<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:
[X] Preliminary Proxy Statement (Amendment No. 2)
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] 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 Its 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 thefiling for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:............................................
2) Form, Schedule or Registration Statement No........................
3) Filing Party:......................................................
4) Date Filed:........................................................
- --------------------------------------------------------------------------------
<PAGE>
Fonix Corporation
60 East South Temple, Suite 1225
Salt Lake City, Utah 84111
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _______________, 1999
To the Shareholders:
Notice is hereby given that a special meeting (the "Special Meeting")
of the shareholders of Fonix Corporation (the "Company") will be held at 180
West Election Road, Draper, Utah 84020, on _____________, ________________,
1999, at __ :00 a.m., M.S.T. for the following purposes, which are discussed in
the following pages and which are made part of this Notice:
1. 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;
2. 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;
3. 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 200,000,000
shares of Common Stock; and
4. To consider and act upon any other matters that properly may
come before the Special Meeting or any adjournment thereof.
The Company's Board of Directors has fixed the close of business on
_______________, ______________, 1999 as the record date (the "Record Date") for
the determination of shareholders having the right to notice of, and to vote at,
the Special Meeting and any adjournment thereof. A list of such shareholders
will be available for examination by a shareholder as of the record date for any
purpose germane to the meeting during ordinary business hours at the offices of
the Company at 180 West Election Road, Draper, Utah 84020, during the 10
business days prior to the Special 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. Your vote is important. Please
sign and date the enclosed Proxy and return it promptly in the enclosed return
envelope whether or not you expect to attend the meeting. The giving of your
proxy as requested hereby will not affect your right to vote in person should
you decide to attend the Special 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 Special Meeting.
By Order of the Board of Directors,
Thomas A. Murdock, Chief Executive Officer
Salt Lake City, Utah
____________________, 1999
<PAGE>
Fonix Corporation
60 East South Temple, Suite 1225
Salt Lake City, Utah 84111
(801)328-8700
-----------------------------------------------------
PROXY STATEMENT
-----------------------------------------------------
SPECIAL 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 special meeting
of shareholders (the "Special Meeting") to be held at 180 West Election Road,
Draper, Utah 84020, on _________________, ___________, 1999, at _____ a.m.,
M.S.T., 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 Special 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:
1. 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
2. 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
3. FOR approval of a proposed amendment to the Company's
certificate of incorporation that would increase the
authorized capital of the Company to include 200,000,000
shares of Common Stock.
A shareholder giving a proxy has the power to revoke it at any time prior to its
exercise by voting in person at the Special Meeting, by giving written notice to
the Company prior to the Special Meeting or by giving a later dated proxy.
The presence at the Special Meeting, in person or by proxy, of the
holders of a majority of the Company's Common Stock issued and outstanding and
entitled to vote at the Special Meeting is necessary to constitute a quorum to
transact business. Each share of Common Stock represented at the Special Meeting
in person or by proxy will be counted for purposes of determining whether a
quorum is present. In deciding all matters, a holder of Common Stock on the
Record Date shall be entitled to cast one vote for each share of Common Stock
then registered in such holder's name. Abstentions and broker non-votes will
count for purposes of establishing a quorum; their effect on the specific
proposals included in this Proxy Statement is discussed separately below. Votes
cast by shareholders who attend and vote in person or by proxy at the Special
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).
Under Delaware law, approval of Proposal No. 1 requires the affirmative
vote of a majority of the shares of Common Stock present or represented at the
Special Meeting and entitled to vote thereon. The Rules of the Nasdaq Stock
Market require approval of Proposal No. 1 by a majority of the votes actually
cast on the proposal in person or by proxy. Abstentions on this proposal may be
specified and will be counted for purposes of determining the number of shares
present or represented and entitled to vote thereon. As a result, abstentions
will have the same effect as votes
-1-
<PAGE>
against this proposal. Broker non-votes will not be counted as votes cast or
entitled to be cast on the proposal and therefore will have no effect on the
result of the vote.
Approval of Proposal Nos. 2 and 3 requires the affirmative vote of a
majority of the shares of Common Stock outstanding and entitled to vote as of
the Record Date. Abstentions on this proposal may be specified and will have the
same effect as a vote against these proposals. Broker non-votes on this Proposal
also will have the same effect as a vote against the proposals.
The close of business on _______________, ___________, 1999, has been
fixed as the Record Date for determining the shareholders entitled to notice of,
and to vote at, the Special Meeting. Each share shall be entitled to one vote on
all matters. As of the Record Date there were ______________ shares of 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 _____________, 1999.
-----------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, the number of
shares of common stock of the Company beneficially owned by all persons known to
be holders of more than 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 shareholder is the Company's principal
executive offices, 60 East South Temple Street, Suite 1225, Salt Lake City, Utah
84111.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1999, the number of
shares of common stock of the Company beneficially owned by all persons known to
be holders of more than 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 shareholder 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>
Alan C. Ashton, Ph.D. 12,329,167(2)(3) 17.4%
c/o Beesmark Investments, L.C.
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
Beesmark Investments, L.C. 11,729,167(3) 16.7%
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
Thomas A. Murdock, Director, 23,605,854(4) 33.1%
Chief Executive Officer, and President
Roger D. Dudley, Director and 5,185,389(5) 7.3%
Executive Vice President
Stephen M. Studdert, Director 5,185,089(6) 7.3%
10252 Oak Creek Lane
Highland, Utah 84003
Joseph Verner Reed, Director 1,220,000(7) 1.7%
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., Director and 580,000 *
Vice President
600 West Cummings Park, Suite 4650
Woburn, MA 01801
Reginald K. Brack, Director 426,500(8) *
1271 Avenue of the Americas, 43rd Floor
New York, New York 10020
Douglas L. Rex, Chief Financial Officer 402,900(9) *
Officers and Directors as a Group (8 persons) 29,327,780 38.0%
</TABLE>
* Less than 1%.
(1) Percentages rounded to nearest 1/10th of 1%. Except as
indicated in the footnotes below, each of the persons listed
exercises sole voting and investment power over all shares of
common stock listed for each such person in the table.
(2) Includes all common stock beneficially owned by Beesmark
Investments, L.C. ("Beesmark"), but only to the extent that
Dr. Ashton is one of two managers of Beesmark, and, as such,
is deemed to share investment power with respect to shares
beneficially owned by Beesmark. Also includes 600,000 shares
of common stock underlying stock options exercisable by Dr.
Ashton presently or within 60 days.
-3-
<PAGE>
(3) Beesmark's beneficial ownership includes 166,667 shares of
common stock presently issuable upon the conversion of 166,667
shares of Series A preferred stock. All shares of common stock
owned by Beesmark are deposited into the Voting Trust. The
managers of Beesmark are Dr. Ashton and Karen Ashton. As
managers of Beesmark, they each are deemed to share voting
control over shares beneficially owned by Beesmark. Mrs.
Ashton beneficially owns no shares other those deemed to be
owned by her as a control person of Beesmark, and consequently
her beneficial ownership is not separately reported.
(4) Includes 22,213,542 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 405,793 shares the Economic Rights as to
which are owned by 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 20,000shares 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.
(5) Includes (i) 3,415,083 shares owned by Mr. Dudley and
deposited into the Voting Trust, (ii) 405,793 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 in the Voting Trust; (iii) 2,813 shares
owned directly by Mr. Dudley; (iv) 300 shares owned by Mr.
Dudley's minor children; (v) 11,400 shares owned by 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.
(6) Includes (i) 3,415,083 shares owned by Mr. Studdert and
deposited into the Voting Trust, (ii) 405,793 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 in 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.
(7) Includes 1,200,000 shares of common stock underlying presently
exercisable stock options.
(8) Includes 26,000 shares owned directly by Mr. Brack and 500
shares owned by Mr. Brack's son and 400,000 shares underlying
presently exercisable stock options.
-4-
<PAGE>
(9) Includes 2,400 shares owned by Mr. Rex's spouse, 500 shares
owned by an entity owned and controlled by him, and 400,000
shares underlying presently exercisable stock options.
-5-
<PAGE>
PROPOSAL NO. 1
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 June 1, 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 June 1,
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 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 June 1, 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 June 1, 1999, on which date the
conversion price would have been $0.49, 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 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
-6-
<PAGE>
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>
Dominion Capital Fund, Ltd. 2,688,915 (2) 197,514 8,307,233 27,000 1,131,919 12,128,067 14.65%
Sovereign Partners, LP 3,149,002 (3) 248,209 10,439,413 16,500 691,728 14,280,143 16.81%
Canadian Advantage Limited
Partnership 1,288,479 (4) 21,111 887,906 0 0 2,176,385 2.99%
Endeavor Capital Fund, S.A. 0 52,722 2,217,432 0 0 2,217,432 3.04%
JNC Opportunity Fund Ltd. 0 432,500 18,190,498 0 0 18,190,498 20.47%
Diversified Strategies Fund,
L.P. 0 20,278 852,871 0 0 852,871 1.19%
------------ ----------- ------------ ---------- ------------ ------------
Totals 7,126,396 972,334 40,895,353 43,500 1,823,647 49,845,396 41.36%
============ =========== ============ ========== ============ ============
</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 2,654,879 shares of Common Stock issued upon the
conversion of 98,000 shares of Series E preferred stock and
34,036 shares of Common Stock issued as dividends accrued
thereon prior to the date of this Proxy Statement. Excludes
2,620,968 shares of Common Stock issuable upon the
hypothetical conversion of $1,218,750 principal amount of
-7-
<PAGE>
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 June 1, 1999; 40,155 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 3,107,137 shares of Common Stock issued upon the
conversion of 108,500 shares of Series E preferred stock and
41,865 shares of Common Stock issued as dividends accrued
thereon prior to the date of this Proxy Statement. Excludes
3,494,623 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 June 1, 1999; 53,540 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 1,259,191 shares of Common Stock issued upon the
conversion of 36,000 shares of Series D preferred stock and
29,288 shares of Common Stock issued as dividends accrued
thereon prior to the date of this Proxy Statement.
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>
$0.25 972,334 77,786,720 43,500 3,480,000 81,266,720
$0.75 972,334 25,928,907 43,500 1,160,000 27,088,907
$1.50 972,334 12,964,453 43,500 580,000 13,544,453
$2.25 972,334 8,642,969 43,500 386,667 9,029,636
$3.00 972,334 6,482,227 43,500 290,000 6,772,227
</TABLE>
Nasdaq SmallCap Market Shareholder Approval Requirement
-8-
<PAGE>
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 hold the Special Meeting at which
the Board of Directors would recommend that the shareholders approve 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 22,213,542 shares of Common
Stock constituting 31.7% 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. 1.
Risk Factors
In considering how to respond to the solicitation of your proxy for
this Proposal No. 1, you should carefully consider the following risks:
Introduction
Fonix presently has three series of preferred stock outstanding: Series
A, Series D and Series E. All of Fonix'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. In addition to the Series D and E
preferred stock, Fonix 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, Fonix 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
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:
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<PAGE>
$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.
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, Fonix 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 June 1, 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, Fonix 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.
-10-
<PAGE>
<TABLE>
<CAPTION>
Number of Convertible
Securities Outstanding/
Principal Amount of Shares of Common Percent of Common
Debentures Stock Issuable Upon Stock Owned By
Conversion or Holders After
Convertible Security Exercise Conversion
- --------------------------- ---------------------- --------------------- - ----------------------
<S> <C> <C> <C>
Series D Preferred Stock 972,334 39,687,102 35.97%
Series E Preferred Stock 43,500 1,775,510 2.45%
Repricing Rights 1,801,802 2,981,626 4.05%
Debentures $6,500,000 13,978,495 16.52%
---------- -------
Total 59,101,671 45.55%
========== =======
</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 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 77,786,720 3,480,000 8,358,199 26,000,000 115,624,919
$0.75 25,928,907 1,160,000 1,584,865 8,666,667 37,340,439
$1.50 12,964,453 580,000 0 4,333,333 17,877,786
$2.25 8,642,969 386,667 0 2,888,889 11,918,525
$3.00 6,482,227 290,000 0 2,166,667 8,938,894
</TABLE>
-12-
<PAGE>
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 "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.
-13-
<PAGE>
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.
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
-14-
<PAGE>
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
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 the date of this proxy statement, 36,000 shares of Series D
preferred stock had been converted into 1,288,479 shares of Common Stock,
including amounts issued as payment of dividends accrued on the Series D
preferred stock converted.
As of the date of this proxy statement, 206,500 shares of Series E
preferred stock had been converted into 5,837,917 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. 1
----------------------------
-15-
<PAGE>
PROPOSAL NO. 2
PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO AUTHORIZE
CLASS B 2COMMON 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. 3 is approved by the shareholders. The text of Article
Fourth, as proposed to be amended assuming the shareholders do not approve
Proposal No. 3 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.
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 August 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
-16-
<PAGE>
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 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. 2
----------------------------------------
PROPOSAL NO. 3
PROPOSED AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED CAPITAL OF THE COMPANY TO INCLUDE 200,000,000 SHARES OF COMMON 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."
-17-
<PAGE>
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 200,000,000 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 TWO HUNDRED MILLION (200,000,000) shares of
Common Stock and TWENTY MILLION (20,000,000) 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 the Special Meeting and seek the Company's shareholders'
approval both with respect to the issues described in Proposal No. 1, 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 date of this Proxy Statement, there are 70,660,944 shares of
the Company's Common Stock issued and outstanding. 19,709,282 shares of Common
Stock are reserved for issuance pursuant to presently issued and outstanding
options, warrants and similar rights, and 7,304,718 shares 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 second 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.
-18-
<PAGE>
If the Amendment No. 2 is approved at the Special 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 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.
-20-
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 3
----------------------------------------
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 Special Meeting other than
as set forth herein and in the Notice of the Special Meeting. If any other
matter properly comes before the meeting, it is intended that the holders of
proxies will act in accordance with their best judgment.
The accompanying proxy is being solicited on behalf of the Board of
Directors of the Company. In addition to the solicitation of proxies by mail,
certain of the officers and employees of the Company, without extra
compensation, may solicit proxies personally or by telephone, and, if deemed
necessary, third party solicitation agents may be engaged by the Company to
solicit proxies by means of telephone, facsimile or telegram, although no such
third party has been engaged by the Company as of the date hereof. The Company
will also request brokerage houses, nominees, custodians and fiduciaries to
forward soliciting materials to the beneficial owners of Common Stock held of
record and will reimburse such persons for forwarding such material. The cost of
this solicitation of proxies will be borne by the Company.
-----------------------------------------------------
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.
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
Thomas A. Murdock, Chief Executive Officer
Salt Lake City, Utah
___________________, 1999
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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 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.
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<PAGE>
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 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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<PAGE>
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 TWO HUNDRED MILLION (200,000,000) 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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<PAGE>
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
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<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."
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<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 Special Meeting of Shareholders
to be held at 180 West Election Road, Draper, Utah, 84020, on _____________,
_________________, 1999, at ______ a.m., M.S.T., or at any adjournment thereof.
1. 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
/ / / / / /
2. 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
/ / / / / /
3. 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 200,000,000 shares of Common Stock, par value
$.0001 per share.
FOR AGAINST ABSTAIN
/ / / / / /
4. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Special 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 PROPOSAL NOS. 1, 2 and 3.
Please sign and Date this Proxy Where Shown Below and Return it Promptly:
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<PAGE>
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.
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