cease to be outstanding and
shall have the status of authorized but undesignated stock,
but may not be reissued as Class B Common Stock. The entire
Redemption Price payable to any holder shall be paid in
cash by the Redemption Date.
c. Definitions.
(i) "Redemption Price" shall be (i) during
the period between September 2, 2003 and that date
sixty (60) days thereafter, two and 75/100 dollars
($2.75) per share of Class B Common Stock redeemed,
and (ii) at any time after the sixty-first (61st) day
following September 2, 2003, the Fair Market Value (as
defined herein) of the Class A Common Stock on the
Redemption Date.
(ii) "Fair Market Value" shall mean, on any
particular date (a) the closing bid price per share of
the Class A Common Stock on the last trading day
immediately prior to such date on the Nasdaq SmallCap
Market or other principal stock exchange or quotation
system on which the Class A Common Stock is then
listed or quoted or if there is no such price on such
date, then the closing bid price on such exchange or
quotation system on the date nearest preceding such
date, or (b) if the Class A Common Stock is not listed
then on the Nasdaq SmallCap Market or any stock
exchange or quotation system, the closing bid price
for a share of Class A Common Stock in the
over-the-counter market, as reported by the Nasdaq
Stock Market or in the National Quotation Bureau
Incorporated or similar organization or agency
succeeding to its functions of reporting prices at the
close of business on such date, or (c) if the Class A
Common Stock is not then reported by the National
Quotation Bureau Incorporated or similar organization
or agency succeeding to its functions of reporting
prices, then the average of the "Pink Sheet" quotes
for the relevant conversion period, as determined in
good faith by the holder, or (d) if the Class A Common
Stock is not then publicly traded the fair market
value of a share of Class A Common Stock as determined
by an appraiser selected in good faith by the Company.
B. Preferred Stock. The Preferred Stock shall be issued from
time to time in one or more series, with such distinctive serial
designations as shall be stated and expressed in the resolution or
resolutions providing for the issuance of such shares as are from
time to time adopted by the Board of Directors. In such resolution or
resolutions providing for the issuance of shares of each particular
series of Preferred Stock, the Board of Directors is expressly
authorized, without further vote or action of the stockholders of the
Company and to the fullest extent allowed under Delaware law, to fix
the rights, preferences, privileges, and restrictions of such series
of Preferred Stock, including the annual rate or rates of dividends
for the particular series and whether such dividends shall be
cumulative or noncumulative; the redemption price or prices for the
particular series; the rights, if any, of holders of the shares of
the particular series to convert the same into shares of any other
series or class or other securities of the Company or any other
corporation, with any provisions for the subsequent adjustment of
such conversion rights; the voting rights; anti-dilution rights;
terms of redemption (including sinking fund provisions); the number
of shares constituting any series, and the designation of such
series; and to classify or reclassify any unissued Preferred Stock by
fixing or altering from time to time any of the foregoing rights,
privileges and qualifications. If pursuant to this Article FOURTH,
the Company's Board of Directors shall authorize the issuance of any
class or series of Preferred Stock, (i) such class or series of
Preferred Stock may be granted the right to elect one or more of the
Company's directors, as the Board of Directors shall prescribe, and
said directors shall have voting rights identical to the other
directors of the Company and shall serve until such time as their
successors are elected or until the class or series of Preferred
-39-
<PAGE>
Stock entitled to elect them shall cease to be outstanding; and (ii)
such class or series of Preferred Stock may be granted preemptive
rights to acquire additional issues of such Preferred Stock or any
other class or series of stock issued by the Company."
-40-
<PAGE>
PROXY
Fonix Corporation
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas A. Murdock and Roger D. Dudley and each
of them as Proxies, with full power of substitution, and hereby authorizes them
to represent and vote, as designated below, all shares of Common Stock of the
Company held of record by the undersigned at the Annual Meeting of Shareholders
to be held at the ___________________________________________, Salt Lake City,
Utah _____, on Friday, October 29, 1999, at _____ a.m., MDT, or at any
adjournment thereof.
1. Election of Directors.
FOR WITHHOLD AS TO ALL FOR ALL EXCEPT
/ / / / / /
(INSTRUCTIONS: IF YOU MARK THE "FOR ALL EXCEPT" CATEGORY ABOVE,
INDICATE THE NOMINEE(S) AT TO WHICH YOU DESIRE TO WITHHOLD AUTHORITY
BY STRIKING A LINE THROUGH SUCH NOMINEE(S) NAME IN THE LIST BELOW:)
Thomas A. Murdock Roger D. Dudley
John A. Oberteuffer, Ph.D. William A. Maasberg, Jr.
2. To approve a series of transactions pursuant to which the Company has
issued its Series D 4% Convertible Preferred Stock and Series E 4%
Convertible Preferred Stock to seven institutional investors, which
preferred stock may be convertible into in excess of 20% of the total
number of shares of Common Stock issued and outstanding prior to the
commencement of such series of transactions.
FOR AGAINST ABSTAIN
/ / / / / /
3. To consider and act upon a proposed amendment to the Company's
certificate of incorporation that would: (A) create a new class of
Class B Non-Voting Common Stock; and (B) redesignate the
Corporation's current Common Stock as Class A Common Stock and change
each share of existing Common Stock into a share of Class A Common
Stock.
FOR AGAINST ABSTAIN
/ / / / / /
4. To consider and act upon a proposed amendment to the Company's
certificate of incorporation that would increase the authorized
capital of the Company to include 300,000,000 shares of Common Stock,
par value $.0001 per share, and 50,000,000 shares of Preferred Stock,
par value $.0001 per share.
FOR AGAINST ABSTAIN
/ / / / / /
<PAGE>
5. To approve the Board of Directors' selection of Arthur Andersen LLP,
as the Company's independent public accountant for the fiscal year
ended December 31, 1999.
FOR AGAINST ABSTAIN
/ / / / / /
6. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the Annual Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSALS 1 THROUGH 5.
Please sign and date this Proxy Where Shown Below and Return it Promptly:
Date: , 1999
Signed:
SIGNATURE(S)
PLEASE SIGN ABOVE EXACTLY AS THE SHARES ARE ISSUED. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, AS EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
