SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number 333-12979
VOICENET, INC.
(Name of small business issuer as specified in its charter)
DELAWARE 13-3896031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Park Avenue, 17th Floor, New York, NY 10022
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 572-4861
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Common Stock, $.01 par value
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].
State Issuer's revenues for its most recent fiscal year: 0
As of December 31, 1997: (a) 3,261,550 Common Shares, $.01 par value, of
the registrant were outstanding; (b) approximately 564,050 Common Shares were
held by non-affiliates; and (c) the aggregate market value of the Common Shares
held by non-affiliates was $4,794,425 based on the last sale of $8.50 per share
on March 30, 1998.
<PAGE>
PART I
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
Section 21 E of the Securities Exchange Act of 1934, as amended, or subsequent
expansions or replacements of such sections, including information with respect
to the Company's plans and strategy for its business. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "estimates," "feels," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below under the caption "Factors That May Affect Future Results" included
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Part II of this Annual Report on Form 10-KSB.
Item 1. Description of Business
General
Voicenet, Inc. (the "Company" or "Voicenet"), a Delaware corporation, was
established on April 2, 1996 for the marketing and distribution of large
vocabulary, continuous speech, recognition systems and of digital audio
reporting, transcription, storage, archiving and retrieval systems
(collectively, the "Voice Systems"). The products and technologies to be
marketed by the Company are the result of research and development conducted by
Voicenet (Aust) Ltd. ( formerly Southern Group Limited) ("VNA") and Philips
Electronics, N.V. ("Philips"). VNA is a publicly owned Australian corporation
listed on the Australian Stock Exchange. Philips is a multinational corporation
based in the Netherlands which has been in the forefront of the dictation and
recording markets world-wide.
The Company acquired from VNA pursuant to a Technology Transfer Agreement
dated as of August 1, 1996 (the "Technology Transfer Agreement") the exclusive
rights for the North, Central and South American markets (the "Territory") to
the latest version of the technology developed by VNA relating to the voice
products and the Voice Systems, including the right to manufacture and market
VNA's latest version of (i) digital audio recording, archiving and retrieval
systems known as COURTSCRIPT(TM) for the court recording industry (collectively
the "Court Reporting Systems"); (ii) large vocabulary, continuous speech
recognition systems for the medical industry known as RADTALK(TM), and
PSYCHTALK(TM) (collectively the "Medical Systems"); (iii) digital audio products
and technologies for the broadcasting industry; and (iv) VNA's current and
future digital voice-to-text audio products developed to exploit the markets for
continuous, speech recognition and automatic transcription technology
(collectively, the "Technology").
Pursuant to the terms of the Technology Transfer Agreement, VNA transferred
the Technology and related rights to the Company for the purchase price of
$4,500,000. The Company paid the purchase price by issuing its Promissory Note
in the amount of $4,500,000. Pursuant to an amendment to the Promissory Note
dated September 25, 1997, the Company and VNA agreed that the Promissory Note
may be converted into Common Stock of the Company at a conversion price of $8.00
per share. VNA elected to exercise that conversion option and was consequently
issued 562,500 registered shares of
2
<PAGE>
common stock of the Company. VNA therefore, holds a controlling interest in the
Company. Additionally the Company's President and Chief Executive Officer is
also the Managing Director and Chief Executive of VNA. See "Description of
Business--Technology Transfer Agreement; "Management."
The Technology and products acquired by the Company under the Technology
Transfer Agreement embrace two main voice technologies: (i) digital voice
compression, storage and retrieval, and (ii) speech recognition.
Philips developed a large vocabulary (64,000 word capacity), continuous
speech recognition engine (the "Philips Engine") which can process speech from
normal parlance. VNA is the developer of proprietary digital audio compression,
storage and retrieval systems and speech recognition systems and software which
incorporate the Philips Engine. In April and October, 1996, VNA signed
technology licensing and development agreements with Philips for the product
recognition system using the Philips Engine.
In August 1997, Philips and the Company signed an agreement for the joint
development of the U.S. market for the Company's speech recognition products.
The Company's objective is to become a leader in the marketing of the Voice
Systems. The Company's strategy is to (i) establish a sales force to market the
Court Reporting Systems to court administrators, (ii) obtain marketing partners
and distributors which already have a significant presence in the field for the
marketing of its Medical Systems to hospitals, physicians and physician practice
management groups and (iii) obtain marketing partners and licensees for the
sales and distribution of its voice systems to other applications and field of
use.
The Company has signed a trade services agreement with the Columbus Group
for the marketing, sales and licensing of Voicenet's technologies and products.
The Arlington, Virginia based company will market Voicenet's technologies in
North America including its suite of dictation-orientated products utilizing
high-vocabulary natural continuous speech and its digital audio recording and
transcription products.
Particular marketing emphasis will be placed on a range of Voicenet
products, including COURTSCRIPT(TM) a digital audio recording, archiving,
retrieval and transcription system for the court industry and high-vocabulary
continuous speech recognition recording, transcription and archiving suite of
systems.
RADTALK(TM) a system for radiology practitioners, is currently installed in
a number of leading Australian hospitals and is creating interest within the
U.S. radiology community, while COURTSCRIPT(TM), a digital audio court recording
and transcription system, is either in use or being tested in a growing number
of countries, including the United States, Canada, Hong Kong and Australia.
The Columbus Group has achieved considerable success as an international
professional services firm, providing marketing support to a number of U.S. and
foreign firms through its Washington based staff and an international network of
offices and associates. The group provides services in a number of strategically
important areas, including telecommunications and information technology,
financial services, health care management, government marketing and
contracting.
3
<PAGE>
The Company is in the development stage and its operations are subject to
all the problems, expenses, delays and other risks inherent in the establishment
of a new business enterprise, as well as the problems inherent in developing and
marketing a new product/service and in establishing a name and business
reputation. The likelihood of the success of the Company must also be considered
in connection with the rapidly and continually changing technology and the
competitive environment in which the Company will operate. There can be no
assurance that the Company's operations will result in its becoming or remaining
economically viable. Shareholders should be aware of the problems, delays,
expenses and difficulties encountered by any company in a development stage,
many of which may be beyond the Company's control. These include, but are not
limited to, organization and hiring of sales, administrative and management
personnel, lack of customer acceptance of the Company's products, sales and
marketing problems, intense competition, product quality control, and inadequate
financial resources. The Company has had no revenues from operations to date
and, because it is just beginning to enter the commercial stage, it may likely
sustain operating losses for an indeterminate time period. Since its inception
in April 1996, the Company has devoted substantially all of its efforts and
resources to raising capital through an initial public offering of its common
stock. During the year ended December 31, 1997, the Company generated an
accumulated deficit of $615,330 and has a total accumulated deficit of $616,055.
The Company has no revenues from continuing operations in the year ending
December 31, 1997. The Company has incurred net losses since its inception in
1996. The Company's losses incurred since inception have resulted principally
from legal, accounting, printing, marketing and travel expenditures incurred in
pursuing its capital raising activities, and to a lesser extent early stage
product marketing expenses. The Company expects to incur operating costs and
possible losses therefrom over the next several years due primarily to expanded
sales and marketing efforts, including the establishment of product sales
office, the staffing of such office with marketing, administrative and
management personnel, and travel and related business entertainment expenses
incurred by the sales personnel as they seek potential customers for the
Company's products. There can be no assurance of when and whether the Company
will generate revenues or become profitable on a sustained basis, if at all.
Although the Company anticipates sales to commence in 1998, the Company's
results of operations may vary significantly from quarter to quarter due to
timing of payments and other factors. The timing of the Company's revenues, if
any, may not match the timing of associated product development of other
expenses.
The Company's ability to achieve sales and increase its levels of revenue
will depend upon its ability to secure capital financing and to sell the
Company's products. The Company's ability to generate significant revenue and
become profitable is dependent in large part on its commercializing the
Company's lead product, the CourtScript system for digital recording of courts.
There can be no assurance that the operations of the Company will generate
significant revenue or will ever be profitable.
Business Strategy
The Company's objective is to become a leader in the marketing of the Voice
Systems. Implementing the Company's strategies involves the following
activities:
o Emphasize large vocabulary, continuous speech recognition systems
product line. The Company intends to emphasize the continued
development of its state-of-the-art high
4
<PAGE>
vocabulary, continuous speech recognition systems product line, which
product line management anticipates will lead to the development of
new products and product enhancements. Examples of such products are
the Company's soon to be released third generation of Court Reporting
System and first generation of a Medical Recordkeeping System in the
Territory, a high vocabulary, continuous speech recognition system for
the medical industry which has completed commercial installations.
o Target and Expand Court Reporting Market. The Company intends to
establish a sales force to market its Court Reporting Systems to
legislative bodies and administrative agencies within the Territory.
VNA has tested its Court Reporting Systems in courts within the
Territory and has experienced positive results and inquiries from
governments that have heard about the Court Reporting Systems.
Management believes that use of the Court Reporting Systems will
result in lower costs and more efficient and accurate court reporting.
o Pursue Market Through Marketing Partner and Distributor Relationships.
The Company intends to market some of its products, such as the
Medical Systems, within the Territory by entering into strategic
distribution agreements. The Company believes that systems like those
developed by the Company have not been previously available to users
distributors may reach.
o Further Develop Strategic Alliances. The Company will support most of
its internal development and marketing efforts with strategic
alliances. To date, the Company has established significant product
development relationships with VNA and directly with Philips. The
Company believes that its collaborative relationships with these
companies will expand the breath of opportunities for the Company's
technology. The Company intends to continue to enhance the established
strategic alliances and it believes the relationships will further
enhance the Company's development and marketing efforts.
Voicenet (Aust) Ltd. and Development of the Technology
VNA is a research and development company that focuses on digital audio
applications. In 1989, VNA developed one of the world's first digital audio mass
storage system ("DAMS(TM)) for the broadcasting industry. The system permitted,
for the first time, the facility for radio broadcasters to digitally store, and
instantaneously access from a simple in-studio system control panel, all
broadcast material from archives which could be saved on hard disk or CD Rom.
In 1992, VNA was commissioned by a division of the Australian Federal
Attorney General's department to develop a digital system for recording,
reporting and archiving court proceedings. The result of that commission was the
development of a system code named DART(TM). On completion and sale to Auscript
of the DART", VNA continued to research and develop the application, and with
the assistance of the Los Angeles County Superior Court Division, which
permitted the use of four of its courts as a test site for a twelve month
period, completed an earlier version of the Court Reporting System of digital
audio recording and transcription. Earlier versions of the system have been sold
by VNA to courts in Canberra (the Australian Capital Territory), Hong Kong, and,
by a non-exclusive licensee in North America, Karri Technologies Corp., in
Pennsylvania, California and Maryland. Newer versions of the Court Reporting
System are currently being marketed by VNA and others in various other countries
around the world. While Karri Technologies Corp. has non-exclusive license
rights to use certain components of the earlier version of the System and to use
the name in COURTSMART(TM) in connection
5
<PAGE>
therewith in North America, VNA's subsidiary KTI ceased operation in 1994 in the
United States. The Company anticipates that its newer version of Court Reporting
Systems, some of which will incorporate continuous, voice-to-text ability, may
be also marketed under the names COURTSCRIPT(TM) AND VOICESCRIPT(TM).
VNA has signed technology licensing agreements with Philips for the product
development, marketing and distribution of its continuous speech, large
vocabulary recognition system. Although there can be no assurance, advances
facilitated by an amalgamation of the large vocabulary continuous voice
recognition digital technology applications developed by VNA are expected by
management to have a significant impact on the interactivity aspect of the
computer industry, where continuous large vocabulary speech can be processed,
transcribed, stored and printed. Both the audio and transcribed material can be
archived and retrieved on and from the same storage medium in a synchronous
manner.
Technical Summary of Court Reporting System and Continuous
Speech Recognition Engine and Medical Recordkeeping System
The Technology and products acquired by the Company under the Technology
Transfer Agreement embrace two main voice technologies: digital audio
compression/transmission and speech recognition.
The proprietary hardware and software utilized in VNA's Court Reporting
System has been designed, developed and manufactured by VNA and its
subsidiaries. The system currently operates over a Microsoft(TM) network.
The second generation of the Court Reporting System that is being acquired
by the Company will include an encoder card that will make the external analogue
mixer redundant as the encoder card will input directly 16 channels of analogue
audio, perform AGC, mix the audio into 4 channels and digitize with a choice of
using either ADPCM or MPEG for compression facilitating audio quality ranging
from voice grade to broadcast grade as required. The new encoder card will also
have an in-built wide area network ("WAN") capability.
The main barrier for processing speech continuously has been computer
processing power. Even with rapid developments in personal computer ("PC")
technology, management believes that not even the currently fastest Intel
Pentium(TM) microprocessor can process speech continuously. Hence, a special
accelerator board has recently been developed by Philips to increase the
processing of continuous speech by approximately ten fold, which along with
proprietary software embodies the Philips Engine. The methodology embraced in
utilizing this continuous speech recognition technology is heavily speech
context orientated. The reason is that to process continuous speech, you not
only need acoustical models for comparison computation, but a statistical
language model that can calculate the probability of word sequences in this
context. This is an integral part of achieving high speech recognition rates.
The Philips Engine performs these comparisons by using feature vectors. A
feature vector is a mathematical representation of phonemes (the smallest unit
of speech) that is created from the input speech to compare with a library of
feature vectors to identify the correct interpretation with the aid of Hidden
Markov Modelling. The accelerator board acts a pre-processor (i.e., it performs
the computationally intensive numerical calculations). The board's principal
function is to compare feature vectors created from the
6
<PAGE>
input speech with the feature vectors in the known context (vocabulary) and
output the required distance value between the vectors for the voice recognition
engine to process quickly, without this initial computational overhead.
Industry Comparison of Technology
VNA's technology licensing agreement with Philips for product development,
integration, marketing and distribution, and in turn the transfer of the
Technology from VNA under the Technology Transfer Agreement to the Company, is
for its large vocabulary, continuous speech recognition systems. This is to be
distinguished from speech technology that has been available for several years
in various limited applications, which have had two major limitations (i) that
the speech recognition systems could only facilitate "discrete" speech (i.e.,
distinct pauses are required between the words spoken for the computer to
recognize the individual words) and (ii) speaker dependence whereby there is a
requirement for each individual user to train or custom program the system to
ensure an acceptable level of recognition of the speaker's voice. These previous
limitations have made the adoption of the speech recognized technology slow and
isolated in use.
Because there are many voice recognition ("VR") technology providers in the
market today, it is important to compare these other systems to the Company's
technology. The three principal bases typically used the VR industry are (i)
continuous versus discrete speech; (ii) large versus small vocabulary; and (iii)
speaker dependent versus speaker independent. There is a relationship between
the size of the vocabulary which determines the effectiveness of its recognition
factor, i.e. the smaller the vocabulary, the easier it is for recognition and
conversely, the larger the vocabulary, the more difficult it is to achieve
recognition.
The specific use contexts can also be broken down into three main
categories: (i) dictation, (ii) telephony, and (iii) "command & control." The
Company intends to operate in a dictation context. Each use context needs to be
benchmarked in a manner consistent with the baselines set for the applicable
use, (e.g., the baseline for large vocabulary in the telephony context means
2,000 words). It is not uncommon for telephony or "command & control" VR
developers to provide a "continuous speech" facility because they are used
solely for small vocabularies which address basic telephony application
interaction (i.e. continuous digit recognition for credit card details or
limited phrases for action commands such as phone number retrieval or
progressive information steps).
However, in the dictation context the baseline for "large vocabulary" is
considered to be greater than 20,000 words. Moreover, a continuous and active
large vocabulary dictation context is even more technically challenging. The
speech recognition technology to be marketed by the Company is the only
technology in the dictation context which can process very large active
vocabulary (64,000 words) with continuous voice recognition in a dictation
context. IBM has recently introduced a continuous voice recognition system with
a reported vocabulary of 20,000 words for the medical recordkeeping industry.
Development and Use of the COURTSMART(TM) Court Reporting System
The earlier version of the court reporting system was developed and was
installed as a test site, in December 1993 in a courtroom operated for the Los
Angeles County Superior Court Division. During that period, the information
received from the Los Angeles Superior Court administration on the operation of
the system was instrumental in determining the final characteristics of the
subsequent versions of the
7
<PAGE>
system.
The court reporting system using computer and other shelf and proprietary
hardware with proprietary software, operates as follows: (1) microphones within
the courtroom are combined and processed with other relevant communication
channels and employ automation and control techniques that normally do not
require a local operator to be in attendance; (2) speech is then recorded
directly to a combination of digital storage media which provide the optimum mix
of both instant access and archived storage in a secure and efficient manner.
During this process several levels of automated "tagging" are available, to both
users and operators so that sections of text can be readily recalled and
identified at a later time; and (3) the voice recordings once stored digitally,
are made available in rapidly accessible and reusable format through a local
network, to any number of workstations for transcription purposes. Each
workstation can take any part of any recording and in any required length. The
text thus produced using any one of several popular word processing packages, is
then automatically merged and stored in association with the voice recording.
The network can then at any time print text, replay the audio or archive
material in any required format. Non-active material is archived to DDS (Digital
Data Storage) tape or CD-ROM providing storage densities far greater than any
analogue system, and can be easily reloaded at any subsequent time.
The Company believes that its version of the Court Reporting System
introduces three major advances over traditional systems: the first is the
delivery of recorded audio direct from the court to the transcription operator
via computer network negating all physical handling of recordings (present tape
based systems are labor intensive); the second is the ability to tag direct to
incoming audio providing Transcription Staff with fault free recognition of a
particular speaker; and the third is the ability to search many hours of
recorded audio rapidly (random access), based on the permanently stored time and
date stamp or text tag attached to each one second of audio.
All facilities provided by the latest version of the Court Reporting System
are aimed at increasing the overall efficiency of the recording and
transcription operation, thus ultimately, being reflected in a reduction in the
cost per page of transcript generated.
Marketing
Court Reporting
Court reporting is the verbatim transcription of the spoken work into the
written word, generally from sworn legal testimony. The industry is divided into
two distinct sectors -- the recording of proceedings in court, or "official"
court reporting, and all other court reporting. Official court reporting is
performed by civil servant court reporters employed by municipal, state, or
federal courts. All other court reporting is performed outside the courtroom by
free-lance court reporters, who may be either self-employed, or employees of
independent contractors affiliated with a court reporting agency.
Although there are no independently verified statistics with respect to the
number of court reporters, there are approximately 20,000 members of the
National Court Reporting Association "NACRA"), the only national professional
association in the industry, and an additional 13,000 student members. The
Company estimates that there are approximately 40,000 court reporters in the
United States.
8
<PAGE>
Court reporting requires trained professional capable of transcribing
speech usually by steno type machine, which generally approximates 200 words per
minute, using shorthand symbols. The shorthand notes are translated from the
paper or magnetic medium, then edited to produce a final transcript.
The Company intends to market and distribute the COURTSCRIPT(TM) system to
courts initially. It can be anticipated, however, that court reporters, which
are generally unionized government employees, may resist the introduction and
implementation of electronic court reporting systems. Although there can be no
assurance, the Company believes, however, that the cost and benefit of its
system in comparison to court reporters will convince court administrators to
begin using its Court Reporting Systems. The Company also intends to market its
Court Reporting Systems to parliamentary and legislative bodies. The Company may
use the name VOICESCRIPT(TM) in connection with such systems.
Marketing Strategy
The Company plans to seek ongoing relationship with a distributor or
distributors that have a strong foothold in the medical marketplace to market
the Medical Systems. The Company's initial focus for the distributors will be on
major hospitals and medical centers within the Territory.
The Company plans to market the Court Reporting Systems by appointing up to
eleven sales representatives for the United States, who will operate as
independent contractors and primarily be compensated on a commission basis,
which represents one for each of the eleven Federal Court Circuits. The Company
intends to appoint sales representatives for the circuits after the completion
of this offering at the rate of one per month. The Company intends to appoint
three sales representatives for Canada, covering the provinces of Ontario,
Quebec and British Columbia. The first of these has been appointed.
The Company has had marketing material prepared by an advertising agency
including a professional video of approximately 7 minutes duration which covers
(a) the existing court system; (b) cost benefit analysis; (c) the Court
Reporting System; and (d) how its Court Reporting System functions.
Pursuant to the Company's agreement with VNA, all potential and executory
contracts being negotiated by VNA within North America will be transferred to
the Company.
Competition
Competition in the continuous speech recognition systems and digital audio
technology market is intense. The Company believes that its principal
competitors in the field of voice recognition are IBM, AT&T, Microsoft, Kurz
Weil, Philips Electronics, N.V., Dragon Systems, Inc., Kolvox, Fonix, Voice
Control Systems, Inc., Voice Processing Corporation, Lernout & Hauspie, Inc. and
Karrit Technologies Corp., one of VNA's non-exclusive licensees of the earlier
version of certain components of the system
9
<PAGE>
which has the non-exclusive right to also use the name COURTSMART(TM) in
connection with such components in North America. In particular, IBM and Dragon
Systems have recently introduced voice recognition systems which have continuous
voice recognition abilities and large vocabulary. Further, although the Company
will have the exclusive right to the Technology from VNA, the Company does not
have the exclusive right to the Philips Engine in its Territory. Consequently,
it is possible that Philips or another Philips licensee could develop a combined
product similar to VNA's voice system and Technology and market such voice
recognition product in the areas encompassed by the Company's Territory from
VNA. Lernout & Hauspie is involved in "command and control" aspects of speech
recognition within a sentence and based on small vocabulary: the Dragon Dictate
system has a large vocabulary capacity. Voice Control Systems, Inc. and Voice
Processing Corporation seem to be principally involved in speech recognition in
telephony applications such as voice verification over telephone fields of
"command and control," continuous digit recognition and alpha-numerics. There
can be no guarantee that these companies or other new entrants into the market
segments or similar technologies will not succeed in developing similar or more
effective competitive products or technologies.
Many of the Company's competitors are large established companies with
greater resources, greater marketing and operating experience, greater research
and development and greater production capabilities than those of the Company.
The Company's competitive position will also depend upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient resources for
the marketing and servicing of its products. There is no assurance that the
Company will be able to compete successfully.
Technology Transfer Agreement
The Company has acquired from VNA pursuant to a Technology Transfer
Agreement dated as of August 1, 1996 the exclusive rights for the North, Central
and South American markets to the Technology developed by VNA relating to the
voice products and the digital audio reporting, transcription, archiving and
retrieval systems, including the right to manufacture and market the latest
version of digital audio reporting, transcription, archiving and retrieval
systems for the court recording industry; high vocabulary; continuous voice
recognition and digital voice-to-text recording; storage and retrieval for the
medical industry; digital audio products and technologies for the broadcasting
industry; and the digital audio products developed to exploit the markets for
continuous speech recognition and automatic transcription technology. Pursuant
to the terms of the Technology Transfer Agreement, VNA transferred the
Technology and related rights for the purchase price of $4,500,000, which was
paid by the Company issuing its non-interest bearing Promissory Note in such
amount. The note has been altered to be payable as follows: (a) $2.5 million
upon the earlier of March 31, 1998 or the successful closing of the Company's
offering, (b) $1 million upon the first signed installation contract for a
COURTSMART(TM) system in the United States of at least $30,000 and (c) $1
million on March 31, 1998. By amendment to the Promissory Note dated September
25, 1997, the Company and VNA agreed that the Promissory Note may be converted
into Common Stock of the Company at a conversion price of $8.00 per share. That
Promissory Note has been converted and upon conversion of the promissory Note
and issuance of the 562,500 to the Selling Stockholder, VNA, the $4.5 million
obligation has been satisfied in full.
The Company commissioned Gorey & Sinclair, an independent Australian
chartered accounting
10
<PAGE>
firm to prepare a valuation report of the latest version of the COURTSMART(TM)
system in the United States. In the opinion of Gorey & Sinclair, based upon
certain assumptions, the COURTSMART(TM) system for the United States has a
potential value between $23.7 million and $32 million upon full
commercialization. The Company relied on this report as its primarily basis for
determining the purchase price of the Technology from VNA. The report by Gorey &
Sinclair is necessarily based upon a number of estimates, assumptions and
forecasts that, while they are considered reasonable by the Company, assuming
the Company has adequate financing, are inherently subject to significant
material business, economic, and competitive uncertainties and contingencies
which are beyond the control of the Company, and upon assumptions with respect
to future sales which may never develop. Accordingly, there can be no assurance
that these results will be archived or that the value estimated by Gorey &
Sinclair will ever be realized. The prospective financial valuation presented in
the Gorey & Sinclair report will vary from actual results, and these variations
may be material. The inclusion of such information in the Gorey & Sinclair
report should not be regarded as a representation by the Company or any other
person that these results or estimates will be ever obtained. It is merely an
estimation of potential if the underlying assumptions are realized. Prospective
investors in the offering are cautioned not to place undue reliance on this
information.
Manufacturing and Supply of Products
The Company has no manufacturing facilities and relies upon VNA and other
contract manufacturers to manufacture its proposed products. Except for one
small hardware component and two software components, all of the remaining
components utilized in the latest version of the Court Reporting Systems and the
Medical Recordkeeping Systems, are readily available and can be purchased from
numerous sources in the United States and abroad. The one hardware component and
the two software components that contain the proprietary technology developed by
VNA which incorporates the Philips Engine will be acquired from VNA. VNA has
agreed to manufacture the one hardware component and the two software components
of the system in Australia and sell them to the Company at prices which shall
not be greater than the prices at which VNA sells the components to unaffiliated
parties, less a minimum discount of 10%.
Intellectual Property
The Company does not own any patents, trademarks or trade secrets. Under
the Technology Transfer Agreement for the court reporting system and related
technology, the Company is granted the exclusive right to manufacture, market,
sell and distribute the latest version of the system and other digital voice
systems developed by VNA in North, Central and South America under VNA's
trademarks. VNA developed the systems, and has copyrighted the computer software
used in the Court Reporting System and it has applied for a patent on the
hardware component that it developed. Pending the issuance of any patents, which
cannot be assured, VNA intends to rely on unpatented proprietary technology and
technical know-how. Accordingly, because the Company will only receive under the
Technology Transfer Agreement such intellectual property rights as may be owned
by VNA, the Company will similarly rely on unpatented proprietary technology and
technical know-how. Philip owns and has patented the technology comprising the
Philips Engine. VNA is a licensee of the Philips Engine. The Company's composite
product which is VNA's patented and proprietary digital cardio recording,
storage, archiving and retrieval technology integrated with the Philips Engine.
The Company does not have an exclusive right from Philips to the Philips Engine
in the Territory. No assurance can be given that others will not independently
develop substantially equivalent technology, knowledge and techniques or
otherwise gain
11
<PAGE>
access to VNA's technology, or use the Philips Engine to make a similar product,
or that VNA or the Company can meaningfully protect its rights in such
unpatented proprietary technology or know-how.
The Company's principal business address is 300 Park Avenue, 17th Floor,
New York, New York 10022, and its telephone number is (212) 572-4861.
Item 2. Properties
The Company leases approximately 110 square feet of office space at 300
Park Avenue, New York, NY on a month-to-month basis at the rate of $1,600 per
month.
Item 3. Legal Proceedings
The Company is not aware of any other material pending or threatened legal
proceedings against the Company or its officers and directors.
Item 4. Submissions of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders in the
fourth quarter of 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information
There is currently a limited public trading market for the Company's Common
Stock. There are currently 2 market-makers for the Company's Common Stock. The
Common Stock has traded on a limited basis on the OTC Bulletin Board under the
symbol "VNET" since January 5, 1998. The stock register and transfer agent for
the Company is American Stock Transfer & Trust Company, New York, New York.
(b) Holders of Common Stock
Approximate Number of
Title of Class Record Holders as of December 31, 1997
-------------- --------------------------------------
Common Stock, $.01 par value 30
A number of shares are held by record by brokerage and other institutional
firms for their customers.
(c) Dividends
The Company has never declared or paid a cash dividend on its common stock,
and it is anticipated that the Company will continue to retain its earnings for
use in its business and not pay cash dividends. Declaration and payment of
dividends are within the discretion of the Company's Board of Directors, which
will review such dividend policy from time to time.
12
<PAGE>
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of operations for the period commencing April 2, 1996 through
December 31, 1997 (the "1997 Period"); compared with the period commencing April
2, 1996 through December 31, 1996 (the "1996 Period").
Net losses increased from $725 for the 1996 Period to $615,330 for the 1997
Period. The Company had no revenue or operating income for the 1996 and 1997
Periods from continuing operations. The Company had interest income of $38,372
for the 1997 Period and $106 in the 1996 Period. Total general, administrative
and development expenses were $653,702 for the 1997 Period in comparison to $831
for the 1996 Period an increase of 652,871.
At December 31, 1996, the Company had total assets of $4,623,324, and at
December 31, 1997, the Company had total assets of $5,424,499, an increase of
$801,175. At December 31, 1996, the Company had total liabilities of $4,599,029,
and at December 31, 1997 the Company had total liabilities of $455,267. At
December 31, 1997 the Company had an total stockholders equity of $4,969,232 in
comparison to a total stockholders' equity of $24,295 at the comparable date in
1996.
The Company had working capital as of December 31, 1997 of $465,332 in
comparison to negative working capital of $4,590,059 as of December 31, 1996.
The Company had an accumulated deficit of $725 as of December 31, 1996 in
comparison to an accumulated deficit of $616,055 at December 31, 1997 period.
The increase in the accumulated deficit is primarily related to continuing
operating costs without any operating income. For the 1997 Period the Company's
cash requirements were satisfied from the cash reserves in its operating and
investment accounts and from unsecured loans made by the Company's majority
shareholder, VNA, which totalled $312,624 at December 31, 1997.
On November 5, 1997, the Company successfully completed an initial public
offering of its common stock. In the public offering, 562,500 shares of common
stock were issued to VNA at a conversion price of $8.00 per share in payment and
satisfaction of a $4.5 million promissory note which the Company had executed
and delivered to VNA in August, 1996 pursuant to the purchase of digital
technology from VNA under a Technology Purchase Agreement dated August 1, 1996,
and 188,250 shares of common stock were sold to new shareholders at the price of
$8.00 per share. After the underwriters selling commission and discount, the
Company had net proceeds of approximately $973,867. In addition, the Company
incurred approximately $532,133 in transaction costs in connection with the
offering, including filing fees, attorney fees, accountants fees, printing
costs, transfer agent's fees, travel expenses and other costs and expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company does not currently possess a bank source of financing and has
not had any revenues. The Company cannot be certain that its existing sources of
cash will be adequate to meet its
13
<PAGE>
liquidity requirements. Therefore, the Company is considering the following
options to meet its liquidity requirements:
(a) attempting to raise additional funds through the sale of equity
securities to persons or entities who are not presently stockholders of the
Company;
(b) attempting to obtain a bank line of credit; and
(c) should insufficient funds be available from the foregoing sources,
reducing the Company's present rate of expenditures which might materially
adversely affect the ability of the Company to produce competitive products
and services and to market them effectively.
The Company believes that its existing cash and cash equivalents together
with the approximately $1 million of net proceeds after offering expenses and
costs resulting from the closing of its initial public offering, excluding any
potential cash flow from operating revenue, will be sufficient to meet its
operating expenses and capital expenditures requirements for at least the next
12 months. The Company's future capital requirements, however, will depend on
numerous factors, including (i) the effectiveness of product commercialization
activities and marketing activities, including the creation and progress of its
sales and marketing operations, (ii) the effect of competing technological and
market developments, from competitors that have greater resources than the
Company. However, if operating expenses are higher than expected or if cash flow
from operations is lower than anticipated, there can be no assurance that the
Company will have sufficient capital resources to be able to continue as a going
concern after such twelve month period. Therefore, the Company's ability to
continue in business as a going concern depends upon its ability to sell
products, to generate fees from the sale of its services, to conserve liquidity
by getting marketing and other priorities and reducing expenditures, to obtain
bank financing and to obtain additional funds through offering of its
securities. The Company's ability to obtain funds through an offering of its
debt securities is limited by its lack of revenue. In any event, there is no
assurance that any expenditure reductions, financings or other measures that the
Company may be able to effect will enable it to meet its working capital
requirements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" Section, in other sections of
this Annual Report on Form 10-KSB including, without limitation the "Description
of Business" Section in Part I, and in prior and future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral statements made with the approval of an authorized executive which are
not historical or current facts are "forward-looking statements" made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and are subject to certain risks and uncertainties that could cause actual
results to differ materially from those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the
14
<PAGE>
date made. The following important factors, among others, in some cases have
affected and in the future could affect the Company's actual results and could
cause the Company's actual financial and operating performance to differ
materially from that expressed in any expressed in any forward-looking
statement:
New Venture -- No Operating History
Voicenet, Inc. is a development stage company, incorporated on April 2,
1996 in the State of Delaware. Its proposed operations are subject to all the
problems, expenses, delays and other risks inherent in the establishment of a
new business enterprise without an operating history, as well as the problems
inherent in developing and marketing a new product/service and in establishing a
name and business reputation. The likelihood of the success of the Company must
also be considered in connection with the rapidly and continually changing
technology and the competitive environment in which the Company will operate.
There can be no assurance that the Company's operations will result in its
becoming or remaining economically viable. The Company may experience problems,
delays, expenses and difficulties typically encountered by any company in a
developmental stage, many of which may be beyond the Company's control. These
include, but are not limited to, unanticipated regulatory compliance, marketing
problems and intense competition that may exceed current estimates. The Company
has had no revenues to date and, as a result of the start-up nature of the
Company's business and the fact that it has not yet commenced operations, the
Company will likely sustain operating losses for an indeterminate time period.
Unless the Company is able to generate revenues or obtain financing through some
means in the near future, the operations of the Company in its development phase
may raise doubt about the ability of the Company to continue as a going concern
after such twelve month period. There can be no assurance that the operations of
the Company will ever be competitive or profitable.
Possible Need for Additional Financing
The Company anticipates that its existing capital resources will be
padequate to satisfy its current capital requirement for at least the next
twelve months. Thereafter, the Company may in the future determine, depending
upon the opportunities available to it, to seek additional debt or equity
financing to fund the cost of continuing expansion. To the extent that the
Company obtains equity financing or finances an acquisition with equity
securities, any such issuance of equity securities could result in dilution to
the interests of the Company's stockholders. Additionally, to the extent that
the Company incurs additional indebtedness or issues debt securities in
connection with an acquisition, the Company will be subject to risks associated
with incurring substantial additional indebtedness including the possibility
that cash flow may be insufficient to pay principal and interest on any such
indebtedness. There can be no assurance that additional financing will be
available to the Company on acceptable terms, or at all.
Early Stage of Market Development
The speech technology market is at a relatively early stage of development.
To date, the speech technology products that will be manufactured and marketed
by the Company have only been incorporated in commercially available products on
a limited basis. Acceptance of these technologies on a commercial basis will be
dependent upon the development of the speech technology markets, the performance
and price of the Company's products and customer reaction to these products.
There can be no assurance that the speech technology market will develop further
or that the Company's products will achieve any or significant market
acceptance. See "Description of Business--Industry Comparison of Technology."
15
<PAGE>
Dependence on Acceptance by Court Administrators
Sales of the Company's Court Reporting System products on a commercial
basis will be substantially dependent on acceptance by the court community. It
is anticipated that court reporters which are generally unionized government
employees will resist the introduction and implementation of electronic court
reporting systems such as COURTSCRIPT(TM). There can be no assurance that the
Company's proposed Court Reporting System products will be accepted in the court
community, and the Company is unable to estimate the length of time it would
take to gain such acceptance. See "Description of Business."
Uncertainty of Market Acceptance -- Lack of Marketing Arrangements
The Company has only recently commenced significant marketing activities,
primarily through instituting trade agreements, and the distribution of
promotional materials. Achieving market acceptance for the Company's products
will require substantial marketing efforts and the expenditure of significant
funds. There is no assurance that the Company will be able to create a
successful marketing program, or that the Company's products can be sold in a
manner that will permit the Company to achieve long range profitability, if
ever. See "Description of Business."
Limitations of Scope for the Company's Product Line
The Company intends to engage in the marketing and distribution of speech
recognition systems and of Court Reporting Systems and Medical Systems. The
Company's success will be totally dependent on its ability to market its product
line. The Company's current plans do not include any other potential sources of
revenue. See "Description of Business."
Possible Product Obsolescence
The Company expects technological developments to continue at a rapid pace
in the computer and communications industries, and there can be no assurance
that technological developments will not cause the Company's Technology to be
rendered obsolete. The Company's future success, if any, will be dependent upon
its ability to remain competitive with others involved in the development,
manufacture and marketing of similar products and technologies through its
continued capability to design high quality products in a cost efficient and
timely manner, of which there can be no assurance. See "Description of
Business."
No Assurance as to Protection of Intellectual Property; Dependence on
Intellectual Property
Patents have been applied for by VNA in relation to the court reporting
system and its components. No patents have, as yet, been issued. However, the
Company's ability to compete effectively with other companies will depend, in
part, on its ability to maintain the proprietary nature of its technologies. The
Company also intends to rely on unpatented proprietary information and know-how,
and there can be no assurance that others will not develop such information and
know-how independently or otherwise obtain access to the Company's technology.
Also, no assurance can be given that the Company's products will not infringe
upon the patents of others, licenses to which may not be available to the
Company. The computer software source codes which are essential elements of the
Company's
16
<PAGE>
products, are proprietary trade secrets of the Company. The Company has
attempted to protect the proprietary nature of this technology by reliance upon
copyright laws, patents applied for, and contractual arrangements with its
employees and customers, although it is questionable whether computer software
and technology can be adequately protected by such means. In the event of any
misappropriation, the Company may be without an effective legal remedy. There
can be no assurance that the Company's competitors will not independently
develop comparable or superior technologies. In the future, third parties may
assert that the Company's or its licensor's products infringe their proprietary
rights. Should litigation with respect to any such claims commence, such
litigation could be extremely expensive and time consuming and could materially
and adversely affect the Company's results of operations regardless of the
outcome of the litigation. There can be no assurance that VNA will defend, or
will be in a financial position to defend against third party infringements on
their proprietary rights. See "Description of Business -- Intellectual
Property."
Dependence Upon Key Personnel and Possible Conflict of Interest
The success of the Company is substantially dependent upon existing
management, all of whom devote only a portion of their time to the Company.
These individuals may have conflicts between their responsibilities to the
Company and to other entities with which they are affiliated. The directors or
affiliates of the Company may in the future seek to exploit opportunities which
the Company is not able to undertake because of limited capital. Frank Carr, the
President, Chief Executive Officer and Chief Financial Officer will devote only
a portion of his time to the Company as set forth in his Employment Agreement.
Mr. Carr is also the Managing Director and Chief Executive Officer of VNA, which
is the transferor of the Technology, and the payee of $4,500,000 Promissory
Note. Mr. Carr's employment agreement with the Company having an annual salary
of $180,000, was to have commenced upon the closing of the offering. The loss of
the services of Mr. Carr, as well as other key personnel, or any inability to
attract and retain qualified personnel, may adversely affect the Company's
business. The Company has not applied for key man life insurance on the life of
Frank Carr and does not intend to. See "Management." Because of the nature of
its business, the Company will be dependent upon its ability to attract and
retain qualified personnel, including competition from companies with
substantially greater resources than the Company. There is no assurance that the
Company will successfully recruit or retain personnel of the requisite technical
caliber or in adequate numbers to enable it to conduct its business as proposed.
Mr. Carr may also have conflicts of interest if a dispute were to arise under
the Technology Transfer Agreement. See "Management -- Potential Conflict of
Interest."
Initial Reliance on Sole Manufacturer and Supplier
The Company does not own or operate any manufacturing or production
facilities. VNA, an Australian company which owns 80% of the Company, causes or
provides for the manufacturing of three of the components required for the
operation of the Voice Systems, including the Court Reporting Systems and
Medical Systems. Should VNA terminate its relationship with the Company, there
can be no assurance that the Company could obtain a satisfactory arrangement
with another manufacturer on the same terms, i.e., price and credit terms. See
"Description of Business -- Technology Transfer Agreement."
No Feasibility and Marketing Studies
The Company's planned commencement of operations is being undertaken
primarily on the basis
17
<PAGE>
of management's evaluation of market potential regarding its proposed operations
in North, Central and South America.
Product Development and Integration
The development of the Company's technology for its customers has required,
and will continue to require, significant technical innovations. Once the
Company has products such as the Court Reporting Systems or Medical
Recordkeeping Systems, the Company must adapt that product to meet the specific
requirements of the customer hardware or software in which it is to be
integrated. There can be no assurance that the Company will be successful in
developing new products or enhancing the performance of its existing products
for customer use on a timely basis or within budget, if at all. Any such failure
could materially and adversely affect the Company's technology and its business
and prospects.
Management of Changing Business
Due to the level of technical and marketing expertise necessary to support
its anticipated new customers, the Company must attract and retain highly
qualified and well-trained personnel. There are a limited number of persons with
the requisite skills to serve in these positions, and it may become increasingly
difficult for the Company to hire such personnel. There can be no assurance that
the Company will be able to have such personnel, and if so, on favorable terms.
The Company's expansion may also significantly strain the Company's management,
financial and other resources. The Company believes that improvements in
management and operational controls and operations, financial and management
information systems are needed to manage future growth, should it occur. The
failure to implement such improvements could have a material adverse effect upon
the Company. See "Management.
Products Reliability
Most applications incorporating the Company's technologies are being
developed or have only recently been introduced to the market. As a result of
the limited period of use and the controlled environment in which most of the
Company's technologies have been tested and used to date, there can be no
assurance that they will meet their performance specifications under all
conditions or for all applications. If any of the Company's technologies fail to
meet such expectations, the Company may be required to enhance or improve that
technology, and there can be no assurance that the Company would be able to do
so on a timely basis, if at all. Any significant reliability problems could have
material adverse effect on the Company's business and prospects.
Rapid Technological Change
The market for speech technology products has been characterized by rapid
technological change, frequent product introductions and evolving industry
requirements. The Company believes that these trends will continue into the
foreseeable future. The Company's success will depend, among the other matters,
upon its ability to enhance its existing products being acquired pursuant to the
Technology Transfer Agreement and to successfully develop new products that meet
increasing customer requirements and gain market acceptance. Achieving these
goals will require continued substantial investment by the Company in product
development and marketing. There can be no assurance that the Company will have
18
<PAGE>
sufficient resources to make these investments, that the Company will be
successful in developing product enhancements or new products on a timely basis,
if at all, or that the Company will be able to successfully market these
enhancements and new products once developed. Further, there can be no assurance
that the Company's products will not be rendered obsolete by new industry
standards or changing technology. See "Description of Business--Industry
Comparison of Technology."
Products Liability and Other Claims
The Company may be subject to substantial products liability costs if
claims arise out of problems associated with the Company's products. The Company
will seek to maintain products liability coverage for the benefit of the Company
to protect the Company against such liabilities, but there can be no assurance
that such arrangements can be made, or if made, will be effective to insulate
the assets of the company from such claims. The Company will attempt to maintain
insurance against such contingencies, in scope and amount which it believes to
be adequate; prior to selling its first products. However, there can be no
assurance that such product liability insurance will be available, or if
available, that it will adequately insure against such claim.
Competition
Competition in the continuous speech, voice recognition systems and digital
audio technology market is intense. The Company faces competition from many
companies in the United States and abroad, including a number of large companies
and firms specialized in the development and production of systems. Most of the
Company's competitors have substantially greater resources, greater operating
experience, greater research and development and marketing capabilities and
greater production capabilities than those of the Company. There can be no
assurance that the Company's competitors will not develop voice recognition
technologies and products that are more effective or less expensive than the
Company's or which would render the Company's technology and products obsolete
and noncompetitive.
Although the Company is of the opinion that the speech recognition systems
and VNA's latest revision of the Court Reporting Systems and Medical Systems are
at the forefront of their respective fields at the present time, there is no
assurance that other companies with greater resources than the Company may not
enter the field. The speech technology markets are extremely competitive and
rapidly changing. A number of companies have already developed or are expected
to develop speech technology products that will compete with the Company's
products in North America. In particular, International Business Machines Corp.
("IBM") ha recently introduced a speech recognition system for medical
applications which has continuous voice recognition abilities and a reported
20,000 word vocabulary. Another such company, Karri Technologies Corp., is a
licensee of VNA of the earlier version of certain components of COURTSMART(TM)
in North America, which also has the non-exclusive right to use the name
COURTSMART(TM) in connection with those components in North America. Many other
competitors and potential competitors, including AT&T, Apple Computer, Inc.,
IBM, Microsoft Corporation, NEC Corp., Dictaphone, Philips, N.V., Texas
Instruments Incorporated and Lernout and Hauspie, Inc. have substantially
greater resources than the Company. The Company also competes with other smaller
companies which have developed advanced speech technology products. Further,
although the Company will have the exclusive right to the Technology from VNA in
the Company's Territory, the Company does not have the exclusive right to the
Philips Engine in such Territory. Consequently, it is possible that Philips or
another Philips licensee could develop a combined product similar to VNA's Voice
System Technology and market such voice recognition product in the areas
encompassed by the Company's
19
<PAGE>
Territory from VNA. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
other parties to increase the abilities of their speech technology products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. There is no assurance that the Company
will be able to compete successfully.
General Economic Conditions
The operations of the Company are subject to general economic conditions,
particularly relating to government agency spending and payment practices. The
risks would include governmental appropriations and budgeting, any potential
restrictions imposed by governmental authorities, changes in federal, state, or
local tax laws applicable to the Company, availability of skilled labor,
availability of capital for future needs, purchasing habits and trends, etc. The
Company may not have sufficient capitalization to survive lack of market
acceptance and economic exigencies in general.
Issuance of Additional Shares
The Company is currently authorized to issue up to a total of 10,000,000
shares of Common Stock and 1,000,000 shares of preferred stock. There are
currently 3,261,550 shares of Common Stock outstanding.
The Company's Board of Directors is authorized to issue preferred stock in
one or more series and to fix the voting powers and the designations,
preferences and relative, participating, optional or other rights and
restrictions thereof. Accordingly, the Company may further issue a series of
preferred stock in the future that will have preference over the Common Stock
with respect to the payment of dividends and proceeds from the Company's
liquidation, dissolution or winding up or having voting or conversion rights
which could adversely affect the voting power and percentage ownership of the
holders of the Common Stock. The Company has no plans, arrangements,
understandings or commitments to issue any preferred stock. However, the ability
of the Company to issue such additional shares and the possible exercise of the
Representative's Warrants may prove to be a hindrance to future financings by
the Company since the holders of such Warrants may be expected to exercise them
at a time when the Company would otherwise be able to obtain additional equity
capital on terms more favorable to the Company. Also, rights granted to future
holders of preferred stock could be used to restrict the Company's ability to
merge with, or sell its assets to, a third party, and the ability of the Board
of Directors to issue preferred stock could discourage, delay or prevent a
takeover of the Company, thereby preserving control of the Company by the
current shareholders. See "Description of Securities--Preferred Stock."
Shares Eligible for Future Sale
All of the 2,500,000 shares of Common Stock outstanding as of the date of
the Prospectus filed with the Securities and Exchange Commission on October 7,
1997 are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
All of such shares became eligible for resale under Rule 144 in April 1997. In
general, under Rule 144, subject to the satisfaction of certain other
conditions, a person (or persons whose shares are aggregated under the terms of
Rule 144), including an affiliate of the Company, who has owned restricted
shares of Common Stock beneficially for at least one year, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding
20
<PAGE>
shares of the same class, or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the sale, as reported by all
national securities exchanges on which the Common Stock is traded and/or the
automated quotation system of a registered securities association, or an
approved consolidated transaction reporting system. A person who has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has beneficially owned shares of Common Stock for at least two
years is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above. No prediction can be made as to the effect,
if any, that sales of shares of Common Stock or the availability of shares for
sale will have on the market prices prevailing from time to time. The
possibility that substantial amounts of Common Stock may be sold in the public
market in the future may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through the
sale of its equity securities. See "Shares Eligible for Future Sale."
Anti-takeover Provisions
Certain provisions of Delaware law, the Certificate of Incorporation and
the Company's By-laws, as amended (the "By-laws"), could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. These provisions
and the prohibition against certain business combinations could have the effect
of delaying, deferring or preventing a change in control or the removal of
existing management of the Company. See "Description of Securities."
Service of Process in Australia
Certain of the Company's officers and directors are residents of Australia,
and VNA Group Limited, the transferor of the Technology, is incorporated and has
its principal place of business under the laws of Australia. Consequently, it
might be difficult for investors or the Company to effect service of process
within the United States upon such persons, or to enforce against them judgments
obtained in United States courts predicated upon the civil liability provisions
of the Securities Act, or any other U.S. or individual state's laws or
regulations. There is also substantially doubt whether an action could be
brought in Australia in the first instance on the basis of liability predicated
upon such law.
Risks of Low Priced Securities
If the price per share of the Company's common stock is below $5.00, then
unless the Company satisfied certain net asset tests, the Company's securities
would become subject to certain "penny stock" rules promulgated by the
Commission. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. Based on the
21
<PAGE>
Company's most recent financial statement for the year ended December 31, 1997,
the Company is excluded from the definition of a "penny stock" based on its net
tangible assets being over $2 million at that date. If the Common Stock become
subject to the penny stock rules, owners of the Company's common stock may find
it more difficult to sell their shares.
Absence of Dividends
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business.
Item 7. Financial Statements
The Company's financial statements for the fiscal years ending December 31,
1997, and 1996 are included herein and consist of:
Balance Sheet (1997 and 1996) F-2
Statement of Operations and Deficit F-4
Consolidated Statement of Stockholders' Equity (Deficit) F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Item 8. Changes In And Disagreements With Accountants On Accounting And
financial Disclosure
There have been no changes in or reported disagreements with the
accountants on any matter of accounting principles, practices or financial
statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of The Exchange Act
The following table sets forth information concerning the executive
officers, directors and key employees of the Company:
(a) The directors of the Company as of December 31, 1997 are set forth in
the following table:
Year First Elected As
Name Age Director Directorship Held
---- --- -------- -----------------
James Sim 76 1997 Chairman of the Board
Frank Carr 49 1997 Director
William J. Potter 48 1997 Director
22
<PAGE>
Each Director is elected for a period of one year and thereafter serves
until his successor is duly elected by the stockholders.
As at March 18, 1998, the resignation, because of deteriorating health, of
the Chairman, Mr. James Sim, was accepted by the Board. At that date Mr. Carr
was appointed Chairman of the Board.
On March 18, 1998, Mr. Christopher John Brown, CPA, was appointed a
Director of the Company.
On March 18, 1998, Mr. Howard Messer, CPA, was appointed Chief Financial
Officer of the Company.
(b) The current executive officers of the Company are set forth in the
following table:
Year First
Name Age Elected into Office Office Held
- ---- --- ------------------- -----------
Frank Carr 49 1997 Chairman, President,
Chief Executive Officer
Howard Messer 45 1998 Chief Financial Officer
Jason Beever 27 1997 Vice President,
Speech Technologies
William J. Potter 48 1997 Secretary & Director
Christopher J. Brown 40 1998 Director
Except for its agreement with Mr. Carr, there are no other employment
contracts with the executive officers. Officers serve at the will of the Board
of Directors.
(c) The following persons are considered a significant employee of the
Company:
Frank Carr, Chairman, President and Chief Executive Officer. Mr. Carr has
been a director, President and Chief Executive Officer of the Company since its
inception in 1996. He has been the Chief Executive Officer of VNA, a public
company listed on the Australia Stock Exchange Limited, for 5 years. He has been
involved in company management and direction for 25 years and in 1986 was
jointly awarded the Australian Business Entrepreneur of the Year Award for his
work in establishing and developing a waste disposal business and, in the same
year, his company was awarded the marketing award by the Australian Marketing
Institute. Mr. Carr was elected to Fellowship of the Institute of Directors in
the U.K. in 1981 and to Fellowship of the Australian Institute of Management in
1986.
James Sim, Chairman of the Board. Mr. Sim has been the Company's Chairman
of the Board since 1996. Mr. Sim has spent his career in banking, retiring as
Director and General Manager (Area North) and a member of the court of Directors
of the Bank of Ireland. Since his retirement, he has been appointed by the
British Government as its representative to the board of directors of several
companies, including that of Short Bros. Aircraft. He was the Founding Chairman
of the Northern Island Co-
23
<PAGE>
Ownership Housing Association ("NICHA"). NICHA is an initiative of Her Majesty's
Government, funded by the British Department of the Environment, by which
families are assisted to purchase their own homes in a part buy/part rent
scheme. In the 15 years of its operation it has provided funding in excess of
US$1 billion. He was also Vice-Chairman of the Progressive Building Society
(assets in excess of US$500m). He is a Member of the Institute of Bankers in the
United Kingdom and a Fellow of the Institute of Directors.
Jason Beever, Vice President, Speech Technologies. Mr. Beever has been Vice
President, Speech Technologies of the Company since 1996. Mr. Beever is VNA
Group's General Manager for its speech recognition products and technologies.
Formerly a computer programmer, he has for three years been responsible for the
successful development, marketing and sale of such products; systems integration
of voice recognition products; and the design, development and implementation of
interactive voice response systems. He has most recently completed a
certification program on the large vocabulary continuous speech technology with
Philips Dictation Systems at Vienna, Austria. Mr. Beever graduated from Curtin
University of Technology in Western Australia with a Bachelor of Science degree
in computer science and marketing.
William J. Potter, Secretary and Director. Mr. Potter has been Secretary
and a Director of the Company since 1996. Mr. Potter is president of the
Ridgewood Group International, Inc., a New York based investment bank, and
Ridgewood Capital Funding, Inc., a NASD securities broker-dealer. Prior to
establishing and owning the Ridgewood Capital Funding, Inc. and Ridgewood
Partners, Ltd. in 1989, Mr. Potter was Managing Director for International
Investment Banking at Prudential-Bache Securities Inc. and Director of
Prudential-Bache Securities Canada Ltd. He was previously a senior executive
with Barclays Bank PLC, and Toronto Dominion Bank. Mr. Potter received a
Bachelor of Arts degree from Colgate University and a Master of Business
Administration from the Harvard Business School.
Christopher J. Brown, Director. Mr. Brown was appointed Company Secretary
of Voicenet (Aust) Ltd. in August of 1995 and to the Board of Voicenet (Aust)
Ltd. in July of 1997. In his role as Company Secretary he is actively involved
on a daily basis in the operations and direction of the Company. Mr. Brown is a
principal of a leading Australian accounting firm, William Buck. He has
extensive experience in the field of strategic planning, corporate marketing,
international tax planning and technology transfer. He received his Masters
degree in Business Administration from Curtin University of Technology in Perth
and is, among his other pursuits, currently completing doctorate studies in the
field of intellectual property and international technology transfer. He is a
member of the Australian Society of CPA's, the Australian Institute of
Management Consultants and the World Institute of Management Consultants.
Howard Messer, Chief Financial Officer. Howard Messer is a CPA in the State
of New Jersey. Since March of 1994, Mr. Messer served as Vice President of
Finance of Compuflex Systems, Inc. and was instrumental in its acquisition and
pooling of interests between it and Intec Overseas Software Limited. During that
period Compuflex combined revenues grew at an annual rate of 50% per annum, Mr.
Messer assisted the company in its acquisition of debt financing and, as a
result of his business plan, in July 1997, Compuflex was acquired in a $12
million stock purchase agreement. He is a graduate of the University of Virginia
with a B.S. Commerce degree and began his professional career with Arthur
Andersen & Co. Mr. Messer left Arthur Andersen as an audit manager.
24
<PAGE>
Remuneration
Directors shall receive a fee of $10,000 per year per director for serving
in such capacity. Additionally, each director has received options to acquire
50,000 shares of Common Stock for a price of $1.00 per share, exercisable over a
period of five years, which options shall vest after 12 months of service as a
director ("Directors' Options").
The Company has retained Frank Carr as its President, Chief Executive
Officer under remuneration contract at a fee of $180,000 per year for a three
year term which commenced in October 1997.
The Company had retained Ridgewood Group International, Ltd., of which Mr.
William J. Potter, a Director and Secretary of the Company, is President and the
major shareholder, as management advisor to the Company at a fee of $8,000 per
month for a three year term which commenced November, 1997. However, that
contract was terminated by mutual consent with effect from March 1, 1998. Mr.
Potter, while he remains Company Secretary, will receive a remuneration of
$2,000 per month.
Except as set forth above, no director or executive officer of the Company
is currently a director with any other Company with a class of securities
registered pursuant to Section 12 of the Exchange Act or subject to the
requirements of Section 15(d) of such act or any investment company registered
under the Investment Company Act of 1940.
Election of Directors and Officers; Committees
The Company's bylaws provide for a Board of Directors consisting of not
less than three nor more than nine members who are elected annually by the
shareholders. The officers of the Company are elected by the Board of Directors
from time to time.
The Company currently has no committees of its Board of Directors, but it
is anticipated that standing audit and compensation committees will be
established following the offering. It is expected that the audit and
compensation committees will consist of three members of the Board, a majority
of whom are not otherwise affiliated with the Company as officers or employers.
Employment Arrangements
The Company has retained Frank Carr as its President, Chief Executive
Officer under a remuneration contract at a fee of $180,000 per year for a three
year term which commenced in October 1997.
(d) Family Relationships
No family relationships exist among the executive officers of the company.
Item 9. Executive Compensation
SUMMARY COMPENSATION TABLE
No executive officer received compensation, annual salary, and bonus which
exceeded
25
<PAGE>
$100,000 in any of the fiscal years ended December 31, 1996 and 1997.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table identifies each person known to the Company to be the
beneficial owner of more than five percent of the Company's Common Stock, each
director of the Company and all directors and officers of the Company as a
group, and sets forth the number of shares of the Company's Common Stock
beneficially owned by each such person and such group and the percentage of the
shares of the Company's outstanding Common Stock owned by each such person and
such group. In all cases, the named person individually or together with his
spouse has sole voting power and sole investment power over the securities.
(a) As of the December 31, 1997, five persons owned of record or were known
by the Company to own beneficially more than five percent (5%) of the Common
Stock outstanding.
(b) The following table sets forth certain information regarding the
beneficial ownership (determined in accordance with Securities and Exchange
Commission Rule 13d-3 Securities Exchange Act of 1934) of common stock of the
Company as of December 31, 1997, by: (i) each person who is known by the Company
to own beneficially more than 5% of the outstanding shares of common stock; (ii)
each of the Company's directors; and (iii) all officers and directors of the
Company's as a group:
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership (2) Percent of Class
- ------------------- ------------------------ ----------------
Voicenet (Aust) Ltd.(1)
72 Kings Park Road
West Perth, Australia 6005 2,597,500 79.6%
Frank Carr(1)
72 Kings Park Road
West Perth, Australia 6005 0 0%
James Sim
20 Trench Road
Comber, Northern Ireland 0 0%
William J. Potter(3)
380 Lexington Avenue
New York, NY 10138 100,000 2.67%
Quarten Holdings, Ltd. 290,000 8.9%
George Street
Caymen Islands
F.D. Costa(4) 290,000 8.9%
All Officers and Directors
as a group (2 persons) 437,675 13.4%
- ----------
26
<PAGE>
(1) Reflects shares indirectly owned by Mr. Frank Carr who owns a majority of
the shares in a private corporation which owns approximately 11% of VNA, a
publicly owned Australian corporation. Mr. Carr is also Managing Director
and Chief Executive Officer of VNA. Mr. Carr does not directly own any
shares of the Company. By reason of his interest in and ability to control
VNA, he will be able to elect all of the directors and otherwise control
the Company.
(2) Includes the issuance of 562,500 shares to VNA upon conversion of the $4.5
million Promissory Note.
(3) Mr. Potter, a Director of the Company, beneficially owns these shares as
the President and majority shareholder of Ridgewood Group International,
Inc. which directly owns 100,000 shares of the Company's common stock.
(4) Includes 290,000 shares owned by Quartern Holdings, Ltd., Mr. Costa is an
officer, director and principal shareholder of Quartern Holdings, Ltd., and
through such position is an indirect Beneficial owner of the designated
shares of the Company.
(5) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares of
common stock beneficially owned by him or it.
Item 13. Certain Relationships and Related Transactions
(a) All of the shareholders existing at the date of registration of the
Prospectus of the Company acquired the outstanding 2,500,000 shares of the
Company's common stock for $.01 per Share.
In connection with the acquisition of the Technology from VNA, the Company
agreed to pay VNA $4,500,000. This obligation is evidenced by a Promissory Note
in the amount of $4,500,000, which bears no interest, secured by a first
security interest collateral pledge of the Technology to VNA. By amendment to
the Promissory Note dated September 25, 1997, the Company and VNA agreed that
the Promissory Note may be converted into Common Stock of the Company at a
conversion price of $8.00 per share. Upon conversion of the Promissory Note,
562,500 additional shares will be issued to VNA, the Selling Stockholder, in
satisfaction of the Company's $4.5 million obligation. VNA elected to exercise
its right of conversion and 562,500 shares of common stock were issued to VNA.
The Company had entered into a one year oral agreement with Ridgewood Group
International, Inc. for its office space and various associated office and
administrative services, including telephones, postage, fax, courier, beverage;
accounting personnel; and other miscellaneous overhead expenses, at 105% of cost
to Ridgewood, payable monthly. Payments vary from month to month, but currently
are approximately $3,000. That agreement was terminated in December 1997.
(b) Except as above described, there have been no business relationships
with directors or nominees for director of the Company since January 1, 1997.
(c) At December 31, 1997, no officers or directors were indebted to the
Company.
(d) See 7(b) above.
(e) Reports on Form 8-K
The Company filed no report on Form 8-K for the year ending December 31,
1997.
27
<PAGE>
VOICENET, INC.
(A Development Stage Company)
CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheets F-2-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6-7
NOTES TO FINANCIAL STATEMENTS F-8-12
<PAGE>
To the Board of Directors of
Voicenet, Inc.
We have audited the accompanying balance sheets of Voicenet, Inc. (a development
stage company) as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1997 and for the period April 2, 1996 (inception) through December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Voicenet, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
year ended December 31, 1997 and for the period April 2, 1996 (inception)
through December 31, 1996, in conformity with generally accepted accounting
principles.
New York, New York
March 13, 1998
F-1
<PAGE>
VOICENET, INC.
(A Development Stage Company)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
----------- --------
CURRENT ASSETS
Cash and cash equivalents $ 909,217 $ 8,970
Prepaid expenses 11,382 -0-
---------- ----------
Total Current Assets 920,599 8,970
---------- ----------
OTHER ASSETS
Deferred offering costs -0- 112,654
Organization costs, net 1,300 1,700
Intangible asset 4,500,000 4,500,000
Security deposit 2,600 -0-
---------- ----------
Total Other Assets 4,503,900 4,614,354
---------- ----------
TOTAL ASSETS $5,424,499 $4,623,324
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
VOICENET, INC.
(A Development Stage Company)
BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 138,643 $ 74,029
Due to Voicenet (Aust) Ltd. 312,624 25,000
Due to related party 4,000 -0-
Note payable, Voicenet (Aust) Ltd. -0- 4,500,000
----------- -----------
TOTAL LIABILITIES 455,267 4,599,029
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding -0- -0-
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,261,550 and 2,500,000 shares issued
and outstanding in 1997 and 1996, respectively 32,616 25,000
Additional paid-in-capital 5,552,671 20
Deficit accumulated during the development stage (616,055) (725)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 4,969,232 24,295
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,424,499 $ 4,623,324
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
VOICENET, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997 and
For the Period April 2, 1996 (Inception) Through December 31, 1996
<TABLE>
<CAPTION>
For the Period For the Period
April 2, 1996 April 2, 1996
(Inception) (Inception)
through through
December 31, December 31,
1997 1996 1997
----------- ------------- --------------
<S> <C> <C> <C>
INTEREST INCOME $ 38,372 $ 106 $ 38,478
----------- ---------- -----------
EXPENSES
Insurance 4,377 -0- 4,377
Professional fees 307,996 -0- 307,996
Officer's salary 31,196 -0- 31,196
Travel and promotion 264,921 -0- 264,921
Office expense 21,246 -0- 21,246
Fees and licenses 1,511 -0- 1,511
Rent 5,835 -0- 5,835
Amortization 400 300 700
State and City franchise taxes 15,092 528 15,620
Bank charges 1,128 3 1,131
----------- ---------- -----------
TOTAL EXPENSES 653,702 831 654,533
----------- ---------- -----------
NET LOSS $ (615,330) $ (725) $ (616,055)
=========== ========== ===========
Net Loss Per Share, Basic and Diluted $ (0.23) $ 0.00
Weighted average number of common shares
outstanding during the periods 2,619,327 2,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
VOICENET, INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1997 and
For the Period April 2, 1996 (Inception) Through December 31, 1996
<TABLE>
<CAPTION>
Additional Deficit Accumulated
Common Stock Paid-in during the
Shares Amount Capital Development Stage Total
------ ------ ------- ----------------- -----
<S> <C> <C> <C> <C> <C>
Initial issuance of shares 1,000 $ 1 $ 25,019 $ -0- $ 25,020
Stock split 2,499,000 24,999 (24,999) -0-
Net loss for the period April 2, 1996 (inception)
through December 31, 1996 (725) (725)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1996 2,500,000 25,000 20 (725) 24,295
Issuance of shares in connection with the initial
public offering, net of offering costs 188,250 1,883 971,984 973,867
Issuance of shares on December 30, 1997 10,800 108 86,292 86,400
Conversion of debt to common shares 562,500 5,625 4,494,375 4,500,000
Net loss for the year ended December 31, 1997 (615,330) (615,330)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997 3,261,550 $ 32,616 $ 5,552,671 $ (616,055) $ 4,969,232
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
VOICENET, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1997 and
For the Period April 2, 1996 (Inception) Through December 31, 1996
<TABLE>
<CAPTION>
April 2, 1996 April 2, 1996
(Inception) (Inception)
through through
December 31, December 31,
1997 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (615,330) $ (725) $ (616,055)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization expense 400 300 700
Increase in prepaid expenses (11,382) -0- (11,382)
Increase in accounts payable 64,614 74,029 138,643
Increase in security deposit (2,600) -0- (2,600)
----------- ----------- -----------
TOTAL ADJUSTMENTS 51,032 74,329 125,361
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (564,298) 73,604 (490,694)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Payments for organization costs -0- (2,000) (2,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock 1,172,921 25,020 1,197,941
Net advances from parent company 287,624 25,000 312,624
Net advances, from related party 4,000 -0- 4,000
Payments for deferred offering costs -0- (112,654) (112,654)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,464,545 (62,634) 1,401,911
----------- ----------- -----------
NET INCREASE IN CASH AND CASH 900,247 8,970 909,217
EQUIVALENTS
CASH AND CASH EQUIVALENTS-Beginning 8,970 -0- -0-
----------- ----------- -----------
CASH AND CASH EQUIVALENTS-Ending $ 909,217 $ 8,970 $ 909,217
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
VOICENET, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Continued
For the Year Ended December 31, 1997 and
For the Period April 2, 1996 (Inception) Through December 31, 1996
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
April 2, 1996 April 2, 1996
(Inception) (Inception)
through through
December 31, December 31,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the periods for:
Income taxes $ 3,329 $ 3,329
Noncash investment and financing activities:
Purchase of technology from Voicenet (Aust)
Ltd. in exchange of a note payable $4,500,000 $4,500,000
Conversion of note payable, Voicenet (Aust) Ltd. $4,500,000 $4,500,000
to equity
Deferred offering costs directly attributable to
issuance of stock $ 112,654 $ 112,654
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
VOICENET, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business
Voicenet, Inc. (the "Company"), a Delaware corporation, was incorporated on
April 2, 1996. The Company was established for the marketing and
distribution of continuous speech and voice recognition systems and of
digital audio reporting, transcription, archiving and retrieval systems in
North America, Central America and South America. The Company has not
commenced operations and is considered a development stage company in
accordance with Statement of Financial Accounting Standards No. 7. The
Company is majority-owned (80%) by Voicenet (Aust) Ltd. formerly known as
Southern Group Limited, an Australian company.
Successful operations are subject to certain risks and uncertainties
including, among others, the Company's proposed operations which are
subject to all the problems, expenses, delays and other risks inherent in
developing and marketing a new product/service, actual and potential
competition by entities with greater financial resources, experience and
market presence than the Company. Further risks and uncertainties relate to
technological advancements, the regulatory environment and the ability of
the Company to generate sufficient revenue and obtain financing and
additional equity.
Net Loss Per Share
Net loss per share is computed based on the weighted average number of
shares of common stock outstanding for the year ended December 31, 1997 and
for the period April 2, 1996 (inception) through December 31, 1996.
Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletins, common stock issued at prices below the anticipated public
offering price during the 12-month period prior to the Offering have been
included in the calculation as if they were outstanding for the entire
period presented.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), which is required to be adopted beginning with the quarter
ended December 31, 1997. At December 31, 1997, the Company adopted SFAS 128
which eliminates the presentation of primary and fully diluted earnings per
share ("EPS") and requires the presentation of basic and diluted EPS.
Common stock equivalents have been excluded from weighted-average shares
for the year ended December 31, 1997 as inclusion would be anti-dilutive.
All prior periods have been restated to conform to the new pronouncement.
The impact of adopting SFAS 128 was not material.
Organization Costs
Organization costs have been capitalized and are being amortized over five
years using the straight-line method.
F-8
<PAGE>
VOICENET, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Intangible Asset
The intangible asset related to the purchase of technology will be
amortized using the straight-line method over twenty-five (25) years
commencing when the Company begins generating revenue.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
The Company has cash balances in banks in excess of maximum amounts insured
by FDIC at December 31, 1997.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due.
Stock Options
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS requires compensation expense
to be recorded (I) using the fair value method or (ii) using existing
accounting rules prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations with pro forma disclosure of what net income and earnings
per share would have been had the Company adopted the fair value method.
The Company intends to continue to account for its stock based compensation
plans in accordance with the provisions of APB 25. Had the Company selected
to recognize compensation costs based on fair value of the options at the
date of grant as prescribed by SFAS 123, there would be no material effect
from that recognized under APB 25 for the year ended December 31, 1997 and
the period April 2, 1996 (inception) through December 31, 1996.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Company's financial instruments include cash and accounts payable. Due
to the short-term nature of these instruments, the fair value of these
instruments approximate their recorded value. The Company has other
liabilities which it believes is stated at estimated fair market value.
F-9
<PAGE>
VOICENET, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - Stockholders' Equity
At inception, the Company authorized 3,000 shares of $.001 par value common
stock and issued 1,000 of these shares for $25,000.
On September 15, 1996 the Company increased its number of authorized Common
Shares to 10,000,000 and changed its par value of these shares to $.01 per
share. In addition, the Company authorized 1,000,000 shares of blank check
Preferred Stock, par value $.01 per share with such designations, powers,
preferences, rights, qualifications, limitations and restrictions and in
such series as the Company, subject to the State of Delaware, may determine
from time to time.
On September 15, 1996 the board of directors of the Company declared a
2,500-for-1 stock split. The financial statements have been adjusted to
reflect this transaction.
During 1997, the Company offered to sell as part of the initial public
offering ("IPO") a minimum of 187,500 shares and a maximum of 1,875,000
shares at a public offering price of $8.00 per share. The IPO was completed
on November 5, 1997, whereby 562,500 shares were issued to Voicenet (Aust)
Ltd. at a price of $8.00 per share in full satisfaction of the $4.5 million
obligation of the Company under the Promissory Note (see Note 4). 188,250
shares of common stock were sold to the public at $8.00 per share. The net
proceeds form the sale of the common stock to the public amounted to
$973,867, net of direct related costs of $532,133. On December 30, 1997,
the Company sold an additional 10,800 shares of its common stock for
$86,400. In accordance with the amended underwriting agreement, the
underwriter has been issued warrants to purchase 11,250 shares of stock at
an exercise price of $11.20 per share. The warrants expire on October 31,
2002 and no warrants have been exercised as of the balance sheet date.
NOTE 3 - Stock Option Plan
In 1996 the Company adopted a Non-Qualified Stock Option Plan (the "Plan").
An aggregate of 500,000 shares of Common Stock are authorized for issuance
under the Plan. The Plan provides that incentive and non-qualified options
may be granted to officers and directors and consultants to the Company for
the purpose of providing an incentive to those persons to work for the
Company. Options granted under the plan are exercisable for a period of up
to ten years from the date of grant. In addition, the Company will not
grant a non-qualified option with an exercise price less than 85% of the
fair market value of the underlying Common Stock on the date of the grant.
As of December 31, 1997, no options have been issued by the Company.
F-10
<PAGE>
VOICENET, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - Purchase of Technology
On August 1, 1996 the Company entered into a Technology Sales and Purchase
Agreement (the "Technology Agreement") with Voicenet (Aust) Ltd. to acquire
certain exclusive rights and ownership with respect to the development,
use, marketing, sales and distribution of a continuous computer based
digital voice compression, recognition and recording technology. The term
of the agreement is for the longer of twenty-five (25) years or the life of
any patents and extensions granted under the patent applications. The
rights acquired are for territories including North America, Central
America and South America. These rights were originally purchased for
$4,500,000 in the form of a noninterest-bearing promissory note. The note
was converted into 562,500 shares of the Company's common stock with a
conversion price of $8.00 per share in conjunction with the initial public
offering (see Note 2).
NOTE 5 - Due to Voicenet (Aust) Ltd.
The Company received advances from Voicenet (Aust) Ltd. and Voicenet (Aust)
Ltd. incurred expenses on behalf of the Company for start-up purposes which
have been expensed in the financial statements. The balance due to Voicenet
(Aust) Ltd. at December 31, 1997 and 1996 was $312,624 and $25,000,
respectively. Such amounts are noninterest-bearing and due on demand.
NOTE 6 - Income Taxes
The Company has no taxable income to date; therefore, no provision for
federal income taxes has been made. The minimum state and local franchise
taxes have been provided in the accompanying financial statements.
The Company recognized deferred tax assets of $240,000 in connection with
net operating loss carry forwards. A valuation allowance is required if
based on the weight of evidence available, it is more likely than not that
some portion or all of the deferred asset will not be realized. It was
concluded that a valuation allowance was appropriate for the full amount of
the deferred tax asset at December 31, 1997.
Operating loss carry forwards which may provide future tax benefits
approximate $615,000 at December 31, 1997. These operating loss
carryforwards expire through the year 2112.
F-11
<PAGE>
VOICENET, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - Related Party Transaction
The Company has retained Ridgewood Group International Ltd. ("Ridgewood")
for various advisory services since inception. Ridgewood is a shareholder
in Voicenet, Inc. and a principal of Ridgewood is also a director of the
Company. The Company paid Ridgewood $48,640 and $12,000 in 1997 and 1996,
respectively.
NOTE 8 - Commitments
Lease Agreement
The Company rents its office premises on a month to month basis without a
formal lease agreement. Rent expense was $5,835 and $-0- for 1997 and 1996,
respectively.
Employment Agreements
On November 5, 1997, the Company entered into a three year employment
agreement with an officer of the Company whereby the Company will pay a
salary of $180,000 per annum plus direct expenses. Salary expense relating
to this agreement was $31,196 and $-0- for 1997 and 1996, respectively.
NOTE 9 - Subsequent Event
On February 1, 1998 the Company entered into a one year consulting
agreement with IPAC, Inc. ("IPAC"), whereby IPAC will provide consulting
and product development services for a monthly fee of $10,000 plus direct
expenses.
F-12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VOICENET, INC.
By: /s/ Frank Carr
-----------------------------------------
Frank Carr, Chairman and
Chief Executive Officer
Date: April 14, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Frank Carr
- ------------------------- President, Chief Executive Officer April 14, 1998
Frank Carr Director, Principal Executive Officer
/s/ Howard Messer
- ------------------------- Chief Financial Officer April 14, 1998
Howard Messer Principal Accounting Officer
/s/ William J. Potter
- ------------------------- Director April 14, 1998
William J. Potter
/s/ Christopher J. Brown
- ------------------------- Director April 14, 1998
Christopher J. Brown
28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 909,217
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 920,599
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,424,499
<CURRENT-LIABILITIES> 455,267
<BONDS> 0
0
0
<COMMON> 32,616
<OTHER-SE> 4,936,616
<TOTAL-LIABILITY-AND-EQUITY> 5,424,499
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 653,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (38,372)
<INCOME-PRETAX> (615,330)
<INCOME-TAX> 0
<INCOME-CONTINUING> (615,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (615,330)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
