<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. 1)
[ ] 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 the filing 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
<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 five percent of the Company's Common Stock and by the
executive officers and directors of the Company individually and as a group.
Unless indicated otherwise, the address of the shareholder is the Company's
principal executive offices, 60 East South Temple Street, Suite 1225, Salt Lake
City, Utah 84111.
Number of
Name and Address of 5% Shares
Beneficial Owners, Beneficially Percent of
Executive Officers and Directors Owned Class/(1)/
- ------------------------------------------------------------------------
Thomas A. Murdock 23,605,854/(2)/ 33.1%
Chief Executive Officer, President
and Director
Alan C. Ashton, Ph.D. 12,329,167/(3)(4)/ 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/(4)/ 16.7%
5% Beneficial Owner
261 East 1200 South
Orem, Utah 84097
-2-
<PAGE>
Roger D. Dudley, 5,185,389/(5)/ 7.3%
Executive Vice President,
Director
Stephen M. Studdert 5,185,089/(6)/ 7.3%
Chairman of the Board and
Chief Executive Officer
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., 380,000 *
Vice President, Director
600 West Cummings Park, Suite 4650
Woburn, MA 01801
Reginald K. Brack, Director 426,500/(8)/ *
Douglas L. Rex, Chief Financial Officer 405,300/(9)/ *
Officers and Directors as a Group (8 persons) 29,330,180 38.0%
- ------------
* 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 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 Studdert Companies,
Corp, a corporation of which Mr. Murdock is a 1/3 equity owner
("SCC"). 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
-3-
<PAGE>
1,350,000 shares of Common Stock underlying stock options owned by
Mr. Murdock and exercisable presently or within 60 days.
/(3)/ Includes all Common Stock beneficially owned by Beesmark
Investments, L.C. ("Beesmark"), but only to the extent that Dr.
Ashton is one of two managers of Beesmark, and, as such, is deemed
to share investment power with respect to shares beneficially owned
by Beesmark. Also includes 600,000 shares of Common Stock underlying
stock options exercisable by Dr. Ashton presently or within 60 days.
/(4)/ Beesmark's beneficial ownership includes 166,667 shares of Common
Stock presently issuable upon the conversion of shares of Series A
Preferred Stock. All shares of Common Stock owned by Beesmark are
deposited into the Voting Trust. The managers of Beesmark are Alan
C. Ashton and Karen Ashton. As managers of Beesmark, they each are
deemed to share voting control over shares beneficially owned by
Beesmark. Mrs. Ashton beneficially owns no shares other those deemed
to be owned by her as a control person of Beesmark, and consequently
her beneficial ownership is not separately reported.
/(5)/ Includes (i) 3,415,083 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.
/(9)/ Includes 2,400 shares owned directly by Mr. Rex, 2,400 shares owned
by his spouse, 500 shares owned by an entity owned and controlled by
him, and 400,000 shares underlying presently exercisable stock
options.
-4-
<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 February 25, 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 February
25, 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 February 25, 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 February 25, 1999, on which date the
conversion price would have been $.81, 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 do 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
-5-
<PAGE>
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>
Total
Shares of Shares of Shares of Percent of
Common Common Common Common
Stock Stock Stock Stock
Shares of Shares of Issuable Shares of Issuable Owned Owned
Common Stock Series D Upon Series E upon After After
Name of Holder Presently Owned Owned Conversion Owned Conversion Conversion(1) Conversion(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dominion Capital Fund, Ltd. 1,856,497 /(1)/ 197,514 4,973,343 45,000 1,129,383 7,959,223 10.45%
Sovereign Partners, LP 1,830,019 /(2)/ 248,209 6,249,827 45,000 1,129,383 9,209,229 11.89%
Canadian Advantage Limited
Partnership 426,464 /(3)/ 39,611 997,393 0 0 1,423,857 2.00%
Endeavor Capital Fund, S.A. 0 52,722 1,327,524 0 0 1,327,524 1.86%
JNC Opportunity Fund Ltd. 0 432,500 10,890,219 0 0 10,890,219 13.45%
Diversified Strategies 0 20,278 510,594 0 0 510,594 0.72%
Fund, L.P.
--------- ------- ---------- ------ --------- ----------
Totals 4,112,980 990,834 24,948,900 90,000 2,258,766 31,320,646
========= ======= ========== ====== ========= ==========
</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 1,837,858 shares of Common Stock issued upon the conversion of
80,000 shares of Series E preferred stock and 18,639 shares of Common Stock
issued as dividends accrued thereon prior to the date of this Proxy
Statement. Excludes 600,000 shares of Common Stock issuable upon the
hypothetical conversion of $1,000,000 principal amount of Fonix's Series C
5% Convertible Debentures issued January 29, 1999, assuming such principal
amount were converted in full as of February 25, 1999, 2,250 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 1,813,520 shares of Common Stock issued upon the conversion of
80,000 shares of Series E preferred stock and 16,499 shares of Common Stock
issued as dividends accrued thereon prior to the date of this Proxy
Statement. Excludes 800,000 shares of Common Stock issuable upon the
hypothetical conversion of $750,000 principal amount of Fonix's Series C 5%
Convertible Debentures issued January 29, 1999, assuming such principal
amount were converted in full as of February 25, 1999, 3,000 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.
-6-
<PAGE>
(4) Includes 419,475 shares of Common Stock issued upon the conversion of
17,500 shares of Series D preferred stock and 6,989 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> Common Common
Hypothetical Series D Stock Series E Stock Total Common
Conversion Price Outstanding Issuable Outstanding Issuable Stock Issuable
- ----------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 990,834 26,422,240 90,000 2,400,000 28,822,240
$1.50 990,834 13,211,120 90,000 1,200,000 14,411,120
$2.25 990,834 8,807,413 90,000 800,000 9,607,413
$3.00 990,834 6,605,560 90,000 600,000 7,205,560
</TABLE>
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 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
a director 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:
-7-
<PAGE>
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:
$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 February 25, 1999, and the percentage of Common Stock
that
-8-
<PAGE>
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.
<TABLE>
<CAPTION>
Number of Convertible Percent of Common
Securities Outstanding/ Shares of Common Stock Owned By
Principal Amount of Stock Issuable Upon Holders After
Convertible Security Debentures Conversion or Exercise Conversion
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series D Preferred Stock 990,834 24,465,037 25.9%
Series E Preferred Stock 90,000 2,222,222 3.1%
Repricing Rights 1,801,802 0 0.0%
Debentures $6,500,000 5,200,000 6.9%
--------------------
Totals 31,887,259 31.3%
====================
</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 Series D Series E
Conversion/ Preferred Preferred Repricing Total Common
Exercise Price Stock Stock Rights Debentures Stock Issuable
- ---------------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 26,422,240 2,400,000 1,531,532 8,666,667 39,020,438
$1.50 13,211,120 1,200,000 0 4,333,333 18,744,453
$2.25 8,807,413 800,000 0 2,888,889 12,496,302
$3.00 6,605,560 600,000 0 2,166,667 9,372,227
</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
-9-
<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.
-10-
<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 10 trading-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
-11-
<PAGE>
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, 17,500 shares of Series D preferred
stock had been converted into 426,464 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, 160,000 shares of Series E
preferred stock had been converted into 3,686,516 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
____________________________
PROPOSAL NO. 2
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,
-12-
<PAGE>
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 May 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.
-13-
<PAGE>
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."
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.
-14-
<PAGE>
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 70,064,495 shares of the
Company's Common Stock issued and outstanding. 19,695,521 shares of Common Stock
are reserved for issuance pursuant to presently issued and outstanding options,
warrants and similar rights. 8,226,218 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 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 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 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
-15-
<PAGE>
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.
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.
-16-
<PAGE>
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
-17-
<PAGE>
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.
-18-
<PAGE>
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.
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
-19-
<PAGE>
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."
-20-
<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
-21-
<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
-22-
<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."
-23-
<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:
-24-
<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.
-25-
