FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
Commission File Number: 0-7796
VOICE IT WORLDWIDE, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 83-0203787
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2643 Midpoint Drive, Suite A
Fort Collins, Colorado 80525
- ---------------------------- ----------------------
(Address of principal (Zip Code)
executive offices)
(970) 221-1705
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of the Issuer's Common Stock, as of September 30,
1998 was 6,466,502 shares of the Registrant's common stock $.10 par value.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial
Statements
VOICE IT WORLDWIDE, INC.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales - net .............. $ 1,360,996 $ 651,296 $ 4,079,481 $ 2,802,843
Cost of sales ............ 949,850 373,544 2,441,420 1,452,492
----------- ----------- ----------- -----------
Gross profit ........... 411,146 277,752 1,638,061 1,350,351
Operating expenses:
Administrative and
general ................ 319,916 299,392 998,998 990,861
Selling & marketing ..... 568,515 203,580 1,403,866 1,345,738
Research and development 222,013 252,105 676,389 732,059
----------- ----------- ----------- -----------
Total operating
expenses ............ 1,110,444 755,077 3,079,253 3,068,658
Net operating profit ..... (699,298) (477,325) (1,441,192)
Other income (expense)
Interest income (expense) (87,760) (87,371) (229,094) (242,417)
----------- ----------- ----------- -----------
Net income (loss) before
income tax .............. (787,058) (564,696) (1,670,286)
Income tax (Note 4) ...... 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) ........ ($ 787,058) ($ 564,696) ($1,670,286) ($1,960,724)
=========== =========== =========== ===========
Net income (loss) per
common share (Note 7) ... ($ 0.16) ($ 0.08) ($ 0.33) ($ 0.30)
=========== =========== =========== ===========
Weighted average number of
shares outstanding ...... 5,054,802 6,466,502 5,054,802 6,466,502
=========== =========== =========== ===========
</TABLE>
- 2 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Balance Sheets
Assets (unaudited)
December 31, September 30,
1997 1998
----------- -----------
Current assets:
Cash and cash equivalents .......... $ 867,242 $ 163,290
Accounts receivable, net of
allowance $110,256 (1997)
and $159,710 (1998) (Note 5) ...... 2,814,035 424,217
Other receivables .................. 251,087 264,201
Inventories (Note 3) ............... 1,789,347 2,137,539
Prepaid expenses and other
current assets .................... 337,575 245,417
----------- -----------
6,059,286 3,234,664
Tooling, furniture and office
equipment, net of accumulated
depreciation (N0te 3) .............. 429,758 283,421
Other assets (Note 3) ............... 832,499 837,932
- ----------- -----------
Total assets ........................ $ 7,321,543 $ 4,356,017
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................... $ 1,799,466 $ 1,472,286
Accrued liabilities (Note 3) ....... 288,694 190,973
Deferred Revenue ................... 0 100,000
Current portion of long-term
debt and line-of-credit
(Notes 2 and 5) ................... 48,755 137,371
----------- -----------
2,136,915 1,900,630
Long-term debt (Note 5) ............. 3,169,762 2,401,245
Stockholders' equity (Note 6):
Common stock; $.10 par; 20,000,000
shares authorized; 6,466,502
issued & outstanding .............. 646,650 646,650
Preferred stock, 10,000,000
shares authorized; none issued
and outstanding ................... 0 0
Additional paid in capital ......... 6,720,140 6,720,140
Accumulated deficit ................ (5,351,924) (7,312,648)
----------- -----------
2,014,866 54,142
----------- -----------
Total liabilities and
stockholders' equity ............... $ 7,321,543 $ 4,356,017
=========== ===========
- 3 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Statement of Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance-December 31, 1997 .. 6,466,502 $ 646,650 $ 6,720,140 ($5,351,924) $ 2,014,866
Net (loss) for the
nine months ended
September 30, 1998 ........ 0 0 0 (1,960,724) (1,960,724)
----------- ----------- ----------- ----------- -----------
Balance - September 30, 1998 6,466,502 $ 646,650 $ 6,720,140 ($7,312,648) $ 54,142
=========== =========== =========== =========== ===========
</TABLE>
- 4 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
----------------------------
1997 1998
----------- -----------
Cash flows from operating activities:
Net loss .............................. ($1,670,286) ($1,960,724)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Allowance for discounts and
bad debts ........................... (24,173) 49,454
Depreciation and amortization ........ 281,565 399,457
Amortization of deferred
loan costs .......................... 19,080 19,080
Changes in current assets
and liabilities:
Receivables ......................... 1,397,340 2,327,250
Prepaid expenses .................... (170,673) 92,158
Inventories ......................... (44,137) (348,192)
Accounts payable .................... (1,043,233) (327,180)
Accrued libilities .................. (199,477) (97,721)
Deferred revenue .................... 0 100,000
----------- -----------
Cash (used in) provided by
operating activities ........... (1,453,994) 253,582
Cash flows from investing activities:
Other assets .......................... (263,444) (254,497)
Acquisition of tooling, furniture
and equipment ........................ (89,296) (23,136)
----------- -----------
Cash used in investing activities (352,740) (277,633)
Cash flows from financing activities:
Draws (payments) on long term
line-of-credit - nt .................. 1,446,976 (679,901)
----------- -----------
Cash provided by (used in)
financing ...................... 1,446,976 (679,901)
----------- -----------
Net decrease in cash ................... (359,758) (703,952)
Cash - Beginning of period ............. 585,414 867,242
----------- -----------
Cash - End of period ................... $ 225,656 $ 163,290
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the period
for interest was $204,942 (1997) and $93,433 (1998).
-5-
<PAGE>
VOICE IT WORLDWIDE, INC.
Notes to Financial Statements
(unaudited)
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
The summary of the Company's significant accounting policies are incorporated by
reference to the audited Voice It Worldwide, Inc. financial reports included in
the Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
The statements of operations, balance sheets, stockholders' equity and cash
flows as of September 30, 1998 and 1997 and the periods then ended have not been
audited by independent accountants, but in the opinion of the management,
reflect all normal recurring adjustments and entries necessary for the fair
presentation of the operations of the Company. The results of operations for any
quarter, and quarter-to-quarter trends, are not necessarily indicative of the
results to be expected for any future period.
Note 2 - Letter of Credit
- -------------------------
At September 30, 1998, the Company had no irrevocable standby letters of credit
outstanding. However, from time to time, letters of credit are required by major
suppliers and have various expiration dates. When issued, these letters of
credit are secured by the Company's line of credit (Note 5).
Note 3 - Selected Balance Sheet Information
- -------------------------------------------
December 31, September 30,
1997 1998
----------- ------------
(Unaudited)
Inventories
Raw materials ..................... $ 1,150,884 $ 1,244,500
Finished goods .................... 922,882 992,005
(Reserves) ........................ (284,419) (98,966)
----------- -----------
$ 1,789,347 $ 2,137,539
=========== ===========
Tooling, furniture and equipment
Office furniture and equipment .... $ 247,072 $ 258,007
Tooling and manufacturing equipment 679,122 691,323
----------- -----------
926,194 949,330
Less accumulated depreciation ... (496,436) (665,909)
----------- -----------
$ 429,758 $ 283,421
=========== ===========
Other assets
Deferred loan costs - net of
accumulated amortization of
$52,999 in 1997 and $72,079
in 1998 ........................ $ 130,394 $ 111,314
Product software development
costs - net of accumulated
amortization of $216,923 in 1997
and $404,798 in 1998 ........... 493,148 552,495
Patent costs - net of accumulated
amortization of $120,846 in 1997
and $162,955 in 1998 ........... 158,957 124,123
Marketable securities ........... 50,000 50,000
----------- -----------
$ 832,499 $ 837,932
=========== ===========
<PAGE>
Note 3 - Selected Balance Sheet Information (continued)
- -------------------------------------------------------
December 31, September 30,
1997 1998
-------- --------
(Unaudited)
Accrued liabilities
Vacation & 401K .. $ 40,608 $ 40,608
Advertising ...... 101,489 101,406
Warranty ......... 38,694 28,909
Commissions ...... 101,738 0
Other ............ 6,165 20,050
-------- --------
$288,694 $190,973
======== ========
<PAGE>
Note 4 - Income Taxes
- ---------------------
The Company reports income taxes for interim periods based on annualized
estimates of earnings, tax credits and book/tax differences at the estimated
annual effective tax rate. For federal and state income tax purposes, at
December 31, 1997, the Company had net operating loss carry forwards of
approximately $5,160,000 which substantially expire in fiscal years 2008 through
2012 and general business credits of $46,791 which expire in fiscal year 2009.
The net operating loss carryforwards and other credits generated a deferred tax
asset, which has been fully reserved, due to a lack of profitable operating
history.
Note 5 - Long-Term Debt and Line-of-credit
- ------------------------------------------
December 31, September 30,
1997 1998
------------ -----------
(Unaudited)
$2,000,000 line of credit to a bank,
reduced to $150,000 at September 30,
1998, and $100,000 in October, 1998,
interest at their "Base Rate" plus 2.5%,
totaling 11.0% at September 30, 1998,
payable monthly, principal due on or
before November 15, 1998. Borrowings
are collateralized by, and limited to
a percentage of eligible worldwide
accounts receivable and finished goods
inventory (Note 2) .......................... $ 768,517 $ 88,616
8% convertible debenture, interest payable
monthly, convertible into one share of
common stock for each $0.95 of principal
converted. Principal due November 1, 2002
Loan costs associated with this debenture
were approximately $180,000, and are amortized
over the life of the agreement resulting in
an effective interest rate of 9%. Monthly
principal redemption of one percent of the
then outstanding balance begins in November,
1998 ........................................ 2,450,000 2,450,000
----------- -----------
3,218,517 2,538,616
Less current portion .......................... (48,755) (137,371)
----------- -----------
Total long-term debt .......................... $ 3,169,762 $ 2,401,245
=========== ===========
<PAGE>
Note 6 - Stockholders' Equity
- -----------------------------
On June 12, 1998, at a special meeting of the shareholders, the shareholders of
the Company approved an amendment to the Articles of Incorporation of the
Company to increase the number of authorized shares of Common Stock from
10,000,000 to 20,000,000 and also authorize 10,000,000 shares of preferred
stock.
Warrants
- --------
Combined with the $2,450,000 convertible debenture (Note 4), the Company issued
915,000 warrants (the "Debenture Warrants") to buy unregistered shares of the
Company's common stock at an exercise price of $2.75 per share. In the first
quarter, 1996, the Company issued an additional 25,000 warrants at an exercise
price of $1.50 per share to the debenture holder in exchange for a waiver of
certain financial covenants. As part of a repricing negotiation with the
debenture holder, the Company lowered the exercise price of all Warrants to
$1.06 per share and the Warrants were then exercised on December 30, 1997,
resulting in proceeds to the Company of $996,400. In January 1998, the Company
agreed to issue an additional 500,000 warrants subject to a vote of the
shareholders increasing the number of shares authorized.
During 1995, the Company completed the sale of 648,880 units of its common
stock. In connection with the private placement and the issuance of convertible
debt, the Company issued an aggregate total of 38,131 warrants to placement
agents. Each warrant entitles the holder to purchase one unregistered share of
common stock at any time from June, 1996 through June, 1999 at an exercise price
of $2.75 per share. However, with the issuance of warrants pursuant to an
employment agreement, the Company lowered the exercise price of these Warrants
to $1.06 per share.
During the first half of 1996, the Company used letters-of-credit issued from
individuals with the Company as beneficiary. These letters-of-credit were used
as collateral at the Company's bank for its line-of-credit. As an incentive to
participate in this collateral program, the Company issued 20,000 warrants to
acquire the Company's common stock. Each warrant entitles the holder to purchase
one share of the Company's unregistered common stock at an exercise price of
$2.75 per share. These warrants can be exercised at any time prior to their
expiration in May, 2000.
Pursuant to an employment agreement with an officer, the Company issued 40,000
Warrants to acquire common stock. Each warrant entitles the holder to purchase
one share of the Company's unregistered common stock at an exercise price of
$1.06 per share. Warrants for 20,000 of these shares expired on December 31,
1997; the remaining 20,000 can be exercised at any time prior to their
expiration in December, 1999.
Stock Options
- -------------
The Company has reserved a total of 860,243 of its authorized but unissued
common stock for stock option plans (the "Plans") pursuant to which officers,
directors, employees and non-employees of the Company are eligible to receive
incentive and/or non-qualified stock options. Under the terms of the Plans,
options are exercisable based on various vesting schedules with an exercise
price which equals the market price of the common stock on the date of grant.
Through September 30, 1998, the Company had granted (net of cancellations)
426,443 options with various vesting periods and an exercise price of between
$0.31 and $3.00 per share. As of September 30, 1998, 328,943 granted options are
vested with exercise prices ranging from $1.06 to $3.00. However, no options
have been exercised.
Note 6 - Stockholders' Equity (continued)
- -----------------------------------------
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). Accordingly, no compensation cost has been recognized for the stock
options and warrants granted. Consistent with the disclosure-only provisions of
SFAS No. 123, the Company must provide pro forma net earnings and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair value based method defined in SFAS No. 123 had been
applied.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock option
grants. The Model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including the
expected stock price volatility, expected dividend yields, the risk free
interest rate and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's option, the value determined by the Model is not
necessarily indicative of the ultimate value of the granted options.
Note 7 - Earnings Per Share
- ---------------------------
The Company adopted Statement of Financial Accounting Standard No. 128 ("FAS
128"), Earnings Per Share. All prior period loss per common share data has been
restated to conform to the provisions of this statement. Basic loss per common
share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock, only if their effect is dilutive. Options and warrants to
purchase shares of common stock in 1998 and 1997 were not included in the
computation of diluted loss per common share because their effect would be
antidilutive.
Note 8 - Subsequent Events
- --------------------------
On November 2, 1998, the Company filed a voluntary petition for protection under
the reorganization provisions of Chapter 11 of the Bankruptcy Code with the
United States Bankruptcy Court, District of Colorado, file number 98-25542 RJB.
The Company will continue to operate as a Debtor-in-Possession.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
Voice It Worldwide, Inc. utilizes a broad range of silicon chip technology
including digital and analog storage devices, flash memory and digital voice
compression integrated circuits. Voice It combines these technologies with
proprietary software which enables the Company to develop leading edge consumer
voice recorder products. The Company protects its proprietary technology through
a combination of pending patents, copyrights and trade secrets.
The Company's first product, the Voice It Personal Note Recorder, with a 75
second capacity was introduced in the market in November of 1993. Since then,
the Company has expanded its Personal Note Recorder line to include models with
recording capacities from 40 seconds to 32 minutes. The Company has also added
product lines to include more business oriented tools such as the Voice It
Executive Series, the Voice It(R) Manager and the Voice It(R) Digital Voice
Recorder.
During the fourth quarter of 1996, the Company introduced the Voice It Managers.
This new line of digital recording products offer both extended digital
recording capacity and organization features including time and date stamping of
messages and file folder organizers, an LCD display and a built-in icon library
for file folder labeling. The Voice It Manager products also offer message
alarms, calendar scheduling, a phone data base for 100 names with notes and
three phone numbers for each name and also includes auto-dial capabilities
During 1997, the Company continued to redefined its role in digital recording
technology by developing and introducing a new Executive Series of Personal Note
Recorders and a dictation-length digital recorder with edit and computer
download features. The Company's new dictation-length recorder, called the Voice
It Digital Voice Recorder has 50 minutes of internal memory as well as the
ability to increase its capacity by adding a 50-minute removable memory card. By
using additional memory cards, the Voice It Digital Voice Recorder has virtually
unlimited storage capacity. The Digital Voice Recorder's edit features work like
a "verbal word processor" for voice files enabling the addition or deletion of
words or phrases seamlessly within a sentence or paragraph. In addition to all
of the other enhanced features, the Company's new recorder downloads its
compressed verbal files to a Personal Computer. Using the Voice It PC Link
software, the files can be named and stored, played through the computer's
speakers for transcription using popular word processing programs, or even
attached to email and sent via the internet.
During 1998, the Company is in the process of completing its transition into the
Original Equipment Manufacturing ("OEM") market and has developed its newest
version of the Voice It Digital Voice Recorder. This new digital recorder will
continue to be able to download to your computer, and will also be able to
interface with various popular continuous speech voice-to-text software. This
innovation will allow the voice-to-text software user to escape the confines of
their computer and become mobile in their dictation. Currently, the Company has
a contract with a leading Voice-to-Text software company to provide them with
our Voice It unit.
<PAGE>
The Company markets its Note Recorder products in the United States and
internationally in Canada, Mexico, Europe, South Africa and the Middle East.
While many Voice It products are currently available in a variety of
distribution channels (including direct mail catalogs, office super stores,
catalog showrooms and electronic specialty stores) the number of retail outlets,
and corresponding retail sales, are significantly declining as the Company
pursues it's OEM business.
Results of Operations:
The following table sets forth, for the periods indicated, items in the
Statement of Operations expressed as a percentage of net sales:
Three Months EndedNine Months Ended
September 30, September 30,
1997 1998 1997 1998
------- ------- ------- -------
Net sales .................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ................ 69.8 57.4 59.8 51.8
----- ----- ----- -----
Gross profit ................ 30.2 42.6 40.2 48.2
----- ----- ----- -----
Operating expenses
Administrative and
general .................... 23.5 46.0 24.5 35.4
Selling and marketing ....... 41.8 31.3 34.4 48.0
Research and development .... 16.3 38.6 16.6 26.1
----- ----- ----- -----
Total operating expenses .. 81.6 115.9 75.5 109.5
----- ----- ----- -----
Operating loss ............ (51.4) (73.3) (35.3) (61.3)
Other income (expense), net (6.4) (13.4) (5.6) (8.7)
----- ----- ----- -----
Net loss before income tax (57.8) (86.7) (40.9) (70.0)
Income tax (benefit) ...... 0.0 0.0 0.0 0.0
----- ----- ----- -----
Net loss .................. (57.8)% (86.7)% (40.9)% (70.0)%
===== ===== ===== =====
Three Months ended September 30, 1998 vs. Three Months ended September 30, 1997:
Net sales for the three months ended September 30, 1998 were $651,300 compared
to $1,361,000 for the three months ended September 30, 1997. The Company is
currently introducing an upgraded version of its Voice It Digital Recorder that
will interface with the new popular continuous speech voice-to-text software. As
the customer anticipated this new technology, sales of the existing version of
our Digital Recorder were much slower than anticipated. Additionally, the number
of retail outlets, and corresponding retail sales, have significantly declined
as the Company pursues it's strategy of focusing on its Original Equipment
Manufacturing ("OEM") business.
Cost of sales for the quarter ended September 30, 1998 decreased to $373,500 or
57.4% of net sales from $949,800 or 69.8% of net sales during the third quarter
of 1997. As a percentage of net sales, cost of sales decreased during the
quarter due to cost savings associated with various components. However, while
the Company continues to expect cost of sales for the Personal Note Recorders to
continue at approximately 50%, the Company will introduce its newest digital
recorder during the fourth quarter with sales to Dragon Systems, Inc., the
leading provider of voice-to-text software in the United States. These OEM sales
carry a lower gross margin and will increase the relative cost of sales (as a
percentage of sales) for the remainder of the year.
General and administrative expenses were $299,400 during the third quarter of
1998 compared with $319,900 for the same period in 1997. These expenses are
mostly fixed and therefore have not decreased as sales decreased.
Sales and marketing expenses for the quarter ended September 30, 1998 decreased
$364,900 to $203,600 from $568,500 during the same quarter in 1997. This
decrease is due to the decrease in advertising and marketing costs. While OEM
business generates a smaller gross margin as mentioned above, there are also
fewer marketing costs associated with the sales, thereby decreasing the sales
and marketing expenses.
Research and development costs increased $30,100 to $252,100 for the third
quarter of 1998 from $222,000 for the same quarter in 1997. Research costs have
increased for two reasons. First is that the Company is in the process of
completing its development of its new Digital Dictation Length Recorder, and
corresponding software interface, used to complement current Voice-to-Text
software. Second, the Company amortizes its software development costs, and
expenses all other research and development costs. The amortized costs are
amortized over the estimated useful life of the product with is approximately 3
years. The current year's amortization expense has increased due to the
continued effort to develop new and better products.
The Company incurred an operating loss of approximately $477,300 for the third
quarter ended September 30, 1998 compared with an operating loss of
approximately $699,300 for the same quarter in 1997. While the sales decreased
by 52%, the cost of sales decreased by over 60% and the operating expenses
decreased by 32% causing a lower operating loss during the current quarter when
comparing it to the third quarter of 1997. Additionally, management believes
that with the OEM supply contracts that are currently in place, and with the
expense reductions that are in place, the fourth quarter, 1998 should be
profitable.
Net interest expense for the quarter ended September 30, 1998 of $87,400
compares to net interest expense during the same period last year of $87,700.
The primary component of interest expense is the interest on the $2.45 million
convertible debt the Company entered into during the fourth quarter of 1995.
Additionally, the Company incurred interest expense from utilization of its
line-of-credit facility as well as interest paid to one of the Company's vendors
for extended payment terms. After interest expense, the net loss for the three
months ended September 30, 1998 was $564,696 or $0.08 per share compared to a
net loss of $787,058 or $0.16 per share for the third quarter of 1997.
Nine Months ended September 30, 1998 vs. Nine Months ended September 30, 1997:
Net sales for the nine months ended September 30, 1998 were $2,802,800 compared
to $4,079,500 for the nine months ended September 30, 1997. As mentioned
earlier, the sales for 1998 declined due in part to the Company's transition
into the OEM business. Additionally, because the new generation of this recorder
will be introduced during the fourth quarter of 1998, orders for the earlier
version of the Digital Recorder have been lower than expected. There was also
generally a high retail inventory of the older recorder which resulted from the
late fourth quarter, 1997 introduction.
<PAGE>
Cost of sales for the first nine months ended September 30, 1998 decreased to
$1,452,500 or 51.8% of net sales from $2,441,400 or 59.8% of net sales during
the nine months of 1997. As a percentage of net sales, cost of sales have
decreased due in part to cost savings associated with various components.
However, the Company expects costs of sales to increase as a percentage of sales
during late third quarter and into the fourth quarter due to the OEM
introduction of the new digital voice recorder that is compatible with
continuous speech, voice-to-text software.
General and administrative expenses decreased $8,100 to $990,900 during the
first nine months of 1998 compared with $999,000 for the same period in 1997.
While sales have been significantly lower during the period, general and
administrative expenses are mostly fixed costs that will be less affected by the
lower sales.
Sales and marketing expenses for the nine months ended September 30, 1998
decreased $58,100 to $1,345,700 from $1,403,800 during the same period in 1997.
While many of the expenses in this area have decreased due to the lower sales
and shifting sales more toward OEM, there were some significant increases due to
increased cooperative advertising reserves that were needed as commitments had
been made but corresponding sales were not generated.
Research and development costs increased $55,700 to $732,100 for the nine months
of 1998 from $676,400 for the same period in 1997. A primary reason for this
increase is due to the increased amortization of previously capitalized software
development costs, as well as increased amortization of various tooling costs.
The Company incurred an operating loss of approximately $1,718,300 for the first
nine months ended September 30, 1998 compared with an operating loss of
approximately $1,441,200 for the same period in 1997. The primary increase in
the operating loss during the current quarter is related to the decrease in
sales during the period combined with increased cooperative advertising costs
during the second quarter to cover past commitments.
Net interest expense for the nine months ending September 30, 1998 of $242,400
compares to net interest expense during the same period last year of $229,100.
The primary component of interest expense is the interest on the $2.45 million
convertible debenture the Company entered into during the fourth quarter of
1995. Additionally, the Company incurred interest expense from utilization of
its line-of-credit facility as well as interest paid to one of the Company's
vendors for extended payment terms. After interest expense, the net loss for the
nine months ended September 30, 1998 was $1,960,724 or $0.30 per share compared
to a net loss of $1,670,286 or $0.33 per share for the first nine months of
1997.
Liquidity and Capital Resources:
The Company has financed its growth to date primarily from the private sale of
Common Stock and Warrants, the merger with Lander Energy Co. and the issuance of
$2,450,000 in convertible debentures. The Company also uses bank financings for
short-term working capital needs. At September 30, 1998, the Company had cash
and cash equivalents of approximately $163,300. The Company also had working
capital of approximately $1,334,000 at September 30, 1998, which is
significantly lower than the $3,922,400 of working capital available at December
31, 1997. The primary reason for the decrease in working capital is the
Company's net loss for the nine months ended September 30, 1998, of
approximately $1,960,700.
Cash provided by the Company for operating activities during the nine months
ended September 30, 1998 was approximately $253,600. A primary component of
operating cash was the Company's net loss of $1,960,700 adjusted for non-cash
adjustments of depreciation and amortization of approximately $468,000. Other
uses of operating cash for the period included increases in the Company's
inventories of approximately $348,200 as well as decreases in accounts payable
and accrued liabilities of approximately $327,200 and $97,700 respectively.
Sources of operating cash were the decrease in account receivables and prepaid
expenses of approximately $2,327,200 and $92,200 respectively as well as the
increase in deferred revenue of $100,000.
Additional uses of cash include $277,600 for the acquisition of tooling and
other assets. During the nine months ended September 30, 1998, the Company used
approximately $679,900 by paying down a large portion of its bank
line-of-credit.
On April 18, 1997, the Company obtained a three year $2,000,000 line-of-credit
from a lender. In January, 1998, this line-of-credit was amended to reduce the
total limit to $1,000,000, amend the maturity date to January 1, 1999, and
reduced the total line by $20,000 per week beginning January 14, 1998. The
line-of-credit was further amended in October, 1998 to further reduce the total
limit to $100,000 and change the expiration date to November 15, 1998. Under the
terms of the line-of-credit, the Company' borrowings are collateralized by, and
limited to, a percentage of eligible worldwide accounts receivable as well as
finished goods inventories. The Company's interest rate is equal to the lenders
"Base Rate" plus 2.5%, totaling 11% at September 30, 1998.
During the past months, the Company has been seeking additional working capital
through equity infusions, negotiating a new operating line-of-credit, or short
term loans. Because the Company was unsuccessful in raising the necessary
additional working capital, the current operations were becoming impaired due to
the increasing debt burden. Therefore, on November 2, 1998, the Company sought
protection by filing a voluntary petition for reorganization under the
provisions of Chapter 11 of the Bankruptcy Code. This petition was filed with
the United States Bankruptcy Court, District of Colorado, and was assigned the
file number 98-25542 RJB. The Company will continue to operate as a
Debtor-in-Possession.
Seasonality:
While the Company still anticipates that its business will be seasonal, with
approximately 40% of its sales occurring in the fourth quarter for the holiday
season, it is expanding its product line into more business application tools
and transitioning its sales into more OEM sales, in part to smooth out this
holiday seasonality.
Foreign Exchange:
The Company's products are principally purchased from suppliers in the Far East
with its prices negotiated on an annual basis in U.S. dollars at exchange rates
reset annually. Exchange rate fluctuations between the U.S. Dollar and the
Singapore dollar could have an adverse effect on the Company's costs of sales
and gross margins. In the event of extreme exchange rate fluctuations, it may
become uneconomical for the relationship between the Company and its suppliers
to continue.
<PAGE>
The Company also records a significant amount of its revenues in Europe and the
Middle East. In most countries, the Company sets its sales prices in U.S.
dollars so that any variances are for the purchaser's account. However, if the
exchange rate fluctuates between these other currencies and the U.S. dollar, it
may have an adverse effect on the Company's sales.
Inflation:
Management believes that inflation has not and will not have a significant
impact on its business.
Year 2000 Compliance:
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and conversions to new
software, the Year 2000 problem will not pose significant operations problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed in a timely manner, the
Year 2000 problem may have a material impact on the operations of the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 2, 1998, the Company filed a voluntary petition for protection
under the reorganization provisions of Chapter 11 of the Bankruptcy Code
with the United States Bankruptcy Court, District of Colorado, file number
98-25542 RJB. The Company will continue to operate as a
Debtor-in-Possession.
Item 2. Changes in Securities. None
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
No report on Form 8-K was filed during the quarter ended September 30, 1998.
However, on November 9, 1998, the Company filed a report on Form 8-K reporting
in item 3 thereof that on November 2, 1998, the Company filed a for protection
under of Chapter 11 of the Bankruptcy Code.
SIGNATURES
Pursuant to the requirements 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.
VOICE IT WORLDWIDE, INC.
Registrant
Date: 11/18/98
/s/ J. Fredrick Walters
J. Fredrick Walters
Chairman of the Board of Directors
Date: 11/18/98
/s/ Mark A. Griffith
Mark A. Griffith
Chief Financial Officer
Chief Accounting Officer
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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