SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2002, or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
------ ----------
Commission File No. 0-23862
Fonix Corporation
(Exact name of registrant as specified in its charter)
Delaware 87-0380088
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
180 W. Election Road, Suite 210
Draper, Utah 84020
(Address of principal executive offices with zip code)
(801) 553-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common
Stock ($0.0001 par value per share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No[ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $9,185,369, calculated using a closing price of
$0.0137 per share on March 21, 2003. For purposes of this calculation, the
registrant has included only the number of shares directly held by its officers
and directors as of March 21, 2003 (and not counting shares beneficially owned
on that date), in determining the shares held by non-affiliates. As of March 21,
2003, there were issued and outstanding 670,496,603 (16,762,415 post-reverse
stock split) shares of the Company's Class A common stock.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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Fonix Corporation
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Page
Item 1. Business 3
Item 2. Properties 26
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 29
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 32
Item 8. Financial Statements and Supplementary Data 52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 52
Part III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 56
Item 12. Security Ownership of Certain Beneficial
Owners and Management 60
Item 13. Certain Relationships and Related Transactions 61
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 63
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PART I
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED BY
THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED BELOW IN THE SECTION
ENTITLED "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS ANNUAL REPORT. THE
FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH THE COMPANY'S FINANCIAL
STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS DOCUMENT.
General
Fonix Corporation, a Delaware corporation ("Fonix" or the "Company"),
delivers speech interface solutions and applications ("Products") that empower
people to interact conversationally with information systems and computing
devices. Fonix Products are based on the Company's speech-enabling technologies,
which include text- to-speech ("TTS") and neural network-based automated speech
recognition ("ASR"). ASR and TTS technologies are sometimes collectively
referred to in this report as "Core Technologies." The Company believes its
intuitive speech-enabling Products enhance user productivity and efficiency in a
broad range of markets including mobile and wireless devices; embedded speech
solutions for automotive applications; computer telephony and server
applications; assistive and language learning applications for everyday use with
computers and electronic devices; and end-to-end distributive speech processing
and connectivity.
Prior to 2002, the Company was focused on research and development
("R&D") and prototype development projects for customized applications. The R&D
and prototype development utilized the Core Technologies and development and
marketing of multiple operating systems and hardware platforms. The transition
from R&D and prototype development to standard speech Products began in 2002.
The Company expects to leverage its standard speech Products across multiple
platforms, multiple products, and markets.
The Company currently markets speech Products that utilize its Core
Technologies to software developers, consumer electronics manufacturers,
micro-processor manufacturers, third-party product developers, operating system
developers, network developers, and wireless operators, as well as directly to
consumers. The Company currently focuses its marketing efforts toward embedded
systems for automotive applications and wireless and mobile electronic devices,
server-based solutions for telephony voice-activated applications, and
enterprise distributive speech solutions. The Company pursues revenue
opportunities through generation of royalty fees, product and technology
licenses, product sales, non-recurring engineering fees, and support agreements.
Speech-enabled Products are a value-added interface solution for
computing and communications devices. The Company believes that manufacturers of
consumer electronics products, software developers, wireless operators,
telephony distributors, system integrators, and value added re-sellers ("VARs")
can simplify the use and increase the functionality of their products and
services by integrating the Company's Products, resulting in broader market
opportunities and significant competitive advantage. Fonix Products support
multiple hardware and software platforms, are environment and speaker
independent, optimize cost and power efficiencies, provide easy integration
within a relatively small memory requirement for embedded applications, and
enhance scalability for high channel capacity for computer telephony and
server-based systems.
The Company believes that it is well positioned to serve markets that
are rapidly adopting speech-enabled solutions and applications. As memory
requirements, noise robustness, recognition accuracy, and efficiency of speech
solutions become increasingly critical, Fonix expects that its Products will
provide compelling solutions to meet highly competitive customer demands.
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Market Focus
Newly streamlined and focused operations have resulted in delivery of
Fonix Products in five primary market areas:
o Wireless /mobile devices and game consoles: Cell phones, personal
data assistants ("PDAs"), PDAs with PhoneEdition, "smartphones,"
and entertainment game consoles.
o Telephony and server applications: Automated phone directory
applications.
o Everyday speech interface applications: "e.Speech(TM)" for
Assistive, language learning, and PC and PDA applications.
o End-to-end: Distributive speech solution; embedded devices
connected to servers.
o Automotive: Speech enabled interface with automotive multi-media
systems and electronic functions.
FONIX MOBILE/WIRELESS AND GAME CONSOLES
Fonix provides intuitive speech interface Products for mobile and
wireless devices, such as PDAs, PDAs with Phone Edition, new "smartphones,"
other mobile phones, game consoles, web pads, wireless communication devices,
and other consumer electronics. Fonix believes that in many cases, a significant
deterrent to full functionality and more widespread use of these powerful and
small computing devices is the current dependence on a keyboard, touch screen
and/or computer mouse to interface with the device. Fonix also believes that
speech- enabling applications that provide an intuitive user interface will
increase the utility of these devices and improve access to information. Other
product development initiatives that may drive additional interest in
speech-enabling solutions include electronic books; wearable computers; smart
toys and appliances such as VCRs, answering machines, wireless climate control
systems; and command-and-control applications.
The handheld device market has experienced radical change as devices
have added more powerful processors, more memory, and wireless connection
capabilities. Technologies like Wi-Fi (802.11), Bluetooth, and 2.5-3G wireless
have changed the way consumers use their devices. Handheld devices are no longer
just an address book or calendar; now, these devices are being used for
activities such as accessing the Internet, and providing real time e-mail, and
navigation. As the line between PDAs and mobile phones starts to blur and a new
category of devices--smartphones--emerges, access to information and device
functionality increase with the use of speech enabling solutions and
applications. And as these devices become smaller, voice solutions become
attractive means to easily and safely access the Internet, manage e-mail, and
even navigate applications on these devices. Fonix Products for mobile/wireless
devices are described below.
o Fonix VoiceSuite
Fonix offers a fully integrated solution under the Fonix
VoiceSuite(R) umbrella. The first Product of the VoiceSuite is Fonix
VoiceDialTM. Fonix VoiceDial is a totally interactive, hands-free software
application that enables a user to place calls by number or by contact name,
fully integrated with Microsoft Outlook(R), with no voice training required. A
user simply speaks the number or name and Fonix VoiceDial makes the call. With
Fonix VoiceDial, true mobility is now possible through the power of speech.
Fonix has announced support for the following devices:
Microsoft PocketPC(R) Phone Edition Devices
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T-Mobile Pocket PC Phone Edition
AT&T Siemens SX56
O2 XDA
HP Journada 928
Hitachi Multimedia Communicator
Samsung i700
Microsoft Smartphone Devices
Orange SPV
Bluetooth Devices
Bluetooth enabled Microsoft PocketPC 2002 PDA
Sony-Ericsson T68i mobile phone
Bluetooth headset
Fonix also expects to support devices with Symbian and Palm operating
systems. Subject to resource allocation and cooperation with Symbian and Palm,
Fonix expects to deliver the VoiceSuite on Symbian and Palm devices in 2003.
Future Fonix VoiceSuite Products include Fonix VoiceEmail(TM), Fonix
VoiceInternet(TM), and Fonix VoiceCalendar(TM).
o Fonix VoiceEmail features the ability to conduct
"e-mail triage" by voice. Access, respond and
have emails read to the user through the device.
o Fonix VoiceInternet features the ability to
navigate the Internet by voice. It also allows
for access to databases on business websites.
o Fonix VoiceCalendar features the ability to
manage a calendar, including rescheduling
appointments.
All components of the Fonix VoiceSuite are currently available or
Fonix ancipates that they will be available in spring/summer of 2003. The Suite
will support American and UK English, German, French, and Spanish with
additional languages in development. Fonix is developing additional solutions
based on Microsoft PocketPC Phone Edition, Microsoft Smartphone, Microsoft
PocketPC, Symbian, and Palm operating systems.
o Platforms, Ports, Processors
Fonix supports multiple microprocessors ("Chips") and operating
systems ("OS"). The following chart identifies some of the Chips and OS
platforms Fonix supports:
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- -------------------------------------- -----------------------------------------------------------------------------
Types of Operating Systems
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
No OS
Support
Types of Microprocessors Win32 WinCE VxWorks QNX Linux Required
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Analog Devices
Blackfin ADSP-21535 o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
ARM
ARM o o
ARM 9 o o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Epson
S1C33 Family
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Hitachi
SH-3 o
SH-4 o o o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Intel
SA-1110 o
PXA250 o o
X86 o o o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
MIPS
MIPS 32-bit processor Family o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Motorola
MGT5100 o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
NeoMagic
MiMagic3 (NMS7210) o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
TI
OMAP1510 (ARM9 core only) o
- -------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
o Game Consoles
In February 2003, the Microsoft Xbox(R) Development Kit with Fonix
ASR was first available for game developers. Game developers for the Microsoft
Xbox are now able to easily add Fonix speaker-independent ASR to games. Fonix
speaker-independent speech recognition allows the game developer to author
multiple vocabulary sets and select between various active vocabularies. These
vocabularies may then be used as voice-activated commands during game play.
Fonix is working to deliver similar solutions for game consoles offered by other
manufacturers. Fonix also intends in the future to offer services to help game
developers successfully deliver speech-enabled games.
o Fonix Mobile/Wireless and Game Consoles Market Opportunities
As new developments and initiatives drive interest in speech-enabled
mobile and wireless solutions, Fonix is well positioned to meet demand and grow
with the market. Fonix's partners and OEMs provide significant potential to
reach users in many market areas.
Page 6
Fonix has already seen significant early market response to
VoiceDial. With the additional support for German, French, and Spanish, Fonix
will extend its sales efforts to better address the European market. Further,
subject to continued market growth, Fonix intends to add support for additional
languages in order to address more markets.
Specific to VoiceDial, Fonix expects to deliver in the following
channels:
o Original Equipment Manufacturers ("OEM"): The first
VoiceDial contract delivered the Product on the Hewlett
Packard ("HP") Journada(R)928 WDA. Fonix is aggressively
pursuing additional OEM opportunities with its partners:
Microsoft, Intel, TI, Accelent, NeoMagic, HP, Hitachi,
Siemens, O2, and Samsung. There is also an opportunity to
include VoiceDial on media delivered with devices. For
example, mobile carriers, retailers, or OEMs could all
include applications on CDs or memory cards. These
applications could be fully licensed versions or 15- day
trials that require payment to unlock. Recent devices have
been delivered with trial programs included on memory cards
or on CDs. This allows OEMs to deliver additional
functionality to customers without additional expense.
o Mobile Operators: Fonix will attempt to market VoiceDial
and future applications in the Fonix VoiceSuite through
mobile operators, such as AT&T Wireless, T-Mobile, Orange,
Vodaphone, and Verizon. Fonix anticipates that the use of
VoiceDial will increase the monthly air time use of
wireless devices. Early analysis indicates that making it
easier for customers to access all of their contacts likely
will result in an increase in air time.
Fonix speech applications also offer mobile operators the
ability to add additional high margin accessory sales to
their store operations. Because most mobile operators
subsidize their handset sales, the accessory market is
attractive for additional revenue. Fonix Products could be
delivered in many methods including having boxes on the
shelf, loading software directly on the device, or
over-the-air activation.
o Innovative Retail Opportunities: The market for speech
applications sold over the Internet is beginning to mature.
Handango, PocketGear, PocketPC Passion, and others will
allow Fonix to distribute VoiceDial in high traffic
Internet locations without the distribution costs of
working with retail stores. Fonix also provides its
Products on its website.
o Bundled Solutions: Other complementary solutions are also
channels for Fonix distribution. Companies like Travroute
have integrated Fonix solutions into their applications.
Fonix foresees partners shipping the full VoiceDial
functionality as a complement to their applications and
devices.
Fonix has several competitors in the speaker-independent speech
market. Companies like ART, Voice Signal, and Neuvoice all deliver
speaker-dependent and speaker-independent solutions. Other speech companies like
IBM and Speechworks may introduce competitive products.
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FONIX TELEPHONY AND SERVER
Fonix Speak@Me(R) provides telephony and server-based solutions for
automated phone directory and database information systems. Fonix believes that
traditional operator systems and other means of accessing information are
becoming antiquated. Significant employee and personal time is lost trying to
access information through keypad directories or because calls are blocked after
hours. Also, information stored or transferred through servers, PBX, or
databases may not be easily accessed through non-integrated platforms.
Voice-automated systems are capable of integrating these markets and meeting
customer expectations of competitive costs, easy installation with minimal
change to their existing infrastructure, and a simple user interface.
o Speak@Me
Speak@Me is a user-friendly and intuitive Product for telephony and
server-based systems. Designed to fit easily into existing telephone systems,
Speak@Me is a complete package of easy-to-use personal and professional
services.
ConnectMe(R), the first Product in the Speak@Me suite, is the latest
in ASR innovation designed to transform the way businesses connect incoming and
outgoing phone calls. A voice-automated telephone operator, ConnectMe provides
an efficient, professional means of handling incoming calls.
ConnectMe 2.0 is scheduled for release in the second quarter of 2003.
Additional modules for the Speak@Me Suite, with expected availability in the
second half of 2003, include:
o NotifyMe: System generated notifications via a phone call
with TTS.
o ScheduleMe: Call a calendar and have it read aloud with TTS.
o ReadMe: Voice-activated (user) database queries--have email,
Web, or any info read aloud.
o AuthorizeMe: Security layer authentication by phone
notification.
o Government - 511 System: United States federal, state, and
local governments are increasingly providing citizens with
vital information on traffic, weather, road conditions, and
other transportation information. These systems are
generally accessed via telephone by dialing "511." Fonix,
along with partner Meridian Environmental Technology, Inc.,
is providing a "511 System." Current markets include
Montana, South Dakota, North Dakota, Kansas, and Nebraska.
Future targets include common-boundary states Oregon, Idaho,
Wyoming, Colorado, and Illinois. Competition in the 511
arena includes TellMe and IBM's WebSphere.
Fonix Telephony and Server Opportunities
Fonix is positioned to be a primary competitor in telephony products
via ConnectMe and the Speak@Me Suite. The selling points for ConnectMe include
the system's appeal to customer satisfaction, immediate ROI, consumer safety,
easy installation and maintenance, and its ability to bring a professional
"voice" to companies' telephone operator systems. Fonix's market strategy is to
identify user/customers' resellers and, as the Products' popularity increases,
push its value upward through VARs and distributors. Possible competitors in the
telephony/server markets include Phonetic Systems, Locus Dialog, and Avaya.
Fonix expects that as the market grows significant pricing pressure will
develop, resulting in smaller margins.
Page 8
FONIX EVERYDAY SPEECH, OR e.SPEECH(TM)
Fonix e.Speech, or "everyday speech," provides speech interface
Products for disabled, non-English language, and professional and personal
users. e.Speech allows users to access information with simple and easy voice
interface to computers and devices. e.Speech truly enhances the Fonix mission of
Freedom of Speech(TM). Fonix believes older device interfaces (like keypads) or
lesser quality TTS engines are antiquated and inadequate for users with special
needs or disabilities. Fonix e.Speech Products provide a user-intuitive
interface that can greatly increase the everyday functionality of assistive
users. Fonix also believes that a smaller memory requirement and ability to
recognize the user's voice in many languages allows the same or similar
technology to be applied effectively to language learning markets in an
expanding global community. Finally, Fonix e.Speech Products for PDAs and PCs
brings superior functionality to everyone, whether a user wants Web pages read
aloud or to launch applications on a PDA by speaking to the device.
o e.Speech for the Assistive Market
e.Speech has an established position in the assistive market based on
the wide acceptance and long-term history of Fonix's DECtalk TTS (acquired from
Force Computers, Inc., in December 2001). Fonix has a significant and
market-leading base of installed users in the assistive TTS market. Many users
rely on the Fonix DECtalk "Perfect Paul" or "Whispery Wendy" as their
voice-of-choice to read their e-mail, the daily news, or as their voice to the
outside world. In addition, Fonix is expanding its Products for the assistive
market to incorporate the full line of Fonix TTS offerings, including a
high-quality concatenated TTS and a high-recognition rate ASR. These offerings
meet assistive users' needs whether someone has a learning disability requiring
a more natural voice or a disabled user who requires voice-activated input
methods. Current OEM partners in the assistive market include Dynavox, GW Micro,
Prentke-Romich, Kurweil Education Systems, and Toby Churchill.
o e.Speech Language Learning
In the language learning market, the Company is attempting to
capitalize on Fonix DECtalk's small memory footprint and high intelligibility
and Fonix's ASR's high recognition rates capabilities. Language learning is an
emerging market, especially in the Asian markets. Several OEMs, including
Eintech and TopGrade, are selling handheld devices that allow individuals to
speak a word in their native language (like Korean) and have the text read back
to them in English. Fonix TTS provides this function to mass-market OEM devices.
This is a growing market outside the U.S. and one that Fonix expects will soon
emerge domestically as well.
The Company currently works with OEMs, government agencies, software
providers, and VARs who can take its languange learning Products and offer them
to their customers in devices that meet the needs of their unique markets. Fonix
is the TTS engine of choice for Asian language learning companies such as
Eintech and TopGrade. Fonix's other partners in the Asian market include E-Star
Lab, NEC Custom Technica, Kodensha, Dream C&C, and Dico. These channels expand
the Company's ability to serve millions of individuals while generating revenue
on already existing technologies that can be diverse in their final application.
Fonix's goal is to become the primary supplier of speech solutions for OEMs
providing language learning devices and systems.
o e.Speech for PDA and PC
Fonix e.Speech Products apply the intuitive use of voice to tasks
that users perform everyday. Many of these Products are appropriate for multiple
markets--assistive, mobile and wireless, and business and home users.
o Fonix VoiceAlert(TM) gives users the ability to
have scheduled meetings read aloud from a PDA
telling details like who they will meet with and
where-- all without looking at the screen.
Page 9
o Fonix VoiceDirector(TM) allows users to launch
desktop shortcuts or commonly used files and
applications with the command of the user's
voice.
o Fonix iSpeak(TM) reads e-mail, digital books,
documents, and websites in a natural,
human-sounding voice.
Fonix is also developing Products for different consumer electronic
devices, such as cordless phones, toys, home audio, and MP3 Players.
o e.Speech Market Opportunity
Revenue potential in these markets is significant as world markets
evolve. In the assistive market, more governments are recognizing the benefits
of providing accessibility to their diabled citizens. Fonix expects significant
market expansion as governments enact new regulations supporting and funding the
use of speech-based solutions.
Also, with the acceptance of the Internet and an increasingly global
economy, more people need to "speak" a foreign language. Fonix believes that
language learning tools, including translators, will be a profitable market,
with an estimated expansion of over 100% annually for the next few years. Fonix
believs that its ASR speech recognition and small footprint TTS offerings
currently meet the market's needs and will continue to do so.
Memory sizing and voice quality pose the major risks in these markets
areas. As devices are able to use larger memory and more powerful CPUs, the
Fonix advantage of a smaller footprint may diminish. Also, there is an inherent
requirement in many of these markets for intelligibility more so than
naturalness. If the market emphasis shifts to naturalness, the format-based
solutions like Fonix DECtalk will lose some of their advantages. To minimize
these risks, Fonix also offers a concatenated TTS that offers a higher level of
naturalness using a larger footprint.
e.Speech primary competitors include ScanSoft, IBM, NextUp
Technologies, Premier Assistive Technology, and Speechworks. However, the
Company believes that its advantages in format technologies and current market
positioning will allow it to compete in these spaces over the next few years.
FONIX END-TO-END: DISTRIBUTED SPEECH SOLUTIONS
End-to-end speech solutions are connected and/or wireless systems
where an embedded device (usually a mobile device such as a cell phone or PDA)
works with a network element such as a database or application server. The
mobile device communicates with a network system via a data communication path,
and the two ends exchange speech grammars, images, control signals, and other
information. Generally, application software runs at both ends and speech
software--ASR and/or TTS--runs at least at one end.
Fonix is proficient at both "ends"--embedded mobile devices and
servers--but has a particular strength on the embedded end. The objective of the
end-to-end marketing effort is to drive sales of embedded software, including
Product and ASR and TTS technology sales. By offering an end-to-end solution,
Fonix can capitalize on its competitive strength, reach new markets, and command
higher prices.
Examples of end-to-end Products include:
o Distributed Voice Dialing: Fonix offers an embedded
voice-dialing product, VoiceDial, that runs on a
handheld device. It also offers a network Product,
ConnectMe, accessed by telephone. These end-to-end
Products allow customers to place calls using either
the handheld device or via telephone to the network
equipment and still have access to the same contact
list. If the customer adds a new name to the contact
list on the handheld
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unit, for example, the two ends can synchronize
so that the new name is also available on the
network system.
o Multimodal Applications: Companies such as Oracle and
Glenayre offer network solutions where an application
server sends commands to a speech server. In this
configuration, the application server controls the
dialog flow and the speech server supports ASR and TTS
software. If the Company adds a handheld device with
Fonix software, the handheld can communicate with the
application server in place of the speech server. The
Company is working with Oracle to build a connection
between the Company's handheld software and the Oracle
application server so that the Company can approach
customers who want application access via both modes.
o Maps & Directions: Users speak a location, and ASR
software on the handheld device recognizes the voice
command. A network server then provides maps, which are
displayed on the handheld, and directions, which are
read aloud by the handheld unit using TTS software.
o Engineering Info: A maintenance worker requests a
schematic or parts diagram with a keyboardless tablet.
The request is recognized by embedded ASR software and
sent to a database server. The required information is
uploaded to the tablet and displayed on the LCD screen.
o End-to-End Sales & Market Opportunities
Fonix's primary end-to-end marketing approach is to offer only the
embedded end and work with partners who supply the network end. Partners may be
network equipment or software vendors, telecommunications carriers, and mobile
equipment manufacturers. These partners will contribute technology on the
network side for a better product solution which will in turn help Fonix access
a wider customer base. Currently, Fonix's most active partner is Oracle. Oracle
offers a network application server and the Company is working cooperatively to
build a software interface between Oreacle's server and the Company's handheld
software.
Fonix's competitors are primarily other embedded speech software
vendors like ART, ScanSoft, and Speechworks. Fonix's partners also have
competitors; for example Oracle, competes with Microsoft. However, Fonix is not
precluded from working with our partners' competitors.
An end-to-end strategy has some inherent risks. The end-to-end market
is still emerging, and it is a new direction for Fonix, so the market size and
the Company's ability to capitalize are untested. Also, building the interface
and applications for an end-to-end solution requires investment. Finally, there
are several competing protocols the Company might use to connect to the network,
such as SALT, VoiceXML, and other proprietary solutions. Fonix lacks the
resources to support all possibilities from the start, so there is some risk if
the Company chooses to develop one protocol that differs from the needs of
potential customers and partners. Despite these risks, however, Fonix intends to
seek end-to-end solutions and partners to capitalize on the market and revenue
potentials. End-to-end opens up new markets, such as companies who are deploying
network solutions and want to support mobile devices also.
FONIX AUTOMOTIVE VOICE INTERFACE SOLUTIONS
Fonix provides speech applications for fully integrated multimedia
automotive solutions. These applications, now available in complete market-ready
solutions, can be quickly deployed and adopted by the automotive electronics
marketplace, and are based on our proprietary ASR and TTS technologies. These
solutions are ideal for automotive environments in that they are highly noise
robust, require no user training, are available in
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many language options, require minimal computing resources, and are available in
a wide variety of automotive- qualified hardware configurations.
Automotive OEMs continue to develop and market systems that can
provide drivers and passengers optimized access to information but not at the
cost of safety. Voice-activated response and control systems are the natural
next step in driver safety and convenience. Fonix speech software is designed to
work as a natural voice interface inside a car for controlling and managing
complex system functions. Navigation, climate control, and Internet and cell
phone access are just the beginning of the hands-free and safety-minded
environment voice- activated technologies provide. As automotive telematics and
multimedia systems become more complex, Fonix voice interface solutions
significantly increase security, productivity, and passenger/driver satisfaction
for those interacting with in-car systems.
Fonix is executing a well-defined strategy to win large volume
automotive OEM business and drive significant revenues through its automotive
unit. The Company believes that it can develop and deliver production- ready,
automotive-qualified, voice interface products for telematics and multimedia
systems to automotive OEM and Tier 1 suppliers worldwide. The Company sees
long-term return in the cross-platform application of the Core Technologies with
little or no new development. Fonix believes that the technical implementation
of the delivered software package can be done in a short period of time with
predictable results. The portability of Fonix voice interface products allows
the automotive partner to create its own dedicated solution platform and to
reuse many parts of a solution for another production line.
o Applications for Independent and Integrated Automotive
Solutions
The automotive industry requires highly robust, reusable, cost
effective software components that can be easily and repeatedly deployed. Fonix
Products fit this need by creating the following standard independent(stand-
alone) and integrated/open high-end Products:
o Hands-free phone: Speaker-independent continuous digit
and word recognition; speaker- dependent voice tags,
contact management (i.e. Microsoft Outlook(R)); system
integration
o Navigation: Letter-to-word decoder incorporating N-best
recognition results, integration with standard
navigation databases (i.e. Navtech)
o Automotive Master Control System: Auto HVAC voice
control, interior system voice control
o Radio/Audio: Auto radio/CD voice control, entertainment
system control
o Onboard Diagnostic Control System: Miscellaneous
automotive diagnostics controlled via ASR and/or TTS
o Internet: E-mail and Internet access
o Fonix Automotive Opportunities
Fonix recognizes that automotive speech interface solutions require a
partnering strategy to be successful. Fonix has and will continue to partner and
joint-market with the leading silicon, operating systems, and Tier 1 suppliers
to create compelling solutions for automotive OEMs. The Company continually
works with its partners' sales and marketing organizations to define, create,
and deploy speech interface solutions required by the automotive industry.
Current Fonix automotive partners include: Motorola, Hitachi, Yazaki North
America, Volkswagen North America, Mitsubishi, Intel, Analog Devices, QNX, Sun
Microsystems, and WindRiver. Fonix has also had
Page 12
discussions directly with multiple Tier 1 suppliers such as Lear Automotive
Systems, Yazaki North America, JCI and other OEMs to drive large-volume,
recurring revenue business.
Major competitors include IBM (Via Voice, Pervasive Computing),
Scansoft, and Speechworks. Fonix believes that it can execute the current plan
to create the standard Products described above. As these Products are created
and proven, Fonix must enter into supplier relationships--in many instances
replacing established suppliers--to create long-term, recurring revenue
situations. There can be no assurance that Fonix can establish such supplier
relationships or that if it does, such relationships will result in significant
Product sales in this market.
Employees
As of March 21, 2003, the Company employed 95 people. Of this total,
56 were employed in product development and delivery, 17 were employed in sales
and marketing, and 22 were employed in strategic development, administration and
support.
RECENT DEVELOPMENTS
Grants of Stock Options
During 2002, Fonix granted options to purchase 157,225 shares of
Class A common stock as follows:
Grantee Number of Shares Exercise Prices
- ------- ---------------- ---------------
Directors and Executive Officers 72,500 $2.00 - $3.60
Employees 84,725 $2.00 - $5.60
The term of all of these stock options is ten years from the date of
grant and all were granted at the quoted market price on the date of grant.
During 2002, 124,543 options were canceled or forfeited and no options expired
without exercise. As of December 31, 2002, the Company had a total of 634,652
options outstanding, of which 443,183 were exercisable at a weighted average
exercise price of $90.80.
2002 Employee Compensation Plan
On February 6, 2003, the Fonix Board of Directors adopted the 2002
Employee Compensation Plan (the "2002 Plan"). Shares of Class A common stock
issued under the 2002 Plan will be in partial payment of wages and salaries
earned by employees during the plan period, which runs from December 1, 2002,
through May 31, 2003. The plan period may be extended by the Board of Directors.
Each current employee has agreed to the terms of the 2002 Plan.
The maximum aggregate number of shares that may be issued under the
2002 Plan is 150,000,000 Shares (3,750,000 post-Reverse Stock Split shares). The
2002 Plan will be administered by the Board of Directors or a committee of the
Board. Shares under the 2002 Plan may be issued only to employees of Fonix.
Employees subject to the 2002 Plan were required to provide the
Company with a notice of election to participate in the 2002 Plan and to
indicate the amount of compensation to be deferred during the plan period. The
deferred compensation of employees electing to participate in the 2002 Plan may
be paid, at the option of the employee, in shares of the Company's Class A
common stock, in cash, or in a combination of the two. The payment of deferred
compensation will commence June 30, 2003.
As of March 26, 2003, no employee had notified the Company of the
ratio of cash and Class A common stock to be issued under the 2002 Plan, and no
shares or cash had been issued or paid to employees under the 2002 Plan.
Page 13
The Company intends to seek shareholder approval of the 2002 Plan at
its 2003 Annual Meeting of Shareholders.
U.S. Department of Labor Settlement Agreement
On March 5, 2003, the Company entered into a settlement agreement
with the U.S. Department of Labor relating to back wages not paid to former and
current employees during 2002. Under this agreement the Company will pay all
amounts owed in twenty-four installment payments to each former and current
employee. The first installment payment is due May 1, 2003. The remaining
payments are due on the first day of each month, until paid in full. If any of
the installment payments are more than fifteen days late, the entire balance may
become due and payable.
Employees may elect to receive a portion of their wages in registered
shares of the Company's Class A common stock. However, the amount that
represents minimum wage and overtime, if any, as defined in the Fair Labor
Standards Act of 1938, may not be paid with the Company's Class A common stock.
Page 14
CERTAIN SIGNIFICANT RISK FACTORS
The short- and long-term success of the Company is subject to certain risks,
many of which are substantial in nature and outside the control of the Company.
You should consider carefully the following risk factors, in addition to other
information contained herein. All forward-looking statements contained herein
are deemed by the Company to be covered by and to qualify for the safe harbor
protection provided by the Private Securities Litigation Reform Act of 1995. You
should understand that several factors govern whether any forward-looking
statement contained herein will or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected herein.
These forward-looking statements include plans and objectives of management for
future operations, including the strategies, plans and objectives relating to
the products and the future economic performance of the Company and its
subsidiaries discussed above. In light of the significant uncertainties inherent
in the forward-looking statements included herein, the inclusion of any such
statement should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved.
The Company's substantial and continuing losses since inception, coupled with
significant ongoing operating expenses, raise doubt about its ability to
continue as a going concern.
Since inception, the Company has sustained substantial losses. Such
losses continue due to ongoing operating expenses and a lack of revenues
sufficient to offset operating expenses. The Company had negative working
capital of $14,428,750 at December 31, 2002. The Company has raised capital to
fund ongoing operations by private sales of the Company's securities, some of
which sales have been highly dilutive and involve considerable expense. In the
Company's present circumstances, there is substantial doubt about its ability to
continue as a going concern absent significant sales of the Company's existing
products, substantial revenues from new licensing or co- development contracts,
or continuing large sales of its securities.
The Company incurred net losses of $19,897,564, $31,059,791, and
$22,761,229 for the years ended December 31, 2002, 2001 and 2000, respectively.
As of December 31, 2002, the Company had an accumulated deficit of $194,006,920,
and owed trade payables of $3,083,425, of which $2,232,149 were more than 60
days past due.
The Company expects to spend significant amounts to enhance its
products and technologies, expand domestic and international sales and
operations and fund further Product development. As a result, it will need to
generate significant additional revenue to achieve profitability. Even if the
Company does achieve profitability, it may not be able to sustain or increase
profitability on a quarterly or annual basis. If it does not achieve and
maintain profitability, the market price for the Company's common stock may
further decline, perhaps substantially, and the Company may have to curtail or
cease its operations.
The "going concern" paragraph in the reports of the Company's independent
certified public accountants for the years ended December 31, 2002, 2001 and
2000 raises doubts about the Company's ability to continue as a going concern.
The independent certified public accountants' reports for the
Company's financial statements for the years ended December 31, 2002, 2001, and
2000 include an explanatory paragraph regarding substantial doubt about the
Company's ability to continue as a going concern. This may have an adverse
effect on the Company's ability to obtain financing for operations and to
further develop and market products.
If the Company 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.
The Company anticipates incurring substantial sales and marketing,
product development and research and general operating expenses in the future
that will require substantial amounts of additional capital on an ongoing
Page 15
basis. It will most likely have to obtain such capital from sales of its equity,
convertible equity and/or debt securities. Obtaining future financing may be
costly and will likely be dilutive to existing stockholders. The Company
previously established three equity lines of credit with an unaffiliated third
party (the "Equity Line Investor") upon which the Company drew to pay operating
expenses, but the Company has either drawn the maximum amount available or have
no registered shares of Class A common stock available to put to the Equity Line
Investor under two of those equity lines. The Company also has entered into a
third equity line with the Equity Line Investor, and has prepared and filed a
prospectus, and the registration statement of which it is a part, to register
the sale of up to 5,000,000 shares of Fonix Class A common stock by the Equity
Line Investor. As of March 21, 2003, the Company had drawn $2,500,000 on the
third equity line.
If the Company is not able to obtain adequate financing under the
third equity line or from other financing sources when and in the amounts
needed, and on terms that are acceptable, the Company's operations, financial
condition and prospects could be materially and adversely affected, and the
Company could be forced to curtail its operations or sell part or all of its
assets, including our Core Technologies, or seek protection under bankruptcy
laws.
Continuing debt obligations could impair the Company's ability to continue as a
going concern.
As of December 31, 2002, the Company had debt obligations of
$1,738,857. Additionally, at March 21, 2003, unpaid compensation payable to
current and former employees was approximately $5,265,000 and vendor accounts
payable was approximately $3,083,000. At present, the Company's revenues from
existing licensing arrangements and products are not sufficient to offset its
ongoing operating expenses or to pay in full its current debt obligations.
Although the Company has negotiated with its current and former
employees and vendors regarding payment terms of these unpaid amounts, and the
Company has entered into an agreement with the United States Department of Labor
to pay past due employee wages over a 24-month period, if the Company is unable
to generate sufficient revenues from operations or obtain sufficient additional
capital from the sale of its equity or debt securities, the Company may not be
able to satisfy its obligations to its current and former employees and vendors.
There is substantial risk, therefore, that the existence and extent
of the debt obligations described above could adversely affect the Company's
business, operations and financial condition, and the Company may be forced to
curtail its operations, sell part or all of its assets, including the Core
Technologies, or seek protection under bankruptcy laws. Additionally, there is
substantial risk that the current or former employees or the Company's vendors
could bring lawsuits to collect the unpaid amounts. In the event of lawsuits of
this type, if the Company is unable to negotiate settlements or satisfy its
obligations, the Company could be forced into bankruptcy.
Certain Risks Associated With the Reverse Stock Split.
At a Special Meeting of Shareholders held March 24, 2003, in Salt
Lake City, Utah, the Company's shareholders approved a reverse stock split (the
"Reverse Stock Split") of the Company's Class A common stock at a ratio of one
(1) new share for forty (40) old shares. Risks relating to the Reverse Split
include, but are not limited to, the following:
There can be no assurance that the total market capitalization of the
Class A common stock after the proposed reverse stock split will be
equal to or greater than the total market capitalization before the
proposed reverse stock split or that the per share market price of
the Class A common stock following the reverse stock split will
either exceed or remain higher than the current per share market
price.
There can be no assurance that the market price per new share of the
Class A common stock (the "New Shares") after the reverse stock split will rise
or remain constant in proportion to the reduction in the number of old shares of
the Class A common stock (the "Old Shares") outstanding before the Reverse Stock
Split. For example,
Page 16
based on the market price of the Old Shares on February 7, 2003, of $0.02 per
share, there can be no assurance that the post-split market price of the New
Shares would be $0.80 per share or greater.
Accordingly, the total market capitalization of the Class A common
stock after the Reverse Stock Split may be lower than the total market
capitalization before the Reverse Stock Split and, in the future, the market
price of the New Shares following the Reverse Stock Split may not exceed or
remain higher than the market price prior to the proposed Reverse Stock Split.
In many cases, the total market capitalization of a company following a reverse
stock split is lower than the total market capitalization before the reverse
stock split.
There can be no assurance that the Reverse Stock Split will result in
a per share price that will attract institutional investors and
brokers.
While the Board of Directors believes that a higher stock price may
help generate investor interest, there can be no assurance that the Reverse
Stock Split will result in a per share price that will attract institutional
investors and brokers, or that any higher stock price achieved as a result of
the Reverse Stock Split will be maintained.
There can be no assurance that the Reverse Stock Split will result in
a per share price that will increase the Company's ability to attract
and retain employees and other service providers.
While the Board of Directors believes that a higher stock price may
help the Company attract and retain employees and other service providers who
are less likely to work for a company with a low stock price, there can be no
assurance that the Reverse Stock Split will result in a per share price that
will increase the Company's ability to attract and retain employees and other
service providers.
A decline in the market price for the New Shares after the Reverse
Stock Split may result in a greater percentage decline than would
occur in the absence of a Reverse Stock Split, and the liquidity of
the New Shares could be adversely affected following a Reverse Stock
Split.
The market price of the New Shares Stock will also be based on the
Company's performance and other factors, some of which are unrelated to the
number of shares outstanding. If the market price of the New Shares declines,
the percentage decline as an absolute number and as a percentage of the
Company's overall market capitalization may be greater than would occur in the
absence of the Reverse Stock Split. In many cases, both the total market
capitalization of a company and the market price of a share of such company's
common stock following a Reverse Stock Split are lower than they were before the
Reverse Stock Split. Furthermore, the liquidity of the New Shares could be
adversely affected by the reduced number of shares that will be outstanding
after the Reverse Stock Split.
Holders of Fonix Class A common stock are subject to the risk of
additional and substantial dilution to their interests as a result of
the Reverse Stock Split.
The following table sets forth the approximate number of shares that
will be authorized for issuance, issued and outstanding, authorized and reserved
for issuance, and authorized but unissued as a result of the adoption of the
Reverse Stock Split. The table below does not take into effect the additional
New Shares that will be issued to holders of fractional shares.
Page 17
Shares Authorized
Shares Authorized Shares Issued and Shares Reserved for but Unissued and
for Issuance Outstanding Issuance Unreserved
Prior to Reverse 800,000,000 555,784,693 115,456,303 128,759,004
Stock Split
(February 7, 2003 -
record date for
Special Meeting of
Shareholders)
Following 1 for 40 800,000,000 13,894,618 2,886,408 783,218,974
Reverse Split
The Reverse Stock Split will not reduce the number of shares
authorized for issuance. As such, issuance by the Company of additional shares
which remain authorized for issuance will have a dilutive effect on the holders
of New Shares.
The Company's issuances of shares following the Reverse Stock Split
likely will result in overall dilution to market value and relative
voting power of previously issued Class A common stock, which could
result in substantial dilution to the value of shares held by
shareholders prior to implementation of the Reverse Stock Split.
The issuance by the Company of Class A common stock following the
Reverse Stock Split in capital raising transactions may result in substantial
dilution to the equity interests of holders of New Shares. Specifically, the
issuance of a significant amount of additional New Shares will result in a
decrease of the relative voting control of the Class A common stock issued and
outstanding prior to the issuance of Class A common stock following the Reverse
Stock Split. Additionally, holders of New Shares likely will experience
increased dilution with decreases in market value of Class A common stock in
relation to the Company's issuances of shares following the Reverse Stock Split,
which could have a material adverse impact on the value of their shares.
Holders of Fonix Class A common stock are subject to the risk of additional and
substantial dilution to their interests as a result of the issuances of Class A
common stock in connection with the third equity line and the Debentures.
Introduction
In addition to the Class A common stock registered in connection with
the third equity line, the Company has also registered 3,435,185 shares of Class
A common stock in connection with the sale of $1,500,000 Series D Convertible
Debentures (the "Debentures") to a third party. As of March 26, 2003, the
balance due under the debentures was $607,067.
The following table describes the number of shares of Class A common
stock that would be issuable, assuming the hypothetical conversion of the total
remaining outstanding principal amount of the Debentures as of March 26, 2003,
by the holder of the Debentures (excluding the issuance of shares of Class A
common stock as payment of interest on the Debentures at the date of
conversion), and that the full amount available under the third equity line had
been put to the Equity Line Investor (irrespective of the availability of
registered shares), and further assuming that the applicable conversion or
exercise prices at the time of such conversion or put were the following
amounts:
Page 18
Shares of Class A Common Stock
Issuable
- --------------------------------- ---------------------------------------------- ----------------------------
Shares issuable
Upon Conversion Shares issuable
of Series D upon puts
Hypothetical Conversion/ Convertible aggregating Total Class A Common
Exercise Price Debentures $20,000,000 Stock Issuable
- --------------------------------- --------------------- -------------------- ----------------------------
$0.02 30,353,350 1,000,000,000 1,030,353,350
$0.03 20,235,567 666,666,667 686,902,233
$0.04 15,176,675 500,000,000 515,176,675
$0.05 12,141,340 400,000,000 412,141,340
$0.10 6,070,670 200,000,000 206,070,670
$0.15 4,047,113 133,333,333 137,380,447
$0.25 2,428,268 80,000,000 82,428,268
$0.50 1,214,134 40,000,000 41,214,134
$0.80 758,834 25,000,000 25,758,834
Given the formulas for calculating the shares to be issued upon
conversion of the Debentures and in connection with puts under the third equity
line, there effectively is no limitation on the number of shares of Class A
common stock which may be issued in connection with conversion of the
Debentures, except for the number of shares registered under the prospectus and
registration statement covering the resale of shares by the holder of the
Debentures, or with a put under the third equity line, except for the number of
shares registered under the prospectus and the registration statement covering
the resale of shares issued in connection with the third equity line. If the
market price of the Class A common stock decreases, the number of shares of
Class A common stock issuable in connection with the Debentures and the third
equity line will increase and, accordingly, the aggregate amount of draws under
the third equity line will decrease. Accordingly, despite the Company's right to
draw up to $20,000,000 under the third equity line Agreement, the Company may
run out of shares registered under the prospectus and the related registration
statement to issue to the Equity Line Investor in connection with draws. In such
an event, the Company would be required to, and would, file additional
registration statements to cover the resale of additional shares issuable under
the third equity line. The following table demonstrates the correlation between
share price decline and decreases in aggregate draw amounts available, given the
maximum 200,000,000 shares of Class A common stock registered under the
prospectus and the related registration statement covering shares issuable under
the third equity line:
Shares issuable upon puts, up to a Maximum draws available, up to
Hypothetical Conversion Price maximum of 5,000,000 $20,000,000
$0.02 5,000,000 $100,000
$0.03 5,000,000 $150,000
$0.04 5,000,000 $200,000
$0.05 5,000,000 $250,000
$0.10 5,000,000 $500,000
$0.15 5,000,000 $750,000
$0.25 5,000,000 $1,250,000
$0.50 5,000,000 $2,500,000
$0.80 5,000,000 $4,000,000
The Company's issuances of shares in connection with conversions of principal
amounts of the Debentures or under the third equity line likely will result in
overall dilution to market value and relative voting power of previously issued
common stock, which could result in substantial dilution to the value of shares
held by shareholders.
Historically, the issuance of Class A common stock to the Equity Line
Investor under the first two equity lines has resulted in substantial dilution
to the equity interests of all holders of Class A common stock, except the
Equity Line Investor. The issuance of Class A common stock in connection with
conversions of the Debentures or with draws under the third equity line may
result in substantial dilution to the equity interests of holders of Fonix Class
A common stock other than the holder of the Debentures or the Equity Line
Investor. Specifically, the issuance of a significant amount of additional Class
A common stock will result in a decrease of the relative voting control of the
Class A common stock issued and outstanding prior to the issuance of Class A
common stock in connection with conversions of Debentures or the third equity
line. Furthermore, public resales of Class A common stock by the holder of the
Debentures or by the Equity Line Investor following the issuance of Class A
common stock in connection with conversions of the Debentures or with puts under
the third equity line, respectively, likely will depress the prevailing market
price of the Class A common stock. Even prior to the time of actual conversions,
exercises, and public resales, the market "overhang" resulting from the mere
existence of the Company's obligation to honor such conversions or exercises
could depress the market price of its Class A common stock.
Existing shareholders likely will experience increased dilution with decreases
in market value of Class A common stock in relation to the Company's issuances
of shares upon conversion of the Debentures or under the third equity line,
which could have a material adverse impact on the value of their shares.
The formulas for determining the number of shares of Class A common
stock to be issued upon conversion of the Debentures or under the third equity
line are based, in part, on the market price of the Class A common stock and in
both cases includes a discount from the market price equal to 90% of the average
of the two lowest closing bid prices of the Class A common stock over a
specified trading period. As a result, the lower the market price of the
Company's Class A common stock at and around the time the Debenture holder were
to convert some or all of the Debentures or the Company were to put shares under
the third equity line, the more shares of Class A common stock the Debenture
holder or Equity Line Investor would receive. Any increase in the number of
shares of Class A common stock issued upon conversion of Debentures puts of
shares as a result of decreases in the prevailing market price would compound
the risks of dilution described in the preceding paragraph.
There is an increased potential for short sales of the Class A common stock due
to the sales of shares put to the Equity Line Investor in connection with the
third equity line, which could materially effect the market price of the stock.
Downward pressure on the market price of the Class A common stock
that likely will result from sales of the Class A common stock by the Equity
Line Investor issued in connection with a put under the third equity line could
encourage short sales of Class A common stock by the Equity Line Investor.
Significant amounts of such short selling could place further downward pressure
on the market price of the Company's Class A common stock.
Certain restrictions on the extent of puts may have little, if any, effect on
the adverse impact of the Company's issuance of shares under the third equity
line, and as such, the Equity Line Investor may sell a large number of shares,
resulting in substantial dilution to the value of shares held by existing
shareholders.
The Company is prohibited from putting shares to the Equity Line
Investor under the third equity line if such put would result in that investor
holding more than 4.999% of the then outstanding Class A common stock. These
restrictions, however, do not prevent the Equity Line Investor from selling
shares of Class A common stock received in connection with a put, and then
receiving additional shares of Class A common stock in connection with a
subsequent put. In this way, the Equity Line Investor could sell more than
4.999% of the outstanding Class A common stock in a relatively short time frame
while never holding more than 4.999% at one time.
Page 19
In addition to the dilution described above, issuances of shares of Fonix Class
A common stock upon conversion of the Debentures by the debenture holder may
result in substantial dilution to the value of shares held by existing
shareholders.
The following table identifies the total principal amount of the
Debentures outstanding as of March 26, 2003 ($607,067), and the total number of
shares of Class A common stock that would be issuable, assuming that the full
amount of the Debentures were converted by the holder, and further assuming that
the applicable conversion or exercise prices at the time of such conversion or
exercise were the following amounts. The calculations below exclude the issuance
of shares of Class A common stock as payment of interest on the Debentures at
the date of conversion.
Shares
issuable upon
conversion of
Hypothetical Conversion principal amount of
Price $607,067
$0.02 30,353,350
$0.03 20,235,567
$0.04 15,176,675
$0.05 12,141,340
$0.10 6,070,670
$0.15 4,047,113
$0.25 2,428,268
$0.50 1,214,134
$0.80 758,834
Given the structure of the conversion formulas applicable to the
Debentures, there effectively is no limitation on the number of shares of Class
A common stock into which the Debentures may be converted. If the market price
of the Class A common stock decreases, the number of shares of Class A common
stock issuable upon conversion of the Debentures continues to increase.
Applicable accounting rules require the Company periodically to assess the value
of its intangible assets and recognize any decline in value. As a result of that
requirement, the Company recently has recognized a significant impairment of
certain speech software technology in the accompanying consolidated financial
statements. Any further reduction of the carrying value of the Company's
intangible assets could have a material adverse impact on the Company's
financial position.
Applicable accounting rules require the Company to assess the value
of its intangible assets periodically or as circumstances dictate, and to
recognize any change in value of those assets. The Company tested its speech
software technology for impairment in December 2001and in December 2002. Due to
the down-turn in the software industry and the U.S. economy in general,
management revised estimated net future cash flows from the speech software
technology (the Core Technologies), which resulted in recognition of an
impairment loss of $5,832,217 during the fourth quarter of 2001. The impairment
loss was charged to cost of revenues. Management determined in December 2002
that no additional impairment had occured in 2002 which required recognition of
impariment loss in 2002.
Page 20
Future assessments required by the applicable accounting rules may
require recognition of additional impairments to the Company's speech software
technology or other intangible assets. Any additional impairments could further
reduce the Company's asset base, which reduction could have a material adverse
impact on the Company's ability to borrow or otherwise raise capital.
The Company has a limited Product offering and many of its key technologies are
still in the product development stage.
Presently, there are a limited number of commercially available
Products incorporating the Company's Core Technologies. For the Company to be
ultimately successful, sales from these Products must be substantially greater.
An additional element of its business strategy is to achieve revenues through
strategic alliances, co-development arrangements, and license arrangements with
third parties. For example, the Company has entered into licensing and
joint-marketing agreements with Intel, Microsoft, HP, Panasonic, Epson, and
others. These agreements provide for joint marketing and application development
for end-users or customers. There can be no assurance that these collaboration
agreements will produce license or other agreements which will generate
significant revenues for the Company.
The market for many of the Company's technologies and Products is largely
unproven and may never develop sufficiently to allow it to capitalize on its
technology and Products.
The market for speech-enabled Products is relatively new and rapidly
evolving. Additionally, the Company's Products are new and, in many instances,
represent a significant departure from technologies which already have found a
degree of acceptance in the speech-enabled technologies marketplace. The
Company's financial performance will depend, in part, on the future development,
growth, and ultimate size of the market for speech-enabled applications and
products generally, and applications and products incorporating its Products.
Accordingly, in order to achieve commercial acceptance of the Core Technologies
and its Products, the Company will have to educate prospective customers,
including large, established companies, about the uses and benefits of
speech-enabled software in general and its products in particular. If these
efforts fail, or if speech-enabled software platforms do not achieve commercial
acceptance, the Company's business could be harmed or even fail.
The Products which incorporate the Company's Core Technologies will
be competing with more conventional means of information processing such as data
entry, access by keyboard, mouse or touch-tone telephone. The Company believes
that there is a substantial potential market for applications and products
incorporating advanced speech-enabled technologies. Nevertheless, such a market
for the Company's Products may never develop to the point that profitable
operations can be achieved or sustained.
Speech-enabling Products may not achieve widespread acceptance by businesses or
telecommunications carriers, which could limit the Company's ability to grow its
business.
The market for speech-enabled products and applications is relatively
new and rapidly evolving. The Company's ability to increase revenue in the
future depends on the acceptance of speech-enabling products and applications by
both its customers and end users. The adoption and integration of
speech-enabling products and applications could be hindered by the perceived
costs of these new products and applications, as well as the reluctance of
enterprises that have invested substantial resources in existing applications to
replace their current systems with these new products and applications.
Accordingly, in order to achieve commercial acceptance, the Company will have to
educate prospective customers, including large, established companies, about the
uses and benefits of speech-enabling products and applications in general and
its Products in particular. If these efforts fail, or if speech-enabling
products and technology platforms do not achieve commercial acceptance, the
Company's business will not develop or may subsequently fail.
Continued development of the market for the Company's Products also
will depend upon the following factors over which the Company has little or no
control:
Page 21
o widespread deployment of speech-enabling applications by third
parties, which is driven by consumer demand for services having a
voice user interface;
o demand for new uses and applications of speech-enabling
technology, including adoption of speech-enabled interfaces by
companies that operate web sites;
o adoption of industry standards for speech-enabling and related
technologies; and
o continuing improvements in hardware technology that may reduce
the costs of speech-enabling technology solutions.
The delivery of the Company's Products to end users is dependent upon third-
party integration and may be subject to delays and cancellations that are beyond
its control.
Because the Company is pursuing third-party integration of its
Products into mass market, general business, automotive and personal electronics
products, and computing solutions, lead time to revenue recognition will be
longer than software products directly released into consumer channels. Purchase
of the Company's Products often requires a significant expenditure by a
customer. Accordingly, the decision to purchase the Company's Products typically
requires significant pre-purchase evaluation. The Company spends significant
time educating and providing information to prospective customers regarding the
use and benefits of its Products. During this evaluation period, the Company may
expend substantial sales, marketing and management resources.
Further, the Company's Products sold and integrated into customer
applications and products are subject to both customer production schedules and
customer success in marketing their own products and generating product sales.
The Company's revenues are thus subject to delays and possible cancellation
resulting from customer integration risks and delays.
In cases where the Company's contract with its customers specifies
milestones or acceptance criteria, it may not be able to recognize license or
services revenue until these conditions are met. The Company has in the past and
may in the future experience unexpected delays in recognizing revenue.
Consequently, the length of the Company's sales and implementation cycles and
the varying order amounts for its Products make it difficult to predict the
quarter in which revenue recognition may occur and may cause license and
services revenue and operating results to vary significantly from period to
period. These factors could cause the Company's stock price to be volatile or to
decline.
Competition from other industry participants and rapid technological change
could impede the Company's ability to achieve profitable operations.
The computer hardware and software industries are highly and
intensely competitive. In particular, the speech-enabled technologies market
sector and, specifically, the ASR, computer voice and communications industries
are characterized by rapid technological change. Competition in the
speech-enabled technologies market 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 the Company's competitors may render the Company's
Products less attractive or even obsolete. Accordingly, the Company's success
will depend upon its ability to continually enhance the Core Technologies and
its Products to keep pace with or ahead of technological developments and to
address the changing needs of the marketplace. Barriers to entry in the software
industry are low, and as the market for various speech-enabled products expands
and matures, the Company expects more entrants into this already competitive
arena.
Page 22
The Company's Products can have a long sales cycle and, as a result, its
quarterly operating results and its stock price may fluctuate.
The sales cycles for the Company's Products are generally six to
twelve months but may be shorter or longer depending on the size and complexity
of the order, the amount of services to be provided and whether the sale is made
directly by the Company or indirectly through an OEM, VAR or systems integrator.
The length of the sales cycles could adversely impact the Company's operating
results.
The Company's current and potential competitors, some of whom have greater
resources and experience than it does, may develop products and technologies
that may cause a decline in demand for, and the prices of, the Company's
Products.
A number of companies have developed, or are expected to develop,
products that compete with the Company's Products and technologies. Competitors
in the speech technology software market include IBM, SpeechWorks International,
Nuance, and ScanSoft. The Company expects additional competition from other
companies, including Microsoft, which has made investments in and acquired voice
interface technology companies. Furthermore, the Company's competitors may
combine with each other, and other companies may enter its markets by acquiring
or entering into strategic relationships with its competitors. Current and
potential competitors have established, or may establish, cooperative
relationships among themselves or with third parties to increase the abilities
of their speech and language technology products to address the needs of the
Company's prospective customers.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than the Company does. The Company's present or future
competitors may be able to develop products comparable or superior to those it
offers, adapt more quickly to new technologies, evolving industry trends and
standards, or customer requirements than it does, or devote greater resources to
the development, promotion and sale of their products than it does. Accordingly,
the Company may not be able to compete effectively in its markets, and
competition may intensify and may harm the Company's business.
The Company's failure to respond to rapid change in the speech-enabled
technologies market could cause the Company to lose revenue and harm its
business.
The speech-enabled technologies industry is relatively new and
rapidly evolving. The Company's success will depend substantially upon its
ability to enhance its existing Products and to develop and introduce, on a
timely and cost-effective basis, new technologies, Products and features that
meet changing end-user requirements and incorporate technological advancements.
If the Company is unable to develop new Products and enhanced functionalities or
technologies to adapt to these changes, or if it cannot offset a decline in
revenue from existing Products with sales of new Products, the Company's
business will suffer.
Commercial acceptance of the Company's Products will depend, among
other things, on:
o the ability of its Products to meet and adapt to the needs of its
target markets;
o the performance and price of its Products and its competitors'
products; and
o its ability to deliver customer services directly and through its
resellers, VARs and OEM partners.
Page 23
Any software defects in the Company's Products could harm its business and
result in litigation.
Complex software products such as the Company's may contain errors,
defects and bugs. With the planned release of any Product, the Company may
discover these errors, defects and bugs and, as a result, Products may take
longer to develop than expected. In addition, the Company may discover that
remedies for errors or bugs may be technologically infeasible. Delivery of
Products with undetected production defects or reliability, quality, or
compatibility problems could damage the Company's reputation. Errors, defects or
bugs could also cause interruptions, delays or a cessation of sales to its
customers. The Company could be required to expend significant capital and other
resources to remedy these problems. In addition, customers whose businesses are
disrupted by these errors, defects and bugs could bring claims against us which,
even if unsuccessful, would likely be time- consuming and could result in costly
litigation and payment of damages.
In order to increase the Company's international sales, the Company must
increase the foreign language capacities of its Products. If it is unable to do
so, it may be unable to grow its revenue and execute its business strategy.
The Company intends to expand its international sales, which requires
a significant investment to create and refine different language models for each
particular language or dialect. These language models are required to create
versions of products that allow end users to speak the local language or dialect
and be understood. If the Company fails to develop additional foreign language
capacity of its Products, its ability to address international market
opportunities and to grow its business will be limited.
The Company may encounter difficulties in managing its growth, which could
prevent it from executing its business strategy.
The Company's growth has placed, and continues to place, a
significant strain on its resources. To accommodate this growth, the Company
must continue to upgrade a variety of operational and financial systems,
procedures and controls and hire additional employees to support increased
business and product development activity. This has resulted in increased
responsibilities for the Company's management. The Company's systems, procedures
and controls may not be adequate to support its operations. If the Company fails
to improve its operational, financial and managerial information systems, or to
hire, train, motivate or manage its employees, its business could be harmed or
fail.
The Company may incur a variety of costs to engage in future acquisitions of
companies, products or technologies, and the anticipated benefits of those
acquisitions may never be realized.
The Company may make acquisitions of, or significant investments in,
complementary companies, products or technologies, such as the recent purchase
of assets from Force Computers, Inc. discussed elsewhere herein, although no
material acquisitions or investments are currently pending. Any future
acquisitions would be accompanied by risks such as:
o difficulties in assimilating the operations and employees of
acquired companies;
o diversion of the Company's management's attention from ongoing
business concerns;
o the Company's potential inability to maximize its financial and
strategic position through the successful incorporation of
acquired technology and rights into its products and services;
o additional expense associated with amortization of acquired
assets;
o maintenance and implementation of uniform standards, controls,
procedures and policies; and
Page 24
o impairment of existing relationships with employees, suppliers
and customers as a result of the integration of new management
employees.
The Company cannot guarantee that it will be able to successfully
integrate any business, products, technologies or employees that it might
acquire in the future, and its failure to do so could harm its business.
If the Company is unable to hire and retain technical, sales and marketing and
operational employees, its business could be harmed.
The Company intends to hire additional employees, including software
engineers, sales and marketing employees and operational employees. Competition
for hiring these individuals is intense, especially in the Salt Lake City area
where the Company is headquartered, and it may not be able to attract,
assimilate, or retain additional highly qualified employees in the future. The
failure to attract, integrate, motivate and retain these employees could harm
its business.
The Company's stock price is volatile, and an investor may not be able to resell
its shares at or above the purchase price.
In recent years, the stock market in general, and the OTC Bulletin
Board and the securities of technology companies in particular, has experienced
extreme price and trading volume fluctuations. These fluctuations have often
been unrelated or disproportionate to the operating performance of individual
companies. These broad market fluctuations may materially adversely affect its
stock price, regardless of operating results.
The Company's operations and financial condition could be adversely affected by
its failure or inability to protect its intellectual property or if its
technologies are found to infringe the intellectual property of a third party.
Dependence on proprietary technology
The Company's success is heavily dependent upon its proprietary
technology. Certain elements of the Company's Core Technologies are the subject
of seven patents issued and allowed by the United States Patent and Trademark
Office and 10 other patent applications which are pending. In addition to its
patents, the Company 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 the Company's proprietary
rights may not be adequate because such laws provide only limited protection.
Despite precautions that the Company takes, it may be possible for unauthorized
third parties to duplicate aspects of its technologies or the current or future
products or technologies of its business units or to obtain and use information
that it regards as proprietary. Additionally, its competitors may independently
develop similar or superior technology. Policing unauthorized use of proprietary
rights is difficult, and some international laws do not protect proprietary
rights to the same extent as United States laws. Litigation periodically may be
necessary to enforce the Company's intellectual property rights, to protect its
trade secrets or to determine the validity and scope of the proprietary rights
of others.
Risks of the Company's infringement upon the technology of unrelated
parties or entities
The Company 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 its technologies. The Company expects that developers of
speech-enabled technologies 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. Responding to
any such claims, whether or not they are found to have merit, could be time
consuming, result in costly litigation, cause development delays, or require us
to enter into royalty or license
Page 25
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 its business, operating results, and financial condition.
The Company is subject to the risk that certain key personnel, including key
scientific employees and independent contractors named below, on whom it
depends, in part, for the Company's operations, will cease to be involved with
the Company.
The Company is dependent on the knowledge, skill and expertise of
several key scientific and business development employees, including John A.
Oberteuffer, Ph.D., Dale Lynn Shepherd, R. Brian Moncur, Doug Jensen, Edward A.
Bruckert, Tim Cross, Tim Hong, Paul Clayson, John Oelfke, K. H. Kim, Kurt
Flygare and Rolf-Juergen Bruess; independent contractors including C. Hal Hansen
and Tony R. Martinez, Ph.D.; and executive officers, including Thomas A.
Murdock, Roger D. Dudley and William A. Maasberg, Jr. The loss of any of the key
personnel listed above could materially and adversely affect its future business
efforts. Although it 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 the Company's key scientific employees, 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 the Company. The Company does not
presently have any key man life insurance on any of its employees except Mr.
Dudley, for whom it carries a policy with a face amount of $4 million. The
Company is the named beneficiary.
The Company has no dividend history and has no intention to pay dividends in the
foreseeable future.
The Company has never paid dividends on or in connection with any
class of its common stock and does not intend to pay any dividends to common
stockholders for the foreseeable future.
There may be additional unknown risks which could have a negative effect on the
Company and its business.
The risks and uncertainties described in this section are not the
only ones facing the Company. Additional risks and uncertainties not presently
known to the Company or that it currently deems immaterial may also impair its
business operations. If any of the foregoing risks actually occur, its business,
financial condition, or results of operations could be materially adversely
affected. In such case, the trading price of its Class A common stock could
decline.
ITEM 2. PROPERTIES
The Company owns no real property. Commencing in October 1996, the
Company leased a 25,600 square foot facility in Draper, Utah, from an
unaffiliated third party at which it conducts its principal scientific research,
product development and sales and marketing activities. The Company's lease of
that facility is for a term of eight years, with a right to terminate after five
years, which right the Company did not exercise in 2001. Provided that the
Company is not in default under the lease, the Company has the option to extend
the lease for five additional years. The average base monthly lease payment over
the eight-year life of the lease for that facility is $28,389.
In addition to the Draper facility, the Company subleased office
space at market rates from SCC Asset Management, Inc., formerly Studdert
Companies Corporation ("SCC"). SCC is owned and controlled by three individuals,
two of whom are executive officers and directors of the Company. (See "Certain
Relationships and Related Transactions," and "Security Ownership of Certain
Beneficial Owners and Management"). The two executive officers and a former
executive officer of the Company personally guaranteed these leases in favor of
SCC's landlord. The subleases required monthly rental payments of $10,368.
During October 2002, the Company assumed SCC's lease obligation. The subleases
were terminated effective February 2003. On March 18, 2003, the Company executed
a promissory note with the landlord in the amount of $113,768 covering outanding
lease
Page 26
obligations. The note bears annual interest at 10% and is payable in monthly
installments of $3,000 commencing April 10, 2003.
The Company leases approximately 2,507 square feet of office space in
Waltham, Massachusetts, where it conducts sales and marketing for its Products
and product development for certain Core Technologies. This lease expires
December 31, 2003, and requires monthly rental payments of $3,551.
Effective May 25, 1999, the Company entered into an agreement to
sublease a Cupertino, California facility to an unrelated third party. The
agreement requires the sublessee to pay the monthly rent of $31,651 directly to
the lessor through the end of the lease term on May 31, 2003. In the event the
sublessee fails to make timely payments, the Company could be required to cover
deficiencies in payments.
The Company believes that the facilities described above are adequate
for its current operating needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in claims and actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters will not materially affect
the consolidated financial position, liquidity or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
2002 Annual Meeting of Shareholders
On July 12, 2002, the Company held its Annual Meeting of Shareholders
in Boston, Massachusetts. The record date for the meeting was May 24, 2002, on
which date there were 12,070,147 shares of the Company's Class A common stock
outstanding.
The first matter voted upon at the meeting was the election of
directors. The following directors were elected:
SHARES SHARES
DIRECTOR VOTED IN FAVOR VOTED AGAINST
- -------- -------------- -------------
Thomas A. Murdock 9,985,780 278,654
Roger D. Dudley 9,984,033 280,402
John A. Oberteuffer, Ph.D 10,122,581 141,853
William A. Maasberg, Jr. 10,085,989 178,445
Mark S. Tanner 10,090,106 174,328
The second matter voted upon at the meeting was the approval of a
proposed amendment to the Company's Certificate of Incorporation to increase the
authorized capital stock of the Company to include 800,000,000 shares of Class A
Common Stock. The results of the voting were 9,935,830 shares in favor, 294,172
shares against, and 34,433 shares withheld or abstaining.
March 2003 Special Meeting of Shareholders
On March 24, 2003, the Company held a Special Meeting of Shareholders
in Salt Lake City, Utah. The record date for the meeting was February 7, 2003,
on which date there were 15,915,367 shares of the Company's
Page 27
Class A common stock issued, of which 2,020,750 shares were held as collateral
under escrow agreements and were not entitled to vote.
The first matter voted upon at the special meeting was the approval
of the Board of Directors' selection of Hansen, Barnett & Maxwell as the
Company's independent certified public accountants for the fiscal year ending
December 31, 2002. The results of the voting were 11,343,679 shares in favor,
185,011 shares against, and 152,555 shares withheld or abstaining.
The second matter voted upon at the special meeting was to consider
and act upon a proposed amendment to the Company's certificate of incorporation
to effect a reverse stock split of the Company's Class A common stock at a ratio
of one share for forty shares. The results of the voting were 10,325,475 shares
in favor, 1,240,197 shares against, and 55,573 shares withheld or abstaining.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Fonix Class A common stock is listed on the OTC Bulletin Board under
the trading symbol FONX. The following table shows the range of high and low
sales price information for Class A common stock as quoted on the OTC Bulletin
Board for the four quarters of calendar 2002 and 2001. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions. The quotations also do not reflect price
adjustments which will occur as a result of the Reverse Stock Split (see
"Reverst Stock Split" below).
Calendar Year 2002 Calendar Year 2001
----------------------- ----------------------
High Low High Low
---- ----- ----- ----
First Quarter $0.13 $0.04 $ 0.95 $ 0.31
Second Quarter $0.16 $0.06 $ 0.61 $ 0.28
Third Quarter $0.08 $0.05 $ 0.32 $ 0.06
Fourth Quarter $0.06 $0.04 $ 0.24 $ 0.07
As of March 21, 2003, there were 14,571,081 shares of Fonix Class A
common stock outstanding, held by approximately 1,036 holders of record and
40,000 beneficial holders. This number of beneficial holders represents an
estimate of the number of actual holders of the Company's stock, including
beneficial owners of shares held in "nominee" or "street" name. The actual
number of beneficial owners is not known to the Company.
The Company has never declared any dividend on its Class A common
stock and it is expected that earnings, if any, in future periods will be
retained to further the development and sale of the Company's speech- enabling
technologies and products. No dividends can be paid on the Class A common stock
until such time as all accrued and unpaid dividends on outstanding preferred
stock, if any, have been paid.
Reverse Stock Split
At a special meeting of shareholders held on March 24, 2003, the
Company's shareholders approved a Reverst Stock Split of the Company's Class A
common stock at a ratio of one share for forty shares. The Company will file an
amendment to its Certificate of Incorporation (as amended) with the Delaware
Secretary of State, stating that the effective date of the Reverse Stock Split
will be 12:01 a.m., April 4, 2003. The shares presented in this Annual Report
have been presented on a post-split basis.
Page 28
Securities authorized for issuance under equity compensation plans
The following table sets forth information about the Company's equity
compensation plans, including the number of securities to be issued upon the
exercise of outstanding options, warrants, and rights; the weighted average
exercise price of the outstanding options, warrants, and rights; and the number
of securities remaining available for issuance under the specified plan.
Number of securities
Number of securities to Weighted average remaining available for
be issued upon exercise exercise price of future issuance under
of outstanding options, outstanding options, equity compensation
Plan Category warrants, and rights warrants, and rights plans
-------------------------- ------------------------- ---------------------------
Equity compensation
plans approved by 685,902 $62.60 162,630
shareholders
Equity compensation
plans not approved by -- -- --
shareholders
Total 685,902 $62.60 162,630
2002 Employee Compensation Plan
On February 6, 2003, the Fonix Board of Directors adopted the 2002
Employee Compensation Plan (the "2002 Plan"). Shares of Class A common stock
issued under the 2002 Plan will be in partial payment of wages and salaries
earned by employees during the plan period, which runs from December 1, 2002,
through May 31, 2003. The plan period may be extended by the Board of Directors.
Each current employee has agreed to the terms of the 2002 Plan.
The maximum aggregate number of shares that may be issued under the
2002 Plan is 150,000,000 Shares (3,750,000 post-Reverse Stock Split shares). The
2002 Plan will be administered by the Board of Directors or a committee of the
Board. Shares under the 2002 Plan may be issued only to employees of Fonix.
Employees subject to the 2002 Plan were required to provide the
Company with a notice of election to participate in the 2002 Plan and to
indicate the amount of compensation to be deferred during the plan period. The
deferred compensation of employees electing to participate in the 2002 Plan may
be paid, at the option of the employee, in shares of the Company's Class A
common stock, in cash, or in a combination of the two. The payment of deferred
compensation will commence June 30, 2003.
As of March 26, 2003, no employee had notified the Company of the
ratio of cash and Class A common stock to be issued under the 2002 Plan, and no
shares or cash had been issued or paid to employees under the 2002 Plan.
The Company intends to seek shareholder approval of the 2002 Plan at
its 2003 Annual Meeting of Shareholders.
Page 29
Recent Sales of Unregistered Equity Securities
For the year ended December 31, 2001, the Company received $5,510,000
in funds drawn under the first equity line, less commissions and fees of
$165,300, and issued 658,829 shares of Class A common stock to the Equity Line
Investor. The shares were issued without registration under the 1933 Act in
reliance on Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"), and the rules and regulations promulgated thereunder. The resales of the
shares were subsequently registered under registration statements on Form S-2.
Between May 25, 2001 and December 31, 2001, the Company received
$13,425,000 in funds drawn under a second equity line, less commissions and fees
of $497,750, and issued 2,950,325 shares of Class A common stock to the Equity
Line Investor. Subsequent to December 31, 2001, the Company received $4,643,164
in funds drawn under the second equity line, less commissions and fees of
$139,295, and issued 83,897,735 shares of Class A common stock to the Equity
Line Investor. The shares were issued without registration under the 1933 Act in
reliance on Section 4(2) of the 1933 Act and the rules and regulations
promulgated thereunder. The resales of the shares were subsequently registered
under registration statements on Form S-2.
For the year ended December 31, 2002, the Company received $9,362,663
in funds drawn under the first equity line and second equity line, less
commissions and fees of $274,630, and issued 3,356,998 shares of Class A common
stock to the Equity Line Investor. Subsequent to December 31, 2002, through
March 21, 2003, the Company received $2,500,000 in funds drawn under the third
equity line, less commissions and fees of $64,150, and issued 2,866,412 shares
of Class A common stock to the Equity Line Investor. The shares were issued
without registration under the 1933 Act in reliance on Section 4(2) of the 1933
Act and the rules and regulations promulgated thereunder. The resales of the
shares by the Equity Line Investor were subsequently registered under
registration statements on Form S-2.
Page 30
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information set forth below is
derived from the Company's consolidated balance sheets and statements of
operations as of and for the years ended December 31, 2002, 2001, 2000, 1999,
and 1998. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes thereto
included in this Report.
For the Year Ended December 31,
2002 2001 2000 1999 1998
-------------- ------------- ------------- -------------- --------------
Statement of Operations Data:
Revenues $ 3,064,719 $ 581,684 $ 656,853 $ 439,507 $ 2,604,724
Cost of Revenues 553,404 9,898,769 1,851,876 2,009,723 1,238,400
Selling, general and administrative expenses 12,029,997 11,646,139 10,751,597 9,498,753 8,817,643
Product development and research 8,192,664 8,123,453 5,871,414 7,909,228 13,060,604
Amortization of intangible assets 30,600 604,105 604,105 604,105 473,867
Impairment loss on investment in affiliate -- 823,275 -- -- --
Purchased in-process research and development -- -- 474,000 -- 9,315,000
Other expense, net (581,294) (173,221) (3,991,348) (3,698,789) (6,507,245)
Loss from continuing operations (18,855,788) (30,687,278) (22,810,677) (19,949,196) (36,843,475)
Equity in loss of affiliate (456,692) (372,513) -- -- --
Loss from discontinued operations -- -- -- (2,187,080) (6,275,307)
Gain (loss) on extraordinary items -- -- 49,448 473,857 --
Net loss (19,897,564) (31,059,791) (22,887,487) (21,662,419) (43,118,782)
Basic and diluted net loss per common share $ (1.73) $ (5.20)$ (6.42) $ (12.40) $ (36.40)
Basic and diluted weighted average number of common 11,471,564 5,978,281 4,067,107 1,918,243 1,312,780
shares outstanding
As of December 31,
-------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------------- ---------------- ----------------- ---------------- -----------------
Balance Sheet Data:
Current assets $ 690,844 $ 1,269,124 $ 3,752,210 $ 480,885 $ 20,638,070
Total assets 6,523,480 8,599,028 17,517,373 19,173,147 61,912,791
Current liabilities 15,119,594 7,370,392 3,571,854 5,285,681 35,317,045
Long-term debt, net of current portion 3,312 -- 19,767 3,971,107 --
Stockholders' (deficit) equity (8,599,426) 1,228,636 13,925,752 8,086,359 24,765,746
Page 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL INFORMAT