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, 1999 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)
1040 First Avenue, New York, NY 10022
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 642-5476
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
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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: $3,400
As of December 31, 1999 as adjusted giving effect to the 2 for 1 stock-split
that became effective on March 17, 2000: (a) 9,831,022 Common Shares, $.01 par
value, of the registrant were outstanding; (b) approximately 1,870,698 Common
Shares were held by non-affiliates; and (c) the aggregate market value of the
Common Shares held by non-affiliates was $23,383,725 based on the last sale
price (as adjusted for the stock split) of $12.50 per share.
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PART I
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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
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Voicenet, Inc. (the "Company" or "Voicenet"), a Delaware corporation,
was established on April 2, 1996. The Company develops software and
voice-enabled systems and applications that enable users to interact with
computers using their voice. The technologies and applications marketed by the
Company are the result of research and development conducted by Voicenet (Aust)
Ltd ("VNA"), which is a publicly-owned Australian corporation listed on the
Australian Stock Exchange, that owns approximately 80% of the outstanding shares
of common stock of the Company.
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 versions of the technology developed by VNA relating
to the voice products and Voice Systems, including VNA's current and future
digital voice-to-text audio products developed to exploit the markets for
continuous, speech recognition and related technologies (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 $4.00 per share. VNA elected to exercise that conversion
option and was consequently issued 1,125,000 registered shares of common stock
of the Company. In 1999, VNA invested an additional $3 million into the Company
in the form of Series A Convertible Preferred Stock. All of the Preferred Stock
had been converted into common stock by December 31, 1999. VNA therefore, holds
a controlling interest in the Company. Additionally the Company's Chief
Executive Officer, Mr. Frank Carr, is also a Board Member of VNA. All of the
other directors of the Company are members of the VNA board of directors.
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, which the
Company calls SPEECHware(TM).
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Developed out of the experience gained from five years in research and
development in the speech recognition field and building on our technology in
digital compression, the SPEECHware technology is a cost -effective front-end
platform, which is both service and engine independent. It offers a high degree
of interoperability allowing for adaptation to suit any type of recognition
engine and is capable of providing a platform for any type of communications
service, such as wireless, GSM, landline or intra-or inter-enterprise and
incorporating natural language understanding, speech to text, text to speech and
voice verification functions (collectively "Voice Systems").
Voicenet's SPEECHware is an enabling technology and system
architecture which allows for the rapid development of voice recognition
applications across a broad range of hardware platforms and applications and is
functionally capable of supporting a range of services ultimately providing a
complete unified messaging system. It will allow wireless telephone access to
data and internet networks by voice in natural language without the necessity
for training.
The telecommunications industry is the focus for the marketing of our
SPEECHware platform for commercial application. We believe that service
providers in the industry have an urgent need for value-added services in the
telecommunications network where the value of "airtime" , and the price paid by
customers for such time, is rapidly diminishing as competition intensifies.
The Company is currently in discussion with several telecommunication
service providers in regard to the commercial application of SPEECHware.
The Company's objective is to become a leader in the marketing of the
Voice Systems. The Company's strategy is to obtain marketing partners and
licensees for the sales and distribution of its Voice Systems to other
applications and field of use.
In the development of the Voice Systems, VNA has successfully
developed and marketed two industry-specific speech recognition products:
RADTALK(TM) and COURTSCRIPT(TM). 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 in
use in a number of countries, including the United States, Canada, Hong Kong and
Australia.
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. During the year ended
December 31, 1999, the Company generated a net loss from operations of
$1,053,236 and has a total accumulated deficit of $3,787,157.
The Company had limited revenues from continuing operations in 1999
and 1998 in the amounts of $3,400 and $45,500, respectively. The Company has
incurred net losses since its inception in 1996. The Company's losses incurred
since inception have resulted principally from legal,
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accounting, printing, marketing and travel expenditures incurred in pursuing its
capital raising activities, amortization of intangibles, stock-based
compensation, 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 sales and marketing efforts, 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 increase in 2000, 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 on its commercializing the Company's products.
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 PURSUE MARKET THROUGH LICENSING, MARKETING PARTNER AND DISTRIBUTOR
RELATIONSHIPS.
The Company intends to market some of its products, such as the Voice
Systems, within the Territory by entering into licenses and strategic marketing
and 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 product development and
marketing efforts with strategic alliances. To date, the Company has established
significant product development relationships with VNA. The Company believes
that its collaborative relationships will expand the breadth 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 product development and marketing efforts.
VOICENET (AUST) LTD. AND DEVELOPMENT OF THE TECHNOLOGY
VNA is a research and development and marketing company that focuses
on voice recognition systems and applications and 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.
<PAGE>
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). 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, 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.
TECHNOLOGY TRANSFER AGREEMENT
The Company acquired from VNA pursuant to the 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. 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 $4.00 per share. That Promissory Note has been converted and
upon conversion of the promissory Note and issuance of the 1,125,000 to the
Selling Stockholder, VNA, the $4.5 million obligation has been satisfied in
full.
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.
No assurance can be given that others will not independently develop
substantially equivalent technology, knowledge and techniques or otherwise gain
access to VNA's technology, or use the components to make a similar product, or
that VNA or the Company can meaningfully protect its rights in such unpatented
proprietary technology or know-how.
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EMPLOYEES
As of December 31, 1999, the Company had a total of two employees. None of
the Company's employees are represented by a union and the Company has not
experienced any work stoppages. The Company believes its relations with its
employees is good.
RECENT SALES OF UNREGISTERED SECURITIES
In the fourth quarter of 1999 the Company completed a private offering of
100,000 shares of its Series A Convertible Preferred Stock at $30.00 per share,
for gross proceeds of $3 million pursuant to Regulation D to VNA which
represented that it is an "accredited investor" as that term is defined in
Regulation D. No placement agent was utilized. The Company did not pay any
commissions in connection with the sale of securities.
The Company's principal business address is 1040 First Avenue, New York,
New York 10022, and its telephone number is (212) 642-5476.
ITEM 2. PROPERTIES
The Company maintains an office at 1040 First Avenue, New York, New York,
on a month-to-month basis which is provided by an affiliate at no rental cost to
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any 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 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock has been traded on the OTC Bulletin Board under the
symbol "VNET" since January 5, 1998. There are currently 2 market-makers for the
Company's Common Stock. The stock register and transfer agent for the Company is
American Stock Transfer & Trust Company, New York, New York. The table set forth
below presents the high and low bid prices of the common stock for the period
indicated. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions. The following prices do not reflect the 2 for 1
stock split which was effective on March 17, 2000.
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1999 High Low
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Quarter ended March 31, 1999 $ 5.25 $0.125
Quarter ended June 30, 1999 $ 3,25 $0.625
Quarter ended September 30, 1999 $ 2.06 $0.625
Quarter ended December 31, 1999 $22.00 $1.97
On March 20, 2000, the last reported bid price of the common stock was
$47.50.
1998
Quarter ended March 31, 1998 $9.50 $6.00
Quarter ended June 30, 1998 $9.00 $8.00
Quarter ended September 30, 1998 $9.25 $6.00
Quarter ended December 31, 1998 $8.50 $1.25
(b) Holders of Common Stock
Approximate Number of
TITLE OF CLASS RECORD HOLDERS AS OF DECEMBER 31, 1999
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Common Stock, $.01 par value 1,630
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS 1999 AS COMPARED TO 1998
Net losses decreased from $2,117,866 for the 1998 Period to $1,053,236 for
the 1999 Period. The Company had revenue of $3,400 for the year ended December
31, 1999 as compared to revenue of $45,500 in 1998. The Company had interest
income of $40,682 in 1998 as compared to $7,235 for the 1998 Period. The
increase in interest was due to the injection of capital as a result of the
preferred stock purchase. Total expenses were $1,100,456 for the 1999 Period in
comparison to
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$2,170,601 for the 1998 Period a decrease of $1,070,145. This decrease was due
primarily to a decrease in stock based compensation expense totaling $1,223,600
relating to the issuance of 150,000 shares of common stock and 260,000 stock
options at prices less than the fair market value as of the date of grant in
1998 and decreases in selling and administrative expenses of approximately
$236,087 offset by an increase in amortization expense of $415,500 as a result
of reducing the life of the technology rights to seven years.
At December 31, 1999, the Company had total assets of $6,834,422, and at
December 31, 1998, the Company had total assets of $4,586,196, an increase of
$2,248,266. At December 31, 1998, the Company had total liabilities of $217,249,
and at December 31, 1999 the Company had total liabilities of $186,753 as a
result of greater liquidity available to pay current obligations. At December
31, 1999 the Company had a total stockholders equity of $6,647,669 in comparison
to a total stockholders' equity of $4,368,947 at the comparable date in 1998.
The Company had working capital of $2,765,232 as of December 31, 1999 as
compared to a working capital deficit of $80,878 as of December 31, 1998. The
Company had an accumulated deficit of $2,733,921 as of December 31, 1998 in
comparison to an accumulated deficit of $3,787,157 at December 31, 1999. The
increase in the accumulated deficit is primarily related to continuing operating
costs without any operating income. For the 1999 Period the Company's cash
requirements were satisfied from the cash reserves in its operating and
investment accounts as well as the investment of $3,000,000 from VNA, the parent
company, by its purchase of Series A Convertible Preferred Stock. VNA
subsequently elected to convert all of the Preferred Stock into Common Stock.
RESULTS OF OPERATIONS 1998 AS COMPARED TO 1997
Net losses increased from $615,330 for the 1997 Period to $2,117,866 for
the 1998 Period. The Company had revenue of $45,500 for the year ended December
31, 1998 as compared to no revenue in 1997. The Company had interest income of
$7,235 in 1998 as compared to $38,372 for the 1997 Period. The decrease in
interest was due to the use of funds raised in the prior period to meet
operating expense requirements. Total general, administrative and development
expenses were $2,156,493 for the 1998 Period in comparison to $638,610 for the
1997 Period an increase of $1,517,883. This increase was due primarily to
consulting and compensation expenses totaling $1,490,050 relating to the
issuance of 75,000 shares of common stock and stock options at prices less than
the fair market value as of the date of grant and $72,000 of amortization for
technology.
At December 31, 1998, the Company had total assets of $4,586,196, and at
December 31, 1997, the Company had total assets of $5,424,499, a decrease of
$838,303. At December 31, 1997, the Company had total liabilities of $455,267,
and at December 31, 1998 the Company had total liabilities of $217,249. The
decrease in liabilities is attributable of amounts due to a related party. At
December 31, 1998 the Company had an total stockholders equity of $4,368,947 in
comparison to a total stockholders' equity of $4,969,232 at the comparable date
in 1997.
The Company had a working capital deficit of $80,878 as of December 31,
1998 as compared to working capital of $465,332 as of December 31, 1997. The
Company had an accumulated deficit of $616,055 as of December 31, 1997 in
comparison to an accumulated deficit of $2,733,921 at December 31, 1998. The
increase in the accumulated deficit is primarily related to continuing operating
costs without any operating income. For the 1998 Period the Company's cash
requirements were satisfied from the cash reserves in its operating and
investment accounts.
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LIQUIDITY AND CAPITAL RESOURCES
The Company does not currently possess a bank source of financing and has
had only revenues of approximately $3,400 during the year ended December 31,
1999. The Company believes that its existing $2,916,531 of cash and cash
equivalents and 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. 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 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. Accordingly, 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.
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. Such
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "believe," "intend," "anticipate," "estimate," "hope,"
"content," "continue" or similar words. These statements discuss future
expectations, estimate the happening of future events or our financial condition
or state other "forward-looking" information. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the 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:
LIMITED 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
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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 minimal revenues to date and has incurred losses since
inception including for the year ended December 31, 1999. As a result of the
developing nature of the Company's business and the fact that it has limited
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
adequate 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.
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.
UNCERTAINTY OF MARKET ACCEPTANCE - LACK OF MARKETING ARRANGEMENTS
The Company has only recently commenced significant marketing activities.
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.
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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 Voice 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.
POSSIBLE PRODUCT OBSOLESCENCE
The Company expects technological developments to continue at a rapid pace
in the computer and telecommunications industries, and there can be no assurance
that technological developments will not cause the Company's Technology and
Voice Systems 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.
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 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.
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
Chief Executive Officer will devote only a portion of his time to the Company as
set forth in the Agreement under which he is retained. Mr. Carr is also a
Director of VNA, which is the majority shareholder of the Company. 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. Because of the nature of its
<PAGE>
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.
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 76% 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.
NO FEASIBILITY AND MARKETING STUDIES
The Company's planned commencement of operations is being undertaken
primarily on the basis 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 Voice 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.
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
<PAGE>
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
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.
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 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. 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.
<PAGE>
CONTROL BY SINGLE MAJORITY SHAREHOLDER
VNA, has been the controlling shareholder of the Company since inception
and currently owns approximately 80% of the outstanding shares of Common Stock
of the Company. As a result, VNA is able to determine the outcome of all actions
that require shareholder approval, including without limitation electing all of
the directors of the company, controlling changes in management and controlling
mergers or other business combinations.
POTENTIAL ISSUANCE OF ADDITIONAL SHARES
The Company is currently authorized to issue up to a total of 50,000,000
shares of Common Stock and 1,000,000 shares of preferred stock. There are
currently 9,391,022 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. 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.
SHARES ELIGIBLE FOR FUTURE SALE
There are approximately 7,960,324 shares of Common Stock outstanding that
are held by affiliates and 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 are eligible for resale under Rule 144. 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 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 cause the market
prices for the Common Stock to decline and could impair the Company's ability to
raise capital through the sale of its equity securities.
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
<PAGE>
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.
SERVICE OF PROCESS IN AUSTRALIA
Certain of the Company's officers and all of the Company's directors are
residents of Australia, and VNA , the majority shareholder of the Company and
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.
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,
1999, and 1998 are included herein and consist of:
Index to Financial Statements F-1
Independent Auditors' Report F-2
Balance Sheet F-3
Statements of Operations and Deficit F-4
Consolidated Statement of Stockholders' Equity F-5-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8-9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no reported disagreements with the accountants on any matter of
accounting principles, practices or financial statement disclosure. Reference is
made to Form 8K filed in September, 1999 which discloses a change in the
registrant's accountants.
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, 1999 are set forth in
the following table:
<PAGE>
Year First Elected As
Name Age Director Directorship Held
- --------- --- ---------------------- -----------------------
Frank Carr 51 1997 Chairman and Director
Chris Brown 42 1998 Director
Alan Dawson 47 1999 Director
Each Director is elected for a period of one year and thereafter
serves until his successor is duly elected by the stockholders. Each director
receives an annual fee of $10,000
On March 18, 1998, Mr. Christopher John Brown, CPA, was appointed a
Director of the Company to fill a vacancy on the board.
On February 26, 1999, Mr. Alan Dawson was appointed a Director of the
Company to fill a vacancy on the board.
(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 51 1997 Chairman, President, Chief
Executive Officer
Howard Messer 48 1998 Chief Financial Officer and
Secretary
Except for its agreement with Mr. Carr, there are no other contracts with
the executive officers. Officers serve at the will of the Board of Directors.
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 was the Chief Executive Officer of VNA, a public company
listed on the Australia Stock Exchange, for 5 years. He has been involved in
company management and direction for 30 years and in 1986 was jointly awarded
the Australian Business Entrepreneur of the Year Award 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.
CHRISTOPHER J. BROWN, DIRECTOR. Mr. Brown was appointed a director of Voicenet,
Inc. in 1998 and was appointed 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
VNA 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.
<PAGE>
ALAN DAWSON, DIRECTOR. Mr. Dawson was appointed a director of Voicenet, Inc. in
February, 1999 and was appointed to the position of President of Voicenet (Aust)
Limited in March of 1997 and to the position of Chief Executive Officer of VNA
in January 1999, a position he currently holds. He has extensive experience in
management and related disciplines, having held senior positions in a number of
leading Australian companies over the course of some 25 years. A former director
of the Australian Design Council, he has also practiced in the field of
commercial law for several West Australian legal firms. Mr. Sawson is a graduate
of both the University of Western Australia and the Curtin University of
Technology with Bachelor degrees in both Business and in Law and he has a
Masters degree in Business Administration. He is a member of both the Australian
Institute of Management and the Law Society of Western Australia.
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.
in Commerce degree and began his professional career with Arthur Andersen & Co.
Mr. Messer left Arthur Andersen as an audit manager.
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 in 2000. 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 pusuant to a management services agreement at a fee of $180,000 per year
for a four year term which commenced in January, 2000. The management services
agreement is with Noble Pacific Merchant Capital, Ltd., a corporation which is
controlled by Mr. Carr.
No family relationships exist among the executive officers of the company.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth information concerning the compensation
earned for the past three years for the Company's Chief Executive Officer as of
December 31, 1999. No other executive officer's total salary and bonus for 1999
exceeded $100,000. In accordance with the rules of the
<PAGE>
Securities and Exchange Commission, the compensation described in this table
does not include perquisites and other benefits received by these executive
officers that do not exceed the lesser of $50,000 or 10% of the total salary and
bonus reported for these officers. The amounts shown include compensation for
services in all capacities that were provided to the Company or its
subsidiaries. Long Term
<TABLE>
<CAPTION>
Compensation
------------
No. of Securities Under- All Other
Name and Principal Position Year Salary(a) Bonus Other lying Options Granted Compensation
- --------------------------- ---- --------- ----- ----- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank Carr 1999 $ 180,000 -- -- 95,000(b) $--
Chief Executive 1998 90,000 -- -- 350,000(b) --
Officer and Chairman 1997 31,196 -- -- -- --
</TABLE>
(a) Represents amounts earned with respect to the years indicated, whether paid
or accrued.
(b) Represents the difference between the market price and the exercise price
of the Stock Options granted.
Option Grants Table
- -------------------
The following table sets forth information concerning stock options
which were granted during 1999 to the executive officers named in the Summary
Compensation Table and to the directors of the Company. Information with respect
to options relates to options on the Company Common Stock at December 31, 1999.
<TABLE>
<CAPTION>
% of
Number of Total Options Potential Realizable Value at
Securities Granted to Market Assumed Annual Rates of
Underlying Employees in Price at Stock Price Appreciation for
Options Fiscal Exercise Date of Expiration Option Term (3)
---------------
Name Granted (1) Year Price Grant (2) Date 5% 10%
---- ----------- ---- ----- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Frank
Carr 760,000 63.33% $.50 $.625 October 31, $226,234 $384,992
2004
Howard
Messer 200,000 16.67% $.50 $.625 October 31, $62,890 $159,374
2004
Alan
Dawson 120,000 10.0% $.50 $.625 October 31, $37,734 $95,624
2004
Chris
Brown 120,000 10.0% $.50 $.625 October 31, $37,734 $95,624
2004
</TABLE>
(1) Adjusted for the 2 for 1 stock split effective for shareholders of record
on March 17, 2000
(2) Assumes a fair market value of the Company Common Stock underlying the
Stock Options of $.625 based on the valuation of Company's publicly traded
Common Stock on the date of issuance of the Stock Options as adjusted for
the 2 for 1 stock split which occurred on March 17, 2000.
<PAGE>
(3) The potential realizable value represents the hypothetical gains of the
options granted based on assumed annual compound stock appreciation rates
of 5% and 10% over the option exercise price. The 5% and 10% assumed annual
rates of stock price appreciation are required by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future common stock prices.
Fiscal 1999 Year End Option Values
- ----------------------------------
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In the Money
Underlying Unexercised Options Options at Fiscal Year End
------------------------------ --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Frank Carr 100,000 760,000(1) $1,200,000 $9,120,000
Howard J. Messer 200,000 -- $2,400,000 --
Alan Dawson -- 120,000(1) -- $1,440,000
Chris Brown -- 120,000(1) -- $1,440,000
</TABLE>
Pusuant to the terms of the referenced stock options, they are not exercisable
into common stock of the Company until June 15, 2000.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF DIRECTORS'
LIABILITY
Our certificate of incorporation limits the liability of our directors to
the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which they derived an improper personal benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify our
directors and executive officers and may indemnify other officers and employees
and other agents to the fullest extent permitted by law. We believe that
indemnification under our bylaws covers at least negligence and gross negligence
on the part of indemnified parties. Our bylaws also permit us to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in that capacity, regardless of
whether Delaware law would permit indemnification.
<PAGE>
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 December 31, 1999, one person 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, 1999 (adjusted for a 2 for 1 split of the common
stock which took effect for stockholders of record on March 17, 2000), 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.
72 Kings Park Road
West Perth, Australia 6005 7,510,324 80.0%
Frank Carr(1)(3)
72 Kings Park Road
West Perth, Australia 6005 100,000 1%
Alan Dawson(1)(3)
72 Kings Park Road
West Perth, Australia 6005 -- --
Chris Brown(1)(3)
72 Kings Park Road
West Perth, Australia 6005 -- --
Howard J. Messer
1040 First Avenue
New York, New York 200,000 2%
All Officers and Directors
as a group (4 persons) (3) 300,000 3%
- -----------------------------
(1) Denotes a director of the Company.
<PAGE>
(2) 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.
(3) Excludes options issued to the Chairman and CEO, Frank Carr in 1999 which
are exercisable commencing June 15, 2000 into 760,000 shares of common
stock at $.50 per share for the period ending October 31, 2004; option
issued to Alan Dawson which are exerciable into 120,000 shares of common
stock at $.50 per share for the period ending October 31, 2004; and options
issued to Chris Brown which are exercisable into 120,000 shares of common
stock at $.50 per share for the period ending October 31, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1998, there has not been, nor is there currently proposed, any
transaction or series of similar transactions to which we were or are a party in
which the amount involved exceeds $60,000 and in which any of our directors,
executive officers or holders of more than 5% of our capital stock had or will
have a direct or indirect material interest other than:
- the salaries, options, share repurchase and other agreements that are
described in "Executive Compensation;" and
- the transactions described below.
Financing Transactions
- ----------------------
VNA, the majority shareholder of the Company since inception in 1996
and which has all of the Company's directors as members of VNA's board of
directors, acquired $3,000,000 of Series A Convertible Preferred Stock in
October 1999, which was convertible into common stock based on the weighted
average closing bid price for the Company publicly traded common stock for the
thirty days prior to the conversion date. All of the Series A Convertible
Preferred was converted into common stock by December 31, 1999. As a result of
the conversion of the Series A Convertible Preferred Stock, VNA's ownership of
common stock of the Company increased to approximately 80%.
Other Transactions
- ------------------
All of the shareholders existing at the date of initial public
offering of the Company in November 1997 acquired the then outstanding 5,000,000
shares of the Company's common stock for $.005 per Share.
In connection with the acquisition of the Technology from VNA, the
Company agreed to pay VNA $4,500,000. This obligation was evidenced by a
Promissory Note in the amount of $4,500,000, which bore 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 $4.00 per share (after giving effect to the 2
for 1 split effective on March 17, 2000). Upon conversion of the Promissory
Note, 1,125,000 additional shares were to be issued to VNA, in satisfaction of
the Company's $4.5 million obligation. VNA elected to exercise its right of
conversion and 1,125,000 shares of common stock were issued to VNA in 1997.
See item 7(b) above.
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
The Company filed one report on Form 8-K for the last quarter of year
ending December 31, 1999 with respect to the purchase of the Series A Preferred
Stock by VNA.
<PAGE>
VOICENET, INC.
(a development stage company)
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Balance sheets as of December 31, 1999 and 1998 F-3
Statements of operations for the years ended
December 31, 1999 and 1998 F-4
Statements of stockholders' equity for the years ended
December 31, 1999 and 1998 F-5 - F-6
Statements of cash flows for the years ended
December 31, 1999 and 1998 F-7
Notes to financial statements F-8 - F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Voicenet, Inc.
New York, New York
We have audited the accompanying balance sheet of Voicenet, Inc. (a development
stage company) as of December 31, 1999, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. 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 audit. The financial statements of Voicenet, Inc. for the year ended
December 31, 1998 and the period April 2, 1996 (inception) through December 31,
1998, were audited by other auditors whose report dated April 7, 1999, expressed
an unqualified opinion on those statements and included an explanatory paragraph
regarding a going concern uncertainty.
We conducted our audit 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 audit provides 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. at December 31,
1999, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
HORTON & COMPANY, L.LC.
Wayne, New Jersey
February 29, 2000, except for Note 8
as to which the date is March 6, 2000
F-2
<PAGE>
<TABLE>
VOICENET, INC.
(a development stage company)
BALANCE SHEETS
<CAPTION>
ASSETS
------
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and equivalents ........................................... $ 2,916,531 $ 34,610
Investment, at market value .................................... -- 12,246
Accounts receivable, net ....................................... -- 39,700
Due from Voicenet (Aust) Ltd. .................................. -- 45,015
Other receivables .............................................. -- 4,800
------------ ------------
Total current assets ............................... 2,916,531 136,371
------------ ------------
Other assets:
Technology rights .............................................. 3,905,000 4,410,000
Security deposits and other .................................... 12,891 13,375
Deferred compensation expense .................................. -- 26,450
------------ ------------
Total other assets ................................. 3,917,891 4,449,825
------------ ------------
Total assets ....................................... $ 6,834,422 $ 4,586,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ............................................... $ 186,753 $ 217,249
------------ ------------
Total current liabilities .......................... 186,753 217,249
------------ ------------
Stockholders' equity:
Common stock, $.01 par value
50,000,000 shares authorized
9,831,022 shares issued, 9,391,022 shares outstanding in 1999
6,677,300 shares issued and outstanding in 1998 ............. 98,310 66,773
Additional paid-in capital ..................................... 10,338,716 7,051,814
Accumulated deficit ............................................ (3,787,157) (2,733,921)
Treasury stock, 440,000 shares in 1999, at cost ................ (2,200) --
Accumulated other comprehensive loss ........................... -- (15,719)
------------ ------------
Total stockholders' equity ......................... 6,647,669 4,368,947
------------ ------------
Total liabilities and stockholders' equity ......... $ 6,834,422 $ 4,586,196
============ ============
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
VOICENET, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
<CAPTION>
April 2, 1996
(inception)
through
Year ended December 31, December 31,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue .......................................... $ 3,400 $ 45,500 $ 48,900
----------- ----------- -----------
Costs and expenses:
Cost of sales ................................. -- 25,958 25,958
Selling and administrative .................... 328,106 564,193 1,546,132
Stock-based compensation ...................... 266,450 1,490,050 1,756,500
Amortization .................................. 505,900 90,400 597,000
----------- ----------- -----------
1,100,456 2,170,601 3,925,590
----------- ----------- -----------
Operating loss ................................... (1,097,056) (2,125,101) (3,876,690)
----------- ----------- -----------
Other income:
Interest ...................................... 40,682 7,235 86,395
Gain on sale of securities .................... 3,138 -- 3,138
----------- ----------- -----------
43,820 7,235 89,533
----------- ----------- -----------
Net loss ......................................... $(1,053,236) $(2,117,866) $(3,787,157)
=========== =========== ===========
Loss per share ................................... $ (0.14) $ (0.32)
=========== ===========
Weighted average shares outstanding .............. 7,290,575 6,656,324
=========== ===========
</TABLE>
See notes to financial statements
F-4
<PAGE>
VOICENET, INC.
(a development stage company)
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998 and
for the period April 2, 1996 (inception) through December 31, 1997
<CAPTION>
Accumulated
other
Common stock Additional Treasury Stock compre-
------------------------ paid-in Accumulated -------------- hensive Comprehensive
Shares Amount capital deficit Shares Amount loss loss
---------- ----------- ----------- ----------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance of shares, as
retroactively restated
for subsequent stock splits ..... 5,000,000 $ 50,000 $ (24,980 $ -- -- $-- $ -- $ --
Net loss for the period April
2, 1996 (inception)
through December 31, 1996 ....... -- -- -- (725) -- -- -- --
---------- ----------- ----------- ---------- ----- ----- ------- --------
Balance, December 31, 1996 ......... 5,000,000 50,000 (24,980 (725) -- -- -- --
Issuance of shares in connection
with the initial public offering,
net of offering costs ........... 376,500 3,765 970,102 -- -- -- -- --
Issuance of shares on December
30, 1997 ........................ 21,600 216 86,184 -- -- -- -- --
Conversion of debt to common shares 1,125,000 11,250 4,488,750 -- -- -- -- --
Net loss for the year ended December
31, 1997 ........................ -- -- -- (615,330) -- -- -- --
---------- ----------- ----------- ---------- ----- ----- ------- --------
Balance, December 31, 1997 (forward) 6,523,100 $ 65,231 $ 5,520,056 $ (616,055) -- $-- $ -- $ --
---------- ----------- ----------- ---------- ----- ----- ------- --------
</TABLE>
See notes to financial statements
F-5
<PAGE>
<TABLE>
VOICENET, INC.
(a development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999 and 1998 and
for the period April 2, 1996 (inception) through December 31, 1997
<CAPTION>
Accumulated
other
Common stock Additional Treasury Stock compre-
---------------------- paid-in Accumulated -------------- hensive Comprehensive
Shares Amount capital deficit Shares Amount loss loss
---------- ---------- ---------- ----------- ------ ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997 (forward) ............ 6,523,100 $65,231 $ 5,520,056 $ (616,055) -- $ -- $ -- $ --
Shares issued during 1998 ... 4,200 42 16,758 -- -- -- -- --
Issuance of shares for
consulting services ....... 150,000 1,500 598,500 -- -- -- -- --
Stock options issued ........ -- -- 916,500 -- -- -- -- --
Unrealized loss on securities -- -- -- -- -- -- (15,719) (15,719)
Net loss for the year ended
December 31, 1998 ......... -- -- -- (2,117,866) -- -- -- (2,117,866)
--------- ------- ----------- ----------- ------ ------ -------- -----------
Balance, December 31, 1998 .. 6,677,300 66,773 7,051,814 (2,733,921) -- -- (15,719) $(2,133,585)
===========
Shares issued during 1999 ... 3,153,722 31,537 2,968,463 -- -- -- -- --
Capital contribution ........ -- -- 78,439 -- -- -- -- --
Stock options issued ........ -- -- 240,000 -- -- -- --
Treasury stock purchased .... -- -- -- -- 440,000 (2,200) -- --
Reclassification adjustment
for gains included in
net loss ................. -- -- -- -- -- -- 15,719 --
Net loss for the year ended
December 31, 1999 ........ -- -- -- (1,053,236) -- -- -- (1,053,236)
--------- ------- ----------- ----------- -------- ------- -------- -----------
Balance, December 31, 1999 .. 9,831,022 $98,310 $10,338,716 $(3,787,157) 440,000 $(2,200) $ -- $(1,053,236)
========= ======= =========== =========== ======== ======= ======== ===========
</TABLE>
See notes to financial statements
F-6
<PAGE>
<TABLE>
VOICENET, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
April 2, 1996
(inception)
Years ended December 31, through
---------------------------- December 31,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss ..................................................... $(1,053,236) $(2,117,866) $(3,787,157)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Amortization ........................................... 505,900 90,400 597,000
Stocks issued for consulting services .................. -- 600,000 600,000
Stock option compensation costs ........................ 240,000 916,500 1,156,500
Gain on sale of marketable securities .................. (3,138) -- (3,138)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable .......... 39,700 (39,700) --
(Increase) decrease in other receivables ............ 2,600 (4,800) (2,200)
(Increase) decrease in prepaid expenses ............. -- 11,382 --
(Increase) decrease in security deposits ............ (416) (9,875) (12,891)
(Increase) decrease in deferred compensation expense 26,450 (26,450) --
Increase (decrease) in accounts payable ............. (30,497) 78,606 186,752
----------- ----------- -----------
Total adjustments ............................. 780,599 1,616,063 2,522,023
----------- ----------- -----------
Net cash used in operating activities ......... (272,637) (501,803) (1,265,134)
----------- ----------- -----------
Cash flows from investing activities:
Payments for organization costs ........................... -- -- (2,000)
Purchases of investment ................................... -- (27,965) (27,965)
Proceeds from sale of investment .......................... 31,103 -- 31,103
----------- ----------- -----------
Net cash provided by (used in) investing ...... 31,103 (27,965) 1,138
----------- ----------- -----------
activities
Cash flows from financing activities:
Proceeds from issuance of stock ........................... 3,078,440 16,800 4,293,181
Advances (to) from Voicenet (Aust) Ltd. ................... 45,015 (357,639) --
Advances (to) from related party .......................... -- (4,000) --
Payments of offering costs ................................ -- -- (112,654)
----------- ----------- -----------
Net cash provided by (used in) financing ...... 3,123,455 (344,839) 4,180,527
----------- ----------- -----------
activities
Net increase (decrease) in cash and equivalents 2,881,921 (874,607) 2,916,531
Cash and equivalents at beginning of period ... 34,610 909,217 --
----------- ----------- -----------
Cash and equivalents at end of period ......... $ 2,916,531 $ 34,610 $ 2,916,531
=========== =========== ===========
</TABLE>
See notes to financial statements
F-7
<PAGE>
VOICENET, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Voicenet, Inc. (the
"Company") is presented to assist in understanding the financial
statements. The financial statements and notes are representations of the
management of Voicenet, Inc. which is responsible for their integrity and
objectivity. These accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation
of the financial statements.
Use of estimates
----------------
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.
History and business activity
-----------------------------
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. As of December 31, 1999,
the Company had commenced operations but has not realized significant
revenue from such operations. Therefore, the Company is considered a
development stage company in accordance with Statement of Financial
Accounting Standard No. 7. The Company is majority-owned, (80%) and (65%)
as of December 31, 1999 and 1998, respectively, by Voicenet (Aust) Ltd., an
Australian company.
Successful operations are subject to certain risks and uncertainties
including, amount 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.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net loss per share
------------------
Net loss per share is computed based on the weighted average number of
shares of common stock outstanding for the years ended December 31, 1999
and 1998. Pursuant to the Securities and Exchange Commission's Staff
Accounting Bulletins, common stock issued at prices below the anticipated
public offering price during the twelve-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 eliminates the presentation of primary and fully
diluted earnings per share ("EPS") and requires the presentation of basic
and diluted EPS. The Company adopted SFAS 128 for the year ended December
31, 1998. Diluted loss per share amounts are not presented because they are
anti-dilutive.
Cash equivalents
----------------
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.
Reclassifications
-----------------
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current year financial statements. These reclassifications have no
effect on previously reported income.
Stock options
-------------
In October 1995, the Financial Accounting Standards Board 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
or 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 selected to
continually use APB 25 and adopted the disclosure-only provisions of SFAS
123 for employee options and adopted SFAS 123 for non-employee options.
Comprehensive income
--------------------
During the year ended December 31, 1998, the Company adopted FASB Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires
the reporting of other non-owner changes in equity in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of
net income.
F-9
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of credit risk
----------------------------
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and equivalents.
During 1999, the Company routinely maintained cash balances with one New
York bank in excess of $100,000 limit which is insured by the Federal
Deposit Insurance Corporation (FDIC). At December 31, 1999, the Company's
balance was approximately $2,800,000 in excess of the FDIC insured limit.
The Company has not experienced any losses in such accounts and believes it
is not exposed to any significant credit risk.
Fair value of financial instruments
-----------------------------------
The Company's financial instruments include cash, accounts receivable 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.
2. TECHNOLOGY RIGHTS
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 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 non-interest 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 IPO (see Note 3).
The technology was deemed to be placed in service in July of 1998, and the
Company commenced amortization using the straight-line method over a
25-year period. Effective July 1999, the Company changed the estimated
useful life of the technology to 7 years.
Technology rights are net of accumulated amortization of $595,000 and
$90,000 at December 31, 1999 and 1998, respectively. Amortization expense
for the years ended December 31, 1999 and 1998 was $505,000 and $90,000,
respectively.
3. STOCKHOLDERS' EQUITY
Common stock
------------
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 the par value of these shares to $.01 per share. See Note 8.
F-10
<PAGE>
3. STOCKHOLDERS' EQUITY (CONTINUED)
Preferred stock
---------------
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.
Stock split
-----------
On September 15, 1996, the board of directors of the Company declared a
2,500-for-1 stock split on its common stock. The financial statements have
been adjusted to reflect this transaction.
Initial public offering
-----------------------
During 1997, the Company offered to sell as part of the initial public
offering ("IPO") a minimum of 375,000 shares and a maximum of 3,750,000
shares at a public offering price of $4.00 per share. The IPO was completed
on November 5, 1997, whereby 1,125,000 shares were issued to Voicenet
(Aust) Ltd. at a price of $4.00 per share in full satisfaction of the $4.5
million obligation of the Company. 376,500 shares of common stock were sold
to the public at $4.00 per share. The net proceeds from 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
21,600 shares of its common stock for $86,400, and during March of 1999,
the Company sold an additional 4,200 shares of its common stock for
$16,800.
Consulting costs
----------------
During February of 1998, the Company issued 150,000 shares of the Company's
common stock to two consultants in consideration for services provided. The
fair market value of stock at the date of issuance was $4.00 per share.
Consulting costs of $600,000 relating to this issuance was recorded by the
Company for the year ended December 31, 1998.
Stock issuance
--------------
During 1999, Voicenet (Aust) Ltd. invested $3,000,000 in the Company in
return for 100,000 shares of convertible preferred stock. The preferred
stock was subsequently converted into 3,153,722 shares of the Company's
common stock. Such conversion was effected at the weighted average closing
price of the Company's common stock during the 30-day period preceding the
conversion. During 1999, Voicenet (Aust) Ltd. made an additional capital
contribution of $78,439.
F-11
<PAGE>
4. WARRANTS AND OPTIONS
Stock option plan
-----------------
In 1996 the Company adopted a non-qualified stock option plan (the 1996
Plan). An aggregate of 1,000,000 shares of Common Stock were reserved for
issuance under the 1996 Plan. The 1996 Plan provides for the granting of
either incentive stock options and non-qualified options to purchase shares
of the Company's common stock and for other stock-based awards to key
employees, officers and directors and to non-employee consultants. 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.
In 1998 the Company adopted a non-qualified stock option plan (the 1998
Plan). An aggregate of 1,200,000 shares of Common Stock were reserved for
issuance under the 1998 Plan. The 1998 Plan provides for the granting of
either incentive stock options and non-qualified options to purchase shares
of the Company's common stock and for other stock based awards to key
employees, officers and directors and to non-employee consultants.
During 1999, the Company granted 1,200,000 options from the 1998 Plan to
four individuals who are members of the Company's board or consultants to
the Company, to purchase shares of the Company's common stock at an
exercise price of $0.50 per share. 200,000 of the options are immediately
exercisable on the date of the grant and 1,000,000 are options exercisable
on June 15, 2000. The Company recorded $240,000 in compensation expense in
1999 for these options. At December 31, 1999, no options had been
exercised.
Other options
-------------
During the year ended December 31, 1998, separate from the 1998 Plan, the
Company granted 200,000 and 60,000 options to two directors and three
members of the Company's advisory board, respectively, to purchase common
shares of the Company at an exercise price of $0.50 per share. The 200,000
options are immediately exercisable on the date of grant and the 60,000
options are vested at a rate of one half at the date of grant and the other
half at the first anniversary of the date of grant. The Company recorded
$890,050 in compensation expense in 1998 for these options. At December 31,
1999 and 1998, no options had been exercised.
In accordance with SFAS 123, non-employee stock options must be accounted
for using the fair market value method. The fair market value for these
options were estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:
1999 1998
--------- ----------------
Risk-free rate 6.0% 5.17% and 5.36%
Volatility factor 0.50 0.525
Average life 1 year 1 year
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly-subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options. The weighted average fair value of options granted during
the year ended December 31, 1999 and 1998 was $0.20 and $3.53,
respectively, based upon the calculation using the Black Scholes
option-pricing model.
F-12
<PAGE>
4. WARRANTS AND OPTIONS (CONTINUED)
Other options (continued)
-------------------------
In accordance with the amended underwriting agreement, the underwriter
has been issued warrants to purchase 22,500 shares of stock at an
exercise price of $5.60 per share. The warrants expire on October 31,
2002 and no warrants have been exercised as of December 31, 1999.
On June 9, 1998, the Company issued a warrant to a former director to
purchase 100,000 shares of the Company's common stock at an exercise
price of $4.00 per share. The warrant expires on June 30, 2003 and has
not been exercised at December 31, 1999.
5. RELATED PARTY TRANSACTIONS
Due from (to) Voicenet (Aust) Ltd.
----------------------------------
This balance represents advances from (to) Voicenet (Aust) Ltd. during the
normal course of business. In addition, the Company may incur expenses on
behalf of Voicenet (Aust) Ltd. and Voicenet (Aust) Ltd. may incur expenses
on behalf of the Company, and such expenses will be reimbursed. Such
advances and reimbursable costs are non-interest bearing and due on demand.
At December 31, 1998, the amount due from (to) Voicenet (Aust) Ltd. was
$45,015.
Investment
----------
Investment at December 31, 1998 consists of 100,000 shares of Voicenet
(Aust) Ltd.'s common stock at market value of $12,246, net of unrealized
loss of $15,719. The investment was sold during 1999 at a gain of $3,138.
Advisory services agreement
---------------------------
The Company had retained Ridgewood Group International Ltd. ("Ridgewood"),
a stockholder of the Company, for various advisory services. The Company
paid Ridgewood $5,758 during the year ended December 31, 1998 for services
provided. The advisory services agreement was terminated on March 1, 1998.
Lease agreement
---------------
The Company rents its office premises on a month-to-month basis without a
formal lease agreement from an officer of the Company. Rent expense was
$32,732 and $34,240 for the years ended December 31, 1999 and 1998,
respectively.
F-13
<PAGE>
6. INCOME TAXES
The Company has no taxable income to date; therefore, no provision for
income taxes has been made. The minimum state and local franchise taxes
have been provided in the accompanying financial statements.
Deferred tax assets recognized by the Company in connection with net
operating loss carryforwards at December 31, 1999 and 1998 was $950,000 and
$700,000, respectively. 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, 1999 and 1998 due to losses incurred.
Operating loss carryforwards which may provide future tax benefits
approximate $2,600,000 and $1,800,000 at December 31, 1999 and 1998,
respectively. These operating loss carryforwards expire through the year
2114.
7. COMMITMENTS
Employment and management 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. During 1999, the
employment agreement ws superseded by a management agreement with Noble
Pacific Merchant Capital Ltd. ("Noble") a corporation owned by the same
officer of the Company. Under the terms of the agreement, the Company shall
pay Noble an annual management fee of $180,000 plus direct expenses.
Expense relating to these agreements was $180,000 and $90,000 for the years
ended December 31, 1999 and 1998, respectively.
Consulting agreement
--------------------
On February 1, 1998, the Company entered into a one-year consulting
agreement with IPAC, Inc. ("IPAC") whereby IPAC provides consulting and
product development services for a monthly fee of $10,000 plus direct
expenses. The agreement was terminated during 1998. Total expense relating
to this agreement was $111,294 for the year ended December 31, 1998.
Financial advisory agreement
----------------------------
On March 19, 1998, the Company entered into a five-month financial advisory
agreement with Brooks, Houghton & Company, Inc. ("Brooks Houghton") whereby
Brooks Houghton provides financial advisory services for a down payment of
$25,000 and monthly fee of $6,500 plus direct expenses. The agreement was
terminated during 1998. Total expense relating to this agreement was
$58,212 for the year ended December 31, 1998.
F-14
<PAGE>
8. SUBSEQUENT EVENTS
During March 2000, the Board of Directors authorized a two-for-one split of
the Company's common stock effective March 17, 2000. The Company's capital
structure, including all references to common stock, additional paid-in
capital, common shares outstanding, average number of common stock shares
outstanding, stock options and per share amounts, have been restated for
all periods presented to reflect the two-for-one stock split on a
retroactive basis.
Concurrent with the stock split described above, the Board of Directors
also approved an increase in the number of shares of authorized common
stock from 10,000,000 shares to 50,000,000 shares. The par value of the
common stock remained unchanged at $.01.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VOICENET, INC.
By: /s/ Frank Carr
---------------------
Frank Carr, Chairman and
Chief Executive Officer
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Frank Carr
- ------------------------- President, Chief Executive March 28, 2000
Frank Carr Officer Director, Principal
Executive Officer
/s/ Howard Messer
- ------------------------- Chief Financial Officer March 29, 2000
Howard J. Messer Principal Accounting Officer
/s/ Christopher J. Brown
- ------------------------- Director March 28, 2000
Christopher J. Brown
/s/ Alan Dawson
- ------------------------- Director March 28, 2000
Alan Dawson
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS OF VOICENET, INC. AS OF 12/31/99 AND FOR THE
YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<CIK> 0001023745
<NAME> VOICENET, INC.
<MULTIPLIER> 1
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 12-MOS
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