U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File Number 0-7796
VOICE IT WORLDWIDE, INC.
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(Name of small business issuer in its charter)
Colorado 83-0203787
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(State or other jurisdiction of (I.R.S. Employer Identifica-
incorporation or organization) tion Number)
2643 Midpoint Drive, Suite A
Fort Collins, Colorado 80525
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(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (970) 221-1705
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.10 Par Value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B 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. [ ]
State issuer's revenues for its most recent fiscal year: $7,584,379.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant: As of March 31, 1998: $4,437,822*.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: $.10 Par Value Common
Stock--6,466,502 shares as of March 31, 1998.
Transitional Small Business Disclosure Format: Yes ___ No X
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* The aggregate market value was determined by multiplying the number
of outstanding shares (excluding those shares held of record by executive
officers, directors and greater than five percent shareholders) by $1.375, the
closing price of the Registrant's common stock as of March 31, 1998, such date
being within 60 days prior to the date of filing.
PART I
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-KSB and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well
as other capital spending and competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ
from those expressed in any forward-looking statements made by or on behalf of
the Company. These risks and uncertainties include, but are not limited to,
those relating to market conditions, product life cycles, customer delays in
purchasing products, technology shifts, potential difficulties in introducing
new products, competition, price sensitivity and the uncertainty of continuing
market acceptance of the Company's products by distributors, retailers and
consumers.
ITEM 1. DESCRIPTION OF BUSINESS.
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GENERAL
Voice It Worldwide, Inc. (the "Company") designs, develops and markets a
line of personal consumer electronics products which digitally record and
store voice information on solid state memory. Voice It products utilize
computer chip technology to capture and organize ideas, thoughts, reminders
and messages. In 1993, the Company introduced its first product line, the
Voice It Personal Note Recorder, dimensionally sized like a credit card and
approximately 1/3 inch thick. The compact size, ease of use and portability
make Voice It Personal Note Recorders a convenient replacement for handwritten
sticky notes, particularly at times and in places where handwriting is
impractical.
Voice It Personal Note Recorders are available in recording capacities
ranging from 40 seconds to 22 minutes. Unique message management features
make it easy to record multiple messages, save individual messages, play them
and erase them when no longer needed. Memory management, message management
and high quality voice reproduction have helped the Company stay on the
leading edge in product features and longer recording capacity. During 1997,
management believes that Voice It was the leading brand of digital note
recorders, offering six different models, with prices ranging from $29 to $99.
During the fourth quarter of 1996, the Company introduced the Voice It
Manager, a line of digital recording products that offered both extended
digital recording capacity and organization features, including time and date
stamping of messages, 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 bank for 400 names, with up to three phone
numbers each, and auto-dialer capabilities. During 1997, three models were
available with recording capacities of 22 minutes, 45 minutes or 90 minutes,
ranging in price from $89 to $199.
Also during the fourth quarter of 1996, the Company began shipping a
voice recognition clock which was available exclusively through the Brookstone
catalog and Brookstone stores during the 1996 holiday season. This was the
first travel alarm clock that allowed you to set the time and alarm with your
voice. It also included a special "talk back" feature confirming the time,
date and alarm activation. This product was the Company's first venture into
the field of voice recognition and served to expand its technology base.
During 1997, the Company introduced two major new product lines. The
Voice It "Executive Recorder" series of Personal Note Recorders, introduced in
the third quarter, is designed to be attractive to the business and
professional user who requires longer recording capacity and message
management features and may currently be using a traditional tape recorder to
record thoughts and reminders. These units have recording capacities ranging
from 12 minutes to 22 minutes and have an LCD display that informs the user of
message count, channel, battery life and remaining recording capacity. The
four channels can be individually named for easy message segregation.
Messages can be saved, individually erased or erased in total.
The second major product, the Voice It Digital Recorder, was introduced
in the fourth quarter of 1997. The Digital Recorder provides users with
unlimited recording capacity, through up to 50 minutes of internal memory and
removable flash memory cards, and has edit capabilities. Recordings can be
segregated into four folders in the internal memory and four folders in the
removable memory. Recordings can be downloaded to a computer, in highly
compressed format, using the Voice It PC Link software provided with the unit.
Once downloaded, the recording can be played, edited, stored, transcribed
using popular word processing applications, attached to an e-mail message or
sent over the Internet. Recordings can also be uploaded from the computer to
the Digital Recorder.
The Company distributes its products in the United States through a
network of manufacturers representatives and internationally through
distributors. In the U.S. and Canada, the products are available in a variety
of distribution channels, including direct mail catalogs, mass merchants,
office super stores, catalog showrooms and electronic specialty stores. When
the digital recorder category was first introduced, the Company secured
diverse distribution in a large number of retailers. As the products matured,
some retailers could not economically compete and ceased to carry the
products, while new distribution sources were opened. By year end 1997, Voice
It products were distributed in approximately 5,000 outlets in North America.
Voice It products are available in such well known retailers as The Sharper
Image, Brookstone, Hammacher Schlemmer, Service Merchandise, Staples,
OfficeMax, Office Depot, Circuit City, Best Buy and Day Timers. In Canada,
the products are also available through Radio Shack, London Drugs and Office
Depot. Internationally, Voice It products are sold through independent
distributors and are available in approximately 5,000 outlets throughout 15
countries.
The Company markets its digital recording products directly to consumers
and business individuals, targeting those people most likely to benefit from
its solid state technology. The Company utilizes a national public relations
program, as well as print advertising, to increase consumer awareness and
stimulate purchasing of the Voice It branded products. The market demand for
digital recorders is in the early stages of the product life cycle. From 1993
to 1995, the digital recorder category grew quickly for gadget oriented
products with recording capacities of less than one minute. During 1996,
sales of digital recorders with shorter recording times declined and growth
has generally occurred in the longer capacity recorders. Management believes
that as digital recording technologies advance, new features and applications
are developed and memory costs decrease, the market will again expand and
begin to compete with existing similar categories of electronic products, such
as analog tape recorders. In addition, the new Voice It Digital Recorders
will be positioned to compete against existing tape-based recording products
and will be an enabling technology for managing voice on the computer.
The Company contracts for the manufacture of its products in the Far
East, using companies with fully integrated, turnkey manufacturing services
with expertise in chip-on-board technology, surface mount board assemblies,
printed circuit boards, liquid crystal displays and ISO Quality Certification
Programs. In addition, the Company utilizes on-site quality control personnel
for product inspection and release. The Company protects its proprietary
technologies through a combination of trade secrets, trademarks, patent
applications and copyrights, where appropriate. In 1995, the Company received
registration of its Voice It trademark and a design patent on the Voice It
Personal Note Recorder line. In 1996, the Company continued to receive
worldwide recognition of the Voice It trademark in such countries as Canada,
Germany, Austria, Belgium, Luxembourg, Netherlands, France, United Kingdom,
Sweden, Switzerland and Australia. In late 1997, the U.S. Patent and
Trademark Office indicated that a patent will likely be issued for a voice
recognition timekeeping device patent application filed by the Company.
BUSINESS STRATEGY
The Company's plan of operation and business strategy is based on the
following core points:
Aggressively develop and introduce new products in the digital recording
arena to maintain a leadership role and to establish the Voice It brand as an
alternative to existing tape-based recorders. Primary emphasis has been
placed in research and development to capitalize on the changing technologies
in the digital voice market. During 1996, the Company introduced three new
recording products and its first voice recognition product. In 1997, the
research and development program was accelerated to introduce products with
long recording times that can transfer digital voice data to the personal
computer for editing, transcription, archiving and attaching to E-mail and
Internet messages. In 1998, the Company will integrate its Digital Recorder
product line with Voice-to-Text speech recognition software that will give
the user `mobile dictation' capability.
Aggressively seek strategic relationships which can enable Voice It to
more rapidly access the market of digital, solid state recording. The Company
has focused efforts on successfully building its business by increasing its
revenues, technology and/or resources through strategic relationships. With
the rapid changes in the consumer electronics market, the Company has accessed
cutting edge technology and products through strategic positioning with other
companies.
Market a broad range of products to meet consumer needs and to target
various channels of distribution of target markets. Voice It products appeal
to a broad range of consumers by offering a variety of features and prices to
meet consumer communication needs and price points, broaden market appeal,
increase retail shelf presence and increase product benefits for the end user.
In introducing the Executive Series, the Company is attempting to provide a
`business tool' to the professional individual. The Digital Recorder has been
designed to access to computer channel of distribution and begin to create a
computer peripheral product line.
Maintain value pricing of Voice It products to continue market share
leadership and create a competitive advantage in price vs. feature value to
the end user. By consistently offering better features at lower prices,
management believes it builds brand loyalty and can compete with higher priced
more well known competitors.
Continue to increase consumer awareness of the Voice It brand name
through a national public relations campaign and national advertising during
key seasonal selling periods. The Company continues its advertising and
public relations efforts to the consumer marketplace with emphasis during the
gift giving seasons of the year. The Company plans to continue utilizing
print advertising in its key target markets.
VOICE AS A PRIMARY DATA SOURCE
The easiest and most common means of communication is by spoken word.
Speaking is easy, fast, universal and expressive in meaning and connotation.
To date, the majority of documentation in business and personal life has come
in written form because voice could not easily be stored and used as a primary
source of data. However, technology advances during the last two years are
making it easier to use voice as a primary data communications tool. The
advent of high speed personal computer microprocessors, low cost memory and
the Internet can provide people with the capability of using voice as an
alternative data source. Verbal information, captured on a Voice It Digital
Recorder and transferred to a PC, can be saved, edited and transmitted via
E-mail or the Internet, without undergoing any conversion. These tools can
open up new applications for verbal communications not possible a short time
ago. Management believes these technological advances can create a shift in
the everyday means of communication both personally and in business.
Perhaps more important has been the introduction of continuous
Voice-to-Text speech recognition products to the general public during 1997.
With reasonable initial training of the system, the user can now dictate to
their computer and receive text output with adequate accuracy. By integrating
the Voice It Digital Recorder with Voice-to-Text software, the user will no
longer be tied to their computer, but will be able to create correspondence
"on their feet" and then convert that information to text. Management
believes that this integrated product will provide a significant breakthrough
to individuals and dedicated markets that require or desire documentation of
verbal information.
AGREEMENT WITH APPLIED VOICE RECOGNITION, INC.
On December 31, 1997, the Company entered into a joint product
development agreement with Applied Voice Recognition, Inc. ("AVRI") located in
Houston, Texas. AVRI develops, markets and supports original voice
recognition applications. AVRI's professional line of products includes Voice
COMMANDER Pro, an integrated office correspondence suite that uses continuous
speech recognition. AVRI has also designed a consumer, small office/home
office product called VoiceCOMMANDER which uses continuous speech recognition
and includes a training video for quick and easy usage, a self-contained
address book and a task-oriented user interface. Both of these products are
integrated with IBM Via Voice, run on Windows 95 and work with Microsoft Word
and Corel WordPerfect.
Under the terms of the agreement, AVRI will assist the Company in
integrating VoiceCOMMANDER with the Digital Recorder. The Company agreed to
license a minimum of 50,000 units of the VoiceCOMMANDER software in 1998. The
Company will license and market VoiceCOMMANDER as a stand-alone software
product beginning in the second quarter of 1998. Current plans are for the
Company to market an integrated product of the Digital Recorder and
VoiceCOMMANDER software in the second half of 1998. In addition, the Company
will manufacture the Digital Recorder for AVRI to market and sell to the
healthcare market.
PRODUCTS
The Company currently addresses three product categories: Personal
Messaging, through the Voice It Personal Note Recorder line; Personal
Organization, through the Voice It Manager line; and Personal and Professional
Communications and Documentation, through the Voice It Digital Recorder with
PC Link software.
Initially, the Company focused on personal messaging with its Voice It
Personal Note Recorder product line. The Voice It Note Recorder was invented
to provide consumers with a small, portable means of recording short messages
as personal reminders. The products use computer chip technology allowing
voice signals to be recorded on a silicon chip. The Voice It Personal Note
Recorder is roughly the size of a credit card. Because of its small size,
light weight and the fact that it is battery powered, the product is highly
portable. This portability makes the product a convenient replacement for
handwritten notes and reminders, particularly in places where handwriting is
impractical - such as in a car.
The Company has developed a product line of note recorders, currently
including six different models, each with a different recording capacity,
different message management features and some with LCD display. Recording
capacities in the product line range from 40 seconds to 22 minutes. All
models can hold multiple messages of any length up to the total recording
capacity of the model. Messages can be accessed instantaneously through the
use of buttons. Messages can be saved until no longer needed and erased one
at a time or all at once, if necessary. Higher end models contain additional
features such as audio cues, multiple speeds, and channels for categorizing
messages. Voice It products are superior in the market because of their
message management features, the high quality of voice recording and the
availability of a variety of recording models. Product retail prices range
from $29 to $99.
In 1996, the Company focused on using voice as a means to keep organized.
The Voice It Manager product has multiple features, including reminder
recordings, message pre-set to alarms on a daily, weekly or yearly basis, a
personal phone data bank (capable of storing 400 names with up to three phone
numbers each) and an autodialer. The Voice It Manager uses high compression
recording technology paired with innovative features that make it easy to save
and store information in verbal form. The Voice It Manager brings
state-of-the-art long capacity flash memory technology, which means you don't
lose your information, whether it is messages or phone numbers, even when your
batteries run down or you replace them. The Voice It Manager is one of the
most advanced products of its kind at retail prices that range from $89 to
$199.
In 1997, the Company introduced the Voice It Digital Recorder line which
has the capability of interfacing with a Personal Computer. Voice recording
on a Voice It Digital Recorder allows direct information entry, direct access
and editing features not currently possible in an analog tape format. With
the removable flash card memory, the user has unlimited recording time and
maximum flexibility. Downloading to a computer provides additional editing
capability and message management features as well as the ability to archive
information in voice form. Transmitting messages is also possible by
attaching a voice file to E-mail or Internet messages. Lastly, if information
needs to be transferred to written word, voice messages can be played with
popular word processing applications for easy transcription on the PC. The
Digital Recorder products retail from $199 to $299.
PERSONAL DIGITAL RECORDING MARKET
In 1993, the Company introduced the first credit-card sized digital
recorder in the market. Since that time, the Company has established itself
as the leader in the digital recorder market which has grown significantly
since 1993, with Voice It factory unit sales increasing from approximately
5,000 units in 1993 to more than 225,000 units in 1997. In the first three
years of marketing, the Company's products were positioned primarily as a
replacement for handwritten notes and reminders, a new category in the
personal electronics market. Sales growth was achieved through increased
consumer demand as well as increased distribution at the retail level.
Substantial category growth took place in 1994 and 1995, driven by
increased distribution and increased sales volume to existing customers. After
a weak 1995 holiday selling period and an industry downturn in consumer
electronics, the Company experienced lowered factory sales on its note
recorder line and significant product returns on its Message Center product
throughout 1996. In addition, beginning in 1996 and continuing through the
first nine months of 1997, factory sales were affected by a substantial number
of competitive models being liquidated at extraordinarily low selling prices.
The availability of these close-out models caused lower Voice It sales and
helped contribute to the loss of distribution in some outlets.
Management estimates that in 1996, approximately half of the solid state
recorder category was comprised of products with recording capacities under
one minute. The low recording capacity segment of the category included a
large number of "gadget" recorder products offering poor voice quality and a
limitation of recording just one message. During 1997, the demand for very
short run time products significantly decreased. The market primarily
consists of products with recording capacities ranging from approximately 1
minutes to 50 minutes. Management believes that this segment of the category
is currently dominated by Voice It models.
During 1997, the Company began to execute a strategic re-positioning of
its products. Based upon the consumer demand for longer run times and a
desire to actively compete with analog tape recording devices, the Executive
series and the Digital Recorder were designed. These products are believed to
have significant advantages over analog tape and contain features of
convenience for the user. All high end products utilize flash memory, which
does not require battery power to maintain storage of information, and utilize
advanced digital signal processing technology. The Executive series began
shipping in volume in September 1997 and the Digital Recorder began shipping
in volume in November 1997. The Company had anticipated earlier shipping
dates, and these late initial shipments to customers accounted for some lost
sales due to the inability of these products to reach some retail shelves in
time for the 1997 holiday buying season. While initial acceptance of the
Company's new products is promising, there is not enough sell-through
experience at retail to form long-term conclusions.
Management believes that it is essential for the Company to continue to
increase its product lines to incorporate new features, longer recording
capacity and the ability to make communications easier and faster through its
interface to the personal computer. By incorporating ways to use voice to
simplify and improve communications, digital recording can be utilized in more
personal and business environments.
MARKETING AND SALES
The Company markets its products primarily through retail channels. In
the U.S. and Canada, the Company's products are available in a broad range of
retail stores, including office super stores, catalog showrooms, electronic
specialty stores and direct mail catalogs. Approximately 5,000 retail outlets
in North America carry the products, including such retailers as The Sharper
Image, Brookstone, Hammacher Schlemmer, Service Merchandise, Staples,
OfficeMax, Office Depot, Circuit City, Best Buy and Day Timers. In Canada,
the products are also available through Radio Shack, London Drugs and Office
Depot. Internationally, Voice It products are sold to independent
distributors and are available in 15 countries in a variety of approximately
5,000 retail stores and catalogs.
The Company's marketing strategy emphasizes the unique features and
benefits of the Voice It Personal Note Recorder, the Voice It Manager and the
Digital Recorder products. The Company offers several models for broad scale
distribution and selected models for sheltered distribution in direct mail
catalogs. The Company's strategy also emphasizes the sales potential of the
product line based on successes at other retail outlets and the margins the
product affords to retailers.
The Company sells its products to retailers through a network of
independent manufacturers representatives who sell through direct contact with
retail and wholesale accounts in the U.S. and Canadian markets. These
representatives are paid on a commission-only basis. In addition, the Company
utilizes exclusive distributors internationally and has focused its efforts
primarily in Europe. U.S. and Canadian retail accounts are provided with
payment terms of up to 60 days whereas international business ranges from the
use of letters of credit, payment upon receipt of goods and payment terms of
up to 30 days after receipt of goods.
The Company promotes its products directly to consumers through national
advertising and public relations efforts. In 1995, the Company concentrated
its national advertising in print and radio, running two flights during the
year, one at the Father's Day gift period and again during the holiday season.
In 1996, the Company focused the majority of its efforts primarily in national
television advertising airing during the holiday selling season on such
networks as TNT, TBS, CNN and Headline News. During 1997, the Company
primarily used print advertising in national news weeklies, such as Time and
Newsweek, and national business magazines such as Business Week, Forbes and
Fortune. Management believes that its advertising efforts have increased
consumer awareness and purchases of the Voice It brand. Total dollar
expenditures on advertising were decreased in 1997 as compared with 1996 and
1995.
The Company also engages the services of a public relations firm to
generate trade and consumer press coverage of its products. The efforts
during 1997 and 1996 have been significant in terms of radio and broadcast
coverage of Voice It products and in numerous newspaper and magazine articles
across the country.
MANUFACTURING AND SUPPLIERS
The Company contract manufactures its products in the Far East utilizing
firms that specialize in fully integrated, turnkey contract manufacturing of
electronic products. These entities have expertise in chip-on-board
technology, surface mount board assemblies, printed circuit boards and liquid
crystal displays. They provide the Company with vertically integrated
manufacturing operations which management believes provide better
manufacturability and cost effectiveness for its products. Additionally,
these companies employ ISO Quality Certification Programs, which help insure
that the products meet the Company's quality specifications. The Company also
takes an active role in quality assurance by utilizing on-site quality control
personnel to conduct in-process and final quality inspection as well as
authorize release of finished goods shipments.
The Company purchases certain critical component parts of its products
directly from third parties. In addition, the Company relies on its contract
manufacturers to purchase critical components. Primary suppliers of chip
technology used in the Company's products include Information Storage Devices,
Inc., Lucent Technologies, Microchip Technology, Inc., Oki Electronic Ltd.,
Toshiba and Samsung Semiconductor.
COMPETITION
Although the Voice It Personal Note Recorder was the first product of its
kind to be sold widely through retail channels, direct competition emerged
during the second half of 1994. Many products which competed with the note
recorder line were of short recording capacity, low recording quality and had
little or no ability to manage multiple message recording, selectively erase
or skip search messages. The primary competitor in this segment of the
category was a product called MemoMate, which was introduced in the market in
late 1994 through a direct marketing campaign utilizing direct response
advertising on television. This product was originally priced in the $30
range when first introduced to the retail market in early 1995. Voice It's
aggressive pricing strategy, implemented during the second half of 1995,
forced MemoMate to reduce prices and eventually to liquidate its remaining
models. Most of the liquidation pricing occurred in 1996, when the average
selling price on this product was at levels below $12. In addition to
MemoMate, there have been numerous other small brands which have entered the
market at the low end, including Conair, Allied Voice, Northwestern Bell and a
number of "recorder-key chains" with 20 seconds or less of recording capacity.
Many of these products were introduced in 1995 and were sold at liquidation
pricing during 1996. Management believes that a certain segment of the market
exists for products in this "gadget" category, but that products of this type
do not offer substantial benefits to consumers and are sold at very low
margins to reach retail prices below $15.
During 1996, several large companies entered the digital recording market
with products which ranged in recording capacities from 20 seconds to 18
minutes. Olympus was the first company to introduce a line of personal note
recorders directly competitive with the lower capacity recorders in the Voice
It product line, but at higher price points. Olympus was able to secure
limited distribution to compete directly with Voice It. During the second
half of 1996, Olympus reduced the retail price of their products to compete at
the same price points as Voice It. In the limited number of stores where the
brands directly competed, Olympus gained some market share. In early 1997,
Olympus introduced their plans to market a digital recorder using removable
flash memory and stopped offering the low end recorders for retail
distribution. Delivery of the digital recorder, the D1000, with a recording
capacity of approximately 30 minutes and a retail price of approximately
$250.00, began shipments during the third quarter of 1997. Olympus has
announced that they will offer their recorder combined with IBM Via Voice
software for delivery during the second quarter of 1998.
In mid-1996, Sony began shipping a digital note recorder with 16 minutes
of capacity. This unit retailed in price at approximately $150 and offered
message management and digital editing features. The product was able to
secure distribution in office super stores, electronic specialty outlets and
department stores; however, market share was estimated to be moderate for the
Sony product. During 1997, Sony offered essentially the same unit with
different casing at a retail price of $99. Management believes that the Sony
unit has received moderate success and now competes directly with the
Executive series.
During 1998, the Company expects to see new competition in the personal
note recorder category as well as in the longer recording capacity digital
recording market, but no significant new products have yet been announced. In
addition, voice technology is being added to palm-sized organizer/computer
products, several of which were introduced at the January 1998 Consumer
Electronics Show. The Company believes that in the emerging solid state
recorder category, competitive activity can serve to increase consumer
awareness and stimulate consumer demand. With effective positioning of Voice
It products as a feature and value leader, Management believes it can
effectively compete in the note recorder category as well as the organizer and
"tape" based recorder markets.
PATENTS AND TRADEMARKS
The Company seeks to protect its proprietary technologies through a
combination of trade secrets, patents and copyrights, where appropriate. A
patent application for the Voice It products was filed with the U.S. Patent
and Trademark Office in March 1993 and is currently pending. Additionally,
patents have been filed in 15 foreign countries. Management believes that the
secondary or advanced features of its credit card-sized solid state voice
recorder may be patentable under current patent law in both the United States
and internationally. Additionally, the Company's patent applications do not
appear to infringe on any currently issued patents in the United States or
internationally. The Company has received trademark registration in the
United States for "Voice It" and has also received registered trademarks for
"Voice It" in various foreign countries. The Company has also received a
design patent in the United States for its Voice It Personal Note Recorders.
In December 1997, the Company was advised by the United States Patent and
Trademark Office that a patent will issue for a voice recognition timekeeping
device patent application filed by the Company. Contained in the scope of the
patent are speech recognition command and query for portable and tabletop
clock products, using both speaker-independent and user-trainable voice
recognition. Fundamental to the patent claims is the ability to record
information and then query that information through voice commands. Also
included in the patent are claims covering calendar, time zone, alarms and
other information which could have application in a variety of convenient
portable, tabletop and installed timekeeping products to allow direct access
to timekeeping features through speech recognition.
Management believes that due to the rapid pace of technological change in
its industry, the Company's success is likely to depend more upon continued
innovation, technical expertise, established retail distribution, marketing
skill and customer support than on legal protection of the Company's
proprietary rights.
EMPLOYEES
The Company currently employs 26 persons, including its seven executive
officers. Management believes that it maintains good relationships with the
employees. The Company's employees are not unionized.
PRIOR CORPORATE HISTORY
Prior to the merger in 1994, Voice It Technologies, Inc. ("Voice It") was
incorporated in 1993 to design, develop and market electronic personal message
products to be used in the home, automobile, away from home and in business.
Product development was commenced in 1992 by Tim Walters and Anil Agarwal,
working on product concepts and prototypes of a working solid state personal
note recorder. The Company was incorporated in April 1993, completed its
initial business plans and commenced efforts to obtain financing for its
proposed operations. The Company's first private placement of Common Stock
was completed in September 1993. The Company continued its funding through
additional management contributions to capital and a second private placement
which was completed in November 1994.
While the Company was seeking capital in 1993, it made initial contact
with the officers of Lander Energy Co. ("Lander"). Discussions took place in
early 1994 regarding potential capital funding through a merger with Lander.
The Board of Directors of Voice It believed a merger with Lander offered the
Company and its shareholders an opportunity to enhance its financial strength,
thereby providing increased opportunity for growth, technology innovation and
to meet competitive challenges.
Effective December 29, 1994, the shareholders of Lander and Voice It,
respectively, approved and adopted an Agreement and Plan of Merger, dated as
of June 27, 1994, as amended effective September 6, 1994 (the "Merger
Agreement") which provided for, among other things, the merger of Voice It
with and into Lander (the "Merger"). As a result of the Merger, Lander
acquired the assets and assumed the liabilities of Voice It and Voice It
ceased to exist as a separate legal entity. Although Lander was the surviving
entity, for accounting purposes the Merger has been treated as a reverse
acquisition with Voice It as the acquirer.
Pursuant to the Merger Agreement, Lander (i) amended its articles of
incorporation to provide for a 4.98 for 1 reverse split of all outstanding
shares of its Common Stock prior to the Merger, resulting in 979,431
post-split shares, while maintaining the number of authorized shares of Common
Stock at 10,000,000 with a par value per share of $0.10; (ii) issued an
aggregate of 3,428,500 shares of Common Stock to the holders of all of the
common stock of Voice It; and (iii) changed its name to "Voice It Worldwide,
Inc."
Because of the reverse acquisition accounting treatment, with Voice It as
the acquirer, the historical financial statements prior to and including 1994
are those of Voice It. The operations of Voice It are the only continuing
operations of the Company after the Merger.
ITEM 2. DESCRIPTION OF PROPERTY.
- -------------------------------------
The Company's principal executive office is located at 2643 Midpoint
Drive, Suite A, Fort Collins, Colorado 80525, and its telephone number is
(970) 221-1705. The Company currently leases approximately 4,800 square feet
of office and warehouse space at a monthly rental of approximately $4,500
expiring in February 2001. Management believes that its leased space is
adequate.
ITEM 3. LEGAL PROCEEDINGS.
- ------------------------------
No material legal proceedings to which the Company is a party or to which
the property of the Company is subject are pending and no such proceedings are
known by the Company to be contemplated. No legal actions are contemplated
nor judgments entered against any officer or director of the Company in
connection with any matter involving the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------------------
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ---------------------------------------------------------------------------
(a) The Common Stock is traded in the over-the-counter market and is
quoted on the Nasdaq SmallCap Market under the symbol "MEMO." For the past
two fiscal years, the high and low closing bid prices of the Common Stock as
reported to the Company by the National Association of Securities Dealers,
Inc. were as follows:
<TABLE>
<CAPTION>
FYE 1996 QUARTER ENDED: HIGH LOW
-------------------------- ---- ---
<S> <C> <C>
March 31, 1996 $2.75 $0.94
June 30, 1996 2.00 1.00
September 30, 1996 2.13 1.38
December 31, 1996 1.56 1.00
FYE 1997 QUARTER ENDED: HIGH LOW
-------------------------- ---- ---
March 31, 1997 $1.19 $0.69
June 30, 1997 0.91 0.47
September 30, 1997 0.88 0.47
December 31, 1997 2.31 0.88
</TABLE>
The over-the-counter quotations set forth herein reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
(b) As of March 31, 1998, there were approximately 2,200 record
holders of the Common Stock.
(c) No dividends have been declared by the Company within the last
two years and the Company does not presently intend to declare any dividends
in the future. Further, the terms of the Company's loan agreements contain
restrictions on the Company's ability to pay dividends on its capital stock.
(d) During the fiscal year ended December 31, 1997, the Company sold
the following equity securities that were not registered under the Securities
Act of 1933, as amended (the "Securities Act"):
(i) On December 31, 1997, the Company sold 471,700 shares of
Common Stock to Applied Voice Recognition, Inc. at $1.06 per share.
(ii) On December 31, 1997, Renaissance Capital Growth & Income
Fund III, Inc. exercised its warrant to purchase 940,000 shares of Common
Stock at $1.06 per share.
The issuances of the foregoing securities were made without registration
under the Securities Act in reliance upon the exemption provided by Section
4(2) of the Securities Act as private transactions which did not involve a
public offering of securities. No underwriter was involved in the
distribution of these securities, and no commissions were paid in connection
therewith.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
- ----------------------------------------------------------------------------
OVERVIEW
Voice It Worldwide, Inc. utilizes a broad range of silicon chip
technology, including digital analog storage devices, flash memory and digital
voice compression integrated circuits, and combines these technologies with
proprietary software, enabling 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 markets its products in the United States and Canada and
internationally in Mexico, Europe, South Africa and the Middle East. Voice It
products are now available in a variety of distribution channels, including
direct mail catalogs, office super stores, catalog showrooms and electronic
specialty stores. Many of the retailers carrying Voice It products are well
known stores such as The Sharper Image, Service Merchandise, Staples,
OfficeMax, Office Depot, Circuit City and Best Buy. In Canada, the products
are also available through Radio Shack, London Drugs and Office Depot.
Internationally, the Company currently has distribution in approximately 5,000
retail outlets in more than 15 countries worldwide.
The Company's first product, the Voice It Personal Note Recorder, with a
75-second capacity, was introduced in the market in November 1993. Since
then, the Company has expanded its Personal Note Recorder product line to
include models with recording capacities from 40 seconds to 22 minutes, and
has added product lines to include more business oriented tools such as the
Voice It Manager and the Voice It Voice Recorder.
During the fourth quarter of 1996, the Company introduced the Voice It
Managers, a new line of digital recording products that 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. The Company was able to introduce these products in over 1,500
stores in addition to several national direct mail catalogs. The Company is
marketing three models which have recording capacities of 22, 45 and 90
minutes and range in price from $89 to $199.
During 1997, the Company continued its migration of transforming its
products into more of a business tool by introducing an executive series of
Personal Note Recorders and a dictation-length digital recorder with edit and
download features. The executive series of Personal Note Recorders added an
LCD display as well as extended recording capacity to 22 minutes. The Company
further extended its reach into business tools by introducing its newly
designed Voice It Digital Voice Recorders. The new 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 was also designed with edit
features that work like a "verbal work processor" for voice files that enable
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 that is included with the unit, the files
can be named, stored and played through the computer's speakers for
transcription using popular work processing programs, or even attached to
E-mail and sent via the Internet.
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 57.4 57.4
Cost of obsolete goods & related charges 11.7 0.0
----------- ---------
Gross margins 30.9 42.6
Operating expenses
Administrative 9.6 16.4
Selling & marketing 25.4 31.0
Research & development 6.4 12.1
------------ ---------
Total operating expenses 41.4 59.5
------------ ----------
Operating (loss) (10.5) (16.9)
Other income, net (2.2) (4.4)
------------ ----------
Net (loss) before income tax
benefit (12.7) (21.3)
Income tax benefit 0.0 0.0
------------ -----------
Net (loss) (12.7)% (21.3)%
============ ===========
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales for the year ended December 31, 1997 decreased to $7,584,400 from
$12,219,100 for the year ended December 31, 1996. During 1997, the Company
spent a great deal of time and capital resources to re-design its role in the
consumer electronics market and to introduce products that are considered more
of a business tool. The Company announced this proposed transformation and
its new product ideas during the January 1997 Consumer Electronics Show. As
the Company was planning to introduce new higher capacity products with an
increased number of features during the fourth quarter of 1997, many retail
outlets lowered the amount of inventory they were buying in anticipation of
the new products. During the year, the Company also authorized an inventory
exchange with a major customer to return some of their lower run time Voice It
products and replace them with the enhanced Voice It products. Additionally,
the Company's manufacturer was approximately 9 weeks late in delivering the
new products that were being introduced. Because of the late introduction,
the products were not as widely distributed before the holiday buying season
as was planned. While the Company believes that the new products add to its
sales base and help ease the seasonality of the Company's business, the
factors mentioned above combined to reduce the factory sales during the year
ended December 31, 1997 compared with the previous year.
Cost of sales for the twelve months ended December 31, 1997 decreased
$2,664,200 to $4,352,300 or 57.4% of net sales in 1997 from $7,016,500 or
57.4% of net sales in 1996. This decrease is directly related to the decrease
in the corresponding decrease in sales. As the cost of "Flash" memory
continues to decline, management believes that there is additional ability to
improve margins during the coming year.
In late 1995, the Company introduced the Voice It Family Message Center.
Although the Company was able to achieve good initial distribution, nearly all
retailers chose to carry the product in their electronics department, which is
targeted toward male rather than female consumers. Because of the
positioning, the Company was unable to generate enough retail sell-through to
sustain the distribution. During 1996, nearly all retailers discontinued
carrying the product, leaving the Company with excess inventory. With the
rapid change in technology and the financial risk to re-introduce the product,
management chose to write down the value of the inventory and the associated
costs of the technology change and take a $1,421,700 non-cash charge to
operations during the third quarter of 1996. This charge related to writing
down the carrying value of this inventory as well as writing down older
technology inventory to net realizable values.
Administrative expenses increased $73,700 to $1,245,300 in 1997 compared
with $1,171,600 in 1996. Administrative costs are primarily fixed and
therefore do not decrease in relation to a decrease in sales. The
Administrative section contains not only the infrastructure used to run and
promote the Company, but also contains the Company's customer service and
warehousing departments. The Company places a great emphasis on customer
service as the link in keeping the Voice It consumer satisfied and purchasing
additional Voice It products.
Sales and marketing expenses for the year ended December 31, 1997
decreased by $759,200 to $2,347,600 or 31.0% of net sales in 1997 from
$3,106,800 or 25.4% of net sales in 1996. This decrease in cost is due in
part to the decrease in variable expenses (such as commissions to the
manufacturers representatives) which decrease in relative proportion to the
reduction in sales. The Company also decreased its fixed costs associated
with marketing the product. The Company continued its advertising campaign on
a reduced basis during the fourth quarter of 1997 in publications such as
Fortune, Newsweek, Time, Business Week and US News & World Report. To
--- -------- ---- -------------- -----------------------
conserve costs, more technology-based issues and regional gift giving guides
---
were chosen for the holiday period.
Research and development costs increased by $134,500 to $920,400 in 1997
from $785,900 in 1996. Research and development costs are classified as
either support costs and hardware design costs, which are expensed as
incurred, or the development of new software programs used in the Company's
products, which are capitalized and expensed over the economic useful life.
The increase in the expensed portion of the research and development costs is
primarily due to the increased effort and cost associated with introducing
the new products for 1997. New product development is an essential activity
of the Company as it continues its market leadership in the Personal Note
Recorder category and branches out into the longer record time dictation
products.
The operating loss for the year ended December 31, 1997 was $1,281,200
compared with an operating loss of $1,283,400 in 1996. While the primary
factor that contributed to the loss for the year ended December 31, 1996 was
the $1,421,700 charge to operations relating to obsolete goods and related
charges, the loss for the year ended December 31, 1997 was primarily due to
the reduced level of sales resulting from the re-design of the Company and its
product lines to become less of a "gadget" and more of a business tool.
Management feels that this re-design will help the Company become less
seasonal and add stability. While the Company's sales were lower during the
current year, gross margins continue to be strong. Again, management feels
that there is room to further improve during 1998.
Other income (expense) for the twelve months ended December 31, 1997
consisted primarily of interest expense on borrowed funds as well as expensing
a portion of the deferred loan costs associated with the $2.4 million
convertible debt. Net loss for the year ended December 31, 1997 was
$1,616,385 or $0.32 per share compared with the net loss for the same period
last year of $1,556,251 or $0.31 per share.
QUARTERLY OPERATING RESULTS
The following table sets forth certain statements of operations data for
each of the Company's last four quarters. The information for each of these
quarters is unaudited but includes all adjustments, consisting only of normal
recurring adjustments, that management considers necessary to present fairly
this information. This information was not reviewed by the Company's
independent accountants in accordance with standards established for such
reviews. 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.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
$(000) % $(000) % $(000) % $(000) %
------ -- ------ -- ------ -- ------ --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales - net $ 1,356 100 $ 1,362 100 $ 1,361 100 $1,305 100
------- --- ------- --- ------- --- ------ ----
Gross profit 610 45 617 45 411 30 1,594 45
Operating
expenses 983 72 986 72 1,110 81 1,434 41
------- --- ------ ---- ------ ---- ------ ---
Net operating
income (loss) $ (373) (27) $ (369) (27) $(699) (51) $ 160 4
======== ==== ====== === ===== ==== ===== ===
</TABLE>
As in previous years, over 40% of the Company's annual sales occurred
during the fourth quarter due to the holiday gift giving season.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth to date primarily from the sale of
Common Stock, an equity merger with Lander Energy Co. as well as the issuance
of convertible debt. The Company also utilizes bank financings for
additional operating capital. At December 31, 1997, the Company has cash and
cash equivalents of approximately $867,200. The Company also had working
capital at December 31, 1997 of approximately $3.9 million.
Cash used by the Company for operations during the year ended December
31, 1997 was approximately $890,100. A primary component of this use of cash
during the period was the Company's net loss of $1,616,400 adjusted for
non-cash adjustments of depreciation and amortization of approximately
$407,600. Additional sources of operating cash were the decrease in
receivables and inventories of approximately $231,800 and $781,300,
respectively. Uses of operating cash were increases in prepaid expenses of
approximately $92,700, as well as the decrease in accounts payable and accrued
liabilities of approximately $444,000 and $157,800, respectively. Additional
uses of cash included investing activities of approximately $243,600 for the
acquisition of tooling, property and equipment and $382,600 for other assets.
Cash provided by financing activities include borrowing on the Company's
line-of-credit, and the issuance of common stock (net of prepaid licensing
fees of $200,000) of $501,800 and $1,296,400, respectively.
The Company currently has a $2 million revolving line of credit with a
bank through March 2000. The amount that the Company may borrow from this
line of credit is limited by the level of its eligible accounts receivable and
is secured by the tangible assets of the Company. The line of credit contains
various financial covenants and bears interest at 2.5% above the bank's base
rate, totalling 11.0% at December 31, 1997.
SEASONALITY
While the Company still anticipates that its business will be seasonal,
with approximately 40% of its sales occurring in fourth quarter for the
holiday season, it is expanding its product line into more business
application tools in part to even the sales out over the quarters.
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 may have an effect on the Company's costs of
sales and gross margins. If that happens, it may become uneconomical for the
relationship between the Company and its suppliers to continue.
The Company also creates a significant amount of its sales in Europe and
the Middle East. In most countries, the Company sets its sales prices in U.S.
dollars so that any variance is 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
operational problems for the Company's computer systems as so modified and
converted. However, if such modifications and conversions are not completed
timely, the Year 2000 problem may have a material impact on the operations of
the Company.
ITEM 7. FINANCIAL STATEMENTS.
- ---------------------------------
Table of Contents
-------------------
Independent Auditors' Report F-1
Financial Statements
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- --------------------------------------------------------
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Dennis W. Altbrandt 55 Chief Executive Officer and Director
J. Fredrick Walters 51 Chairman of the Board of Directors and
President - International Division
Timothy L. Walters 43 Vice President of Product Development
Anil K. Agarwal 45 Vice President of Technology
Development
Mark A. Griffith 41 Chief Accounting Officer and Chief
Financial Officer
John H. Ellerby 58 Secretary, Treasurer and Director
Larry D. Holt 57 Director
Michelle L. Morgan 48 Director
Gary E. Nordic 54 Director
Patricia R. Westbrook 45 Director
</TABLE>
The family relationships among the officers, directors and significant
employees are (i) Michelle L. Morgan and her spouse, Christopher W. Elkins and
(ii) J. Fredrick Walters and his brother, Timothy L. Walters. Other than the
directors and executive officers, the Company has no promoters or control
persons.
DENNIS W. ALTBRANDT serves as Chief Executive Officer of the Company
since November 1996 and as a director of the Company since February 1997.
From 1988 to 1991, he served as a partner in Avalon Ventures, La Jolla,
California, responsible for conception, formulation, planning and staffing of
technology related business investment opportunities. From 1991 to 1994, Mr.
Altbrandt served as president and chief executive officer of Steps Education
Products, Inc., a company which markets, sells and distributes independently
developed products to the education marketplace on a national basis. From
1994 to 1995, he served as a principal and chief financial officer of Carrara
Capital Group, L.L.C., with responsibility for financial and investment
activities providing services to emerging growth businesses. During 1996, Mr.
Altbrandt served as a consultant to the Company and as its acting chief
financial officer until his election as Chief Executive Officer in November
1996. Mr. Altbrandt earned a B.S. in Accounting from Syracuse University in
1964.
J. FREDRICK WALTERS is a founder of the Company and serves as Chairman of
the Board of Directors and President - International Division. Mr. Walters
has been involved in international marketing of products since the 1970s. He
was the co-founder, president and chief executive officer of Techmeda GMBH, a
medical and healthcare product company in Europe, from 1980 to 1993. Techmeda
developed and marketed a line of dental products under the Ligma-ject name.
In 1986, Techmeda was appointed the exclusive worldwide distributor of the
Interplak plaque removal instrument. This business was sold to Bausch & Lomb
in 1989. Prior to the formation of Techmeda, Mr. Walters was the European
sales and marketing manager for Teledyne Water Pik from 1975 to 1980.
TIMOTHY L. WALTERS is a founder of the Company and serves as Vice
President of Product Development of the Company. He is the co-inventor of the
Voice It. Mr. Walters held product development positions with Alcoa
Electronic Packaging, Inc. from 1986 to 1992, during which time he developed
the marketing plan for the sale of Alcoa Electronic Packaging, Inc. to
Aluminum Company of America (ALCOA). Mr. Walters earned his B.S. in Chemistry
with an emphasis in Biochemistry from California State University, Fullerton
in 1977.
DR. ANIL K. AGARWAL is a founder of the Company and serves as Vice
President of Technology Development of the Company. Dr. Agarwal is the
co-inventor of the Voice It product. He earned his Ph.D. in Solid State
Physics from the Indian Institute of Technology, New Delhi, India, in 1974 and
his Ph.D. in Materials Engineering from the University of Missouri at Rolla in
1980. He holds four patents and has published 30 articles in the field of
electronics. From 1987 to 1993, Dr. Agarwal served as director of CAD/CAE and
product development for multi-chip modules for Alcoa Electronic Packaging,
Inc.
MARK A. GRIFFITH serves as Chief Financial Officer and Chief Accounting
Officer of the Company since February 1997. From 1980 to 1992, Mr. Griffith
served as assistant controller and then controller of Vipont Pharmaceutical,
Inc. From 1992 to 1993, he served as controller of Monaco Finance, Inc. From
1993 until his election as Chief Financial Officer in February 1997, Mr.
Griffith served as controller of the Company. He earned a B.A. in Accounting
and Business Administration from Western State College in 1980.
JOHN H. ELLERBY serves as Secretary, Treasurer and a director of the
Company. From 1985 until shortly after the merger of Lander with Voice It in
December 1994, Mr. Ellerby served as president of Lander. Prior thereto, he
served as Chairman of the Board from 1981 to 1985 and has been a director
since 1979.
LARRY D. HOLT serves as a director of the Company since November 1995.
Mr. Holt has held numerous financial management positions in his career. Mr.
Holt served in various financial positions with Vipont Pharmaceutical, Inc.,
including vice president of finance and operations, chief financial officer
and secretary from 1985 to 1990. In addition, Mr. Holt served as the vice
president of finance, chief financial officer and corporate assistant
secretary and treasurer of Atrix Laboratories, Inc. from its founding in 1987
until 1990, when Mr. Holt retired.
MICHELLE L. MORGAN is a founder of the Company, serves as a director of
the Company since 1993 and served as President - U.S. Division from 1993
through 1996. From 1990 to 1993, she was co-founder and president of ProMark
Associates, Inc., a marketing consulting firm, which serves as a consultant to
a number of healthcare marketing companies. From 1982 to 1990, Ms. Morgan
served as vice president of marketing and an executive officer of Vipont
Pharmaceutical, Inc. From 1978 to 1981, Ms. Morgan served as manager of
marketing research at Teledyne Water Pik, where she specialized in new product
marketing research. Ms. Morgan earned a B.S. in Communications from
University of Illinois in 1972 and an M.B.A. from Colorado State University in
1983.
GARY E. NORDIC has been a director of the Company since 1980. Mr. Nordic
has been the president of Nordic Construction & Development, Inc., Fort
Collins, Colorado, since 1983.
PATRICIA R. WESTBROOK is a founder of the Company and serves as a
director of the Company. She served as an executive officer of the Company
from January 1994 through February 1997. Ms. Westbrook has extensive
marketing and management experience. From 1989 to 1994, Ms. Westbrook served
as vice president-marketing for Bausch & Lomb's Oral Care Division, with
responsibility for a full range of marketing activities for this Division's
business, including the planning and execution of annual marketing plans and
long term strategic plans. Her work at Bausch & Lomb included a year in the
company's European division where she had marketing responsibility for the
oral care business of Europe, the Middle East and Africa. Ms. Westbrook is a
graduate of the Harvard Business School Professional Management Development
program.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has not established any separate nominating
committee. The Board has established a Compensation Committee, which consists
of Michelle L. Morgan, Gary E. Nordic and Larry D. Holt. Its functions are to
review and approve annual salaries and bonuses for all executive officers,
review, approve and recommend to the Board of Directors the terms and
conditions of all employee benefits or changes thereto, and manage and
administer the Company's 1994 Stock Compensation Plan and the Lander
Nonqualified Stock Option Plan.
The Board of Directors has established an Audit Committee, which consists
of Michelle L. Morgan, Gary E. Nordic and Larry D. Holt. The functions of the
Audit Committee are to recommend annually to the Board of Directors the
appointment of the independent public accountants of the Company, discuss and
review the scope and the fees of the prospective annual audit and review the
results thereof with the independent public accountants, review and approve
non-audit services of the independent public accountants, review compliance
with existing accounting and financial policies of the Company, review the
adequacy of the financial organization of the Company and review management's
procedures and policies relative to the adequacy of the Company's internal
accounting controls and compliance with federal and state laws relating to
financial reporting.
The Board of Directors has also established a Stock Option Committee,
which consists of Michelle L. Morgan and Patricia R. Westbrook. The function
of the Stock Option Committee is to manage and administer the Company's
Outside Directors Stock Option Plan.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during its most recent
fiscal year and Forms 5 and amendments thereto furnished to the Company with
respect to its most recent fiscal year, and any written representation from
the reporting person (as hereinafter defined) that no Form 5 is required, the
Company is not aware of any person who, at any time during the fiscal year,
was a director, officer, beneficial owner of more than ten percent of any
class of equity securities of the Company registered pursuant to Section 12 of
the Exchange Act ("reporting person"), that failed to file on a timely basis,
as disclosed in the above Forms, reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year, except Mark A. Griffith,
whose Form 3 for February 1997 was filed on March 27, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
- ------------------------------------
The following table, and the accompanying explanatory footnotes, sets
forth information regarding compensation paid to (i) the Company's Chief
Executive Officer(s) for services rendered in all capacities during the fiscal
years ended December 31, 1997, December 31, 1996 and December 31, 1995 and
(ii) each executive officer who received total annual salary and bonus for the
fiscal year ended December 31, 1997 in excess of $100,000.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
================================================================
NAME AND
PRINCIPAL FISCAL OTHER ANNUAL OPTIONS
POSITION YEAR SALARY COMPENSATION GRANTED
<S> <C> <C> <C> <C>
Dennis W. Altbrandt, 1997 $160,000 $0 0
Chief Executive
Officer(1)
1996 $94,833 $0 185,000
Michelle L. Morgan, 1996 $72,000 $0 0
Chief Executive
Officer(2) 1995 $56,000 $0 0
</TABLE>
(1) Mr. Altbrandt was elected as Chief Executive Officer of the Company on
November 26, 1996. The information presented also includes compensation paid
to Mr. Altbrandt by the Company for services rendered as a consultant during
1996.
(2) Effective January 1995, Michelle L. Morgan served as Chief Executive
Officer of the Company pursuant to the terms of the Merger Agreement approved
in December 1994. Prior to 1995, Ms. Morgan did not receive any compensation
from Lander Energy Co.
No stock options were granted to the Company's Chief Executive Officer
during the fiscal year ended December 31, 1997.
EMPLOYMENT AGREEMENT
Effective as of November 26, 1996, the Company entered into an employment
agreement with Dennis W. Altbrandt as Chief Executive Officer of the Company
which provides for an annual salary of $160,000 and certain options and
warrants. In addition, subject to the Company's achieving certain performance
objectives, Mr. Altbrandt will earn a bonus.
<PAGE>
THE 1994 STOCK COMPENSATION PLAN
The Company and its shareholders have adopted the 1994 Stock Compensation
Plan (the "1994 Plan"). Options granted pursuant to the 1994 Plan constitute
either incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") or options which
constitute non-qualified options at the time of issuance of such options. The
1994 Plan provides that incentive stock options and/or non-qualified stock
options may be granted to certain officers, directors (other than Outside
Directors), employees and advisors of the Company or its subsidiaries, if any,
selected by the Compensation Committee. A total of 600,000 shares of Common
Stock are authorized and reserved for issuance under the 1994 Plan, subject to
adjustment to reflect changes in the Company's capitalization in the case of a
stock split, stock dividend or similar event. The 1994 Plan is administered
by the Compensation Committee which has the sole authority to interpret the
1994 Plan and to make all determinations necessary or advisable for
administering the 1994 Plan.
During the fiscal year ended December 31, 1997, the Company did not grant
any options under the 1994 Plan to any of its executive officers. As of March
31, 1998, the Company had granted an aggregate of 629,443 options under the
1994 Plan to a total of 27 persons.
THE OUTSIDE DIRECTORS STOCK OPTION PLAN
The Company and its shareholders have adopted the Outside Directors Stock
Option Plan (the "Plan"). The Plan was adopted in order to enhance the
Company's ability to secure and retain highly qualified and experienced
individuals who are not regularly salaried employees of the Company to serve
as directors of the Company. The Plan provides generally that: (i) the
purchase price of the Common Stock under each option granted shall not be less
than the fair market value of the Common Stock on the date of grant; (ii) no
director may be granted during any calendar year options to purchase more than
10,000 shares of Common Stock; (iii) no option may be granted for a period of
greater than five years from the date of grant; and (iv) a maximum of 200,000
shares of Common Stock have been authorized and reserved for issuance under
the Plan.
During the fiscal year ended December 31, 1997, the Company did not grant
any options under the Plan. As of March 31, 1998, 40,000 options had been
granted under the Plan.
THE LANDER NONQUALIFIED STOCK OPTION PLAN
The Company and its shareholders have adopted the Lander Nonqualified
Stock Option Plan (the "Lander Plan") for the benefit of the former directors
of Lander. Pursuant to the Lander Plan, each of the three former directors of
Lander (including Messrs. Ellerby and Nordic) was granted an option to
purchase 20,081 shares of Common Stock at an exercise price of $1.56 per
share. The options have a term of five years and may be exercised at any time
until January 21, 1999. Any optionee may pay the exercise price in cash or by
delivering shares of Common Stock with a value equal to the exercise price. A
total of 60,243 shares of authorized but unissued Common Stock are reserved
for issuance pursuant to the Lander Plan.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -----------------------------------------------------------------------------
Set forth below is certain information as of March 15, 1998 with respect
to ownership of the Common Stock owned of record or beneficially by (i) the
Company's executive officers named in the summary compensation table, (ii)
each director of the Company, (iii) each person owning beneficially more than
five percent of the outstanding Common Stock, and (iv) all directors and
executive officers as a group. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to options currently exercisable or exercisable
within 60 days of March 15, 1998 are deemed outstanding for computing the
percentage of the person holding such securities but are not outstanding for
computing the percentage of any other person.
<TABLE>
<CAPTION>
NAME OF NUMBER OF PERCENTAGE
BENEFICIAL OWNER(1) COMMON SHARES OWNED
- -------------------- -------------- --------
<S> <C> <C>
Dennis W. Altbrandt 82,000(2) 1.3
J. Fredrick Walters 380,667 5.9
Timothy L. Walters 218,117 3.4
Anil K. Agarwal 331,767 5.1
Mark A. Griffith 46,250(3) *
John H. Ellerby 96,719(4) 1.5
Larry D. Holt 103,250(5) 1.6
Michelle L. Morgan 418,300(6) 6.4
Gary E. Nordic 96,487(7) 1.5
Patricia R. Westbrook 310,900 4.8
Renaissance Capital Growth
& Income Fund III, Inc. 3,518,947(8) 38.9
Applied Voice Recognition, Inc. 471,700 7.3
All directors and executive
officers as a group
(10 persons) 2,084,457 30.8
</TABLE>
* Represents beneficial ownership of less than 1% of the outstanding
shares of Common Stock.
(1) The business address of each person listed above is 2643 Midpoint
Drive, Suite A, Fort Collins, Colorado 80525. The business address of
Renaissance Capital Growth & Income Fund III, Inc. is 8080 North Central
Expressway, Suite 210/LB59, Dallas, Texas 75206. The business address of
Applied Voice Recognition, Inc. is 4615 Post Oak Place, Suite III, Houston,
Texas 77027.
(2) Includes options currently exercisable to acquire 62,000 shares of
Common Stock and warrants currently exercisable to purchase 20,000 shares of
Common Stock. Mr. Altbrandt also owns 83,000 additional options which are not
yet vested.
(3) Includes options currently exercisable to acquire 22,000 shares of
Common Stock. Mr. Griffith also owns 4,000 additional options which are not
yet vested.
(4) Includes options currently exercisable to acquire 30,081 shares of
Common Stock. Of the 66,638 shares, 2,623 shares are owned by Mr. Ellerby's
wife, 6,463 shares are owned jointly by Mr. Ellerby and his wife, and the
remaining 57,552 shares are owned by Mr. Ellerby individually.
(5) Includes options currently exercisable to acquire 30,000 shares of
Common Stock. Of the 73,250 shares, 60,750 are owned by Mr. Holt and 12,500
shares are owned jointly by Mr. Holt and his wife.
(6) Michelle L. Morgan is the spouse of Christopher W. Elkins and is
deemed to beneficially own the 35,000 shares and the options currently
exercisable to acquire 63,000 shares of Common Stock owned by Mr. Elkins. Mr.
Elkins also owns 10,000 additional options which are not yet vested.
(7) Includes options currently exercisable to acquire 30,081 shares of
Common Stock. Of the 66,406 shares, 56,406 shares are owned by Mr. Nordic's
wife and 10,000 shares are owned by Mr. Nordic.
(8) Includes a 2,450,000 8% Convertible Debenture currently convertible
into 2,578,947 shares of Common Stock but does not include warrants to
purchase 500,000 shares which are subject to shareholder approval of an
increase in the authorized shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------------
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
- --------------------------------------------------
(a) Exhibits.
--------
2.1 Agreement and Plan of Merger, dated as of June 27, 1994, between
Lander Energy Co. and Voice It Technologies, Inc., as amended effective
September 6, 1994 - incorporated by reference to the Registrant's Registration
Statement on Form S-4, file number 33-81428, declared effective November 18,
1994.
3.1 Articles of Incorporation of the Registrant - incorporated by
reference to the Registrant's Proxy Statement and Notice of Annual Meeting of
Shareholders held July 8, 1986, filed on or about May 27, 1986.
3.2 Bylaws of the Registrant - incorporated by reference to the
Registrant's Proxy Statement and Notice of Annual Meeting of Shareholders held
July 8, 1986, filed on or about May 27, 1986.
3.3 Article of Amendment to Articles of Incorporation - incorporated
by reference to the Registrant's Report on Form 10-K for the fiscal year ended
December 31, 1987, file number 0-7796.
3.4 Articles of Amendment to Articles of Incorporation.*
4.1 Voice It Worldwide, Inc. 8.00% Convertible Debenture dated
October 27, 1995 in the principal amount of $2,450,000 issued to Renaissance
Capital Growth & Income Fund III, Inc.
10.1 Lander Nonqualified Stock Option Plan - incorporated by
reference to Exhibit 10.1 of the Registration Statement on Form S-4, file
number 33-81428, declared effective November 18, 1994.
10.2 The Registrant's 1994 Stock Compensation Plan.*
10.3 The Registrant's Outside Directors Stock Option Plan.*
10.4 Lease agreement dated January 5, 1995 covering the Registrant's
executive offices.*
10.5 Employment Agreement with Dennis W. Altbrandt.**
10.6 Joint Product Development Agreement effective December 31, 1997
between the Company and Applied Voice Recognition, Inc.
23.1 Consent of Ehrhardt Keefe Steiner & Hottman PC, independent
public accountants, to the incorporation by reference in the Registration
Statements on Form S-8 (file numbers 333-12711, 333-12713 and 333-12715) of
their report dated February 11, 1998, included in the Registrant's Report on
Form 10-KSB for the fiscal year ended December 31, 1997.
27.1 Financial Data Schedule.
* Incorporated by reference to the Registrant's Report on Form 10-KSB for
the fiscal year ended December 31, 1994, file number 0-7796.
** Incorporated by reference to the Registrant's Report on Form 10-KSB for
the fiscal year ended December 31, 1996, file number 0-7796.
(b) Reports on Form 8-K. The Company has not filed any Current
--------------------
Report on Form 8-K during the last quarter of the period covered by this
Report on Form 10-KSB.
VOICE IT WORLDWIDE, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
VOICE IT WORLDWIDE, INC.
TABLE OF CONTENTS
-----------------
Independent Auditors' Report F - 1
Financial Statements
Balance Sheets F - 2
Statements of Operations F - 3
Statements of Stockholders' Equity F - 4
Statements of Cash Flows F - 5
Notes to Financial Statements F - 6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Voice It Worldwide, Inc.
Fort Collins, Colorado
We have audited the balance sheets of Voice It Worldwide, Inc. as of December
31, 1996 and 1997, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibil-ity is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstate-ment. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Voice It Worldwide Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 11, 1998
Denver, Colorado
VOICE IT WORLDWIDE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 585,414 $ 867,242
Accounts receivable, net of allowance
of $ $93,965 (1996) and $110,256 (1997)
(Note 4) 3,246,302 2,814,035
Other receivables 34,358 251,087
Inventories (Notes 3 and 4) 2,570,632 1,789,347
Prepaid expenses and other current
assets 44,836 337,575
---------- ---------
Total current assets 6,481,542 6,059,286
Tooling, furniture and equipment, net
of accumulated depreciation (Notes 3 and
4) 379,707 429,758
Other assets, net of accumulated
amortization (Notes 3 and 4) 680,250 832,499
---------- ---------
Total assets $7,541,499 $7,321,543
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $2,243,426 $1,799,466
Accrued liabilities (Note 3) 446,500 288,694
Current portion of long-term debt
and line-of-credit (Note 4) 266,722 48,755
--------- ---------
Total current liabilities 2,956,648 2,136,915
Long-term debt and line-of-credit
(Notes 4, 5 and 7) 2,450,000 3,169,762
Commitments (Notes 2, 6 and 9)
Stockholders' equity (Note 7)
Common stock; $.10 par value;
10,000,000 shares authorized;
6,466,502 shares issued and
outstanding 505,480 646,650
Additional paid in capital 5,364,910 6,720,140
Accumulated deficit (3,735,539) (5,351,924)
------------ ------------
2,134,851 2,014,866
------------ ------------
Total liabilities and stockholders'
equity $7,541,499 $7,321,543
============ ===========
</TABLE>
See notes to financial statements.
<PAGE>
VOICE IT WORLDWIDE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------
1996 1997
----------- ----------
<S> <C> <C>
Net sales $12,219,109 $7,584,379
Cost of sales (7,016,450) (4,352,262)
Cost of obsolete goods
and related charges (1,421,703) -
----------- ----------
Gross profit 3,780,956 3,232,117
----------- -----------
Operating expenses
Administrative and general 1,171,614 1,245,311
Selling and marketing 3,106,839 2,347,612
Research and development 785,866 920,388
--------- ---------
Total operating expenses 5,064,319 4,513,311
----------- -----------
Net operating loss (1,283,363) (1,281,194)
Other income (expense)
Interest expense (273,786) (340,528)
Interest income 898 5,337
---------- -----------
Net other expense (272,888) (335,191)
---------- ----------
Net loss $(1,556,251) $(1,616,385)
============ ===========
Basic and diluted net loss per
common share $ (.31) $ (.32)
============ ==========
Weighted average number of
shares outstanding - basic and
diluted 5,054,802 5,062,537
============ =========
</TABLE>
See notes to financial statements.
VOICE IT WORLDWIDE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
--------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance - December 31,
1995 5,054,802 $ 505,480 $5,364,910 $(2,179,288) $3,691,102
Net loss - - - (1,556,251) (1,556,251)
--------- -------- --------- --------- ---------
Balance -
December 31, 1996 5,054,802 505,480 5,364,910 (3,735,539) 2,134,851
Issuance of common
stock pursuant to
exercise of stock
warrants at $1.06
per share
(Note 7) 940,000 94,000 902,400 - 996,400
Sale of common
stock at $1.06
per share
(Note 7) 471,700 47,170 452,830 - 500,000
Net loss - - - (1,616,385) (1,616,385)
--------- ------- --------- --------- ---------
Balance -
December 31, 1997 6,466,502 $ 646,650 $6,720,140 $(5,351,924) $2,014,866
========= ========= ========= ========== =========
</TABLE>
See notes to financial statements.
VOICE IT WORLDWIDE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,556,251) $(1,616,385)
---------- ----------
Adjustments to reconcile net
loss to net cash provided
by or used in operating activities
Write off of obsolete inventory and
related items 1,421,703 -
Allowance for discounts and bad debts (79,200) (16,291)
Depreciation and amortization 258,600 423,924
Changes in current assets and liabilities
Receivables 1,873,758 231,829
Prepaid expenses (16,366) (92,740)
Inventories (180,870) 781,285
Accounts payable 43,550 (443,960)
Accrued liabilities (486,298) (157,806)
---------- ----------
2,834,877 726,241
---------- ---------
Net cash provided by
(used in) operating activities 1,278,626 (890,144)
--------- ---------
Cash flows from investing activities
Other assets (350,944) (382,604)
Acquisition of tooling, furniture
and equipment (249,610) (243,619)
--------- ----------
Net cash used in investing
activities (600,554) (626,223)
--------- ---------
Cash flows from financing activities
Borrowings (payments) on line of
credit - net (343,979) 501,795
Proceeds from issuance of stock, net - 300,000
Proceeds from exercise of common
stock warrants - 996,400
---------- ---------
Net cash (used in) provided
by financing activities (343,979) 1,798,195
--------- ----------
Net increase in cash and
cash equivalents 334,093 281,828
Cash and cash equivalents -
beginning of year 251,321 585,414
-------- --------
Cash and cash equivalents -
end of year $ 585,414 $ 867,242
========== ==========
</TABLE>
Supplemental disclosure of cash flow information
Cash paid during the year for interest was $269,016 (1996) and $406,040
(1997).
Non-cash investing and financing activities
During 1997, $200,000 of the $500,000 value of stock issued (Note 7) was
recorded as prepaid licensing fees (Note 6).
See notes to financial statements.
VOICE IT WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------
Voice It Worldwide, Inc. (the "Company") utilizes a broad range of silicon
chip technology, including digital analog storage devices, flash memory and
digital voice compression integrated circuits, and combines those technologies
with proprietary software, enabling the Company to develop leading edge
consumer voice recorder products.
Cash and Cash Equivalents
- ----------------------------
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
- -----------
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out method and consist primarily of finished goods and raw
materials. Finished goods include raw materials, labor and overhead.
Marketable Securities
- ----------------------
The Company classifies its investment securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are
bought and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company has the
ability and intent to hold the security until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Trading and
available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses on trading securities are included in earnings. Unrealized
holding gains and losses on available-for-sale securities are excluded from
earnings and are reported as a separate component of stockholder's equity
until realized. Transfers of securities between categories are recorded at
fair value at the date of transfers.
Realized gains and losses for securities classified as available-for-sale and
held-to-maturity are recognized in earnings upon sale or redemption at
maturity. The specific identification method is used to determine the cost of
securities sold. Discounts or premiums are accreted or amortized using the
level-interest-yield method to the earlier of the call date or maturity of the
related held-to-maturity security.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
Tooling, Furniture and Equipment
- -----------------------------------
Tooling, furniture and equipment are recorded at cost. Depreciation is
computed based on the straight-line method over the estimated useful lives for
the following asset categories:
Tooling 3 years
Furniture and equipment 3 - 5 years
Maintenance and repairs are charged to operations in the year in which the
expense is incurred. Additions and improvements are capitalized.
Revenue Recognition
- --------------------
Revenue is recognized at the time products are shipped to the customer.
Research and Development
- --------------------------
Research and development costs for new products are charged to expense as
incurred.
Product Software Development Costs
- -------------------------------------
The Company capitalizes product software development costs when product
technological feasibility is established and concluding when the product is
ready for sale. Software development costs are amortized on the straight-line
method over an expected useful life of three years.
Patent Costs
- -------------
Patent costs are those costs related to filing for patents. These costs are
amortized on a straight-line basis over the estimated useful lives not to
exceed seventeen years.
Loss Per Common Share - Basic and Diluted
- ------------------------------------------------
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. Diluted 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 a total of approximately
720,000 and 1,600,000 shares of common stock in 1997 and 1996, respectively,
were not included in the computation of diluted loss per common share because
their effort would be antidilutive.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
Advertising
- -----------
All advertising costs are expensed as incurred.
Warranty
- --------
Estimated warranty costs are accrued at the time of sale.
Concentration of Credit Risks
- --------------------------------
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash investments and trade
receivables.
The Company places its cash investments with high credit quality financial
institutions and, by policy, limits the amount of credit exposure to any one
institution. The Company does, however, on occasion exceed the FDIC federally
insured limits and at December 31, 1997 exceeded that amount by approximately
$681,000.
The Company grants credit, in the normal course of business, to its customers
who sell their products through catalog distribution and retail outlets. The
Company sells to customers located throughout the United States, Europe, Asia
and Canada. The Company continually monitors the electronics and personal
communications industry and its customers before granting credit. The Company
does not normally require collateral.
For the year ended December 31, 1996 and 1997, the Company's top five
customers represented 46% and 44% of the sales, respectively.
Translation of Foreign Currencies
- ------------------------------------
For non-U.S. operations, the U.S. dollar is the functional currency and
substantially all of the Company's transactions are contracted in U.S.
dollars. However, those transactions that are contracted in a foreign
currency are translated into U.S. dollars at current rates. Exchange gains
and losses arising from currency translations are included in current income.
For the years ended December 31, 1996 and 1997, approximately $310 of foreign
currency translation losses and $50 of foreign currency translation gains,
respectively, were included in computing the net loss. No adjustment is
deemed necessary for future gains or losses from foreign conversions as such
an adjustment would be immaterial.
<PAGE>
- ------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
Reclassifications
- -----------------
Certain items in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, Reporting Comprehensive Income ("Statement 130").
Statement 130 establishes new standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. These new standards require that all items recognized
as components of comprehensive income be reported in financial statements that
is displayed with the same prominence as other financial statements.
Statement 130 is effective for fiscal years beginning after December 15, 1997.
The adoption of Statement 130 is not expected to have a significant impact on
the Company's financial statements.
In June 1997, the FASB issued Statement 131, Disclosure About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 changes
the way public companies report segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports. Statement 131 is effective for
years beginning after December 15, 1997. The adoption of Statement 131 is not
expected to have a significant impact on the Company's financial position and
results of operations, but will require additional disclosure in the notes to
the Company's financial statements.
Fair Value of Financial Instruments
- ---------------------------------------
The carrying amount of financial instruments including cash and cash
equivalents, receivable, accounts payable, and accrued expenses approximated
fair value as of December 31, 1997 because of the relatively short maturity of
these instruments.
The carrying amounts of debt issued approximate fair value because interest
rates on these instruments approximate market interest rates.
Use of Estimates
- ------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management believes that such estimates
have been based on reasonable assumptions and that such estimates are
adequate, however, actual results could differ from those estimates.
Significant estimates include estimates for returns, allowances, warranties
and coop advertising.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- -----------------------------------------------------------------------
Income Taxes
- -------------
The Company accounts for income taxes whereby deferred tax liabilities and
assets are determined based on the difference between the financial statement
assets and liabilities and tax basis assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
NOTE 2 - MARKETABLE SECURITIES
- ----------------------------------
As of December 31, 1997, the cost, gross unrealized gains and losses, and
market value of marketable securities (Note 3) are as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized Unrealized Market
Cost Gains Losses Gains Value
------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997
Marketable
equity securities $ 50,000 $ - $ - $ - $ 50,000
======== ======= ========== ========== =========
</TABLE>
For the year ended December 31, 1997, there were no realized gains or losses
or any sales proceeds.
NOTE 3 - SELECTED BALANCE SHEET INFORMATION
- -------------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
--------- ---------
<S> <C> <C>
Inventories
Raw materials $ 730,917 $1,150,884
Finished goods 1,945,941 922,882
(Reserves) (106,226) (284,419)
---------- -----------
$2,570,632 $1,789,347
============== ========
Tooling, furniture and equipment
Office furniture and equipment $ 222,424 $ 247,072
Tooling and manufacturing
equipment 460,151 679,122
--------- --------
682,575 926,194
Less accumulated depreciation (302,868) (496,436)
---------- ----------
$ 379,707 $ 429,758
============ ============
</TABLE>
<PAGE>
NOTE 3 - SELECTED BALANCE SHEET INFORMATION (CONTINUED)
- --------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
----------- ----------
<S> <C> <C>
Other assets
Deferred loan costs - net of
accumulated amortization of $27,559
(1996) and $52,999 (1997) $ 155,834 $ 130,394
Product software development
costs, net of accumulated
amortization of $66,283 (1996)
and $216,923 (1997) 330,054 493,148
Patent costs - net of accumulated
amortization of $66,647 (1996) and
$120,846 (1997) 194,284 158,957
Marketable securities - available
for sale (Note 2) - 50,000
Other 78 -
----------- -----------
$ 680,250 $ 832,499
=========== ===========
Accrued liabilities
Vacation $ 38,587 $ 40,608
Advertising 254,809 101,489
Warranty 50,729 38,694
Commissions 91,614 101,738
Other 10,761 6,165
---------- -----------
$ 446,500 $ 288,694
=========== ===========
</TABLE>
NOTE 4 - LINE-OF-CREDIT AND LONG-TERM DEBT
- ------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
----------- ---------
<S> <C> <C>
$2,000,000 line-of-credit to financial
institution, interest at prime rate
plus 2.5%, totaling 11.0% at December 31,
1997. Minimum interest of $5,000 is
payable for each of the first three
calendar quarters of each fiscal year and
monthly minimum interest of $15,000 in
the fourth calendar quarter of each
fiscal year. Principal is due March 31,
2000. Borrowings are collateralized
by all receivables, inventory,
investment property, equipment and general
intangibles. $ - $ 768,517
$3,000,000 line-of-credit to a bank,
paid in 1997. 266,722 -
<PAGE>
8% convertible debenture, interest
payable monthly, convertible into one
share of common stock for each $.95
of principal (Note 7). Principal due
November 1, 2002. Loan costs
associated with this debenture were
approximately $180,000. These costs
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
---------- ---------
2,716,722 3,218,517
Less current portion (266,722) (48,755)
---------- ---------
Total long-term debt $2,450,000 $3,169,762
========= =========
</TABLE>
Required annual principal payments are:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
<S> <C>
1998 $ 48,755
1999 272,818
2000 1,010,338
2001 214,347
2002 1,672,259
-----------
$ 3,218,517
===========
</TABLE>
NOTE 5 - INCOME TAXES
- -------------------------
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets
and liabilities using the enacted tax rates in effect for the year in which
the differences are expected to occur. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
<PAGE>
NOTE 5 - INCOME TAXES (CONTINUED)
- --------------------------------------
The differences between the federal income tax rate and the effective income
tax rate as reflected in the accompanying statements of operations are:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1996 1997
----------- --------
<S> <C> <C>
Statutory federal income tax rate (benefit) (34.0)% (34.0)%
Valuation allowance for net operating loss 34.0 34.0
------ -----
Effective tax rate -% -%
======= =====
</TABLE>
The deferred income tax asset/liability results primarily from deferral for
tax purposes of differences in reporting certain expenses from limited
partnerships for tax and financial reporting purposes, differing basis in
assets and liabilities for tax and financial reporting purposes and the
recognition of tax net operating loss carryforwards, and is composed of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
---------- ---------
<S> <C> <C>
Total deferred current tax asset $ 1,312,962 $ 1,845,882
Total deferred tax liability (12,607) (24,691)
Valuation allowance (1,300,355) (1,821,191)
------------ ------------
$ - $ -
============ =============
</TABLE>
For federal and state income tax purposes, the Company has net operating loss
carryforwards 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 for due to a lack
of profitable operating history.
NOTE 6 - COMMITMENTS
- -----------------------
Leases
- ------
The Company has an operating lease for its office and warehouse location and
office equipment which expire from August 4, 2000 to March 1, 2001. Total
rent expense under these leases was $52,015 and $64,060 in 1996 and 1997,
respectively.
<PAGE>
NOTE 6 - COMMITMENTS (CONTINUED)
- ------------------------------------
Leases (continued)
- -------------------
Required minimum lease payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 55,476
1999 55,476
2000 54,451
2001 7,424
2002 -
Thereafter -
-------
$ 172,827
=======
</TABLE>
Retirement Plan
- ----------------
The Company has a 401(k) plan that covers all employees who are twenty years
of age and older, and have completed six months of service. Employees can
contribute up to 15% of their eligible compensation to the plan. The Company
does not contribute a matching contribution and as such this plan does not
create an obligation for the Company.
Joint Product Development Agreement
- --------------------------------------
As of December 31, 1997, the Company entered into a Joint Product Development
Agreement which will integrate the Voice It Digital Recorder hand held unit
with voice-to-text software. Applied Voice Recognition, Inc.'s (AVRI) Speech
Commander software product uses continuous speech recognition developed and
licensed to (AVRI) by IBM know as Via Voice. The Company has entered into a
purchase commitment related to this agreement for the licensing rights to sell
the Speech Commander software. For the year ending December 31, 1998, the
Company must purchase 50,000 licenses at $20 per license. The Company has
prepaid the purchase of 10,000 licenses through the issuance of common stock
(Note 7).
Employment Agreement
- ---------------------
Effective November 1996, the Company entered into an employment agreement with
its Chief Executive Officer which provides for an annual salary of $160,000
and certain options and warrants. Additionally, a bonus is earned if the
Company achieves certain performance objectives.
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY
- ---------------------------------
Stock Issuances
- ----------------
During the year ended December 31, 1997, the Company issued 471,700 shares of
common stock at $1.06 per share. The Company received $300,000 in cash and
the remaining value was recorded as a prepaid related to an agreement that was
effective December 31, 1997 (Note 6).
Convertible Debenture
- ----------------------
During October 1995, the Company completed a $2,450,000 convertible debenture
(Note 4). This debenture was originally convertible into the Company's common
stock at a rate of $2.625 of principal for each share of common stock. In
addition to other financial covenants, the debenture also contained a
provision that would reduce the conversion rate of the note significantly if
certain earnings per share were not met in 1996. Partly because of the
failure of the Company's Message Center Product line, the Company could not
meet the 1996 earnings per share covenant which would cause an automatic
downward revision in April, 1997 of the conversion rate based on a formula.
Because of the revision that was to be triggered, the Company began
negotiations to reprice the conversion rate. Effective December 31, 1996, the
Company agreed to lower the conversion rate to $.95 of principal for each
share of common stock which approximated current market value.
Stock Options and Warrants
- -----------------------------
In connection with the convertible debenture, the Company has issued a total
of 940,000 warrants to buy the Company's common stock at an exercise price of
$1.06 per share. On December 30, 1997, the warrants were exercised at $1.06
per share resulting in proceeds of $996,400.
In connection with the above private placement of common stock, the Company
issued an aggregate total of 38,131 warrants to the placement agents. Each
warrant entitles the holder to purchase an unregistered share of common stock
at any time from June 1996 through June 1999 at an original exercise price of
$2.75 per share. With the issuance of warrants listed above, 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.
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
Stock Options and Warrants (continued)
- ------------------------------------------
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. 20,000 of these Warrants expire on December 31,
1997, the remaining 20,000 can be exercised at any time prior to their
expiration in December, 1999.
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.
The following is a summary of options and warrants granted:
<TABLE>
<CAPTION>
Exercise Price
Options Warrants Per Share
----------- ------------- ---------------
<S> <C> <C> <C>
Outstanding, December 31, 1995 357,443 1,277,571 $1.56-3.00
Warrants granted - 85,000 1.06-1.25
Options granted 262,500 - 1.06-1.75
Warrants expired - (324,440) 2.50
-------- ---------- -----------
Outstanding December 31, 1996 619,943 1,038,131 1.06-3.00
Options granted 25,000 - 1.0625
Warrants exercised - (940,000) 1.0625
Warrants expired - (20,000) 1.0625
Options expired (3,000) - 1.6875
-------- ---------- --------
Outstanding December 31, 1997 641,943 78,131 $1.06-3.00
======== ======= ============
</TABLE>
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
Stock Options and Warrants (continued)
- ------------------------------------------
The Company has the following stock options and warrants outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Warrants Exercise Expiration Currently Ecercisably
---------------------
Outstanding Outstanding Price Date Options Warrants
- ----------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
- 38,131 $ 1.06 June 1999 - 38,131
60,243 - 1.56 December 1999 60,243 -
164,000 - 2.00 January 1999 164,000 -
17,500 - 2.20 September 1999 17,500 -
46,700 - 2.20 December 1999 46,700 -
7,500 - 2.20 December 1999 7,500 -
55,000 - 2.75 April 2000 39,999 -
6,500 - 3.00 July 2000 4,833 -
55,000 - 1.75 February 2001 31,667 -
39,500 - 1.69 July 2001 24,501 -
125,000 - 1.06 November 2001 42,000 -
40,000 - 1.75 February 2001 40,000 -
25,000 - 1.06 February 2002 - -
- 20,000 1.06 December 1999 - 20,000
- 20,000 2.75 May 2000 - 20,000
- ------- -------- ------ --------- ----------
641,943 78,131 $ 1.75 478,943 78,131
======== ======== ======= ======== =======
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock options and warrants granted. Had compensation cost for the Company's
stock options and warrants been determined based on the fair value at the
grant date for awards in 1996 and 1997 consistent with the provisions of SFAS
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
Net loss - as reported $(1,556,251) $(1,616,385)
Net loss - pro forma $(1,764,542) $(1,641,342)
Loss per share - as reported $ (.31) $ (.32)
Loss per share - pro forma $ (.35) $ (.32)
</TABLE>
<PAGE>
NOTE 7 - STOCKHOLDERS' EQUITY (CONTINUED)
- ----------------------------------------------
Stock Options and Warrants (continued)
- ------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants: dividend yield of 0%; expected volatility of
112.8%; discount rate of 8.0%; and expected lives of 3 years.
NOTE 8 - GEOGRAPHIC SEGMENT INFORMATION
- --------------------------------------------
Operating results and other financial data are presented for the principal
geographic areas that the Company operates within for the years ended December
31, 1996 and 1997. Total revenue by geographic area includes sales to
distributors or individuals within that specific geographic area. There are
not significant transfers between geographic areas. Operating income (loss)
does not include either other income (expense) items or income taxes. U.S.
operating income is net of corporate expenses. Corporate operating loss
includes operating expenses not directly related to a specific geographic
area, including administrative and general, as well as research and
development expenses. Identifiable assets by geographic area are those assets
used in Company operations directly in that geographic area, which consist
primarily of office equipment and inventory. Corporate assets are principally
cash, miscellaneous receivables, prepaid expenses and other assets.
<TABLE>
<CAPTION>
Europe/ Corporate
United Middle and
States East Other Other Consolidated
----------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996:
Net sales to
unaffiliated
customers $8,608,616 $3,008,580 $601,913 $ - $12,219,109
Operating profit
(loss) $1,173,356 $ 605,079 $102,272 $(3,164,070) $(1,283,363)
Identifiable assets $3,821,320 $1,425,826 $208,575 $ 2,085,778 $ 7,541,499
DECEMBER 31, 1997:
Net sales to
unaffiliated
customers $4,516,853 $2,513,725 $553,801 $ - $ 7,584,379
Operating profit
(loss) $ 456,778 $ 372,113 $151,397 $(2,261,482) $(1,281,194)
Identifiable assets $2,464,529 $1,094,605 $ 87,571 $ 3,674,838 $ 7,321,543
</TABLE>
<PAGE>
NOTE 9 - SUBSEQUENT EVENTS
- ------------------------------
Line-of-Credit
- --------------
In January 1998, the Company amended its line-of-credit agreement. The credit
limit was decreased to $1,000,000 and the maturity date was changed to January
1, 1999. Further, the credit limit shall be reduced $20,000 per week
beginning January 14, 1998 and continue each week thereafter until the earlier
of the maturity date or refinancing.
Warrants
- --------
In January 1998, the Company agreed to issue an additional 500,000 warrants in
connection with the convertible debenture (Note 4), subject to a vote of the
shareholders increasing the number of shares authorized.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VOICE IT WORLDWIDE, INC.
--------------------------
Registrant
Date: April 3, 1998 By:/s/ Dennis W. Altbrandt
Dennis W. Altbrandt, Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- -------- ----------- -----------
<S> <C> <C>
/s/ J. Fredrick Walters President - International April 3, 1998
J. Fredrick Walters Division and Chairman of
the Board of Directors
/s/ John H. Ellerby Secretary, Treasurer and April 3, 1998
John H. Ellerby Director
/s/ Mark A. Griffith Chief Accounting Officer
Mark A. Griffith and Chief Financial Officer April 3, 1998
/s/ Dennis W. Altbrandt Director April 3, 1998
Dennis W. Altbrandt
/s/ Larry D. Holt Director April 3, 1998
Larry D. Holt
/s/ Michelle L. Morgan Director April 3, 1998
Michelle L. Morgan
/s/ Gary E. Nordic Director April 3, 1998
Gary E. Nordic
/s/ Patricia R. Westbrook Director April 3, 1998
Patricia R. Westbrook
</TABLE>
<PAGE>
The Securities represented by this Debenture have not been registered under
the Securities Act of 1933, as amended (Act), or applicable state securities
laws ("State Acts") and shall not be sold, hypothecated, donated or otherwise
deferred unless the Company shall have received an opinion of Legal Counsel
for the Company, or such other evidence as may be satisfactory to Legal
Counsel for the Company, to the effect that any such transfer shall not
require registration under the Act and the State Acts.
VOICE IT WORLDWIDE, INC.
8.00% CONVERTIBLE DEBENTURE
$2,450,000.00 No: 1
Date of Issue: October 27, 1995
Voice It Worldwide, Inc. (hereinafter referred to as the "Company" or
"Borrower") is indebted and, for value received, herewith promises to pay to:
River Oaks Trust Company, FBO
RENAISSANCE CAPITAL GROWTH & INCOME FUND III, INC.
or to its order, (together with any assignee, jointly or severally, the
"Holder" or "Lender) on or before November 1, 2002 (the "Due Date") (unless
this Debenture shall have been sooner called for redemption or presented for
conversion as herein provided), the sum of Two Million Four Hundred Fifty
Thousand Dollars ($2,450,000) (the "Principal Amount") and to pay interest on
the Principal Amount at the rate of eight percent (8.00%) per annum as
provided herein. In furtherance thereof and in consideration of the premises
the Borrower covenants promises and agrees as follows:
1. Interest: Interest on the Principal Amount outstanding from time to
--------
time shall accrue at the rate of 8.00% per annum and be payable in monthly
installments commencing December 1, 1995, and subsequent payments shall be
made on the first day of each month thereafter until the Principal Amount and
all accrued and unpaid interest shall have been paid in full. Overdue
principal and interest on the Debenture shall to the extent permitted by
applicable law, bear interest at the rate of 8.00% per annum All payments of
both principal and interest shall be made at the address of the Holder hereof
as it appears in the books and records of the Borrower, or at such other place
as may be designated by the Holder hereof.
2. Maturity If not sooner redeemed or converted, this Debenture shall
--------
mature on November 1, 2002 at which time all then remaining unpaid principal
interest and any other charges then due under the Loan Agreement shall be due
and payable in full.
<PAGE>
3. Mandatory Principal Installments: If this Debenture is not sooner
----------------------------------
redeemed or converted, Borrower shall pay to Holder, commencing on November 1,
1998, and the first day of each successive month thereafter prior to maturity,
mandatory principal redemption installments, each of such installments to be
in the amount of Ten Dollars ($10) per Thousand Dollars ($1,000) of the then
remaining principal amount of the Debenture and further, at maturity, shall
make a final installment of all of the remaining unpaid Principal Amount
balance due plus the amount shall be applied in partial redemption of the
Debenture when received by Holder.
4. Change of Control The Debenture shall if (i) the Company's stock is
-----------------
not listed for exchange of the Nasdaq National Market, the New York Stock
Exchange, American Stock Exchange or quoted on the Nasdaq Small Cap System or
(ii) there is a change of control with respect to the majority of the
Company's voting stock, be redeemed at 111% of par prior to November, 1996,
thereafter at 123% of par until November 1, 1997, thereafter at 137% of par
until November 1, 1998, thereafter at 152% of par until November 1, 1999, and
thereafter at 167% of par.
5. Redemption (a) On any interest payment date after November 1, 1997,
----------
and after prior irrevocable notice as provided for below, fifty percent (50%)
of the outstanding principal amount of this Debenture is redeemable, in whole
but not in part, at 120% of par if the following conditions arc satisfied: (i)
The closing bid price for the Common Stock averages at least $7.50 per share
for the 20 consecutive trading days prior to the irrevocable notice and the
Borrower's Common Stock is listed on NASDAQ, AMEX or NYSE; (ii) the $7.50 bid
price is supported by the Borrower's minimum of $0.33 in net earnings per
share in the aggregate for the last four consecutive fiscal quarters
preceeding the date of irrevocable notice excluding any extraordinary gains of
the Borrower, and (iii) the Company will have already begun, and will continue
to use its absolute best efforts to register the shares of Common Stock
issuable upon conversion of the Debentures. The foregoing earnings per shares
and bid price tests shall be duly adjusted for share splits, stock dividends,
mergers, consolidations, and other recapitalizations.
(b) On any interest payment date after November 1, 1998, and after
prior irrevocable notice as provided for below, the outstanding principal
amount of this Debenture is redeemable, in whole and in part, at 120% of par
if the following conditions are satisfied: (i) The closing bid price for the
Borrower's Common Stock averages at least $9.00 per share for the 20
consecutive trading days prior to the irrevocable notice and the Borrower's
Common Stock is listed on NASDAQ, or NYSE; (ii) the $9.00 bid price is
supported by the Borrower's minimum of $0.39 in net earnings per share in the
aggregate for the last four consecutive fiscal quarters preceding the date of
irrevocable notice excluding any extraordinary gains of the Borrower, and
(iii) the Company will have already begun, and will continue to use its
absolute best efforts to register the shares of Common Stock issuable upon
conversion of the Debentures. The foregoing earnings per share and bid price
tests shall be duly adjusted for share splits, stock dividends, mergers,
consolidations, and other recapitalizations.
<PAGE>
(c) The Borrower may exercise this right to redeem prior to maturity by
giving notice (the "Redemption Notice") thereof to the holder of this
Debenture as such name appears on the books of the Borrower, which notice
shall specify the terms of redemption (including the place at which the holder
may obtain payment), the total principal amount to be redeemed (such principal
amount plus the premium thereon herein called the "Redemption Amount") and the
date for redemption (the "Redemption Date"), which date shall not be less than
90 days nor more than 120 days after the date of the notice. On the
Redemption Date, the Borrower shall pay all accrued unpaid interest on the
Debenture up to and including the Redemption Date, and shall pay to the holder
a dollar amount equal to the Redemption Amount In the case of Debentures
called for redemption, the conversion rights will expire at the close of
business on the Redemption Date.
6. Conversion Right: The holder of this Debenture shall have the right, at
holder's option, at any time, to convert all, or, in multiples of $100,000,
any part of this Debenture into such number of fully paid and nonassessable
shares of Common Stock, $.10 par value, of Borrower (the "Common Stock) as
shall be provided herein. The holder of this Debenture may exercise the
conversion right by giving written notice (the "Conversion Notice") to
Borrower of the exercise of such right and stating the name or names in which
the stock certificate or stock certificates for the shares of Common Stock are
to be issued and the address to which such certificates shall be delivered.
The Conversion Notice shall be accompanied by the Debnenture. The number of
shares of Common Stock that shall be issuable upon conversion of the Debenture
shall equal the face amount of the Debenture divided by the Conversion Price
as defined below and in effect on the date the Conversion Notice is given;
provided, however, that in the event that this Debenture shall have been
partially redeemed, shares of Common Stock shall be issued pro rata, rounded
to the nearest whole share. Conversion shall be deemed to have been effected
on the date the Conversion Notice is received (the "Conversion Date"). Within
20 business days after receipt of the Conversion Notice, Borrower shall issue
and deliver by hand against a signed receipt therefor or by United States
registered mail, return receipt requested, to the address designated in the
Conversion Notice, a stock certificate or stock certificates of Borrower
representing the number of shares of Common Stock to which Holder is entitled
and a check or cash in payment of all interest accrued and unpaid on the
Debenture up to and including the Conversion Date. The conversion rights will
be governed by the following provisions:
(a) Conversion Price: On the issue date hereof and until such time as an
adjustment shall occur, the Conversion price per share shall be initially
$2.625 per share provided, however, that the Conversion Price shall be subject
to adjustment at the times, and in accordance with the provisions, as follow:
<PAGE>
(i) Adjustment for Issuance of Shares at less than the Conversion Price:
If and whenever any Additional Common Stock shares shall be issued by Borrower
(the "Stock Issue Date") for a consideration per share less than the
Conversion Price, then in each such case the initial Conversion Price shall be
reduced to a new Conversion Price in an amount equal to the consideration per
share received by the Borrower for the additional shares of Common Stock then
issued and the number of shares issuable to Holder upon conversion shall be
proportionately increased; and, in the case of shares issued without
consideration, the initial Conversion Price shall be reduced in amount and the
number of shares issued upon conversion shall be increased in an amount so as
to maintain for the Holder the right to convert the Debenture into shares
equal in amount to the same percentage interest in the Common Stock of the
Borrower as existed for the Holder immediately preceding the Stock Issue Date.
The provisions of this Section 6 shall not apply to issuances of the first
50,000 shares of Additional Common Stock that arc sold or granted for less
than the Conversion Price. The above adjustment provision shall be subject to
the Borrower's right to redeem the Debenture at 120% of par, or a higher price
if by effect of this Debenture a higher price is then applicable, "within 20
days after the Borrower's issuance of additional shares at less than the
Conversion Price; however, Borrower's right to redeem is subject to the
holder's right to waive said adjustment and refuse redemption. Notice
provisions for redemption found in Section 5 (c) above shall apply to the
redemption right granted above.
(ii) Sale of Shares: In case of the issuance of Additional Common Stock
for a consideration part or all of which shall be casl4 the amount of the cash
consideration therefor shall be deemed to be the amount of the cash received
by B4orrowcr for such shares, after any compensation or discount in the sale,
underwriting or purchase thereof by underwriters or dealers or others
performing similar services or for any expenses incurred in connection
therewith. In case of the issuance of any shares of Additional Common Stock
for a consideration part or all of which shall be other than cash, the amount
of the consideration therefore other than cash, shall be deemed to be the then
market value of the property received.
(iii) Reclassification of Shares: In case of the reclassification of
securities into shares of Common Stock, the shares of Common Stock issued in
such reclassification shall be deemed to have been issued for a consideration
other than cash. Shares of Additional Common Stock issued by way of dividend
or other distribution on any class of stock of Borrower shall be deemed to
have been issued without consideration.
(iv) Split up or Combination of Shares: In case issued and outstanding
shares of Common Stock shall be subdivided or split up into a greater number
of shares of the Common Stock, the Conversion Price shall be proportionately
decreased, and in case issued and outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Conversion Price
shall be proportionately increased, such increase or decrease, as the case may
be, becoming effective at the time of record of the split-up or combination,
as the case may be.
<PAGE>
(v) Exceptions: The term "Additional Common Stock" herein shall mean all
shares of Common Stock hereafter issued by Borrower (including Common Stock
held in the treasury of Borrower), except (1) Common Stock issued upon the
conversion of any of the Debentures; (2) Common Stock issued upon exercise of
any warrants or stock purchase options issued and outstanding as of the date
of this Debenture; and (3) Common Stock issued pursuant to exercise of
authorized or outstanding options under any currently existing stock option
plan for the officers, directors, and certain other key personnel as defined
in said stock option plans of Borrower as currently established.
(b) Adjustment for Mergers, Consolidations, Etc.:
(i) In the event of distribution to all Common Stock holders of any stock,
indebtedness of Borrower or assets (excluding cash dividends or distributions
from retained earnings) or other rights to purchase securities or assets,
then, after such event, the Debentures will be convertible into the kind and
amount of securities, cash and other property which the holder of the
Debentures would have been entitled to receive if the holder owned the Common
Stock issuable upon conversion of the Debentures immediately prior to the
occurrence of such event.
(ii) In case of any capital reorganization, rectification of the stock of
Borrower (other than a change in par value or as a result of a stock dividend,
subdivision, split up or combination of shares), this Debenture shall be
convertible into the kind and number of shares of stock or other securities or
property of Borrower to which the holder of the Debenture would have been
entitled to receive if the holder owned the Common Stock issuable upon
conversion of the Debenture immediately prior to the occurrence of such event.
The provisions of these foregoing sentence shall similarly apply to successive
reorganizations, reclassifications, consolidations, exchanges, leases,
transfers or other dispositions or other share exchanges.
(iii) The term "Fair Market Value", as used herein, is the value ascribed
to consideration other than cash as determined by the Board of Directors of
Borrower in good faith, which determination shall be final, conclusive and
binding. If the Board of Directors shall be unable to agree as to such fair
market value, then the issue of fair market value shall be submitted to
arbitration under and pursuant to the rules and regulations of the American
Arbitration Association, and the decision of the arbitrators shall be final,
conclusive and binding, and a judgment may be entered thereon, provided
however that such arbitration shall be limited to determination of the fair
market value of assets tendered in consideration for the issue of Common
Stock.
<PAGE>
(iv) Notice of Adjustment. (A) In the event Borrower shall propose to take
--------------------
any action which shall result in an Adjustment in the Conversion Price
Borrower shall give notice to the holder of this Debenture, which notice shall
specify the record date, if any, with respect to such action and the date on
which such action is to take place. Such notice shall be given on or before
the earlier of 10 days before the record date or the date which such action
shall be taken. Such notice shall also set forth all facts (to the extent
known) material to the effect of such action on the Conversion Price and the
number, kind or class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or deliverable
upon conversion of this Debenture. (B) Following completion of an event
wherein the Conversion Price shall be adjusted, Borrower shall furnish to the
holder of this Debenture a statement, signed by the Chief Executive Officer of
Borrower, of the facts creating such adjustment and specifying the resultant
adjusted Conversion Price then in effect.
7. One Time Adjustment to Conversion Price. The Conversion Price shall be
---------------------------------------
adjusted upon the Borrower's filing of its 1996 Form 1OKSB if the Borrower
fails to earn before interest expense and taxes a minimum of $0.11 per share
on a fully diluted basis including the shares issued upon a conversion of this
Debenture. If an adjustment is triggered, then the Conversion Price shall be
reduced to the lower of (i) fifteen (15) times 1996 earnings before interest
expense and taxes per share on a fully diluted basis including the shares
issued upon a conversion of this Debenture not to be reduced below two (2)
times tangible book value per share or (ii) eighty percent (80%) of the
closing bid price of the Common Stock for the 20 consecutive trading days
after the date on which the Borrower filed its 1996 Form 10KSB. If an
adjustment is required pursuant to Section 6, then the Borrower shall furnish
to the holder of this Debenture, a statement, signed by the Chief Executive
Officer of Borrower, of the facts creating such adjustment and specifying the
resultant adjusted Conversion Price then in effect. The above mentioned
adjustment shall only be utilized to adjust the Conversion Price to a price
less than the then costing Conversion Price.
8. Reservation of Shares: Borrower wan-ants and agrees that it shall at
----------------------
all times reserve and keep available, free from preemptive rights, sufficient
authorized and unissued shares of Common Stock to effect conversion of this
Debenture.
9. Registration Rights. Shares issued upon conversion of this Debenture
-------------------
shall be restricted from transfer by the holder except if and unless the
shares are duly registered for sale persuant to the Securities Act of 1933, as
amended, or the transfer is duly exempt from registration.
The Holder has certain rights with respect to the registration of shares of
Common Stock issued upon the conversion of this Debenture pursuant to the
terms of the Loan Agreement. Borrower agrees that a copy of the Loan
Agreement with all amendments, additions or substitutions therefor shall be
available to the Holder at the offices of Borrower.
<PAGE>
10. Taxes: The Borrower shall pay any documentary or other transactional
-----
taxes attributable to the issuance or delivery of this Debenture or the shares
of Common Stock issued upon conversion by the Holder (excluding any federal,
state or local income taxes and any franchise taxes or taxes imposed upon the
Holder by the jurisdiction, or any political subdivision thereof, under which
such Holder is organized or is qualified to do business.)
11. Default.
-------
(a) Event of Default: An "Event of Default" shall exist if any one or more
of the following events (herein collectively called "Events of Default") shall
occur and be continuing:
(i) Borrower shall fail to pay (or shall state in writing an intention not
to pay or its inability to pay), when due or not later than 10 days
thereafter, any installment of interest on or principal of, any Debenture or
any fee, expense or other payment required hereunder,
(ii) Any representation or warranty made under the Loan Agreement. or any
of the other Loan Documents, or in any certificate or statement furnished or
made to Lender pursuant hereto or in connection herewith or with the Loans
hereunder, shall prove to be untrue or inaccurate in any material respect as
of the date on which such representation or warranty is made;
(iii) Default in the performance of any of the covenants or agreements of
Borrower or its Subsidiaries, if any, confined under the Loan Agreement, or in
any of the other Loan Documents, which default is not remedied within thirty
(30) days after written notice thereof to Borrower from Lender, provided that
such 30 day grace period shall not apply to default of any payment requirement
or notice covenant made by Borrower;
(iv) Default shall occur in the payment of any material Indebtedness of
the Borrower or its Subsidiary, if any, (other than the obligation) or default
shall occur in respect of any note, loan agreement or credit agreement
relating to any such Indebtedness and such default shall continue for more
than the period of grace, if any, specified therein and any such Indebtedness
shall become due before its stated maturity by acceleration of the maturity
thereof or shall become due by its terms and shall not be promptly paid or
extended;
(v) Any of the Loan Documents shall cease to be legal, valid and binding
agreements enforceable against the borrower in accordance with the respective
terms thereof or shall in any way be terminated or become or be declared
ineffective or inoperative or shall in any way whatsoever cease to give or
provide the respective rights, titles, interest, remedies, powers or
privileges intended to be created thereby;
<PAGE>
(vi) Borrower or its Subsidiaries (as defined in the Loan Agreement), if
any, shall (A) apply for or consent to the appointment of a receiver, trustee,
custodian, intervenor or liquidator of itself, or of all or substantially all
of such Person's assets, (B) file a voluntary petition in bankruptcy, admit in
writing that such Person is unable to pay such Person's debts as they become
due or generally not pay such Person's debts as they become due, (C) make a
general assignment for the benefit of creditors, (D) file a petition or answer
seeking reorganization or an arrangement with creditors or to take advantage
of any bankruptcy or insolvency laws, (E) file an answer admitting the
material allegations of, or consent to, or default in answering, a petition
filed against such Person in any bankruptcy, reorganization or insolvency
proceeding, or (F) take corporate action for the purpose of effective any of
the foregoing;
(vii) An involuntary petition or complaint shall be filed against Borrower
or any of its Subsidiaries, if any, seeking bankruptcy or reorganization of
such Person or the appointment of a receiver, custodian, trustee, intervenor
or liquidator of such Person, or all or substantially all of such Person's
assets, and such petition or complaint shall not have been dismissed within
sixty (60) days of the filing thereof or an order, order for relief, judgment
or decree shall be entered by any court of competent jurisdiction or other
competent authority approving a petition or complaint seeking reorganization
of Borrower or its Subsidiary, if any, or appointing a receiver, custodian,
trustee, intervenor or liquidator of such Person, or of all or substantially
all of such Person's assets;
(viii) Any final judgement(s) for the payment of money in excess of the
sum of $250,000 in the aggregate shall be rendered against Borrower or any
Subsidiary and such judgment or judgments shall not be satisfied or discharged
at least ten (10) days prior to the date on which any of its assets could be
lawfully sold to satisfy such judgment;
(ix) The failure of Borrower to issue and deliver shares of Common Stock
as provided herein upon conversion of the Debenture; or
(x) The failure to elect Lender's nominee, if any, to the Board of
Directors of the Borrower or the removal of Lender's nominee from the Board of
Directors of Borrower for any reason other than good cause.
(b) Remedies Upon Event of Default: If an Event of Default shall have
occurred and be continuing, then Lender may exercise any one or more of the
following rights and remedies, and any other remedies provided in any of the
Loan Documents, as Lender in its sole discretion, may deem necessary or
appropriate:
(i) declare the unpaid Principal Amount (after application of any payments
or installments received by Lender) of, and all interest then accrued but
unpaid on, the Debentures and any other liabilities hereunder to be forthwith
due and payable, whereupon the same shall forthwith become due and payable
without presentment demand, protest, notice of default, notice of acceleration
or of intention to accelerate or other notice of any kind, all of which
Borrower hereby expressly waives.
<PAGE>
(ii) reduce any claim to judgment and/or
(iii) without notice of default or demand, pursue and enforce any of
Lender's rights and remedies under the Loan Documents, or otherwise provided
under or pursuant to any applicable law or agreement, all of which rights may
be specifically enforced.
(c) Remedies Nonexclusive: Each right power or remedy of the holder hereof
---------------------
upon the occurrence of any Event of Default as provided for in this Debenture
or now or hereafter existing at law or in equity or by statute shall be
cumulative and concurrent and shall be in addition to every other right power
or remedy provided for in this Debenture or now or hereafter existing at law
or in equity or by statute. and the exercise or beginning of the exercise by
the holder or transferee hereof of any one or more of such rights, powers or
remedies shall not preclude the simultaneous or later exercise by the holder
of any or all such other rights, powers or remedies.
(d) Expense: Upon the occurrence of a Default or an Event of Default,
-------
which occurrence is not cured within the notice provisions, if any provided
therefore, Borrower agrees to pay and shall pay all costs and expenses
(including Lenders attorney's fees and expenses) reasonably incurred by Lender
in connection with the preservation and enforcement of Lender's rights under
the Loan Agreement, the Debentures, or any other Loan Document.
12. Failure to Act and Waiver. No failure or delay by the holder hereof
-------------------------
to require the performance of any term or terms of this Debenture or not to
exercise any right, or any remedy shall constitute a waiver of any such term
or of any right or of any default, nor shall such delay or failure preclude
the holder hereof from exercising any such right, power or remedy at any later
time or times. By accepting payment after the due date of any amount payable
under this Debenture, the holder hereof shall not be deemed to waive the right
either to require payment when due of all other amounts payable, or to later
declare a default for failure to effect such payment of any such other amount.
The failure of the holder of this Debenture to give notice of any failure or
breach of the Borrower under this Debenture shall not constitute a waiver of
any right or remedy in respect of such continuing failure or breach or any
subsequent failure or breach.
13. Consent to Jurisdiction: The Borrower hereby agrees and consents that
------------------------
any action, suit or proceeding arising out of this Debenture n-Lay be brought
in any appropriate court in the State of Texas including the United States
District Court for the Northern District of Texas or in any other court having
jurisdiction over the subject matter, all at the sole election of the holder
hereof, and by the issuance and execution of this Debenture the Borrower
irrevocably consents to the jurisdiction of each such court. The Borrower
hereby irrevocably appoints CT Corporation, Dallas, Texas, as agent for the
Borrower to accept service of process for and on behalf of the Borrower in any
action, suit or pr g arising out of this Debenture. Except for default in
payment of interest or principal when and as they become due, and except as
otherwise specifically set forth herein or otherwise agreed to in writing by
the parties, any action dispute, claim or controversy (all such herein called
"Dispute") between or among the parties as to the facts or the interpretation
of the Debenture shall be resolved as set forth in Section 11.05 of the Loan
Agreement.
<PAGE>
14. Holders Right to Request Multiple Debentures. The Holder shall, upon
--------------------------------------------
written request and presentation of the Debenture, have the right, at any
interest payment date, to request division of this Debenture into two or more
units, each of such to be in such amounts as shall be requested; provided
however that no Debentures shall be issued in denominations of face amount
less than $1,000,000.
15. Transfer. This Debenture may be transferred on the books of the
--------
Borrower by the registered Holder hereof, or by Holder's attorney duly
authorized in writing, only upon (i) delivery to the Borrower of a duly
executed assignment of the Debenture, or part thereof, to the proposed new
Holder, along with a current notation of the amount of payments received and
net Principal Amount yet unfunded, and presentment of such Debenture to the
Borrower for issue of a replacement Debenture, or Debentures, in the name of
the new Holder, (ii) the designation by the new Holder of the Lender's Agent
for Notice, such agent to be the sole party to whom Borrower shall be required
to provide notice when notice to Lender is required hereunder and who shall be
the sole party authorized to represent Lender in regard to modification or
waivers under the Debenture, the Loan Agreement, or other Loan Documents; and
any action, consent or waiver, (other than a compromise of principal and
interest), when given or taken by Lender's Agent for Notice, shall be deemed
to be the action of the holders of a majority in amount of the Principal
Amount of the Debentures, as such holders are recorded on the books of the
Borrower, and (iii) in compliance with the legend to read "The Securities
represented by this Debenture have not been registered under the Securities
Act of 1933, as amended ("Act"), or applicable state securities laws ("State
Acts") and shall not be sold, hypothecated, donated or otherwise transferred
unless the Company shall have received an opinion of Legal Counsel for the
Company, or such other evidence as may be satisfactory to Legal Counsel for
the Company, to the effect that any such transfer shall not require
registration under the Act and the "State Acts."
The Borrower shall be entitled to treat any holder of record of the Debenture
as the Holder in fact thereof and of the Debenture and shall not be bound to
recognize any equitable or other claim to or interest in this Debenture in the
name of any other person, whether or not it shall have express or other notice
thereof save as expressly provided by the laws of Texas.
16. Notice: All notices and communications under this Debenture shall be
------
in writing and shall be either delivered in person or by FedEx and accompanied
by a signed receipt therefor, or mailed first-class United States certified
mail, return receipt requested, postage prepaid, and addressed as follows: (i)
if to the Borrower at its address for notice as stated in the Loan Agreement;
and, (ii) if to the holder of this Debenture, to the address (a) of such
holder as it appears on the books of the Borrower, or (b) in the case of a
partial assignment to one or more holders, to the Lender's Agent for Notice,
as the case may be. Any notice of communication shall be deemed given and
received as of the date of such delivery if delivered or if mailed, then three
days after the date of mailing.
<PAGE>
17. Maximum Interest Rate: Regardless of any provision contained in this
----------------------
Debenture, Lender shall never be entitled to receive, collect or apply as
interest on the Debenture any amount in excess of interest calculated at the
Maximum Rate, and, in the event that Lender ever receives, collects or applies
as interest any such excess the amount which would be excessive interest shall
be deemed to be a partial prepayment of principal and treated hereunder as
such; and, if the principal amount of the Debenture is paid in full, any
remaining excess shall forthwith be paid to Borrower. In determining whether
or not the interest paid or payable under any specific contingency exceeds
interest calculated at the Maximum Rate, Borrower and Lender shall, to the
maximum extent permitted under applicable law, (i) characterize any non
principal payment as an expense, fee or premium rather than as interest (ii)
exclude voluntary prepaymrnts and the effects thereof, and (iii) amortize, pro
rate, allocate and spread, in equal parts, the total amount of interest
throughout the entire contemplated term of the Debenture;. provided that if
the Debenture is paid and performed in full prior to the end of the full
contemplated term thereof and if the interest received for the actual period
of existence thereof exceeds interest calculated at the Maximum Rate, Lender
shall refund to Borrower the amount of such excess or credit the amount of
such excess against the principal amount of the Debenture and, in such event,
Lender shall not be subject to any penalties provided by any laws for
contracting for, charging, taking, reserving or receiving interest in excess
of interst calculated at the Maximum Rate.
(b) "Maximum Rate" shall mean on any day, the highest nonusurious rate of
interest (if any) permitted by applicable law on such day that at any time-,
or from time to time, may be contracted for, taken, reserved, charged or
received on the Indebtedness evidenced by the Debenture under the laws which
are presently in effect of the United States of America and the State of Texas
or by the laws of any other jurisdiction which are or may be applicable to the
holders of the Debenture and such Indebtedness or, to the extent permitted by
law, under such applicable laws of the United States of America and the State
of Texas or by the laws of any other jurisdiction which are or may be
applicable to the holder of the Debenture and which may hereafter be in effect
and which allow a higher maximum nonusurious interest rate than applicable
laws now allow.
18. Rights Under Loan Agreement: This Debenture is issued pursuant to
---------------------------
that certain Convertible Debenture Loan Agreement dated October 27, 1995 by
and between Voice It World Wide, Inc. as Borrower and Renaissance Capital
Growth & Income Fund III, Inc. as Lender, (the "Loan Agreement"), and the
holder hereof is entitled to all the rights and benefits and is subject to all
the obligations of Lender under said agreement, including the maximum interest
rates limitations as specified in Section 11.07 thereof. Both Borrower and
Lender have participated in the negotiation and preparation of the Loan
Agreement and of this Debenture. Borrower agrees that a copy of the Loan
Agreement with all amendments, additions and substitutions therefor shall be
available to the Holder at the offices of Borrower.
19. GOVERNING LAW: THIS DEBENTURE SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THF, LAWS OF THF, STATE OF TEXAS, OR, WHERE
APPLICABLE, THF, LAWS OF THE UNMD STATES.
<PAGE>
IN WITNESS WHEREOF, the undersigned Borrower has caused this Debenture to be
duly issued on the Date of Issue above stated.
BORROWER
Address for Notice: Voice It Worlwide, Inc.
- --------------------
Voice It Worldwide, Inc.
2643 Midpoint Drive, Suite A
Fort Collins, CO 80525 By:
(800) 221-7711 Title: President
Attest by:
Title: Assistant Secretary
<PAGE>
Acknowledgement for Voice It Worldwide, Inc.
--------------------------------------------
State
SS
County of Dallas
On the 27th day of October, 1995, before me personally appeared Michelle
Morgan known to me, who by me being duly sworn deposed and said: that she is
the President and Chief Executive Officer of Voice It Worldwide, Inc., a
Colorado corporation, and the corporation described in and which executed the
foregoing instrument; that the foregoing instrument has been duly authorized
by the Board of Directors of the corporation; that she has been duly ordered
and has the power to execute such instrument as the binding obligation of the
corporation and has signed her name thereto by such order; and that the seal
affixed to the instrument is the seal of such corporation and it was affixed
to this instrument by such order, or, if no seal is affixed then, no seal is
required to authenticate the instrument as the binding act and agreement of
such corporation.
Notary Public
JOINT PRODUCT DEVELOPM[ENT AGREEMENT
(Applied Voice Recognition, Inc. and Voice It Worldwide, Inc.)
THIS JOINT PRODUCT DEVELOPMMNT AGREEM:ENT (this "Agreement") is entered into
as of December 31, 1997 (the "Effective Date"), by and between APPLIED VOICE
RECOGNITION, INC., a Utah corporation ("AVRI"), and VOICE IT WORLDWIDE, INC.,
a Colorado corporation ("VIW").
WITNESSETH:
-----------
WHEREAS, AVRI and VIW desire to integrate the VIW Digital Recorder hand-held
unit (the "Digital Recorder") with AVRI's SpeechCOMMANDER software product,
using the continuous speech recognition software developed and licensed to
AVRI by IBM known as Via VOICE ("Via VOICE") (or such other software as AVRI
determines), which resulting product will have general consumer applications
and will also be produced in customized versions dedicated to specific
professional or industry applications;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants and obligations set forth in this Agreement, AVRI and VIW hereby
agree as follows:
1. AVRI's Obligations. AVRI hereby agrees to commit such technical and
------------------
financial resources as may be reasonably necessary in order to perform and
complete each of the following tasks:
a. Assist and cooperate with VIW in connection with working directly
with IBM on VIW's behalf in addressing any technical issues presented to AVRI
by VIW;
b. Assist VIW in evaluating, developing and testing a satisfactory
microphone component that will result in satisfactory audio recording quality,
which will in turn maximize the speech recognition applications;
c. Assist VIW in defining design changes to the Digital Recorder in
an effort to meet the needs of the marketplace;
d. Define, develop and/or modify AVRI's software known as
SpeechCOMMANDER or AVRI's software known as VoiceCOMMANDER Personal (as soon
as such software is available) in order to create standards for such products
to integrate with the Digital Recorder and Via VOICE, or other voice
recognition software as AVRI may determine to be appropriate in AVRI's sole
discretion;
e. Define the system protocol for the Digital Recorder and develop
software to interface to the Digital Recorder; and
f. Define and develop an interface between Via VOICE recognition
software and the Digital Recorder, including, without limitation, the "enroll
process" using the Digital Recorder, audio interface dictation interface and
any other critical interface components as AVRI may determine to be
appropriate in AVRI's sole discretion.
<PAGE>
Notwithstanding the foregoing, AVRI and VIW hereby further agree that AVRI
shall (i) have no obligation to provide any technical, financial, advertising
or other support to VIW or VIW's customers except as specifically set forth in
this Agreement, and (ii) be the sole liaison between VIW and IBM for all
technical issues relating to the development of the Digital Recorder or its
applications.
2. VIW's Obligations. VIW hereby agrees to commit such technical and
-----------------
financial resources as may be reasonably required in order to perform and
complete each of the following tasks:
a. Define, manage and obtain a new Digital Signal Processing chip (a
"DSP") that will provide speech co-ding and de-coding for speech recognition
applications while also providing highly compressed capabilities (the speech
encoding for speech recognition should be capable of performing at a minimum
of 92 % accuracy and eventually reach accuracy of 95 % or more);
b. Modify and prepare for manufacturing a printed circuit board that
will complete the hardware interface between the new DSP and the
micro-controller chip;
c. Develop software, as necessary, for the new DSP chip and added
functions;
d. Develop the systems interface protocols between the Digital
Recorder and the personal computer;
e. Identify and develop satisfactory microphone assembly and
interface for adequate audio recording for speech recognition applications;
f. Produce working prototypes of the Digital Recorder that adequately
interfaces with voice recognition software;
g. Develop software for the Digital Recorder, to AVRI specifications,
to interface with specific vertical market applications; and
h. Provide adequate manufacturing sources that can manufacture the
Digital Recorder in required quantities pursuant to Section 10.
3. Milestones. Within thirty (30) days after the Effective Date, AVRI and
----------
VIW hereby agree to mutually set milestones and completion dates with respect
to each of AVRI's and VIW's tasks set forth in Section 1 and Section 2.
Notwithstanding the preceding sentence, however, the parties hereto hereby
agree that (i) VIW will deliver to AVRI a working prototype of the Digital
Recorder by April 30, 1998, and (ii) the Digital Recorder will be in full
production by June 30, 1998. Each party agrees to provide the other with a
monthly report regarding the status of their respective tasks set forth in
Section 1 and Section 2, and their respective expenses incurred with respect
thereto. Such reports will be due on the thirtieth (30th) day of each month
for the prior month. Each report shall contain a description of the current
status of each task, the problems encountered, the proposed solution to such
problems, and the effect of such problems, if any, on the milestones.
<PAGE>
4. Purchase and Sale of VIW Stock. AVRI hereby agrees to purchase and VIW
------------------------------
hereby agrees to sell to AVRI 471,700 shares of VIW common stock at a price of
$1.06 per share, or a total of $500,000. Such stock will be voting stock and
will have all of the same benefits and characteristics of VIW's other shares
of common stock, except that such stock, when issued, will not be registered
under the Securities Act of 1933, as amended (the "Securities Act"). The
closing of such stock purchase transaction shall take place pursuant to the
terms of Section 12.
5. AVRI's Registration Rights. VIW and AVRI hereby agree that
----------------------------
contemporaneously with the execution of this Agreement that VIW and AVRI will
----
execute that certain Registration Rights Agreement effective as of even date
herewith with respect to the registration of the shares of VIW common stock
owned by AVRI.
6. Attendance at Board Meetings, Etc. From and after the Effective Date
----------------------------------
and for so long as at least 100,000 shares of VIW common stock (as adjusted
for stock splits, stock dividends and other capital events) are owned by AVRI,
VIW hereby agrees that VIW will allow one (1) designated representative of
AVRI to receive timely notice of, attend and make comments at all meetings of
VIW's Board of Directors. Such designated representative shall also be sent
all standard communications and notifications from VIW to the members of its
Board of Directors concerning annual and special meetings in the same fashion
and on the same basis, including with respect to timing, as such
representative would if such representative were a member of the Board of
Directors.
7. Purchase and Sale of Software Licenses. VIW hereby agrees to purchase
--------------------------------------
,from AVRI and AVRI hereby agrees to sell to VIW 50,000 licenses to use a
complete software package that includes SpeechCOMMANDER, Via VOICE and an
on-line manual and a training video (collectively, the "Licensed Product"),
all except the training video- contained on two digitally stored "master copy"
compact disks (collectively, the "Master Copy"). The training video will be
delivered on a master videotape. The cost for each such license to use the
Licensed Product shall be $20.00. VIW and AVRI hereby agree as follows with
respect to VIW's purchase of such licenses to use the Licensed Product:
a. At the Closing (as described in Section 12), AVRI will deliver to
VIW the Master Copy. Thereafter, VIW will be responsible, at VIW's sole cost
and expense, for (i) copying such software from the Master Copy, and (ii)
packaging, advertising and shipping such software, in connection with VIW's
sale of licenses to use the Licensed Product.
b. VIW will reasonably cooperate with AVPI to the extent necessary to
allow AVRI to include the latest version, from time to time, of VIW PC Link on
any such Master Copy.
<PAGE>
c. At any time after AVRI's VoiceCOMMANDER Personal software becomes
available, VIW or AVRI will have the option, in either party's discretion, to
cause VIW to thereafter discontinue selling licenses to use versions of the
Licensed Product containing SpeechCOMMANDER and to commence selling licenses
to use versions of the Licensed Product containing VoiceCOMMANDER Personal
(which licenses to use VoiceCOMMANDER shall be sold by AVRI to VIW at the same
price as the licenses to use SpeechCOMMANDER). In such event, the party so
electing will notify the other of such decision in writing and AVRI will
promptly deliver to VIW a Master Copy of the Licensed Product containing
VoiceCOMMANDER Personal. Immediately upon VIW's receipt of such Master Copy
of the Licensed Product containing VoiceCOMMANDER Personal, VIW will return to
AVRI the Master Copy of the Licensed Product containing SpeechCOMMANDER.
d. At the Closing, VIW will deliver to AVRI a payment for $200,000,
which sum will be applied as a prepayment for the first 10,000 licenses to use
the Licensed Product to be sold by VIW. Subsequent payments for the remaining
licenses will be made by VIW to AVRI in equal payments in the amount of
$266,666.66 each on June 15, 1998, September 15, 1998 and December 15, 1998.
If VIW has not yet sold the number of licenses to use the Licensed Product for
which VIW has then paid by the time the next payment is due, then VIW's
payment will be applied as a prepayment for the next licenses sold by VIW.
e. Following the sale by VIW of the first 50,000 licenses to use the
Licensed Product, VIW will commence delivering to AVRI payment for all
additional copies of the Licensed Product within thirty (30) days after the
month during which such copies of the Licensed Product were sold. The price
for such additional copies of the Licensed Product shall be established from
time to time by AVRI, not to exceed $20 per license; provided, however, that
if AVRI's cost for additional licenses to use the Licensed Product during any
calendar quarter increases by more than ten percent (10%) above AYRI's cost
for such licenses during the prior calendar quarter, then AVRI shall be
entitled to increase the price for each license to use the Licensed Product
sold to VIW to a price in excess of $20 per license, which increase in price
per license shall be in proportion to the percentage increase in AVRI's cost
per license. Notwithstanding the foregoing, however, AVRI hereby agrees that
after the first 50,000 copies of the Licensed Product have been paid for by
VIW in any calendar year in accordance with the terms of Section 7.d., no
other customer of AVRI purchasing volumes of the Licensed Product on an annual
basis that are similar to the volumes purchased by VIW will receive a better
price for copies of the Licensed Product than VIW.
f. Upon VIW's and AVRI's mutual agreement, AVRI will reproduce the
Licensed Product and package the Licensed Product for VIW with respect to
sales of the Licensed Product made by VIW. AVRI will charge VIW and VIW will
pay to AVRI for such reproduction and packaging services AVRI's actual cost
for such services plus ten percent (10%). AVRI will invoice VIW on a monthly
basis for such costs. All payments will be due within thirty (30) days after
the date of AVRI's invoice to VIW.
g. VIW hereby additionally agrees to include or otherwise provide
with each VIW product that contains voice recognition technology an option to
purchase a license to use the Licensed Product.
<PAGE>
h. AVRI hereby agrees to cause its website to provide general
technical support for frequently asked questions (FAQ"s) relating to the
Licensed Product. Additionally, AVRI will make available personal technical
support by telephone to VIW's customers with respect to the Licensed Product
in accordance with AVRI's customary technical support program.
Notwithstanding AVRI's agreement to provide such technical support services to
VIW's customers, AVRI will not be responsible for, or liable to VIW's
customers for, any returns or product warranty claims with respect to the
Licensed Product, other than problems resulting from faulty reproduction of
the Licensed Pro-duct performed by AVRI pursuant to Section 7.f.
i. VIW will provide AVRI by the thirtieth (30th) of each month a
detailed report of sales activities of VIW for the prior month with respect to
VIW's sales of the Licensed Product. In the event that VIW is in default of
any of VIW's payment or reporting obligations under this Agreement, AVRI shall
be entitled at any time during VIW's normal business hours, upon at least 24
hours prior notice and at AVRI's sole cost and expense, to inspect, review and
audit VIW's books and records at VIW's principal place of business with
respect to VIW's sales of licenses to use the Licensed Product. VIW shall
cooperate with AVRI in connection with AVRI's ins pection, review and auditing
activities described in this Section. VIW shall be deemed to be in default
under the terms of this Agreement in the event that (i) VIW fails to
reasonably cooperate with AVRI in connection with AVRI's review and audit, or
(ii) AVRI determines, in AVRI's reasonable discretion, that a material
discrepancy exists between the reported sales of the licenses to use the
Licensed Product as reflected in the monthly reports described in this Section
and the actual sales of licenses to use the Licensed Product as reflected in
VIW's books and records. For purposes of this Agreement, the terms "material
discrepancy" shall mean a discrepancy of five percent (5 %) or greater. Upon
any such default, AVRI will. be entitled to exercise its remedies set forth in
Section 14.
j. If VIW is delinquent in the payment of any amounts owed to AVRI
under the terms of this Agreement, AVRI will charge VIW and VIW will pay to
AVRI interest on such past due amounts at the lesser of (i) the rate of twelve
percent (12%) per annum, or (ii) the maximum rate allowed by law.
8. Software License.
-----------------
a. AVRI hereby grants to VIW the non-exclusive license to use, sell
and sublicense the Licensed Product to VIW's customers in accordance with the
terms of this Agreement. VIW will request that all purchasers of the Licensed
Pro-duct execute AVRI's standard-form license agreement as contained in the
installation routine for the Licensed Product (the "Product License"). -VIW
will retain all such licenses and will make them available to AVRI for AVRI's
review upon AVRI's written request.
b. VIW hereby agrees to abide by and to be bound by the terms of the
Product License and shall not utilize such software or Licensed Product for
any purpose other than VIW's own purposes and in connection with VIW's
sublicense of the Licensed Product to VIW's customers in accordance with the
terms of this Agreement.
<PAGE>
9. Proprietary Information
------------------------
a. VIW hereby agrees as follows:
(i) VIW recognizes the exclusive rights of AVRI to all
patents, service marks, trademarks, trade names and copyrights used in
connection with the Licensed Product, and, although no rights are intended to
be transferred to VIW, VIW hereby transfers, and agrees to transfer, all
rights it may acquire in connection with the Licensed Product to AVRI.
(ii) VIW agrees that AVRI's patents, service marks, trade
names may be used only on and with respect to the Licensed Product.
(iii) VIW agrees not to use a mark or other designation
identical with or confusingly similar to any of AVRI's service marks,
trademarks or trade names or any substantial part thereof, except with the
express prior written consent of AVRI.
(iv) Any and all packaging for the Licensed Product will
contain AVRI's logo and AVRI's "Voice Experts" attribution. If VIW desires to
utilize any packaging for the Licensed Product that does not contain such logo
and attribution, then AVRI shall have the right to approve in advance any such
packaging.
b. AVRI hereby agrees as follows:
(i) AVRI recognizes the exclusive rights of VIW to all
patents, service marks, trademarks, trade names and copyrights used in
connection with the Digital Recorder, and, although no rights are intended to
be transferred to AVRI, AVRI hereby transfers, and agrees to transfer, all
rights it may acquire in connection with the Digital Recorder to VIW.
(ii) AVRI agrees that VIW's patents, service marks, trade
names may be used only on and with respect to the Digital Recorder.
(iii) AVRI agrees not to use a mark or other designation
identical with or confusingly similar to any of VIW's service marks,
trademarks or trade names or any substantial part thereof, except with the
express prior written consent of VIW.
(iv) Any and all packaging for the Digital Recorder will
contain VIW's logo. If AVRI desires to utilize any packaging for the Digital
Recorder that does not contain such logo, then VIW shall have the right to
approve in advance any such packaging.
10. Sale and Manufacture of Digital Recorder. AVRI hereby agrees to
-----------------------------------------
purchase units of the Digital Recorder and VIW hereby agrees to manufacture
units of the Digital Recorder and sell to AVRI units of the Digital Recorder
on the following terms:
a. VIW will manufacture units of the Digital Recorder based on AVRI's
specifications on an original equipment manufacturer, or "OEM" basis.
<PAGE>
b. The first 4,000 Digital Recorders will be sold to AVRI at VIW's
actual unit cost of goods sold as reported in VIW's monthly financial package
plus 10%. Thereafter, the price for each Digital Recorder sold to AVRI will
be VIW's actual unit cost of goods sold as reported in VIW's monthly financial
package plus 30%. Notwithstanding the foregoing, however, VIW hereby agrees
that no other customer of VIW will receive a better price for the Digital
Recorder than AVRI. In the event that any customer of VIW does receive a
better price for units of the Digital Recorder than AVRI, then VIW will
promptly (i) notify AVRI of such better price in writing and confirm that AVRI
will be entitled to purchase units of the Digital Recorder at such better
price during the remaining term of this Agreement, (ii) adjust AVRI's price
for the Digital Recorder so that AVRI's price is equal to such better price
for each unit purchased by AVRI since the date of VIW's agreement to sell
units of the Digital Recorder at such better price, and (iii) refund to AVRI
the amount due to AVRI as a result of such price adjustment, or, at AVRI's
option, apply such refund in payment of amounts owed by AVRI to VIW.
c. VIW's actual costs will be calculated and adjusted, if necessary,
on a quarterly basis based upon VIW's unit cost of goods sold as reported in
VIW's monthly financial package for the previous quarter.
d. VIW will invoice AVRI on a monthly basis for all amounts due from
AVRI to VIW under the terms of this Agreement. All payments will be due
within thirty (30) days after the date of VIW's invoice to AVRI.
e. If AVRI is delinquent in the payment of any amounts owed to VIW
under the terms of this Agreement, VIW will charge AVRI and AVRI will pay to
VIW interest on such past due amounts at the lesser of (i) the rate of twelve
percent (12%) per annum, or (ii) the maximum rate allowed by law.
f. Each month, AVRI will provide VIW with (i) a binding purchase
order for the number of units of the Digital Recorder that AVRI will purchase
during next 90day period, which purchase order will replace the purchase order
delivered by AVRI at the beginning of the previous month, except that the
number of units ordered for the next 60-day period will be the same as the
number of units ordered for the last sixty days on the previous purchase
order, and (ii) a non-binding forecast of the number of units of the Digital
Recorder that AVRI expects to purchase during the period that is between 91
days and 180 days in advance of the date of such forecast, which nonbinding
forecast will replace the forecast delivered by AVRI at the beginning of the
previous month with respect to the 91 day to 150 day period referenced in such
new forecast.
<PAGE>
g. If (i) VIW for any reason is not able to deliver the Digital
Recorder in quantities sufficient to meet AVRI's requirements as contained in
the purchase orders and forecasts described in Section 10.f., or at a level of
quality sufficient to meet AVRI's requirements, and VIW is not able to cure
such quantity or quality deficiency within sixty (60) days after AVRI provides
VIW with written notice of such quantity or quality deficiency, or (ii) VIW
refuses, is unable, or is otherwise unavailable (as a result of bankruptcy,
court order or any other reason) to deliver to AVRI any units of the Digital
Recorder for a period of thirty (30) days, then AVRI shall have the right, at
AVRI's own cost and expense to manufacture, or cause to be manufactured on an
"OEM" basis, the Digital Recorder. In the event AVRI so elects to manufacture
the Digital Recorder, then AVRI will pay VIW a fee of ten percent (10%) per
unit sold of the unit cost of goods sold as reported in AVRI's monthly
financials, and VIW will cooperate with AVRI by (A) providing to AVRI copies
of plans and specifications for the Digital Recorder, and (B) granting to AVRI
a non-exclusive, irrevocable license to use all patents, copyrights, trade
secrets, licenses, and other proprietary information relating to the Digital
Recorder.
11. Distribution Rights. VIW hereby grants to AVRI the exclusive right to
-------------------
sell and market the Digital Recorder worldwide with respect to businesses
directly engaged in the delivery of healthcare services (the "Healthcare
Market"), and VIW hereby agrees that VIW will not to compete in the Healthcare
Market. VIW also hereby grants to AVRI the exclusive right to sell the
Digital Recorder to the United States based computer catalog sales industry
(the "Catalog Market"); provided, however, that VIW hereby retains, and this
Agreement excludes, the right to sell the Digital Recorder to VIW's current
catalog sales customers, Sharper Image, Brookstone and Hammacher Schlemmer.
The Healthcare Market and the Catalog Market are collectively referred to
herein as the "Exclusive Markets. " In the event that AVRI fails to have
purchased an aggregate of (A) the lesser of 10,000 Digital Recorders, or
$1,000,000 worth of Digital Recorders by the later of (i) June 1, 1999, or
(ii) the one year anniversary of "full production" (as hereinafter defined) of
the Digital Recorder units (the "Commencement Date"), (B) 50,000 Digital
Recorders by the end of the second anniversary of the Commencement Date, and
(C) 100,000 Digital Recorders by the end of the third anniversary of the
Commencement Date, then VIW will be entitled to immediately terminate the
exclusive nature of AVRI's right to sell and market with respect to the
Exclusive Markets; whereupon AVRI will continue to have a non-exclusive right
to sell and market the Digital Recorder in the Exclusive Markets and VIW will
continue to supply AVRI with Digital Recorders in accordance with the terms of
this Agreement. For purposes of this Agreement, "full production" shall mean
such time when VIW's production facilities are prepared and able to produce
the number of Digital Recorders set forth in AVRI's 90-day purchase order
described in Section 10.f. Notwithstanding AVRI's failure to meet the
purchasing quotas set forth in the preceding portion of this Section 11, AVRI
will be entitled to retain the exclusive right to sell and market to the
Healthcare Market through the third anniversary of the Commencement Date.
After such third anniversary of the Commencement Date, the parties determine,
acting in good faith, the minimum purchase requirements with respect to
Healthcare Market and the Catalog Market for future years.
12. Closing. The closing of the transactions provided for herein (the
-------
"Closing") shall take place on or prior to December 31, 1997 (the "Closing
Date"). At the Closing, the following shall occur:
<PAGE>
a. AVRI will deliver to VIW a check in the amount of $500,000
representing the purchase price for the shares of VIW common stock being
purchased by AVRI in accordance with Section 4, and VIW will deliver to AVRI a
share certificate evidencing such shares of VIW. common stock, or will
immediately instruct its transfer agent to issue and forward directly to AVRI
such certificate.
b. VIW will deliver to AVRI a check in the amount of $200,000
representing the prepayment of the purchase price for the first 10,000 copies
of the Licensed Product being purchased by VIW in accordance with Section 7,
and AVRI will deliver to VIW the Master Copy of the Licensed Product
containing the copy of SpeechCOMMANDER.
13. Use of Proceeds. VIW hereby covenants and agrees that the Proceeds
---------------
received by VIW from AVRI with respect to AVRI's purchase of VIW's common
stock, less the purchase price paid by VIW to AVRI for the initial purchase of
the licenses to use the Licensed Product, shall be used solely for paying the
costs and expenses relating to VIW's performance of its obligations under
Section 2 of this Agreement. The par-ties hereby agree to mutually establish
a detailed budget for the use of such proceeds within thirty (30) days after
the Effective Date. Contemporaneously with VIW's delivery to AVRI of its
monthly reports pursuant to Section 3, VIW will also provide AVRI a monthly
report illustrating its actual costs incurred compared to the budgeted costs,
both for the prior month and on an aggregate basis for the entire project.
VIW hereby agrees to fund all cost overruns and other expenses that may arise
with respect to VIW's completion of its obligations under Section 2 in
accordance with the deadlines established under Section 3. Additionally, VIW
whereby agrees to promptly provide AVRI with copies of such additional
information and support relating to the use of such funds as AVRI may
reasonably request.
14. Remedies. Subject to the provisions of Section 14.d., in the event of
--------
a default under the terms of this Agreement, the parties hereby agree that the
following remedies will be available:
a. In the event that either party hereto shall fail to comply with
any terms, provisions or covenants of this Agreement, and such failure is not
cured within thirty (30) days after the non-defaulting party has given written
notice to the defaulting party, specifying with reasonable particularity the
manner in which the defaulting party has failed to comply with this Agreement,
then the non-defaulting party shall be entitled to terminate this Agreement by
giving written notice to the defaulting party.
b. Notwithstanding the terms of Section 14.a., parties hereto hereby
agree as follows:
(i) That AVRI would be irreparably damaged by reason of any
violation of the provisions of Section 8, Section 9. a. or Section 11 and that
any remedy at law or pursuant to Section 14.c. for a breach of such provisions
would be inadequate. Therefore, in addition to other remedies or relief that
may be available, to AVRI, AVRI shall be entitled to seek and obtain
injunctive or other equitable relief (including, but not limited to, a
temporary restraining order, a temporary injunction or a permanent injunction)
against VIW, VIW's agents, employees, representatives and/or any and all
persons directly or indirectly acting for or with VIW for a breach or
threatened breach of such provisions and without the necessity of (i) proving
actual monetary loss, and (ii) complying with the terms of Section 14.c.
<PAGE>
(ii) That VIW would be irreparably damaged by reason of any
violation of the provisions of Section 9.b. and that any remedy at law or
pursuant to Section 14.c. for a breach of such provisions would be inadequate.
Therefore, in addition to other remedies or relief that may be available to
VIW, VIW shall be entitled to seek and obtain injunctive or other equitable
relief (including, but not limited to, a temporary restraining order, a
temporary injunction or a permanent injunction)"against AVRI, AVRI's agents,
employees, representatives and/or any and all persons directly or indirectly
acting for or with AVRI for a breach or threatened breach of such provisions
and without the necessity of (i) proving actual monetary loss, and (ii)
complying with the terms of Section 14.c.
c. The parties agree that all disputes or questions arising in
connection with this Agreement or its termination shall be settled by a single
arbitrator pursuant to the rules of the American Arbitration Association in
the City of Houston, Texas, and the award of the arbitrators shall be final,
non-appealable, conclusive and enforceable in a court of competent
jurisdiction.
15. No Agency; Relationship of Parties. Both AVRI and VIW are independent
--------------------------
contractors and neither is a legal representative or agent of the other.
Neither party is liable for the debts, accounts, obligations or other
liabilities of the other.
16. Assignment. This Agreement is personal to the parties hereto and
----------
cannot be assigned or transferred voluntarily or by operation of law without
the prior written consent of the other party.
17. Severability. If any provision of this Agreement is illegal, invalid
-------------
or unenforceable, then that provision shall be considered to be severable from
all other parts and provisions hereof and shall not affect the legality,
validity and enforceability of the remainder of the Agreement, which shall
remain in full force and effect.
18. Entire Agreement.This Agreement constitutes the entire Agreement
------------------
between the parties with respect to the subject matter hereof. No amendment
to this Agreement shall be effective unless in writing and duly signed by both
parties.
19. Governing Law.This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Texas, U.S.A., without giving effect
to the conflicts of laws provisions thereof.
20. Notices. A notice required to be given under this Agreement shall be
-------
in writing and be deemed sufficient if given by certified or registered mail,
postage prepaid, telex or facsimile and addressed as follows (or at such other
address, telex or facsimile number as such party may designate from time to
time in writing). Unless otherwise provided, notices shall be deemed given
for purposes hereof, upon confirmation of telex or facsimile, or if deposited
in the mails, on the fifth (5th) day thereafter:
<PAGE>
If to AVRI, to: Applied Voice Recognition, Inc.
4615 Post Oak Place, Suite 111
Houston, Texas 77027
Attention: Timothy J. Connolly
Facsimile No: (713) 621-5870
With copy to: Boyar, Simon & Miller
4265 San Felipe, Suite 1200
Houston, Texas 77027
Attention: Gary W. Miller, Esq.
Facsimile No: (713) 552-1758
If to VIW to: Voice It Worldwide, Inc.
2643 Midpoint Drive, Suite A
Ft. Collins, Colorado 80525
Attention: Chief Executive Officer
Facsimile No.: (970) 221-2058
With copy to: Andrew N. Bernstein, P.C.
5445 DTC Parkway, Suite 520
Greenwood Village, Colorado 80111
Attention: Andrew N. Bernstein
Facsimile No.: (303) 770-7332
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.
AVRI:
- -----
APPLIED VOICE RECOGNITION,
INC., a Utah Corporation
By:/s/ Timothy J. Connolly
Timothy J. Connolly, Chairman of
the Board and Chief Executive Officer
VIW:
- ----
VOICE IT WORLDWIDE, INC. a
Colorado corporation
By: /s/ D.W. Aitbrands
--------------------
Signature
Name: D.W. Attbeands
(Printed Name)
Title: Chief Executing Officer
Signature Page to
Joint Product Development Agreement
BDB\001 756\OODO 1 \65667
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Voice It Worldwide, Inc. on Form S-8 (file numbers 333-12711, 333-12713 and
333-12715) of our reports dated February 11, 1998 appearing in the Annual
Report on Form 10-KSB of Voice It Worldwide, Inc. for the year ended December
31, 1997.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
Denver, Colorado
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 867,242
<SECURITIES> 50,000
<RECEIVABLES> 3,065,122
<ALLOWANCES> (110,256)
<INVENTORY> 1,789,347
<CURRENT-ASSETS> 6,059,286
<PP&E> 926,194
<DEPRECIATION> (496,436)
<TOTAL-ASSETS> 7,321,543
<CURRENT-LIABILITIES> 2,136,915
<BONDS> 0
0
0
<COMMON> 646,650
<OTHER-SE> 1,368,216
<TOTAL-LIABILITY-AND-EQUITY> 7,321,543
<SALES> 7,584,379
<TOTAL-REVENUES> 7,589,716
<CGS> 4,352,262
<TOTAL-COSTS> 8,865,573
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 340,528
<INCOME-PRETAX> (1,616,385)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,616,385)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
