<PAGE>
As filed with the Securities and Exchange Commission on August 11, 1999
Registration Statement No. 333-67573
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
(Amendment No. 3)
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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Fonix Corporation
(Exact name of registrant as specified in its charter)
----------------------
DELAWARE 22-2994719
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
60 East South Temple Street, Suite 1225
Salt Lake City, Utah 84111
(801) 328-8700
(Address, including zip code, and
telephone number, including area code,
of registrant's principal
executive offices)
----------------------
THOMAS A. MURDOCK
PRESIDENT
Fonix Corporation
60 East South Temple Street
Salt Lake City, Utah 84111
(801) 328-8700
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
COPY TO:
JEFFREY M. JONES, ESQ.
DURHAM JONES & PINEGAR, P.C.
50 SOUTH MAIN STREET, SUITE 800
SALT LAKE CITY, UTAH 84144
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: from time to
time after the effective date of this Registration Statement as determined by
market conditions.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _______.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
========================================================================================================================
Proposed Proposed
Maximum Maximum
Amount Aggregate Aggregate Amount of
Title of Class of Securities To be Price Offering Registration
to be Registered Registered Per Share Price Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock, 59,127,554 shares (1) $ 0.40650 (2) $ 24,035,351 (2) $ 6,682 (2)
$.0001 par value per share
Common Stock, 777,867 shares (3) $ 0.40650 (4) $ 316,202 (4) $ 88 (4)
$.0001 par value per share
Common Stock, 8,418,203 shares (5) $ 0.40650 (2) $ 3,422,000 (2) $ 951 (2)
$.0001 par value per share
Common Stock, 34,800 shares (6) $ 0.40650 (4) $ 14,146 (4) $ 4 (4)
$.0001 par value per share
================= ============ ==========
Totals 68,358,424 shares $ 27,787,699 $ 7,725*
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</TABLE>
* The Company already paid a filing fee of $24,701 with the original filing
based on calculations made pursuant to Rule 457(c) and Section 6 of the
Securities Act of 1933.
(1) Includes (i) 1,288,479 shares issued as restricted stock upon the
conversion of 36,000 shares of Series D 4% Convertible Preferred Stock
(the "Series D Preferred"), together with shares issued as payment of
dividends accrued thereon prior to the date hereof, (ii) 56,074,625
shares, representing the shares issuable upon a hypothetical
conversion of $19,446,680 stated principal amount of 972,334 shares of
Series D Preferred, assuming such a conversion occurred on June 14,
1999, and (iii) up to 1,764,450 shares issuable upon payment of
accrued dividends on the Series D Preferred in common stock. All
included amounts
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estimated solely for purposes of calculation of the fee. The actual
number of shares of common stock issuable upon conversion of all or a
portion of the Series D Preferred or of payment of a stock dividend
thereon may be more or less than such estimate based on a variety of
factors, including the date of conversion and the price of the common
stock on such date or the period preceding such date.
(2) The fee is estimated pursuant to Rule 457(c) under the Act on the
basis of the average of the bid and asked price of Fonix's common
stock as reported on the Nasdaq SmallCap Market on June 11, 1999.
(3) Represents shares issuable upon exercise of warrants to purchase up
to an aggregate amount of 777,867 shares of Fonix's common stock at
an exercise price that shall be 120% of the prevailing market price
at the time of exercise, expiring three years after the issue date
thereof, which warrants may be issued to the holders of the Series D
Preferred.
(4) Fee calculated pursuant to Rule 457(g)(3).
(5) Includes (i) 5,837,916 shares issued as restricted stock upon the
conversion of 206,500 shares of Series E 4% Convertible Preferred
Stock (the "Series E Preferred"), together with shares issued as
payment of dividends accrued thereon prior to the date hereof, (ii)
2,508,651 shares, representing the shares issuable upon a hypothetical
conversion of $870,000 stated principal amount of 43,500 shares of
Series E Preferred, assuming such a conversion occurred on June 14,
1999, and (iii) up to 71,636 shares issuable upon payment of accrued
dividends on the Series E Preferred in common stock. All included
amounts estimated solely for purposes of calculation of the fee. The
actual number of shares of common stock issuable upon conversion of
all or a portion of the Series E Preferred or of payment of a stock
dividend thereon may be more or less than such estimate based on a
variety of factors, including the date of conversion and the price of
the common stock on such date or the period preceding such date.
(6) Represents shares issuable upon exercise of warrants to purchase up
to an aggregate amount of 34,800 shares of Fonix's common stock at an
exercise price that shall be 120% of the prevailing market price at
the time of exercise, expiring three years after the issue date
thereof, which warrants may be issued to the holders of the Series E
Preferred.
Pursuant to Rule 416, there are also registered hereby such
additional indeterminate number of shares of such Common Stock as may become
issuable as dividends or to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
OF THE ACT, MAY DETERMINE.
==============================================================================
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Prospectus Subject to Completion dated August 11 , 1999
--------
The information in this prospectus is not complete, and it may change. This
prospectus is included in a registration statement that Fonix filed with the
Securities and Exchange Commission. The selling stockholders cannot sell these
securities until that registration statement becomes effective. This prospectus
is not an offer to sell these securities or the solicitation of an offer to buy
these securities in any state where an offer to sell or the solicitation of an
offer to buy is not permitted. [GRAPHIC OMITTED]
Fonix Corporation
68,358,424
Common Stock, par value $.0001 per share
This prospectus covers the sale of up to 68,358,424 Fonix common stock
(the "Shares"). Seven stockholders of Fonix Corporation are offering all of the
Shares covered by this prospectus. The selling stockholders will receive all of
the proceeds from the sale of the Shares and Fonix will receive none of those
proceeds.
Investment in the shares involves a high degree of risk. You should
consider carefully the risk factors beginning on page 8 of this prospectus
before purchasing any of the Shares offered by this prospectus.
Fonix common stock is quoted on the Nasdaq SmallCap Market and trades
under the symbol "FONX". Nevertheless, the selling stockholders do not have to
sell the Shares in transactions reported on the Nasdaq SmallCap Market, and may
offer their Shares through any type of public or private transactions.
--------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved the Shares, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
August 11, 1999
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Fonix has not registered the Shares for sale by the selling stockholders
under the securities laws of any state. Brokers or dealers effecting
transactions in the Shares covered by this prospectus should confirm that the
Shares covered by this prospectus have been registered under the securities laws
of the state or states in which sales of such shares occur as of the time of
such sales, or that there is an available exemption from the registration
requirements of the securities laws of such states.
This prospectus is not an offer to sell any securities other than the
Shares covered by this prospectus. This prospectus is not an offer to sell
securities in any circumstances in which such an offer is unlawful.
Fonix has not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering Fonix or the Shares that is
different from the information included or incorporated by reference in this
prospectus. You should not assume that the information in this prospectus, or
any supplement to this prospectus, is accurate at any date other than the date
indicated on the cover page of this prospectus or any supplement to it.
Table of contents
<TABLE>
<CAPTION>
<S> <C>
Summary about Fonix and this offering................................................................................3
Recent developments..................................................................................................5
Important information incorporated by reference......................................................................7
Where to get additional information..................................................................................8
Explanation about forward-looking information........................................................................9
Risk factors........................................................................................................10
Use of proceeds.....................................................................................................25
Selling stockholders................................................................................................25
Plan of distribution................................................................................................33
Legal matters.......................................................................................................35
Material changes....................................................................................................35
</TABLE>
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Summary about Fonix and this offering
Fonix
Fonix is a development-stage company that aims to make commercially
available a comprehensive package of products and technologies that allow humans
to interact with computer and other electronic products in a more efficient,
intuitive and natural way than traditional methods such as the keyboard.
Specifically, Fonix has developed proprietary automated speech-recognition and
related technologies such as text-to-speech, which refers to computer software
which can read computer-based text using a synthetic voice, and speech
compression, which refers to computer software which can reduce the amount of
data required to store or transmit digitally recorded speech while preserving
its content and quality. These technologies, as developed to date, use speech
recognition techniques that include the use of a proprietary neural network
method. Neural networks are computer-based methods which simulate the way the
human brain processes information.
In March 1998, Fonix expanded its suite of human-computer interaction
technologies by acquiring AcuVoice, Inc. ("AcuVoice"), a Cupertino,
California-based developer of text-to-speech technologies. In September 1998,
Fonix acquired Articulate Systems, Inc. ("Articulate"), a leading developer of
specialized speech recognition applications used in the health care industry. In
October 1998, Fonix acquired Papyrus Associates, Inc. and Papyrus Development
Corporation, which are referred to collectively in this prospectus as Papyrus,
developers of printing and cursive handwriting recognition products and
technologies. Articulate and Papyrus are located in Woburn, Massachusetts.
Fonix markets technologies it has developed, together with text-to-speech
technologies and products acquired from AcuVoice, and handwriting recognition
products and applications acquired from Papyrus, through its Interactive
Technologies Solutions Group. The present marketing direction for the
Interactive Technologies Solutions Group is to form relationships with third
parties who can incorporate Fonix technologies and the other technologies
available to the group into new or existing products. Such relationships may be
structured in any of a variety of ways including traditional technology
licenses, co-development relationships through joint ventures or otherwise, and
strategic alliances. The third parties with whom Fonix presently has such
relationships and with which it may have similar relationships in the future
include developers of application software, operating systems, computer,
microprocessor chips, consumer electronics, automobile, telephony and health
care technology products.
On May 19, 1999, Fonix signed an agreement to sell the operations and a
significant portion of the assets of its HealthCare Solutions Group, through
which the Company had marketed its large vocabulary speech recognition software
for the capture, transcription, and management of clinical medical information,
to Lernout & Hauspie Speech Products N.V., an unrelated third party. The sale is
subject to approval by Fonix's shareholders, and is scheduled to close during
the third quarter of 1999. The proceeds from the sale will be used to reduce
certain of the
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Company's liabilities and provide working capital to allow Fonix to focus on
marketing and development of technologies and products offered by its
Interactive Technologies Solutions Group as follows:
o Voice internet/web access and navigation to retrieve information
and execute electronic commerce transactions such as stock trades
and quotes, news, weather, sports, travel, and entertainment
reservations;
o Speech and handwriting applications for embedded systems in mobile
consumer electronics including personal data assistants ("PDAs"),
smart phones, and automobile navigation systems;
o Integrated pen and voice input for the next generation of computing
devices and intelligent appliances such as palmPCs, tablets, smart
phones, and kiosks; and
o Automated dictation and transcription speech recognition for use in
natural, open environments without individual training requirements
to facilitate personal dictation, meeting and conference
transcription, and live closed captioning.
Fonix's principal executive offices are located at 60 East South Temple
Street, Suite 1225, Salt Lake City, Utah 84111. Its telephone number is (801)
328-8700. References to Fonix in this prospectus include Fonix and its wholly
owned subsidiaries.
This offering
The Shares covered by this prospectus are the shares of common stock
issued or issuable by Fonix upon the conversion of certain Series D 4%
Convertible Preferred Stock or Series E 4% Convertible Preferred Stock, or the
exercise of warrants issued or issuable in connection with those classes of
preferred stock. The details regarding the classes of preferred stock and the
Shares covered by this prospectus are as follows:
Under an agreement dated August 31, 1998, Fonix issued a total of
1,108,334 shares of its Series D preferred stock. In return for 500,000 shares
of the Series D preferred stock, Fonix received a total of $10,000,000 in new
funding from four investors. That funding was used primarily to finance the
Articulate Systems, Inc. acquisition. As part of the same transaction, Fonix
issued 608,334 shares of the Series D preferred stock in exchange for the
agreement of seven investors to cancel their right to receive "reset shares" of
Fonix common stock in connection with a private placement of Fonix common stock
completed in March 1998.
Under a second agreement dated September 30, 1998, Fonix issued a total of
250,000 shares of its Series E preferred stock. For 100,000 shares of the Series
E preferred stock, Fonix received $2,000,000 of additional funding from two
investors, which also were purchasers of Series D preferred stock. The
purchasers of the Series E preferred stock surrendered a total of 150,000
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shares of Series D preferred stock, one-for-one, for the other 150,000 shares of
Series E preferred stock.
Subsequently, on November 13, 1998, Fonix sold 50,000 additional shares of
Series D preferred stock on the same terms and conditions as the August 31, 1998
agreement.
Both the Series D and the Series E preferred stock are convertible into
shares of Fonix common stock according to one of three separate conversion
formulas. The converting preferred stock holder chooses the conversion formula
at the time of conversion. Under one conversion option, the preferred stock
holder receives both common stock and common stock purchase warrants upon
conversion of the preferred stock. Fonix will not issue warrants if the
converting holder selects either of the other two conversion formulas. As part
of the Series D and Series E transactions, Fonix agreed that it would register
the shares of common stock issuable upon conversion of the Series D and Series E
or the exercise of any warrants issued upon conversion for public resales by the
converting or exercising holder.
Recent developments
Resignation of Stephen M. Studdert as Chief Executive Officer, Chairman
and Director
On January 26, 1999, Stephen M. Studdert resigned as Fonix's Chief
Executive Officer. On April 30, 1999, Mr. Studdert resigned as Chairman of the
Board of Directors of Fonix, and on July 15, 1999, Mr. Studdert resigned his
position as a member of the Board. On April 30, 1999, Thomas A. Murdock, the CEO
of Fonix, was elected Chairman of the Board of Directors. In connection with Mr.
Studdert's resignation, Fonix entered into a separation agreement with Mr.
Studdert under which Mr. Studdert released Fonix from all claims and obligations
under his Employment Agreement and Fonix agreed to pay Mr. Studdert $250,000 per
year through January 31, 2001, and $100,000 for the year ended January 31, 2002.
Sale of HealthCare Solutions Group
Fonix recently signed an agreement to sell the operations and a
significant portion of the assets of its HealthCare Solutions Group to Lernout &
Hauspie Speech Products N.V., an unrelated third party, for $28,000,000, of
which $24,000,000 is to be paid at closing, and the remaining $4,000,000 to be
paid in two installments of $2,000,000 each over the next two years as an
earnout based on performance of the HealthCare Solutions Group. The sale is
subject to approval by Fonix's shareholders, and is scheduled to close during
the third quarter of 1999. The proceeds from the sale will be used to reduce
certain of the Company's liabilities and to provide working capital to allow
Fonix to focus on marketing and development opportunities for its Interactive
Technology Solutions Group.
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Loan Agreements
On April 22, 1999, the Company and Lernout & Hauspie Speech Products N.V.
("L&H") entered into a loan agreement, (the "April Loan"), the terms of which
provide that L&H will lend$1,100,000 to the Company at an interest rate of two
percent above a defined prime rate. The principal and accrued interest are due
on the earlier of August 31, 1999, or the date the sale of the HealthCare
Solutions Group is consummated, and is secured by the intellectual property of
the HealthCare Solutions Group. In connection with the April Loan, the Company
issued to L&H a warrant which allows L&H to purchase 250,000 shares of common
stock of the Company at a price of approximately $0.60 per share. The warrant
expires October 18, 1999. In connection with the issuance of the warrant, the
Company recorded a deferred finance charge totaling $35,959 to be amortized over
the term of the April Loan. The fair value of the warrants was determined as of
the date of grant using the Black-Scholes pricing model assuming the following:
dividend yield of 0%; expected volatility of 85%; risk free interest rate of
5.1%; and an expected life of six months.
On May 19, 1999, the Company and L&H entered into an additional loan
agreement (the "May Loan"), the terms of which provide that L&H will
lend$4,900,000 to the Company at an interest rate of two percent above a defined
prime rate. The May Loan is secured by the Company's common stock of Articulate.
If, as of August 31, 1999, the sale of the HealthCare Solutions Group has not
been consummated and L&H has breached any of its covenants or its
representations and warranties, then the Company is obligated to pay accrued
interest quarterly beginning the first day of August 1999, and the principal
will be due July 28, 2001. If, as of August 31, 1999, the Sale has not been
consummated and the Company has breached any of its covenants or its
representations and warranties or disclosed information to a third person in
connection with a potential purchase of the HealthCare Solutions Group, then the
Company is obligated to pay all accrued interest and the principal August 31,
1999. Under any other circumstances, all interest and principal shall be payable
December 2, 1999. L&H received a warrant in connection with the May Loan which
allows L&H to purchase 600,000 shares of Common Stock of the Company at a price
of $0.70 per share. The warrant expires May 17, 2001. In connection with the
issuance of the warrant, the Company recorded a deferred finance charge totaling
$210,280 to be amortized over the term of the May Loan. The fair value of the
warrants was determined as of the date of grant using the Black-Scholes pricing
model assuming the following: dividend yield of 0%; expected volatility of 85%;
risk free interest rate of 5.1%; and an expected life of two years.
Sublease of the Company's Cupertino, California property
Effective May 25, 1999 the Company entered into an agreement to sublease
8,048 square feet from a total 10,048 square feet of its Cupertino, California
facility to an unrelated third party. The remaining 2,000 square feet occupied
by the Company is to be turned over to the sublessee no sooner than six months
nor later than nine months from the commencement of the sublease. The agreement
requires the sublessee to pay approximately 80% percent of the Company's
obligation under the primary lease agreement through the six to nine month
period of reduced occupancy by the Company and 100% thereafter through May 31,
2003.
Potential Delisting of the Company's common stock from the Nasdaq SmallCap
Market
On June 29, 1999, the Company received a letter from Nasdaq, notifying the
Company that unless the minimum bid price for the Company's common stock
returned to at least $1.00 per share or more for at least ten consecutive
trading days before September 29, 1999, the Company's common stock would be
delisted from the Nasdaq SmallCap Market on October 1, 1999. Such action could
result in a reduction in the liquidity of the Company's common stock, and would
also trigger certain rights of the holders of the Company's Series C 5%
Convertible Debentures and of the Company's Series D and Series E Preferred
Stock. However, in the event of delisting from the Nasdaq SmallCap Market as
described above, the Company believes that its shares qualify for listing on the
OTC Bulletin Board. See "Risk Factors - Potential Delisting from the Nasdaq
SmallCap Market could have an adverse effect on the liquidity of the Company's
common stock and will trigger certain rights of debenture holders."
Important information incorporated by reference
For purposes of this prospectus, the Commission allows Fonix to
"incorporate by reference" information Fonix has filed and will file with the
Commission, which means that Fonix is disclosing important information to you by
referring you to other information Fonix has filed with the Commission. The
information Fonix incorporates by reference is considered part
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of this prospectus. Later information that Fonix will file with the Commission
automatically will update and supersede the information included in this
prospectus. Fonix specifically is incorporating by reference the following
documents:
o Annual Report on Form 10-K for the fiscal year ended December 31,
1998, filed with the Commission on April 15, 1999, together with
Amendment No. 1 to the Annual Report on Form 10-K, filed with the
Commission on August 11, 1999
o Current Report on Form 8-K, dated December 22, 1998, filed with the
Commission on January 7, 1999
o Quarterly Report on Form 10-Q, for the period ended March 31, 1999,
filed with the Commission on May 19, 1999, together with Amendment
No. 1 to the Quarterly Report on Form 10-Q filed with the
Commission on August 11, 1999
o The description of Fonix's Common Stock included in Fonix's
Registration Statement on Form 8-A, filed with the Commission on
April 1, 1994
You can request a free copy of any of the filings listed above by writing
or calling Fonix at:
Fonix Corporation, Investor Relations
180 West Election Drive
Draper, Utah 84020
(801) 553-6600
Alternatively, certain of the documents incorporated by reference are available
at the Commission's website at http://www.sec.gov.
This prospectus is part of a registration statement that Fonix filed with
the Commission. This prospectus does not contain all of the information included
in the registration statement, as certain items are omitted in accordance with
the rules and regulations of the Commission. Statements or descriptions
contained in this prospectus about any agreements or other documents provide, in
Fonix's belief, all information about such agreements or documents that is
material to a decision to invest in the Shares covered by this prospectus, but
not all terms of all such agreements and documents are described. If you want
more information, Fonix refers you to the copy of such agreement or document
filed as an exhibit to the registration statement or the reports and other
materials incorporated by reference into this prospectus. The registration
statement, including all of its exhibits and schedules, may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and you can obtain copies of all or any part of it from the
Commission, although the Commission charges for such copies.
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Where to get additional information
Federal securities law requires Fonix to file information with the
Securities and Exchange Commission concerning its business and operations.
Accordingly, Fonix files annual, quarterly and special reports, proxy statements
and other information with the Commission. You can inspect and copy this
information at the public reference facility maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You
can also do so at the following regional offices of the Commission:
o New York Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048
o Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661
You can get additional information about the operation of the Commission's
public reference facilities by calling the Commission at 1-800-SEC-0330. The
Commission also maintains a web site (http://www.sec.gov) at which you can read
or download Fonix's reports, proxy and information statements and other
information. Reports and other information concerning Fonix also may be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
Explanation about forward-looking information
This prospectus, including information contained in documents that are
incorporated by reference in this prospectus, contains "forward-looking
statements," as that term is defined by federal securities laws, that relate to
the financial condition, results of operations, plans, objectives, future
performance and business of Fonix. These statements are frequently preceded by,
followed by or include the words "believes," "expects," "anticipates,"
"estimates" or similar expressions. These forward-looking statements involve
certain risks and uncertainties, and whether those risks and uncertainties occur
or develop adversely, Fonix's actual results may differ materially from those
contemplated by such forward-looking statements. In the section of the
prospectus entitled "Risk Factors" Fonix has summarized a number of the risks
and uncertainties that could affect the actual outcome of the forward-looking
statements included in this prospectus. Fonix advises you not to place undue
reliance on such forward-looking statements in light of the material risks and
uncertainties to which they are subject.
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Risk factors
An investment in Fonix common stock involves a high degree of risk and
should not be made by persons who cannot afford the loss of their entire
investment. You should carefully consider the risks described below in addition
to the other information presented in this prospectus or incorporated by
reference into this prospectus before deciding to invest in the Shares covered
by this prospectus.
Fonix's substantial and continuing losses since inception, coupled with
significant ongoing operating expenses, raise doubt about Fonix's ability to
continue as a going concern
Since its inception, Fonix has sustained ongoing losses. Such losses are
presently continuing at an accelerated rate due to recent acquisitions, ongoing
operating expenses and a lack of revenues sufficient to offset the increased
operating expenses. Because past and current expenses exceed revenues, Fonix has
negative working capital and has been forced to raise capital to fund ongoing
operations by private sales of its securities, the terms of which transactions
have been highly dilutive and involve considerable expense. Furthermore, in
recent months, the financial condition of the Company has required the Company
to negotiate with its creditors to extend the due date of certain obligations.
In its present circumstances, there is substantial doubt about Fonix's ability
to continue as a going concern absent immediate and significant sales of its
existing products, substantial revenues from new licensing contracts or a
relatively large sale of its securities in the near term.
Fonix incurred a net loss of $9,294,861 for the three months ended March
31, 1999, and net losses of $43,118,782 and $22,453,948 for the years ended
December 31, 1998 and 1997, respectively. For the three months ended March 31,
1999, Fonix recorded revenues from the operations of AcuVoice and Articulate
businesses of $53,806 and $1,056,526, respectively. For the year ended December
31, 1998, Fonix recorded revenues from the operations of AcuVoice and Articulate
businesses in the amount of $236,586 and 284,960, respectively. Other than these
revenues, Fonix's only revenues to date resulted from one-time non-refundable
license fees totaling $2,368,138 paid by Siemens Aktiengesellschaft for the use
of technologies in integrated circuits suitable for telecommunications
applications. On May 19, 1999, the Company signed an agreement to sell the
operations and a significant portion of the assets of its HealthCare Solutions
Group to Lernout & Hauspie Speech Products N.V.
Fonix expects continuing losses from operating activities until such time
as:
o current and additional licensing or co-development arrangements
with third parties that produce revenues sufficient to offset
Fonix's ongoing operating expenses; or
o revenues from the Interactive Technologies Solutions Group increase
to levels sufficient to exceed Fonix's operating expenses.
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Recently incurred debt obligations could impair Fonix's ability to continue as a
going concern
During the last half of 1998, Fonix incurred substantial amounts of debt
which, coupled with Fonix's ongoing operating expenses, could hamper Fonix's
ability to continue as a going concern unless Fonix is immediately able to
generate significant revenues or to raise a substantial amount of capital to pay
that debt. Much of Fonix's debt is payable on demand. Fonix does not presently
have sufficient operating capital or revenues to allow Fonix to satisfy these
obligations if demand for payment is made and Fonix cannot renegotiate the terms
of the debt or otherwise persuade its creditors to withdraw their demand. In
such event, Fonix's financial condition and operations could be adversely
affected. The following discussion summarizes the extent and nature of such
recently incurred debt.
In connection with Fonix's acquisition of Articulate in September 1998,
Fonix incurred new debt obligations to 13 former shareholders of Articulate in
the aggregate amount of $4,747,339. These debt obligations are in the form of
demand notes payable at any time after November 1, 1998, and bear interest at
the annual rate of 8.5%. The due dates of these obligations subsequently were
extended to dates ranging from April 1999 to October 1999, and, in some cases,
Fonix has agreed to pay interest at rates exceeding 8.5% per annum. The Company
and the payees of these obligations have agreed that the unpaid balances due
will be paid out of the proceeds of the sale of the HealthCare Solutions Group.
After the acquisition, Fonix also agreed to pay several Articulate employees
incentive compensation for continued employment in the aggregate amount of
$857,000, in connection with which Fonix issued 8.5% demand notes for $452,900
and recorded an accrued liability of $404,100 for the balance. The notes issued
to the Articulate employees are presently payable on demand, but, as of the date
hereof, Fonix has not received any demand for payment of the notes by the former
Articulate employees. The $404,100 accrued liability was payable on or before
January 31, 1999. The payees with respect to this obligation have orally agreed
to an extension of the payment date to August 31, 1999, and the Company intends
to pay all of these obligations out of the proceeds of the sale of its
HealthCare Solutions Group.
In connection with Fonix's acquisition of Papyrus in October 1998, Fonix
also incurred new debt obligations in the form of promissory notes to the former
shareholders of Papyrus in the aggregate amount of $1,710,000. With respect to
$1,632,375 of the notes, the holders thereof have agreed to accept an aggregate
payment of $1,188,909 in full satisfaction of the notes, if paid before August
31, 1999. Fonix intends to use a portion of the proceeds of the sale of its
HealthCare Solutions Group to pay all of these notes.
On December 2, 1998, Fonix borrowed $560,000 from an unaffiliated private
lender. The loan accrues interest at the rate of 18% per annum, is secured by
certain accounts receivable and was due January 2, 1999. Fonix has subsequently
extended the due date of this loan from month to month by paying the lender the
accrued interest plus a fee of $5,600. The loan balance has also
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<PAGE>
been increased to $584,000 and is due August 31, 1999. However, Fonix
anticipates that it will request and pay for an extension of the due date for
one or more additional months beyond that date if the sale of the HealthCare
Solutions Group has not closed.
In addition to these notes, Fonix presently owes trade payables in the
aggregate amount of approximately $2,400,000, some of which are more than 120
days overdue.
Loan Agreements
On April 22, 1999, the Company and Lernout & Hauspie Speech Products N.V.
("L&H") entered into a loan agreement, (the "April Loan"), the terms of which
provide that L&H will lend $1,100,000 to the Company at an interest rate of two
percent above a defined prime rate. The principal and accrued interest are due
on the earlier of August 31, 1999, or the date the sale of the HealthCare
Solutions Group is consummated, and is secured by the intellectual property of
the HealthCare Solutions Group. In connection with the April Loan, the Company
issued to L&H a warrant which allows L&H to purchase 250,000 shares of common
stock of the Company at a price of approximately $0.60 per share. The warrant
expires October 18, 1999. In connection with the issuance of the warrant, the
Company recorded a deferred finance charge totaling $35,959 to be amortized over
the term of the April Loan. The fair value of the warrants was determined as of
the date of grant using the Black-Scholes pricing model assuming the following:
dividend yield of 0%; expected volatility of 85%; risk free interest rate of
5.1%; and an expected life of six months.
On May 19, 1999, the Company and L&H entered into an additional loan
agreement (the "May Loan"), the terms of which provide that L&H will
lend$4,900,000 to the Company at an interest rate of two percent above a defined
prime rate. The May Loan is secured by the Company's common stock of Articulate.
If, as of August 31, 1999, the sale of the HealthCare Solutions Group has not
been consummated and L&H has breached any of its covenants or its
representations and warranties, then the Company is obligated to pay accrued
interest quarterly beginning the first day of August 1999, and the principal
will be due July 28, 2001. If, as of August 31, 1999, the Sale has not been
consummated and the Company has breached any of its covenants or its
representations and warranties or disclosed information to a third person in
connection with a potential purchase of the HealthCare Solutions Group, then the
Company is obligated to pay all accrued interest and the principal August 31,
1999. Under any other circumstances, all interest and principal shall be payable
December 2, 1999. L&H received a warrant in connection with the May Loan which
allows L&H to purchase 600,000 shares of Common Stock of the Company at a price
of $0.70 per share. The warrant expires May 17, 2001. In connection with the
issuance of the warrant, the Company recorded a deferred finance charge totaling
$210,280 to be amortized over the term of the May Loan. The fair value of the
warrants was determined as of the date of grant using the Black-Scholes pricing
model assuming the following: dividend yield of 0%; expected volatility of 85%;
risk free interest rate of 5.1%; and an expected life of two years.
11
<PAGE>
All of these debt obligations are in addition to Fonix's regularly
recurring operating expenses. At present, Fonix's revenues from existing
licensing arrangements and products are not sufficient to offset Fonix's ongoing
operating expenses or to pay substantial amounts of Fonix's presently due debt.
There is substantial risk, therefore, that the existence and extent of the debt
obligations described above could adversely affect Fonix, its operations and
financial condition.
If Fonix does not receive additional capital when and in the amounts needed in
the near future, its ability to continue as a going concern is in substantial
doubt.
Fonix anticipates incurring substantial product development and research
and general operating expenses for the foreseeable future which will require
substantial amounts of additional capital on an ongoing basis. These capital
needs are in addition to the amounts required to repay the debt discussed above.
Fonix most likely will have to obtain such capital from sales of its equity,
convertible equity and debt securities. Obtaining future financing may be costly
and will be dilutive to existing stockholders. If Fonix is not able to obtain
financing when and in the amounts needed, and on terms that are acceptable to
it, Fonix's operations, financial condition and prospects could be materially
and adversely affected, and Fonix could be forced to curtail its operations or
sell part or all of its assets, including its core technologies.
Holders of Fonix common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the conversion of
presently issued preferred stock and other securities convertible into common
stock.
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 Fonix common stock. The Series A preferred stock was
issued in October 1995 and is convertible, one-for-one into 166,667 shares of
Fonix common stock at the option of the holder. The Series D and Series E
preferred stock is convertible into Fonix common stock according to one of three
separate conversion formulas, one of which is based, in part, on the market
price of Fonix common stock during the several week period leading up to the
conversion date. Such conversion formulas are described in more detail in the
section of this prospectus entitled "Selling Stockholders".
In addition to the Series D and Series 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 Fonix common stock. Specifically, on
December 22, 1998, Fonix completed a private placement "Equity Offering" of
1,801,802 shares of common stock. The investor that participated in that Equity
Offering also acquired "Repricing Rights" that entitle the holder to receive
that number of additional shares of Fonix common stock for no additional
consideration which shall be determined by multiplying the number of Repricing
Rights exercised by the following fraction:
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<PAGE>
(Repricing Price - Market Price)
----------------------------------
Market Price
The investor acquired one Repricing Right for each share of Fonix common stock
purchased. The Repricing Rights will expire nine months after the effective date
of a registration statement covering the common stock issued on December 22,
1998, and issuable upon exercise of the Repricing Rights. "Market Price" is
defined as the lowest closing bid price of Fonix common stock, as quoted on the
Nasdaq SmallCap Market, during the 15 consecutive trading days immediately
preceding the exercise date. "Repricing Price" is defined as:
$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 21, 1999 until the expiration of the
Repricing Rights.
Repricing Rights.
In addition to the Repricing Rights, Fonix 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, Fonix entered into a
Securities Purchase Agreement (the "Debenture Purchase Agreement") with four
investors. Under the Debenture Purchase Agreement, as subsequently supplemented
on March 3, 1999, Fonix 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 number of outstanding shares of the
Series D and Series E Preferred Stock, 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. For purposes of this table, Fonix has assumed
that the holders of
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<PAGE>
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 as payment of
dividends accrued on the Series D and Series E preferred stock and the
Debentures at the date of conversion, as well as shares of common stock issued
upon conversion of the Series D and Series E Preferred Stock prior to the date
of this prospectus.
<TABLE>
<CAPTION>
Number of Shares of Percent of
Convertible Common Common Stock
Securities Stock Owned By
Convertible Outstanding/ Issuable Holders After
Security Principal Upon Conversion
Amount of Conversion or
Debentures Exercise
- --------------------------- ---------------------- --------------------- - ----------------------
<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 on 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):
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<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock Issuable Upon Conversion
or Exercise of
- -------------------------- ------------------------------------------------------------------------------- -------------------
Total
Hypothetical Series D Series E Common
Conversion/ Preferred Preferred Repricing Stock
Exercise Price Stock Stock Rights Debentures Issuable
- -------------------------- ----------------- ----------------- ---------------- ------------------- -------------------
<S> <C> <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>
Given the structure of the conversion formulas applicable to the Series D
and Series E preferred stock, and the other convertible securities described
above, there effectively is no limitation on the number of shares of Fonix
common stock into which such convertible securities may be converted or
exercised. As the market price of the Fonix common stock decreases, the number
of shares of Fonix common stock underlying the Series D and Series E preferred
stock and such other convertible securities continues to increase. The following
specific risk factors relative to this dilution should be considered before
deciding to purchase the Shares offered by this prospectus.
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, the exercise
of the Repricing Rights and the conversion of the Debentures may result in
substantial dilution to the equity interests of other holders of Fonix common
stock. Specifically, the issuance of a significant amount of additional Fonix
common stock would result in a decrease of the relative voting control of Fonix
common stock issued and outstanding prior to the conversion of the Series D and
Series E preferred stock, the exercise of the Repricing Rights and the
conversion of the Debentures. Furthermore, public resales of Fonix common stock
following the conversion of the Series D and Series E preferred stock, the
exercise of the Repricing Rights or the conversion of the Debentures likely
would depress the prevailing market price of Fonix common stock. Even prior to
the time of actual conversions, exercises and public resales, the market
"overhang" resulting from the mere existence of Fonix's obligation to honor such
conversions or exercises could depress the market price of Fonix common stock.
Increased Dilution With Decreases in Market Price of Common Stock
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<PAGE>
The outstanding shares of Series D and Series E preferred stock are
convertible, the Repricing Rights are exercisable and the Debentures are
convertible, at a floating price that may and likely will be below the market
price of Fonix common stock prevailing at the time of conversion or exercise. As
a result, the lower the market price of Fonix common stock at and around the
time the holder converts or exercises, the more Fonix common stock the holder of
such convertible securities gets. Any increase in the number of shares of Fonix
common stock issued upon conversion or exercise as a result of decreases in the
prevailing market price would compound the risks of dilution described in the
preceding paragraph of this risk factor.
Increased Potential for Short Sales
Downward pressure on the market price of Fonix common stock that likely
would result from sales of Fonix common stock issued on conversion of the Series
D and Series E preferred stock, the exercise of the Repricing Rights or the
conversion of the Debentures could encourage short sales of common stock by the
holders of the Series D and Series E preferred stock, the Repricing Rights, the
Debentures or others. Material amounts of such short selling could place further
downward pressure on the market price of Fonix common stock.
Limited Effect of Restrictions on Extent of Conversions
The holders of the Series D and Series E preferred stock, the Repricing
Rights and the Debentures are prohibited from converting their preferred stock
or exercising their Repricing Rights into more than 4.999% of the then
outstanding Fonix common stock. This restriction, however, does not prevent such
holders from either waiving such limitation or converting or exercising 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 and Repricing
Rights could sell more than 4.999% of the outstanding Fonix common stock in a
relatively short time frame while never holding more than 4.999% at a time.
If Fonix has difficulty integrating into its business and capitalizing on recent
acquisitions, its operations and financial prospects could be adversely
affected.
Fonix recently has completed the acquisitions of AcuVoice, Articulate, The
MRC Group, and Papyrus. Notwithstanding its agreement to sell the HealthCare
Solutions Group, Fonix's acquisitions of AcuVoice, Articulate and Papyrus
present risks including at least the following:
o Fonix may have difficulty financing ongoing operations of acquired
businesses to the extent such businesses are not generating
positive cash flows;
o Fonix may have difficulty combining or integrating the technology,
operations, management or work force of the acquired businesses
with Fonix's or its subsidiaries' existing operations;
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<PAGE>
o Fonix may have difficulty retaining the key personnel of the
acquired businesses;
o Fonix may have difficulty expanding Fonix's financial and
management controls and reporting systems and procedures to the
acquired businesses;
o Fonix may have difficulty maintaining uniform standards, controls,
procedures, and policies across its entire organization, including
the acquired businesses;
o There may be impairment of relationships with employees, vendors
and customers as a result of the integration of new businesses and
management personnel; and
o There may be diversion of management attention during the pendency
of transactions, and increased commitment of management resources
and related expenses resulting from efforts to integrate and manage
acquired businesses located at a distance from Fonix's principal
executive offices and research facilities.
Fonix has only a limited product offering and many of its key technologies are
still in the development stage.
There presently are only a limited number of commercially available
applications or products incorporating the Fonix technologies. Through its
Interactive Technologies Solutions Group, Fonix markets text-to-speech products
acquired from AcuVoice and the Allegro handwriting recognition software acquired
from Papyrus. Fonix has also licensed certain elements of its speech recognition
technologies to Siemens for incorporation into telecommunications equipment to
be manufactured by Siemens. Those products are not yet being manufactured. These
product offerings are still relatively limited and have not generated to date
significant revenues. An additional element of Fonix's business strategy is to
achieve revenues through appropriate strategic alliances, co-development
arrangements and license agreements with third parties. Other than the
arrangement with Siemens, a collaborative scientific agreement with the Oregon
Graduate Institute of Science and Technology, a similar agreement with Brigham
Young University and a license of its Allegro handwriting recognition
technology, Fonix presently has no licensing or co-development agreements with
any third party for the technologies which it has developed to date.
The market for many of Fonix's technologies is largely unproven and may never
develop sufficiently to allow Fonix to capitalize on its technology and
products.
The market for human-computer interaction technologies, including
automated speech recognition technologies, is relatively new. Fonix's
technologies are new and, in many instances, represent a significant departure
from technologies which already have found a degree of acceptance in the
human-computer interaction marketplace. The financial performance of Fonix will
depend, in part, on the future development, growth and ultimate size of the
market for human-computer interaction applications and products generally, and
applications and products
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<PAGE>
incorporating Fonix's technologies and the applications and products of its
Interactive Technologies Solutions Group specifically. Applications and products
incorporating Fonix's technologies will compete with more conventional means of
information processing such as data entry, access by keyboard or touch-tone
phone or professional dictation services. Fonix believes that there is a
substantial potential market for applications and products incorporating
advanced human-computer interface technologies including speech recognition,
speech synthesis, speech compression, speaker identification and verification,
handwriting recognition, pen and touch screen input and natural language
understanding. Nevertheless, such a market for Fonix's technologies or for
products incorporating Fonix's technologies may never develop to the point that
profitable operations can be achieved or sustained.
Competition from other industry participants and rapid technological change
could impede Fonix's ability to achieve profitable operations.
The computer hardware and software industries are highly and intensely
competitive. In particular, the human computer interaction market sector and
specifically the speech recognition, computer voice and communications
industries are characterized by rapid technological change. Competition in the
market sector of human-computer interaction technology is based largely on
marketing ability and resources, distribution channels, technology and product
superiority and product service and support. The development of new technology
or material improvements to existing technologies by Fonix's competitors may
render Fonix's technologies less attractive or even obsolete. Accordingly, the
success of Fonix will depend upon its ability to continually enhance its
technologies and interactive solutions and products to keep pace with or ahead
of technological developments and to address the changing needs of the
marketplace. Some of Fonix's competitors have greater experience in developing,
manufacturing and marketing human computer interface technologies, applications
and products, and some have far greater financial and other resources than
Fonix, or its potential licensees and co-developers, as well as broader
name-recognition, more-established technology reputations, and mature
distribution channels for their products and technologies. Barriers to entry in
the software industry are low, and as the market for various human computer
interaction products expands and matures, Fonix expects more entrants into this
already competitive arena.
Fonix's independent public accountants have included a "going concern" paragraph
in their audit reports for the years ended December 31, 1998, 1997 and 1996.
The auditors' reports for Fonix's financial statements for the years 1998,
1997, and 1996 include an explanatory paragraph regarding substantial doubt
about Fonix's ability to continue as a going concern. This may have an adverse
effect on the Company's ability to obtain financing.
18
<PAGE>
Potential delisting from the Nasdaq SmallCap Market could have an adverse effect
on the liquidity of the Company's common stock and would trigger certain rights
of the holders of the Company's Debentures and Preferred Stock.
The Company's common stock currently trades on the Nasdaq SmallCap
Market which requires, for continued listing, a minimum bid price of at least
$1.00 per share. At June 29, 1999, the Company's common stock had traded below
$1.00 for more than thirty consecutive trading days. On June 29, 1999, the
Company received a letter from Nasdaq indicating that unless the minimum bid
price for the Company's common stock returned to at least $1.00 per share for at
least ten consecutive trading days prior to September 29, 1999, the Company's
shares would be delisted from the Nasdaq SmallCap Market on October 1, 1999. The
Company has the right to appeal Nasdaq's notice and/or listing determination on
or before September 29, 1999.
If the Company's common stock is delisted from the Nasdaq SmallCap
Market, the Company believes that its common stock would qualify for listing on
the OTC Bulletin Board. However, the result of delisting from the Nasdaq
SmallCap Market could be a reduction in the liquidity of any investment in the
Company's common stock, even if the Company's shares are thereafter traded on
the OTC Bulletin Board. Further, delisting could reduce the ability of holders
of the Company's common stock to purchase or sell shares as quickly and as
inexpensively as they have done historically.
Additionally, if the Company's common stock is delisted from the Nasdaq
SmallCap Market and is not relisted within three trading days, an event of
default would result under the terms of the Series C 5% Convertible Debentures
(the "Debentures"). Upon the occurrence of an event of default, the full
$6,500,000 principal amount of all of the Debentures, together with accrued
interest and all other amounts owing in respect thereof, would become
immediately due and payable in cash. The requirement to pay such amounts would
deplete the Company's existing cash, and would require the Company to incur
additional debt, thus further increasing the Company's debt obligations. There
can be no assurance that the Company would be able to borrow the amounts needed
to pay the holders of the Debentures or that such financing, if it were
available to the Company, would be available on terms satisfactory to the
Company. Presently, the Company does not have sufficient cash or other liquid
assets to pay the amount which would be due if the holders of the Debentures
declared a default thereunder.
Finally, if the Company's common stock is delisted from the Nasdaq
SmallCap Market and is not relisted within three trading days, the terms of the
Series D and Series E Preferred Stock require the Company to pay to each holder
of Series D or Series E Preferred Stock a fee of two percent of the purchase
price of the Series D or Series E Preferred Stock, to be paid in cash, for each
month that the stock is delisted. The requirement to pay such amounts would
deplete the Company's existing cash, and would require the Company to incur
additional debt, thus further increasing the Company's debt obligations. There
can be no assurance that the Company would be able to borrow the amounts needed
to pay the holders of the Series D or Series E Preferred Stock or that such
financing, if it were available to the Company, would be available on terms
satisfactory to the Company. Presently, the Company does not have sufficient
cash or other liquid assets to pay the amount which would be due.
19
<PAGE>
Fonix's operations and financial condition could be adversely affected by
Fonix's failure or inability to protect its intellectual property or if Fonix's
technologies are found to infringe the intellectual property of a third party.
Dependence on proprietary technology
Fonix's success is heavily dependent upon proprietary technology. On June
17, 1997, the United States Patent and Trademark Office issued U.S. Patent No.
5,640,490 entitled "A User Independent, Real-time Speech Recognition System and
Method." The patent has a 20-year life running from the November 4, 1994 filing
date, and has been assigned to Fonix. This patent covers certain elements of the
Fonix voice recognition technologies. Fonix has acquired other patents and has
filed additional patent applications. In addition to its patents, Fonix relies
on a combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect its proprietary rights. Such
means of protecting Fonix's proprietary rights may not be adequate because such
laws provide only limited protection. Despite precautions that Fonix takes, it
may be possible for unauthorized third parties to duplicate aspects of the Fonix
technologies or the current or future products or technologies of its business
units or to obtain and use information that Fonix regards as proprietary.
Additionally, Fonix's competitors may independently develop similar or superior
technology. Policing unauthorized proprietary rights is difficult, and
some non-U.S. laws do not protect proprietary rights to the same extent as
United States laws. Litigation periodically may be necessary to enforce Fonix's
intellectual property rights, to protect its trade secrets or to determine the
validity and scope of the proprietary rights of others. Fonix presently is
prosecuting an infringement action brought by Articulate against Apple Computer,
which action
20
<PAGE>
is now pending in federal court in Boston, Massachusetts. Such litigation often
results in substantial costs and diversion of management resources and could
materially adversely affect Fonix's business, operating results, and financial
condition. The Company has agreed to pledge the voice recognition technologies
patent as additional security for the repayment of the Company's Debentures.
While the Company has not executed a pledge agreement in favor of the holders of
the Debentures, it may be required to do so in the future. A breach of the
Company's obligations under such Debentures could result in a loss of the
Company's control of or rights under the patent.
Risks of infringement by Fonix upon the technology of unrelated parties or
entities
Fonix is not aware and does not believe that any of its technologies or
products infringe the proprietary rights of third parties. Nevertheless, third
parties may claim infringement with respect to its current or future
technologies or products or products manufactured by others and incorporating
Fonix's technologies. Fonix expects that participants in the human-computer
interaction industry increasingly will be subject to infringement claims as the
number of products and competitors in the industry grows and the functionality
of products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming, result in costly litigation, cause
development delays, or require Fonix to enter into royalty or licensing
agreements. Royalty or license agreements may not be available on acceptable
terms or at all. As a result, infringement claims could have a material adverse
affect on Fonix's business, operating results, and financial condition.
Fonix is subject to the risk that certain key personnel, including key
scientific employees and independent contractors named below, on whom Fonix
depends, in part, for its operations, will cease to be involved with Fonix.
Fonix is dependent on the knowledge, skill and expertise of several key
scientific employees and independent contractors, including John A. Oberteuffer,
Ph.D., C. Hal Hansen, Dale Lynn Shepherd, R. Brian Moncur, Tony R. Martinez,
Ph.D., and Caroline Henton, Ph.D., and its executive officers, Thomas A. Murdock
and Roger D. Dudley. Stephen M. Studdert recently resigned as the Chairman of
the Board of Directors and Chief Executive Officer of Fonix. Mr. Murdock
replaced Mr. Studdert as Chairman of the Board and Chief Executive Officer of
Fonix. Fonix does not believe that Mr. Studdert's resignation will adversely
affect Fonix's operations or financial condition. The loss, however, of any of
the key personnel listed above could materially and adversely affect Fonix's
future business efforts. Although Fonix has taken reasonable steps to protect
its intellectual property rights including obtaining non-competition and
non-disclosure agreements from all of its employees and independent contractors,
if one or more of Fonix's key scientific or executive employees or independent
contractors resigns from Fonix to join a competitor, to the extent not
prohibited by such person's non-competition and non-disclosure agreement, the
loss of such personnel and the employment of such personnel by a competitor
could have a material adverse effect on Fonix. Fonix does not presently have any
key man life insurance on any of its employees.
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Risks associated with pending litigation between Fonix, John R. Clarke, and
Perpetual Growth Fund could adversely affect Fonix if Fonix is required to pay
significant amounts in money damages or as otherwise required by the court.
On August 28, 1998, John R. Clarke and Perpetual Growth Fund, a company
Clarke's spouse purportedly owns, commenced an action against Fonix in federal
court for the Southern District of New York. Clarke and Perpetual Growth assert
claims for breach of contract relating to certain financing Fonix received
during 1998. Specifically, Clarke and Perpetual Growth allege that they entered
into a contract with Fonix under which Fonix agreed to pay them a commission of
5% of all financing provided to Fonix by Southridge Capital Management or its
affiliates. Clarke and Perpetual claim that they are entitled to commissions
with respect to approximately $3,000,000 of equity financing to Fonix in July
and August 1998, and Fonix's offerings of Series D and Series E preferred stock,
totaling together $12,000,000, in August and September 1998.
Fonix believes that the Clarke lawsuit is without merit and filed a
motion to dismiss based upon the court's lack of personal jurisdiction over
Fonix. The court granted Fonix's motion to dismiss, on a conditional basis,
subject to the right of Clarke and Perpetual Growth to produce additional
evidence which would establish jurisdiction of the New York court over Fonix.
Clarke and Perpetual Growth have filed a motion with the New York court that
sought to establish a factual and legal basis for the New York court's exercise
of jurisdiction over Fonix. However, the court has denied that motion. In the
interim, Fonix filed a suit against Clarke and Perpetual Growth in federal court
for the Central District of Utah seeking a declaratory judgment that it does not
owe any money to Clarke and Perpetual Growth. Now that the action in New York
has been dismissed, Fonix intends to vigorously pursue the Utah action. However,
Clarke and Perpetual Growth have appealed the dismissal of the New York action
to the Second Circuit Court of Appeals. If the Court of Appeals reverses the
decision of the lower court, Clarke and Perpetual Growth could prevail in the
lawsuit, in which case Fonix may be required to pay significant amounts of money
damages or other amounts awarded by the court. At a minimum, the ongoing nature
of this action will result in some diversion of management time and effort from
the operation of the business.
In addition to the legal matters described above, Fonix is involved in
other litigation that is routine or does not involve material liabilities and
therefore is not separately discussed in this prospectus.
Year 2000 problems could adversely affect Fonix.
Many computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, many companies' software and computer systems will need to be upgraded
or replaced in order to comply with such Year 2000 requirements. Fonix is
subject to the risk that problems encountered with Year 2000 issues,
22
<PAGE>
either in its internal systems, technologies and products, or in external
systems could adversely affect its operations and financial condition.
In the ordinary course of its business, Fonix tests and evaluates its
technologies and software and hardware products. Fonix believes that all of its
technologies and products generally are Year 2000 compliant, meaning that the
use or occurrence of dates on or after January 1, 2000 will not materially
affect the performance of such technologies or products with respect to four
digit date dependent data or the ability of such products to correctly create,
store, process, and output information related to such data. However, Fonix may
learn that certain of its technologies or products do not contain all necessary
software routines and codes necessary for the accurate calculation, display,
storage, and manipulation of data involving dates. In addition, Fonix has
warranted or expects to warrant that the use or occurrence of dates on or after
January 1, 2000 will not adversely affect the performance of its technologies or
products with respect to four digit date dependent data or the ability to
create, store, process, and output information related to such data. If the end
users of any of Fonix's technologies or products experience Year 2000 problems,
those persons could assert claims for damages.
Fonix uses third party equipment and software that may not be Year 2000
compliant. Fonix is presently conducting a review of key products provided by
outside vendors to determine if their products are Year 2000 compliant. Although
that process is not yet completed, Fonix presently believes that all software
provided by third parties that is critical to its business is Year 2000
compliant. If this third party equipment or software does not operate properly
with regard to the Year 2000 issue, Fonix may incur unexpected expenses to
remedy any problems. Such costs may materially adversely affect Fonix's
business, operating results, and financial condition. In addition, if Fonix's
key systems, or a significant number of its systems, fail as a result of Year
2000 problems Fonix could incur substantial costs and disruption of its
business. Fonix may also experience delays in implementing Year 2000 compliant
software products. Any of these problems could potentially materially adversely
affect Fonix's business, operating results, or financial condition.
In addition, the purchasing patterns of Fonix's licensees, potential
licensees, customers and potential customers may be affected by Year 2000
issues. Many companies are expending significant resources to correct their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to license Fonix technologies or to purchase other
Fonix products. This may adversely affect Fonix's business, operating results,
and financial condition.
Fonix has no dividend history and no intention to pay dividends in the
foreseeable future.
Fonix has never paid dividends on or in connection with its common stock
and does not intend to pay any dividends to common stockholders for the
foreseeable future.
23
<PAGE>
There may be additional unknown risks which could have a negative effect on
Fonix.
The risks and uncertainties described in this section are not the only
ones facing Fonix. Additional risks and uncertainties not presently known to
Fonix or that Fonix currently deems immaterial may also impair its business
operations. If any of the following risks actually occur, Fonix's business,
financial condition, or results of operations could be materially adversely
affected. In such case, the trading price of Fonix common stock could decline
and you may lose all or part of your investment.
Use of proceeds
All of the Shares, if and when sold, are being offered and sold by the
selling stockholders or their pledgees, donees, transferees or other successors
in interest. Fonix will not receive any proceeds from those sales. Fonix will,
however, receive the proceeds of the payment of the exercise price upon the
exercise of the warrants, if any are issued.
Selling stockholders
The selling stockholders are six separate investment entities that are not
affiliated in any way with Fonix or any of its affiliates, and neither the
selling stockholders nor any of their affiliates have any relationship of any
type with Fonix and its affiliates other than the presently established
investment relationships between the selling stockholders, on the one hand, and
Fonix, on the other hand. The selling stockholders have received or may receive
the Shares when they have converted or when they will convert preferred stock
that Fonix sold to them on August 31, 1998, September 30, 1998 and November 13,
1998. The selling stockholders also may obtain Shares when they exercise
warrants they may receive when they convert preferred stock. The following
summary describes how the selling stockholders have received or may receive the
Shares.
March 1998 private placement
In March 1998, Fonix sold 3,333,333 shares of its common stock to the
selling stockholders and one additional investor related to some of the selling
stockholders. In connection with the sale of those shares, the selling
stockholders acquired "reset" rights obligating Fonix to issue to them
additional shares of common stock, referred to in this prospectus as Reset
Shares, for no additional consideration if the average market price of Fonix'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 selling stockholders provided $3,000,000 of additional equity
financing to Fonix, in return for which Fonix issued to them 666,667 additional
shares of common stock.
Series D preferred stock
Fonix and the selling stockholders entered into a Series D Preferred
Stock Purchase Agreement dated August 31, 1998 ("Series D Agreement"). Under the
Series D Agreement,
24
<PAGE>
Fonix issued a total of 500,000 shares of its Series D 4% Convertible Preferred
Stock to five of the selling stockholders in return for the payment by them of a
total of $10,000,000. Additionally, Fonix issued to all of the selling
stockholders, pro rata according to the number of shares of common stock
acquired by them in the March 1998 offering, a total of 608,334 shares of Series
D preferred stock in return for their relinquishment of their contractual right
to receive Reset Shares. In connection with the same transaction, Fonix agreed
to and did issue a total of 1,390,476 Reset Shares of common stock in respect of
the $3,000,000 invested in June and August 1998 by certain of the selling
stockholders. Subsequently, on November 13, 1998, Fonix 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 in cash or common stock at the option of Fonix. The Series D
preferred stock is convertible into common stock at anytime after the earlier of
November 29, 1998 or the date the registration statement of which this
prospectus is a part is declared effective by the Commission. 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:
o the average daily trading volume of Fonix common stock is more than
500,000 shares for the 10-trading-day period before the conversion;
and
o 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.
Each share of Series D 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, which is 110% of the average per share closing bid price
for the 15 trading days immediately preceding August 31, 1998; or
25
<PAGE>
o 90% of the average of the 3 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 Fonix
common stock on the date the warrants are issued and will have a 3- year term.
Any shares of Series D preferred stock not converted as of August 31, 2001 will
automatically be converted into common stock according to whichever of the
conversion formulas above yields the greatest number of shares of common stock.
As of June 1, 1999, 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.
Additionally, Fonix entered into a registration rights agreement with the
purchasers of the Series D preferred stock under which Fonix must register the
common stock issuable upon conversion of the Series D preferred stock, payment
of stock dividends on the Series D preferred stock and exercise of any warrants
issued upon conversion of the Series D preferred stock. Fonix 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
preferred stock and any dividends payable in stock on the preferred stock and
the exercise of the warrants, if any.
Series E preferred stock
Fonix and two of the selling stockholders entered into a Series E
Preferred Stock Exchange and Purchase Agreement dated September 30, 1998
("Series E Agreement"). Under the Series E Agreement, Fonix issued a total of
100,000 shares of its Series E 4% Convertible Preferred Stock to two of the
selling stockholders in return for the payment by them of a total of $2,000,000.
Additionally, Fonix 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.
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 in cash or common stock at the option of Fonix. The Series E
preferred stock is convertible, in whole or in part, into common stock at
anytime after its issuance.
Each share of 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
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<PAGE>
2. the lesser of
o $1.4369, which is 110% of the average per share closing bid price
for the 15 trading days immediately preceding September 30, 1998;
or
o 90% of the average of the 3 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 Fonix
common stock on the date the warrants are issued, will have a 3-year term. Any
shares of Series E preferred stock not converted as of September 30, 2001 will
automatically be converted into common stock according to whichever of the
conversion formulas above yields the greatest number of shares of common stock.
Additionally, Fonix entered into a registration rights agreement with the
purchasers of the Series E preferred stock under which Fonix must register the
common stock issuable upon conversion of the Series E preferred stock, payment
of stock dividends on the Series E preferred stock and exercise of any warrants
issued upon conversion of the Series E preferred stock. Fonix 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 E
preferred stock and any dividends payable in stock on the preferred stock and
the exercise of the warrants, if any.
As of June 1, 1999, 206,500 shares of Series E preferred stock had been
converted into 5,837,916 shares of common stock, including amounts issued as
payment of dividends accrued on the Series E preferred stock converted.
Assuming presently prevailing or decreased market prices for Fonix common
stock, upon conversion of all of the Series D and Series E preferred stock,
Fonix would be obligated to issue more common stock than presently is authorized
by Fonix's certificate of incorporation, as amended to date. Moreover, the
amount of common stock issuable upon full conversion of the Series D and Series
E preferred stock could constitute more than 20% of the total number of shares
of Fonix common stock issued and outstanding immediately before the Series D and
Series E transactions. Consequently, under applicable provisions of Delaware law
and the rules and regulations of the Nasdaq SmallCap Market, Fonix would have to
obtain both:
o the approval of the stockholders entitled to vote at a duly noticed
meeting of the transactions contemplated by the Series D and Series
E Agreements, and
o the approval of a majority of the holders of the issued and
outstanding shares of common stock to approve an amendment to
Fonix's certificate of incorporation to increase the number of
shares of common stock Fonix is authorized to issue.
27
<PAGE>
Under the Series D and Series E Agreements, Fonix covenanted that it would
prepare for and hold a special meeting of its shareholders to address such
issues. Fonix presently is in the process of preparing for that special meeting.
None of the selling stockholders have held any office or maintained any
material relationship with Fonix or any of its predecessors or affiliates over
the past three years. The selling stockholders reserve the right to reduce the
number of Shares offered for sale or to otherwise decline to sell any or all of
the Fonix Shares covered by this prospectus.
The table below provides information about the actual or potential
ownership of shares of Fonix common stock by the selling stockholders as of June
1, 1999 and the number of such shares included for sale in this prospectus. The
number of shares of common stock issuable upon conversion of the Series D and
Series 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 selling stockholders as set
forth in the table below, Fonix and the selling stockholders have assumed a
hypothetical conversion of all of the shares of Series D and shares of Series E
preferred stock owned by the selling stockholder as of June 1, 1999, on which
date the conversion price would have been $0.49. The actual conversion price and
the number of Shares 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 selling
stockholder 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 Fonix common stock following
such conversion. This restriction may be waived by a selling stockholder as to
itself, but not as to other holders of such preferred stock, and only upon not
less than 75 days' notice to Fonix. This restriction does not prevent such
holders from either waiving such limitation 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% of
the outstanding Fonix common stock in a relatively short time frame while never
beneficially owning more than 4.999% of the outstanding Fonix common stock at a
time. For purposes of calculating the number of shares of common stock issuable
to each selling stockholder assuming a full conversion of all the Series D and
Series E preferred stock held by it as set forth below, the effect of such
4.999% limitation has been disregarded. The number of shares issuable to each of
the selling shareholders as described in the table below therefore exceeds the
actual number of shares such selling stockholders may be entitled to
beneficially own upon conversion of the preferred stock. The following
information is not determinative of any selling stockholder's beneficial
ownership of Fonix common stock pursuant to Rule 13d-3 or any other provision
under the Securities Exchange Act of 1934, as amended.
The registration statement of which this prospectus is a part covers up to
68,358,424 shares of common stock issuable upon the conversion of the Series D
and Series E preferred stock, as payment in shares of Fonix common stock payable
as dividends thereon, and issuable upon the
28
<PAGE>
exercise of warrants that may be issued upon the conversion of the Series D and
Series E preferred stock, depending on the conversion formula selected by the
converting preferred stock holder. Because the specific circumstances of the
conversions of the Series D and Series E preferred stock is unascertainable at
this time, the precise total number of shares of Fonix common stock offered by
each Selling Stockholder cannot be fixed. The numbers in the table below
represent the number of shares of Fonix common stock that would be issuable, and
hence offered hereby, assuming the conversion of all of the Series D and E
preferred stock as of June 1, 1999. The actual number of shares of Fonix common
stock offered hereby may differ according to the actual number of shares issued
upon such conversions. Additionally, there is no assurance that the Selling
Stockholders will sell any or all of the Shares covered by the registration
statement of which this prospectus is a part.
<TABLE>
<CAPTION>
Common
Percentage Stock Percen-
Shares of Owned Number Number tage of
Common By or of Shares of Common
Stock Issuable of Shares Stock
Owned by to Common of Com- Bene-
or Issuable Selling Stock mon ficially
to Selling Stock- Offered Stock Owned
Name of Selling Stockholders holders Hereby Owned After
Stockholders Prior to Prior to (1) After the
Offering Offering Offering Offering
- ------------------------------ ------------------- -------------- -------------- - ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Dominion Capital 14,864,190 (2) 21.04% 12,299,28 (3) (3)
Fund, Ltd.
Sovereign Partners, 17,928,306 (4) 25.37% 14,483,51 (3) (3)
LP
Canadian Advantage 2,176,385 (5) 3.08% 2,193,274 (3) (3)
Limited Partnership
Endeavor Capital 2,217,432 (6) 3.14% 2,259,610 (3) (3)
Fund, S.A.
JNC Opportunity 18,190,498 (7) 25.74% 18,536,49 (3) (3)
Fund Ltd.
Diversified Strategies 852,871 (8) 1.21% 869,093 (3) (3)
Fund, L.P.
- ---------------------
</TABLE>
(1) The numbers set forth below represent the number of shares of Fonix
common stock that would be issuable, and hence offered hereby,
assuming the conversion of all of the
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<PAGE>
Series D and Series E preferred stock as of June 1, 1999. The
actual number of shares of Fonix common stock offered hereby may
differ according to the actual number of shares issued upon such
conversions.
(2) Includes:
2,688,915 shares of common stock issued upon
conversion of 98,000 shares of Series E
preferred stock, together with shares issued
as payment of dividends accrued thereon, as
of June 1, 1999;
8,307,233 shares of common stock issuable upon a
hypothetical conversion of 197,514 shares of
Series D preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
thereon, as of June 1, 1999;
1,131,919 shares of common stock issuable upon a
hypothetical conversion of 27,000 shares of
Series E preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
thereon, as of June 1, 1999;
2,661,123 shares of common stock issuable upon the
hypothetical conversion of $1,218,750
principal amount of Series C 5% Convertible
Debentures issued January 29, 1999, and
March 3, 1999, together with shares issuable
as interest accrued thereon, assuming such
principal amount were converted in full as
of June 1, 1999; 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 5%
Convertible Debentures.
(3) There is no assurance that the selling stockholders will sell
any or all of the Shares offered hereby.
(4) Includes:
3,149,002 shares of common stock issued upon
conversion of 108,500 shares of Series E
preferred stock, together with shares issued
as payment of dividends accrued thereon, as
of June 1, 1999;
10,439,413 shares of common stock issuable upon a
hypothetical conversion of 248,209 shares of
Series D preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
691,728 shares of common stock issuable upon a
hypothetical conversion of 16,500 shares of
Series E preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
thereon, as of June 1, 1999;
3,548,163 shares of common stock issuable upon the
hypothetical conversion of $1,625,000
principal amount of Series C 5% Convertible
Debentures issued January 29, 1999, and
March 3, 1999, together with shares issuable
as interest accrued thereon, assuming such
principal amount were converted in full as
of June 1, 1999; 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 5%
Convertible Debentures.
30
<PAGE>
(5) Includes:
1,288,479 shares of common stock issued upon
conversion of 36,000 shares of Series D
preferred stock, together with shares issued
as payment of dividends accrued thereon, as
of June 1, 1999; and
887,906 shares of common stock issuable upon a
hypothetical conversion of 21,111 shares of
Series D preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
thereon, as of June 1, 1999.
(6) Comprised of:
2,217,432 shares of common stock issuable upon a
hypothetical conversion of 52,722 shares of
Series D preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
thereon, as of June 1, 1999.
(7) Comprised of:
18,190,498 shares of common stock issuable upon a
hypothetical conversion of 432,500 shares of
Series D preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
thereon, as of June 1, 1999.
(8) Comprised of:
852,871 shares of common stock issuable upon a
hypothetical conversion of 20,278 shares of
Series D preferred stock owned by the
selling stockholder, together with shares
issued as payment of dividends accrued
thereon, as of June 1, 1999.
The following table lists the natural persons who control each of the
selling stockholders.
31
<PAGE>
<TABLE>
<CAPTION>
Selling Stockholder Name of Natural Person Who Controls
- ------------------------------------------------------- --------------------------------------------------------
<S> <C>
Dominion Capital Fund, Ltd. Nina Ray and Carl O' Connell
Sovereign Partners, LP Steven M. Hicks and Daniel Pickett
Canadian Advantage Limited Partnership Mark Valentine and Ian McKinnon
Endeavor Capital Fund, S.A Shmuli Margulies
JNC Opportunity Fund Ltd. Neil T. Chau and James Q. Chau
Diversified Strategies Fund, L.P. Neil T. Chau and James Q. Chau
</TABLE>
Plan of distribution
Once the registration statement of which this prospectus is part becomes
effective with the Commission, the Shares covered by this prospectus may be
offered and sold from time to time by the selling stockholders or their
pledgees, donees, transferees or successors in interest. Such sales may be made
on the NASDAQ SmallCap Market, in the over-the-counter market or otherwise, at
prices and under terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The Shares may be sold by any means
permitted under law, including one or more of the following:
o a block trade in which a broker-dealer engaged by the selling
stockholder will attempt to sell the Shares as agent, but may
position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by such broker
-dealer for its account under this prospectus;
o an over-the-counter distribution in accordance with the rules of
the NASDAQ SmallCap Market;
o ordinary brokerage transactions in which the broker solicits
purchasers; and
o privately negotiated transactions.
In effecting sales, broker-dealers engaged by the selling stockholders may
arrange for other broker-dealers to participate in the resales.
In connection with distributions of the Shares or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Fonix Shares covered by this prospectus in the
32
<PAGE>
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also sell the Fonix Shares short and redeliver the
Fonix Shares to close out such short positions. The selling stockholders may
also enter into option or other transactions with broker-dealers which require
the delivery to the broker-dealer of the Fonix Shares, which the broker-dealer
may resell or otherwise transfer under this prospectus. The selling stockholders
may also loan or pledge the Fonix Shares registered hereunder to a broker-dealer
and the broker-dealer may sell the shares so loaned or upon a default the
broker-dealer may effect sales of the pledged shares pursuant to this
prospectus.
Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the selling stockholders in amounts
to be negotiated in connection with the sale. Such broker-dealers and any other
participating broker-dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Fonix has advised the selling stockholders that the anti-manipulation
rules under the Securities Exchange Act of 1934 may apply to sales of shares in
the market and to the activities of the selling stockholders and their
affiliates. In addition, Fonix will make copies of this prospectus available to
the selling stockholders and has informed them of the need for delivery of
copies of this prospectus to purchasers at or prior to the time of any sale of
the shares offered hereby.
All costs, expenses and fees in connection with the registration of the
shares will be borne by Fonix. Commissions and discounts, if any, attributable
to the sales of the Shares will be borne by the selling stockholders. The
selling stockholders may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the Fonix Shares against certain
liabilities, including liabilities arising under the Securities Act of 1933.
Fonix will not receive any proceeds from the sale of the Fonix Shares.
Fonix has agreed with the selling stockholders to keep the registration
statement of which this prospectus constitutes a part effective for a period of
3 years. Trading of any unsold shares after the expiration of such period will
be subject to compliance with all applicable securities laws, including Rule
144.
The selling stockholders are not obligated to sell any or all of the Fonix
Shares covered by this prospectus.
In order to comply with the securities laws of certain states, the Shares
will be sold in such jurisdictions only through registered or licensed brokers
or dealers. In addition, the sale and issuance of Shares may be subject to the
notice filing requirements of certain states.
33
<PAGE>
Legal matters
The validity of the Shares offered hereby will be passed upon for Fonix by
Durham Jones & Pinegar, P.C., 50 South Main Street, Suite 800, Salt Lake City,
Utah 84144.
Material Changes
The following unaudited pro forma financial information reflects the
acquisitions of AcuVoice and Articulate during 1998, which constituted business
combinations accounted for as purchases.
On May 19, 1999, the Company entered into an agreement for the sale of the
operations and a significant portion of the assets of its HealthCare Solutions
Group to Lernout & Hauspie Speech Products N.V. However, because the
requirements to consummate the sale have not yet been met, the Company does not
give effect to the transaction in the following pro forma financial statements.
34
<PAGE>
Fonix Corporation and Subsidiaries
[A Development Stage Company]
Unaudited Pro Forma Condensed Consolidating Statements of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Fonix Acuvoice Articulate Adjustments Consolidated
Corporation (Note 1) (Note 1) (Note 2) Pro Forma
---------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 2,889,684 $ 50,808 $ 723,040 $ (4,073) (a) $ 3,659,459
Cost of revenues 76,344 - 99,020 - 175,364
---------------- ------------ -------------- ------------- --------------
Gross margin 2,813,340 50,808 624,020 (4,073) 3,484,095
---------------- ------------ -------------- ------------- --------------
Expenses:
Product development and research 13,620,748 60,774 1,077,326 (18,762) (a) 14,740,086
Purchased in-process research and
development 13,136,000 - - (13,136,000) (b) -
Selling, general and administrative 12,612,015 176,115 1,381,017 2,059,743 (c) 16,209,276
(19,614) (a)
---------------- ------------ -------------- ------------- --------------
Total expenses 39,368,763 236,889 2,458,343 (11,114,633) 30,949,362
---------------- ------------ -------------- ------------- --------------
Loss from operations (36,555,423) (186,081) (1,834,323) 11,110,560 (27,465,267)
---------------- ------------ -------------- ------------- --------------
Other income (expense) (451,782) (175) (172,646) (269,016) (d) (893,619)
Cancellation of common stock reset
provision (6,111,577) - - - (6,111,577)
---------------- ------------ -------------- ------------- --------------
Total other income (expense), net (6,563,359) (175) (172,646) (269,016) (7,005,196)
---------------- ------------ -------------- ------------- --------------
Net loss (43,118,782) (186,256) (2,006,969) 10,841,544 (34,470,463)
Preferred stock dividends (4,797,249) - - (323,016) (e) (5,120,265)
---------------- ------------ -------------- ------------- --------------
Net loss attributable to common
stockholders $ (47,916,031) $ (186,256) $ (2,006,969) $ 10,518,528 $ (39,590,728)
================ ============ ============== ============= ==============
Basic and diluted net loss per common
share $ (0.91) $ (0.67)
================ ==============
Weighted average common shares outstanding 52,511,185 6,767,267 (f) 59,278,452
================ ============= ==============
</TABLE>
P-1
<PAGE>
FONIX CORPORATION AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATING
STATEMENTS OF OPERATIONS
NOTE 1. BASIS OF PRESENTATION
AcuVoice, Inc. - In March 1998, the Company acquired AcuVoice, Inc.
("AcuVoice"). AcuVoice developed and marketed TTS technologies and products
directly to end-users, systems integrators and original equipment manufacturers
for use in the telecommunications, multi-media, education and assistive
technology markets. These same products and services are now provided by the
Company's Interactive Technologies Solutions Group. The Company issued 2,692,216
shares of restricted common stock (having a market value of $16,995,972 on that
date) and paid cash of approximately $8,000,000 for all of the then outstanding
common shares of AcuVoice. The acquisition was accounted for as a purchase.
Of the 2,692,216 shares of stock issued, 80,000 shares were placed in escrow
against which any claims for breach of warranty against the former shareholders
of AcuVoice could be asserted by the Company. On March 12, 1999, the Company
submitted a claim for the shares deposited into the escrow account based on the
Company's assertion of misrepresentations made to the Company.
The purchase price allocations to tangible assets included $253,881 of cash,
$13,728 of accounts receivable, $9,902 of fixed assets and $800 of prepaid
expenses. The purchase price allocations to liabilities assumed included $22,929
of accounts payable and accrued expenses and $599,250 of notes payable.
The excess of the purchase price over the estimated fair market value of the
acquired tangible net assets of AcuVoice was $25,339,840, of which $11,192,000
was capitalized as the purchase cost of the completed technology, $4,832,840 was
capitalized as goodwill and $9,315,000 was expensed as purchased in-process
research and development.
Articulate Systems, Inc. - In September 1998, the Company acquired Articulate
Systems, Inc. ("Articulate"). Articulate was a provider of sophisticated voice
recognition products to specialized segments of the health care industry. These
same products and services are now provided by the Company's HealthCare
Solutions Group, which the Company has since agreed to sell to Lernout & Hauspie
N.V. The Company delivered 5,140,751 shares of restricted common stock (having a
market value of $8,353,720 on that date), a cash payment of $7,787,249 and 8.5
percent demand notes in the aggregate amount of $4,747,339 for all the then
outstanding common shares of Articulate. Additionally, the Company issued 98,132
stock options in exchange for all Articulate stock options outstanding on the
date of acquisition at an exchange rate based on the relative fair value of the
companies' stocks. The estimated fair value of the options issued was $130,000
using the Black-Scholes option pricing model with weighted average assumptions
of a risk-free rate of 5.1 percent, expected life of 2.5 years, expected
volatility of 85 percent and an expected dividend yield of 0 percent. Subsequent
to the acquisition, the Company agreed to pay several Articulate employees
incentive compensation for continued employment in the aggregate amount of
$857,000. The Company issued 8.5 percent demand notes for $452,900 and recorded
an accrued liability of $404,100 for the balance of this obligation. The
Articulate acquisition was accounted for as a purchase.
Of the 5,140,751 shares of common stock issued, 315,575 shares were placed in
escrow against which any claims for breach of warranty against the former
shareholders of Articulate could be asserted by the Company and 1,985,000 shares
were placed in escrow to be converted to a new class of non-voting common stock
upon approval of the establishment of such a class of stock by the shareholders
of the Company.
The purchase price allocations to tangible assets included $286,954 of cash,
$62,835 of accounts receivable, $57,165 of inventory, $14,043 of prepaid
expenses and $117,540 of fixed assets. The purchase price allocations to
liabilities assumed included $310,008 of accounts payable and accrued expenses,
$1,900,000 of notes payable and $929,690 of deferred revenue.
The excess of the purchase price over the estimated fair market value of the
P-2
<PAGE>
acquired tangible net assets of Articulate was $23,714,256, of which $13,945,000
was capitalized as the purchase cost of completed technology, $5,948,256 was
capitalized as goodwill and other intangibles and $3,821,000 was expensed as
purchased in-process research and development.
Papyrus Associates, Inc. and Papyrus Development Corporation - In October 1998,
the Company acquired Papyrus Associates, Inc. ("PAI"), and Papyrus Development
Corporation ("PDC") (together with PAI, "Papyrus"). PAI developed, marketed and
supported printing and cursive handwriting recognition software for "personal
digital assistants", pen tablets and mobile phones under the trademark,
Allegro(TM). PDC was a systems integration provider with expertise and
intellectual property in imbedded systems and enhanced Internet applications.
These same products and services are now provided by the Company's Interactive
Technologies Solutions Group. The Company issued 3,111,114 shares of restricted
common stock (having a market value of $3,208,336 on that date) and promissory
notes aggregating $1,710,000 for all of the then outstanding common shares of
PAI and PDC.
Of the 3,111,114 shares of common stock issued, 311,106 shares were placed in
escrow against which any claims for breach of warranty against the former
shareholders of Papyrus could be asserted by the Company.
The purchase price allocation to tangible assets included $10,342 of cash and
$7,629 of accounts receivable. The purchase price allocation to liabilities
assumed included $118,293 of accounts payable and accrued liabilities. The
excess of the purchase price over the estimated fair market value of the
acquired tangible net assets of Papyrus was $5,018,658 and was capitalized as
goodwill.
The Company incurred $821,197 in research and development expenses related to
services performed by Papyrus prior to the date of the acquisition.
The MRC Group, Inc. - On December 31, 1998, the Company acquired certain assets
of The MRC Group, Inc. ("MRC") relating to MRC's selling, marketing and
servicing of the PowerScribe(R) products. In consideration for the assets, the
Company agreed to pay MRC $219,833 less certain amounts then owed to the
Company, plus $133,333 per month for each of the three months immediately
following the closing, less certain credits. Subsequent to December 31, 1998,
the remaining amounts owing related to this acquisition are $216,666.
The purchase price allocations to tangible assets included $142,852 of accounts
receivable and $40,000 of fixed assets. The purchase price allocations to
liabilities assumed included $311,588 of accrued expenses and $849,742 of
deferred revenue. Additionally, $152,839 of accounts receivable and $987,531 of
deferred revenue from Articulate were eliminated in purchase accounting.
The excess of the purchase price over the estimated fair market value of the
acquired tangible net assets of MRC was $314,761 which was capitalized as
goodwill.
Proforma Financial Statement Data - The accompanying unaudited pro forma
financial statement data for the year ended December 31, 1998 present the
results of operations of the Company as if the acquisitions of AcuVoice and
Articulate had occurred at the beginning of the year. The pro forma results have
been prepared for illustrative purposes only and do not purport to be indicative
of future results or what would have occurred had the acquisitions been made at
the beginning of the year. The results of operations of Papyrus are not included
in the unaudited pro forma financial statement data as the acquisition was not
considered significant to the Company. The results of operations of MRC are not
included in the unaudited pro forma financial statement data as the acquisition
did not constitute the purchase of a business.
The accompanying unaudited pro forma statements of operations should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's annual Report on Form 10-K for the year ended December
31, 1998 and the historical financial statements of AcuVoice and Articulate and
the notes thereto included in the Company's Current Reports on Form 8-K.
P-3
<PAGE>
NOTE 2. PRO FORMA ADJUSTMENTS
(a) The historical operations of AcuVoice for the period from March 14,
1998 to March 31, 1998 are included in the operating results of Fonix
Corporation for the year ended December 31, 1998. The results of this
18- day period are eliminated from the pro forma condensed
consolidated statement of operations so as to not be duplicative
when consolidating with the results from the three-month
period of prior to the acquisition of AcuVoice.
(b) Purchased in-process research and development in the amounts of
$9,315,000 and $3,821,000 were expensed at the date of the
acquisitions of AcuVoice and Articulate, respectively. These expenses
were a non-recurring charge directly attributable to the acquisitions
and are therefore eliminated from the pro forma condensed
consolidating statement of operations.
(c) Amortization of purchased core technology and goodwill of $11,192,000
and $4,832,840, respectively, related to the acquisition of AcuVoice
and $13,945,000 and $5,948,256, respectively, related to the
acquisition of Articulate. These amounts are being amortized on a
straight-line basis over a period of eight years.
(d) Interest on 8.5 percent demand notes issued to the Articulate
shareholders.
(e) Dividends and beneficial conversion features related to the issuance
of Series D 4% Convertible Preferred Stock, which proceeds were used
to fund the cash portion of the purchase price of Articulate.
(f) Issuance of 2,692,216 shares and 5,140,751 shares of restricted
common stock in connection with the acquisitions of AcuVoice and
Articulate, respectively. The change in the weighted average number
of common shares outstanding for the year ended December 31, 1998 is
the incremental increase for the period from January 1, 1998,
through the date of acquisition.
P-4
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Summary about Fonix and this offering................................................................................3
Recent developments..................................................................................................5
Important information incorporated by reference......................................................................7
Where to get additional information..................................................................................8
Explanation about forward-looking information........................................................................9
Risk factors........................................................................................................10
Use of proceeds.....................................................................................................25
Selling stockholders................................................................................................25
Plan of distribution................................................................................................33
Legal matters.......................................................................................................35
Material changes....................................................................................................35
</TABLE>
--------------------
Fonix Corporation
68,358,424
SHARES
COMMON STOCK
--------------------
PROSPECTUS
-------------------
[August ___], 1999
34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, all of which will be borne by the Company. All amounts shown are
estimates except the Securities and Exchange Commission registration fee.
Filing Fee - Securities and Exchange Commission $ 24,701
Legal fees and expenses of the Company 50,000
Accounting fees and expenses 35,000
Blue Sky fees and expenses --
Printing expenses 500
Miscellaneous expenses 5,000
----------
Total Expenses $ 115,201
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of the
State of Delaware empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees)
II-1
<PAGE>
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer
of a corporation has been successful on the merits or otherwise in the defense
of any such action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that the indemnification provided for
by Section 145 shall not be deemed exclusive of any other rights which the
indemnified party may be entitled; that indemnification provided by Section 145
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of such person's heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the General Corporation Law or the State of
Delaware provides that a certificate of incorporation may contain a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the
liability of the director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.
II-2
<PAGE>
Article Ninth of the registrant's Charter provides that, the
registrant shall, "to the fullest extent permitted by Section 145 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders or disinterested Directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person."
Article VII, Section 7 of the registrant's Bylaws further provides
that the registrant "shall indemnify its officers, directors, employees and
agents to the extent permitted by the General Corporation Law of Delaware."
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
II-3
<PAGE>
ITEM 16. LIST OF EXHIBITS.
5 Opinion of Durham Jones & Pinegar, P.C.*
23.1 Consent of Durham Jones & Pinegar, P.C., included in Exhibit 5
filed herewith.*
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Pritchett, Siler & Hardy, P.C.
24 Power of Attorney*
99.1 Securities Purchase Agreement by and among Fonix Corporation and JNC
Strategic Fund Ltd., dated December 21, 1998*
99.2 Securities Purchase Agreement among Fonix Corporation and the
investors identified therein dated January 29, 1999, as supplemented
on March 3, 1999*
- -------------------
*Filed previously
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement. Notwithstanding
the foregoing, any increase or decrease in the volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any derivation from the low or
high
II-4
<PAGE>
end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in
this Registration Statement; provided, however, that paragraphs
(1)(i) and (1)(ii) do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), that are incorporated by reference
in this Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Corporation pursuant to the indemnification provisions described herein,
or otherwise, the
II-5
<PAGE>
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 3 to
the Registration Statement (File No. 333-67573) to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Salt Lake City, State
of Utah, on this 11th day of August, 1999.
Fonix Corporation
By:/s/ Thomas A. Murdock
---------------------------
Thomas A. Murdock
President, Chief Executive Officer
II-7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
- ------------ ---------------------- ------
/s/ Thomas A. Murdock Chief Executive Officer, President, August 11, 1999
- -------------------------- Chairman of the Board of Directors
Thomas A. Murdock (Principal Executive Officer)
/s/ Thomas A. Murdock* Executive Vice President Finance August 11, 1999
- -------------------------- and Director
Roger D. Dudley (Principal Financial Officer)
/s/ Thomas A. Murdock* Chief Financial Officer (Principal August 11, 1999
- -------------------------- Accounting Officer)
Douglas L. Rex
/s/ Thomas A. Murdock* Director August 11, 1999
- --------------------------
Joseph Verner Reed
/s/ Thomas A. Murdock* Director August 11, 1999
- --------------------------
John A. Oberteuffer, Ph.D.
/s/ Thomas A. Murdock* Director August 11, 1999
- --------------------------
Rick D. Nydegger
/s/ Thomas A. Murdock* Director August 11, 1999
- --------------------------
Reginald K. Brack
* As Attorney-in-fact
II-8
<PAGE>
EXHIBIT INDEX
5 Opinion of Durham Jones & Pinegar, P.C.*
23.1 Consent of Durham Jones & Pinegar, P.C., included in Exhibit 5 filed
herewith.*
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Pritchett, Siler & Hardy, P.C.
24 Power of Attorney*
99.1 Securities Purchase Agreement by and among Fonix Corporation and JNC
Strategic Fund Ltd., dated December 21, 1998*
99.2 Securities Purchase Agreement among Fonix Corporation and the
investors identified therein dated January 29, 1999, as supplemented
on March 3, 1999*
- -----------------
* Previously Filed
II-9
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form S-3 of our report dated April
14, 1999 included in Fonix Corporation's Form 10-K (Amendment No. 1) for the
year ended December 31, 1998 and to all references to our firm included in this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 10, 1999
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 4 to
Registration Statement No. 333-67573 of fonixTM corporation on Form S-3 of our
report dated March 28, 1997, appearing in the Amended Annual Report on Form
10-K/A of fonixTM corporation for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Salt Lake City, Utah
August 10, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the accompanying
amendment number 4 to the registration statement on Form S-3, of our report
dated March 4, 1996 which is included in Form 10-K/A of Fonix Corporation for
the year ended December 31, 1998 (relating to the financial statements of Fonix
Corporation for the period from the date of inception on October 1, 1993 through
December 31, 1995, which financial statements are not separately presented in
the Form 10- K), and to the reference to us under the heading "Experts" in the
prospectus which is included in the accompanying registration statement.
/s/ Pritchett, Siler & Hardy, P.C.
PRITCHETT, SILER & HARDY, P.C.
Salt Lake City, Utah
August 10, 1999
