FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
Commission File Number: 0-7796
VOICE IT WORLDWIDE, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 83-0203787
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11031 Via Frontera, Suite B
San Diego, CA 92127
(Address of principal (Zip Code)
executive offices)
(858) 592-6581
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No _____
Number of shares outstanding of the Issuer's Common Stock, as of September
30, 1999 was 6,466,502 shares of the Registrant's common stock $.10 par value.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial
Statements
VOICE IT WORLDWIDE, INC.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales - net ................ $ 651,296 $ 360,919 $ 2,802,843 $ 10,163,158
Cost of sales (Note 11) .... 566,139 372,153 1,925,236 7,379,808
------------ ------------ ------------ ------------
Gross profit ........... 85,157 (11,234) 877,607 2,783,350
Operating expenses:
Administrative and
general ............... 196,351 92,245 718,034 979,587
Selling & marketing .... 203,580 263,842 1,434,070 784,957
Research and development 162,551 186,495 443,810 421,955
------------ ------------ ------------ ------------
Total operating
expenses .......... 562,482 542,582 2,595,914 2,186,499
Net operating profit ....... (477,325) (553,816) (1,718,307) 596,851
Other Income (Expense):
Adjustment - Pre-petition
Liabilities (Note 12) ... -- -- -- (297,291)
Interest/other income
(expense) ............... (87,371) 92,306 (242,417) 47,234
------------ ------------ ------------ ------------
Total other income
(expense) ......... (87,371) 92,306 (242,417) (250,057)
Net income (loss) before
income tax ................ (564,696) (461,510) (1,960,724) 346,794
Income tax (Note 4) ........ 0 0 0 0
------------ ------------ ------------ ------------
Net income (loss) .......... $ (564,696) $ (461,510) $ (1,960,724) $ 346,794
============ ============ ============ ============
Net earnings(loss) per
common share (Note 7) ..... $ (0.09) $ (0.07) $ (0.30) $ 0.05
============ ============ ============ ============
Weighted average number of
shares outstanding ......... 6,466,502 6,466,502 6,466,502 6,466,502
============ ============ ============ ============
</TABLE>
- 2 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Balance Sheets
<TABLE>
<CAPTION>
(unaudited)
December 31, September 30,
1998 1999
----------- -----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 222,339 $ 1,475,026
Accounts receivable, net of allowance
$389,093 (1998) and $56,294 (1999) ...................... 2,388,152 154,944
Other receivables ........................................ 65,186 173,296
Inventories (Note 3) ..................................... 1,509,396 1,617,484
Prepaid expenses and other current
assets .................................................. 192,564 128,496
----------- -----------
Total current assets ............................ 4,377,637 3,549,246
Tooling, furniture and office equipment,
net of accumulated depreciation
(Note 3) ................................................. 195,819 209,729
Other assets-net of accumulated
amortization (Note 3) (Note 13) .......................... 270,482 177,331
=========== ===========
Total assets .............................................. $ 4,843,938 $ 3,936,306
=========== ===========
Liabilities and Stockholders' Deficit
Pre-petition liabilities secured
Line of credit (Note 5) ................................. $ 88,240 $ 104,213
Pre-petition liabilities subject to
compromise (Note 12)
Accounts payable ......................................... 1,917,828 2,298,266
Accrued expenses ......................................... 0 0
Notes Payable (Note 5) .................................. 2,450,000 2,450,000
----------- -----------
4,367,828 4,748,266
Post Petition liabilities
Accounts Payable ......................................... 1,373,446 (196,498)
Accrued expenses (Note 3) ................................ 273,078 517,623
Customer deposits ........................................ 65,438 0
Debtor in possession
notes ................................................... 260,000 0
----------- -----------
1,971,962 321,125
Stockholders' equity (Note 6):
Common stock; $.10 par; 20,000,000
shares authorized; 6,466,502 issued
& outstanding ........................................... 646,650 646,650
Preferred stock, 10,000,000 shares
authorized; none issued
& outstanding ........................................... 0 0
Additional paid in capital ............................... 6,720,140 6,720,140
Accumulated deficit ...................................... (8,950,882) (8,604,088)
Stockholders deficit ..................................... (1,584,092) (1,237,298)
----------- -----------
Total liabilities and
stockholders' deficit .................................... $ 4,843,938 $ 3,936,306
=========== ===========
</TABLE>
- 3 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Statement of Stockholders' Deficit
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance-December 31, 1998 6,466,502 $646,650 $6,720,140 $(8,950,882) $(1,584,092)
Net profit for the nine
months ended September 30
1999 0 0 0 346,794 346,794
---------- ---------- ---------- ----------- ----------
Balance - September 30
1999 6,466,502 $646,650 $6,720,140 $(8,604,088) $(1,237,298)
========== ========== ========== =========== ==========
</TABLE>
- 4 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
----------------------------
1998 1999
----------- -----------
Cash flows from operating activities:
Net income (loss) .................. ($1,960,724) 346,794
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Allowance for discounts and
bad debts ........................ 49,454 (332,799)
Depreciation and amortization ..... 399,457 147,645
Amortization of deferred loan
costs ............................ 19,080 24,820
Changes in current assets and
liabilities:
Receivables ...................... 2,327,250 2,591,328
Prepaid expenses ................. 92,158 64,068
Inventories ...................... (348,192) (241,517)
Customer deposits ................ 100,000 (65,438)
Accounts payable - pre and post
petition ........................ (327,180) (1,189,506)
Accrued liabilities - pre and
post petition ................... (97,721) 244,544
----------- -----------
Cash provided by operating
activities ............... 253,582 1,589,939
Cash flows from investing activities:
Sale of marketable securities ...... -- 30,033
Other assets ....................... (254,497) (2,700)
Acquisition of tooling, furniture
and equipment ..................... (23,136) (120,558)
----------- -----------
Cash used in investing
activities ............... (277,633) (93,225)
Cash flows from financing activities:
Draws (payments) on long term
line-of-credit-net ................ (679,901) 15,973
Payments on Debtor in Possession
notes ............................. -- (260,000)
----------- -----------
Cash used in financing
activities ............... (679,901) (244,027)
----------- -----------
Net increase (decrease) in cash ..... (703,952) 1,252,687
Cash - Beginning of period .......... 867,242 222,339
----------- -----------
Cash - End of period ................ $ 163,290 $ 1,475,026
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest was $93,433 (1998) and $74,265
(1999).
VOICE IT WORLDWIDE, INC.
Notes to Financial Statements
(unaudited)
Note 1 - Summary of Significant Accounting Policies
The summary of the Company's significant accounting policies are
incorporated by reference to the audited Voice It Worldwide, Inc. financial
reports included in the Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998.
The statements of operations, balance sheets, stockholders' deficit
and cash flows as of September 30, 1999 and 1998 and the periods then ended have
not been audited by independent accountants, but in the opinion of the
management, reflect all normal recurring adjustments and entries necessary for
the fair presentation of the operations of the Company. The results of
operations for any quarter, and quarter-to-quarter trends, are not necessarily
indicative of the results to be expected for any future period.
Note 2 - Letter of Credit
At September 30, 1999, the Company had no irrevocable standby letters
of credit outstanding. However, from time to time, letters of credit are
required by major suppliers.
Note 3 - Selected Balance Sheet Information
December 31, September 30,
1998 1999
----------- -----------
(Unaudited)
Inventories
Raw materials ..................... $ 998,787 $ 1,936,926
Finished goods .................... 1,596,996 131,175
Reserve for obsolescence .......... (1,086,387) (450,617)
----------- -----------
$ 1,509,396 $ 1,617,484
=========== ===========
Tooling, furniture and equipment
Office furniture and equipment .... $ 258,361 $ 333,728
Tooling and manufacturing equipment 243,556 288,746
----------- -----------
501,917 622,474
Less accumulated depreciation ..... (306,098) (412,745)
----------- -----------
$ 195,819 $ 209,729
=========== ===========
Other assets
Deferred loan costs - net of
accumulated amortization of
$74,199 in 1998 and $99,019
in 1999 $ 109,194 $ 84,373
Patent costs - net of
accumulated amortization of
$177,388 in (1998) and $218,386
in (1999) 111,288 72,991
Marketable securities - available
for sale (Note 13) 50,000 19,967
----------- -----------
$ 270,482 $ 177,331
=========== ===========
<PAGE>
Note 3 - Selected Balance Sheet Information (continued)
December 31, September 30,
1998 1999
----------- -------------
(Unaudited)
Accrued liabilities
Vacation & 401K $ 39,858 $ 35,826
Advertising 86,187 30,336
Warranty 127,780 165,499
Commissions 2,982 5,388
Interest payable 5,749 0
Licensing fee 0 242,243
Bonuses 0 34,856
Other 10,522 3,475
---------- --------
$273,078 $517,623
========== ========
<PAGE>
Note 4 - Income Taxes
The Company reports income taxes for interim periods based on annualized
estimates of earnings, tax credits and book/tax differences at the estimated
annual effective tax rate. For federal and state income tax purposes, at
December 31, 1998, the Company had net operating loss carry forwards of
approximately $9,400,000 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 carry forwards and other credits generated a deferred tax
asset, which has been fully reserved, due to a lack of profitable operating
history.
Note 5 - Long-Term Debt and Line-of-credit
December 31, September 30,
1998 1999
----------- -------------
(Unaudited)
Prepetition-Secured
$100,000 line-of-credit to financial institution,
interest at prime rate plus 2.5%, totaling 10.25%
at December 31, 1998. Principal is due March, 31,
2000. Borrowings are collateralized by all
receivables, inventory, investment property,
equipment and general intangibles. Pursuant to the
filing of Chapter 11 reorganization, a cash
collateral agreement was signed by both parties
agreeing to monthly interest payments on the balance
outstanding at the date of filing or $2,500, whichever
is greater. $ 88,240 $104,213
Prepetition Liabilities Subject to Compromise
8% convertible debenture, interest payable monthly,
convertible into one share of common stock for each
$0.95 of principal converted. Principal due November 1,
2002. Monthly principal redemption of one percent
of the then outstanding balance was to begin in
November 1998. As of September 30, 1999, no payments
had been made on the principal balance. $2,450,000 $2,450,000
<PAGE>
Note 6 - Stockholders' Equity
Convertible Debenture
The Company has issued a $2,450,000 convertible debenture (Note 5).
This debenture is convertible into the Company's common stock at a rate of $0.95
of principal for each share of common stock. Monthly principal redemption of one
percent of the then outstanding balance was to begin in November 1998. As of
September 30, 1999, no payments had been made on the principal balance. The
Company has rejected this convertible debenture as part of its proposed Amended
Plan of Reorganization filed October 22, 1999 pursuant to Chapter 11 of the
Bankruptcy Code. However, no assurances can be made that the Company's Plan will
be accepted. As such, no adjustments have been made to reflect this proposal.
Warrants
Combined with the $2,450,000 convertible debenture, the Company issued
940,000 warrants to buy shares of 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.
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.
During 1995, the Company completed the sale of 648,880 units of its
common stock. In connection with the private placement and the issuance of
convertible debt, the Company issued an aggregate total of 38,131 warrants to
placement agents. Each warrant entitles the holder to purchase one unregistered
share of common stock at any time from June, 1996 through June, 1999 at an
exercise price of $2.75 per share. However, with the issuance of warrants
pursuant to an employment agreement, the Company lowered the exercise price of
these warrants to $1.06 per share. As of September 30, 1999, no options have
been exercised.
Pursuant to an employment agreement with an officer, the Company
issued 40,000 Warrants to acquire common stock. Each warrant entitles the holder
to purchase one share of the Company's unregistered common stock at an exercise
price of $1.06 per share. Warrants for 20,000 of these shares expired on
December 31, 1997; the remaining 20,000 can be exercised at any time prior to
their expiration in December, 1999.
The Company has rejected all outstanding warrants as part of its
amended Plan of Reorganization filed October 22, 1999 pursuant to Chapter 11 of
the Bankruptcy Code. However, no assurances can be made that the Company's Plan
will be accepted. Therefore, no adjustments have been made that reflect this
proposal.
Stock Options
The Company has reserved a total of 800,000 of its authorized but
unissued common stock for stock option plans (the "Plans") pursuant to which
officers, directors, employees and non-employees of the Company are eligible to
receive incentive and/or non-qualified stock options. Under the terms of the
Plans, options are exercisable based on various vesting schedules with an
exercise price which equals the market price of the common stock on the date of
grant. Through December 31, 1998, the Company had granted (net of cancellations)
426,443 options with various vesting periods and an exercise price of between
$.31 and $3.00 per share. As of September 30, 1998, 384,443 granted options are
vested with exercise prices ranging from $1.06 to $3.00. However, no options
have been exercised.
As part of its amended Plan of Reorganization filed October 22, 1999
pursuant to Chapter 11 of the Bankruptcy Code, the Company has rejected all
outstanding stock options granted pursuant to the 1994 Stock Compensation Plan.
As of September 30, 1999, the Company has granted 763,700 new
incentive and/or non-qualified stock options to officers, directors, employees,
and non-employees as part of its post reorganization plan. 677,200 of these
shares were issued at an exercise price of $0.19 with an expiration date of
January, 13, 2002. 633,700 of these options vested January 13, 1999 and 43,500
options vest on final acceptance of the Company's Amended Plan of Reorganization
by the U.S. Trustee. 25,000 options were granted on March 1, 1999 at $0.48 a
share with three year vesting. 61,500 shares were granted in the third quarter
with prices ranging from $0.30 to $1.00 a share with three year vesting. These
options are dependent on the Company's Amended Plan of Reorganization being
accepted. However, no assurances can be made that the Company's Plan will be
accepted.
Accounting for Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Accordingly, no compensation cost has been
recognized for the stock options and warrants granted. Consistent with the
disclosure-only provisions of SFAS No. 123, the Company must provide pro forma
net earnings and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair value based method
defined in SFAS No. 123 had been applied.
The Company uses one of the most widely used option pricing models,
the Black-Scholes model ("the Model"), for purposes of valuing its stock option
grants. The Model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including the
expected stock price volatility, expected dividend yields, the risk free
interest rate and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's option, the value determined by the Model is not
necessarily indicative of the ultimate value of the granted options.
Note 7 - Earnings Per Share
The Company adopted Statement of Financial Accounting Standard No. 128
("FAS 128"), Earnings Per Share. All prior period loss per common share data has
been restated to conform to the provisions of this statement. Basic loss per
common share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock, only if their effect is dilutive. Options and warrants to
purchase shares of common stock in 1998 and 1997 were not included in the
computation of diluted loss per common share because their effort would be
antidilutive.
Note 8 - Letters-of-Credit
The Company periodically finances the purchase of their raw materials
through the assignment of letters-of-credit issued by their largest customer,
Dragon Systems, Inc. Dragon issues letters-of-credit to the Company who in turn
assigns the letters-of-credit to vendors to prepay the purchase of raw materials
used in the turnkey manufacturing process. As of September 30, 1999 there were
no outstanding letters-of-credit.
Note 9 - Related Party Transactions
As of March 31, 1999 the Company held $600,000 in various debtor in
possession (`DIP') notes payable to members of the Board of Directors. These
loans were approved by the order of the Bankruptcy Court, provide for an
interest rate of 10% per annum and qualify as costs and expenses of
administration in the bankruptcy proceedings. As of September 30, 1999, these
loans and associated accrued interest had been repaid.
Note 10 - Proposed Reorganization
On November 2, 1998, The Company filed a voluntary petition for
protection under the reorganization provisions of Chapter 11 of the Bankruptcy
Code with the United States Bankruptcy Court, District of Colorado, file number
98-25542 RJB. The Company continues to operate as a Debtor-in-Possession.
On March 2, 1999, the Company submitted its initial proposed Plan of
Reorganization to the United States Bankruptcy Court. Subsequent to this filing,
the Company submitted an amended Plan of Reorganization and Disclosure Statement
to the Bankruptcy Court.
On May 14, 1999, the U.S. Trustee objected to the adequacy of the
Disclosure Statement. In June , 1999 the Company filed the First amended
Disclosure Statement to accompany the First amended Plan of Reorganization dated
April 21, 1999.
On October 22, 1999 the Company filed a new Plan of Reorganization and
Disclosure Statement. The proposed new Plan is a cramdown on unsecured creditors
and shareholders. This Plan will effectively cancel all equity interests.
The U.S. Bankruptcy Court judge has scheduled a hearing on December 13,
1999 to review the Debtor's new Plan of Reorganization and the U.S. Trustee's
recommendation for Chapter 7 liquidation.
Note 11 - Reclassification
Certain costs for warranty, manufacturing overhead, and warehouse/shipping
expenses have been reclassified as cost of sales expense instead of operating
expense in the first nine months of 1998. This change was made to conform to the
classification of expenses used in 1999. The change more accurately reflects the
proper categorization of these product related expenses.
Note 12 - Prepetition Liabilities
As of September 30, 1999, the Company had recognized $4,748,266 in
prepetition liabilities subject to compromise. Claims filed by creditors totaled
$5,385,442 as of the end of the second quarter 1999. The Company, through its
attorneys, is in the process of challenging creditor claims that it does not
believe are accurate as part of the bankruptcy process. The Company believes
that when the challenges are complete liabilities will be somewhat higher.
Note 13 - Sale of Other Assets
The Company sold marketable securities with a book value of $30,000 in the
third quarter of 1999. The Company realized a gain on the sale of these assets
of $91,100 during this period. The Company anticipates selling additional shares
of these marketable securities in the fourth quarter of 1999.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
Voice It Worldwide, Inc. utilizes a broad range of silicon chip technology
including digital and analog storage devices, flash memory and digital voice
compression integrated circuits. Voice It combines these technologies with
proprietary software which enables the Company to develop leading edge consumer
voice recorder products. The Company protects its proprietary technology through
a combination of pending patents, copyrights and trade secrets.
Until 1998, the Company's products were designed primarily for consumer use
and sold through retail channels in the U. S., Canada and Europe. In 1998, the
Company began development of a Mobile Dictation recorder designed for
professional users and compatible with voice recognition software. The
capabilities of the new Mobile Dictation recorder provided the Company with an
opportunity to enter significant new markets. During 1998, the Company changed
its business strategy to reduce its reliance on the retail market and expand its
business through OEM, VAR, and vertical markets. In June 1998, the Company
entered into an agreement with Dragon Systems Inc., the leading voice
recognition software marketer in the U.S., to supply Mobile Dictation recorders
for bundling with Dragon Systems voice recognition software. Shipments to this
customer began in October 1998. In April 1999, the Company reported a new two
year supply agreement with Dragon which will expire in December 2000. This
agreement can be terminated by either party with 180 days notice.
The change in business strategy implemented in 1998 led to improved revenue
and earnings performance for the first nine months of 1999. During the first
three quarters of 1999, sales increased to $10,163,200 which was 263% higher
than the similar period last year. The Company also showed a profit of $346,800
or $.05 per share.
Future periods may not show similar growth.
In early 1998, the Company lost distribution of its note recorder products
in several important retail customers, resulting in a 31% decline in sales for
the nine months ended September 30, 1998 versus the same period in 1997. The
Company's failure to meet certain financial performance objectives resulted in
the loss of its line of credit. Although the Company continued to invest in the
development of the Mobile Dictation Recorder and had secured a substantial
purchase order from Dragon Systems for this product, the loss of the line of
credit, coupled with impending principle and interest loan payments, and past
due payables to suppliers, resulted in the Company filing a petition for
protection under reorganization provisions of Chapter 11 of the Bankruptcy Code
with the United States Bankruptcy Court, district of Colorado, on November 2,
1998.
The Company continues its operations as a Debtor-in-Possession (`DIP'). On
March 2, 1999, the Company submitted its initial proposed Plan of Reorganization
dated March 2, 1999 to the United States Bankruptcy Court. On April 21, 1999 the
Company submitted a new Plan of Reorganization along with its Disclosure
Statement to the U. S. Bankruptcy Court. On October 22, 1999 the Company
submitted a new Plan of Reorganization and Disclosure statement. The Company
continues to meet its post-petition financial obligations from cash generated
from receivables by the Company's primary customer.
Results of Operations:
The following table sets forth, for the periods indicated, items in the
Statement of Operations expressed as a percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.9 103.1 68.7 72.6
------ ------ ------ ------
Gross profit 13.1 (3.1) 31.3 27.4
------ ------ ------ ------
Operating expenses
Administrative and general 30.1 25.5 25.6 9.6
Selling and marketing 31.3 73.1 51.2 7.7
Research and development 25.0 51.7 15.8 4.2
------ ------ ------ ------
Total operating expenses 86.4 150.3 92.6 21.5
Operating profit (loss) (73.3) (153.4) (61.3) 5.9
Other income (expense), net (13.4) 25.5 (8.6) (2.5)
Net profit (loss) before
income tax (86.7) (127.9) (69.9) 3.4
Income tax (benefit) 0.0 0.0 0.0 0.0
------ ------ ------ ------
Net profit (loss) (86.7)% (127.9)% (69.9)% 3.4%
====== ====== ====== ======
Three Months ended September 30, 1999 compared to Three Months ended
September 30, 1998:
Net sales for the three months ended September 30, 1999 were $360,900
compared to $651,300 for the three months ended September 30, 1998. The decrease
in sales were the result of Dragon systems postponing shipments scheduled for
the 3rd quarter of 1999 until 2000. As the Company's largest customer, Dragon
represented 85% of year to date 1999 revenue. The delay is the result of Dragon
having excess inventory due to a full product pipeline and increased
competition. The Company's personal note recorder business recorded sales of
$198,000 during the period which represented 55% of third quarter revenue. The
Company continues its strategy of focusing on OEM, VAR and distributor business
as opposed to the retail market that was the emphasis in the first three
quarters of 1998. Sales to international markets represented 46% of total
revenue in the third quarter.
Cost of sales for the quarter ended September 30, 1999 decreased to
$372,200 or 103.1% of net sales from $566,100 or 86.9% of net sales during the
third quarter of 1998. The decrease in cost of sales is the result of the
postponement of shipments of mobile digital recorders to Dragon Systems, the
leading supplier of voice-to text software in the United States. These OEM sales
to Dragon carry a lower product margin than the personal note recorders that
represented the majority of sales in the first six months of 1999. But, the low
sales volume resulted in the under absorption of the fixed manufacturing
overhead.
General and administrative expenses were $92,200 during the third quarter
of 1999 compared with $196,400 for the same period in 1998. As a percent of
revenue, these expenses were only 25.5% in 1999 versus 30.1% in 1998. The
decrease in expenses is primarily due to lower than expected accrued relocation
costs related to the Company's move from its Ft. Collins, Colorado headquarters
to Rancho Bernardo, California.
Sales and marketing expenses for the quarter ended September 30, 1999
increased $60,200 to $263,800 from $203,600 during the same quarter in 1998.
This variance is primarily due to increases in public relations and the timing
of meetings and show expense during the period. As a percent of net sales, sales
and marketing expenses increased to 73.1% in the third quarter of 1999 from
31.3% in the comparable 1998 period, mainly due to the lower third quarter
revenue volume.
Research and development costs increased $23,900 to $186,500 for the third
quarter of 1999 from $162,600 for the same quarter in 1998. Research and
Development costs increased primarily due to consulting and design expenditures
for continued development of the Digital Voice Recorder. Fourth quarter research
and development expenses are expected to be significantly higher due to
development of a new mobile dictation recorder with USB and form filling
capability and increased R & D staff. As a percent of net sales, research and
development expenses increased from 25.0% in 1998 to 51.7% in 1999 mainly due to
the low third quarter revenue volume.
The Company recorded an operating loss of approximately $553,800 or the
third quarter ended September 30, 1999 compared with an operating loss of
approximately $477,300 for the same quarter in 1998. The effect of the 45% sales
decrease could not offset slightly lower operating expenses for the period.
Other income (expense) for the quarter ending September 30, 1999 showed a
gain of $92,300 compared to a net loss of $87,400 during the same period last
year. The primary components of other income (expense) in the third quarter of
1999 include interest expense on the $104,200 secured line of credit and
interest income from money market accounts. The large increase in other income
(expense) is due to a gain on the sale of marketable securities of $91,100.
Third quarter 1998 other income (expense) was primarily comprised of interest
expense on the $2.45 million convertible debt entered into the fourth quarter of
1995 and utilization of a line of credit. After other income (expense), net loss
for the three months ended September 30, 1999 was $461,500 or $0.07 per share
compared to a net loss of $564,700 or $0.09 per share for the third quarter of
1998.
Nine Months ended September 30, 1999 compared to Nine Months ended
September 30, 1998:
Net sales for the nine months ended September 30, 1999 were $10,163,200
compared to $2,802,800 for the nine months ended September 30, 1998. Sales for
the first three quarters of 1999 increased over 263% due to the change in
marketing strategy where the Company began primarily selling its mobile
dictation recorder as a bundled product with Dragon Systems voice recognition
software. Sales in the first three quarters of 1998 were primarily the result of
note recorder sales to retail markets where the Company had experienced
significantly declining distribution and sales. Sales to Dragon Systems
represented 85% of total sales through September of 1999 while sales to
international markets contributed 8% of the Company's revenue.
Cost of sales for the first nine months ended September 30, 1999 increased
to $7,379,800 or 72.6% of net sales from $1,925,200 or 68.7% of net sales during
the nine months of 1998. The increase in cost of sales was the result of the
increased sales volume. The lower gross margin as a percent of sales was the
result of 1999 OEM sales of the new digital voice recorder that is compatible
with continuous speech, voice-to-text software. These OEM sales carry a lower
gross margin than note recorder sales that represented the majority of sales in
the first three quarters of 1998.
General and administrative expenses increased $261,600 to $979,600 during
the first nine months of 1999 compared with $718,000 for the same period in
1998. As stated previously, this increase in expenses is primarily due to
increased legal, accounting, and banking expenses resulting from the Chapter 11
Bankruptcy reorganization proceedings. In addition, expenses for severance and
relocation costs associated with the Company's decision to consolidate its
operations and relocate its headquarters from Ft. Collins, Colorado to San
Diego, California contributed to the increased costs.
Sales and marketing expenses for the nine months ended September 30, 1999
decreased $649,100 (or 45%) to $785,000 from $1,434,100 during the same period
in 1998. This decrease is due to the reduction of cooperative and general print
advertising that was required to support retail sales in 1998. The Company's
strategic decision to market its mobile dictation recorder to OEM, VAR, and
Distributor channels in 1999, significantly reduced its advertising
requirements.
Research and development costs decreased $21,800 to $422,000 for the first
three quarters of 1999 from $443,800 for the same period in 1998. A primary
reason for this decrease is due to timing delays associated with software and
design consultants. These savings offset increased amortization of capitalized
software development costs that contributed to higher research and development
costs in 1998.
The Company recorded an operating profit of approximately $596,900 for the
first nine months ended September 30, 1999 compared with an operating loss of
approximately $1,718,300 for the same period in 1998. The 263% increase in sales
and lower operating expenses more than offset the lower gross margin as a
percent of sales due to the change in sales strategy.
Other income (expense) for the nine months ending September 30, 1999
showed a loss of $250,100 compared to other expense during the same period last
year of $242,400. The primary component of interest expense in 1998 was the
interest on the $2.45 million convertible debenture the Company entered into
during the fourth quarter of 1995. Additionally, the Company incurred interest
expense from utilization of its line-of-credit facility as well as interest paid
to one of the Company's vendors for extended payment terms. Other income
(expense) in the first nine months of 1999 partly reflected interest on DIP
loans provided by Management and interest on the secured line of credit. In
addition, the Company recorded an unfavorable increase in prepetition
liabilities of $297,300 in the second quarter and a favorable gain on the sale
of marketable securities of $91,100 in the third quarter. After interest
expense, the net profit for the nine months ended September 30, 1999 was
$346,800 or $0.05 per share compared to a net loss of $1,960,700 or $0.30 per
share for the first three quarters of 1998.
Liquidity and Capital Resources:
At September 30, 1999, the Company had cash and cash equivalents of
approximately $1,475,000. The Company also had working capital deficit of
approximately $1,624,400 at quarter end which is an improvement from the working
capital deficit of approximately $2,050,400 at December 31, 1998. The primary
reason for the increase in working capital is the Company's net profit for the
nine months ended September 30, 1999 of approximately $346,800.
Cash provided by the Company for operating activities during the nine
months ended September 30, 1999 was approximately $1,589,900. A primary
component of operating cash was the Company's first nine months net income of
$346,800 adjusted for non-cash adjustments of depreciation and amortization of
approximately ($160,300). The largest source of cash for the period was the
decrease in receivables of approximately $2,591,300. Other sources of operating
cash through the third quarter include decreases in the Company's prepaid
expenses of approximately $64,100 and increases in accrued liabilities of
$244,500. Uses of operating cash include the increase in inventories and
customer deposits of $241,500 and $65,400, respectively and decreases in account
payables of $1,189,500. Additional uses of cash include $120,600 for leasehold
improvements and the acquisition of tooling and other capital assets. Cash was
also favorably impacted $30,000 by the sale of marketable securities. During the
nine months ended September 30, 1999, the Company used approximately $260,000 by
paying off Debtor in Possession notes provided by Management.
During the second quarter of 1999, the Company financed its working capital
requirements through letters-of-credit from Dragon Systems, Inc. The Company
believes that it will have sufficient working capital to finance operations
during the FOURTH QUARTER of 1999 although this situation could change if the
Company's current Plan of Reorganization is approved by the Court or the
Creditor's Committee.
Seasonality:
The Company's business has traditionally been skewed toward the fourth
quarter. In 1998, 61% of sales occurred in the fourth quarter. However, this was
primarily the result of the introduction of the new Digital Voice Recorder
commencing with initial pipeline shipments to its primary OEM customer Dragon
Systems. These pipeline shipments continued through the first half of 1999. In
the third quarter there were no product shipments to Dragon, the Company's
largest customer. The Company anticipates that following the initial success and
sell through of its product bundled with Dragon software, fourth quarter sales
to Dragon will be also be severely limited due to a full product pipeline at the
wholesale and retail level and increased competition. It is anticipated that
shipments to Dragon will resume in 2000 as their inventory levels are reduced as
a result of holiday sales and the introduction of Dragon's new 4.0 version
software.
Foreign Exchange:
The Company's products are principally purchased from suppliers in the Far
East with its prices negotiated on an annual basis in U.S. dollars at exchange
rates reset annually. Exchange rate fluctuations between the U.S. Dollar and the
Singapore dollar could have an adverse effect on the Company's costs of sales
and gross margins. In the event of extreme exchange rate fluctuations, it may
become uneconomical for the relationship between the Company and its suppliers
to continue.
The Company also historically records less than 10% of its revenues
in Europe and the Middle East. In most countries, the Company sets
its sales prices in U. S. dollars so that any variances are for the
purchaser's account. However, if the exchange rate fluctuates
between these other currencies and the U. S. dollar, it may have an
adverse effect on the Company's sales
Inflation:
Management believes that inflation has not and will not have a significant
impact on its business.
<PAGE>
Bankruptcy:
The Company continues its operations as a Debtor-in -Possession (`DIP'). On
March 2, 1999, the Company submitted its initial proposed Plan of Reorganization
to the U. S. Bankruptcy Court. On April 21, the Company submitted a new Plan of
Reorganization and Disclosure Statement to the Trustee of the U. S. Bankruptcy
Court.
In May, the U.S. Trustee found that the Company's initial Disclosure
Statement to be inadequate and requested that the Company file an Amended
Disclosure Statement. The Company filed a First Amended Disclosure Statement to
accompany its First Amended Plan of Reorganization dated April 21, 1999. The
Bankruptcy Court ordered that the hearing to consider the adequacy of the
Debtor's First Amended Disclosure Statement originally set for July be reset at
the request of the Company.
The Bankruptcy Court ordered that the Company file a status report with
the Court on the progress of the Debtor and Renaissance Capital of the Creditors
Committee in formulating a consensual plan of reorganization on or BEFORE
SEPTEMBER 20, 1999.
On October 6, 1999 the United States Trustee applied to the Bankruptcy
Court for an order dismissing or converting to a proceeding under Chapter 7
liquidation. The trustee cited unreasonable delay, the inability to effectuate a
plan and continuing loss to or diminution of estate and the absence of
reasonable likelihood of rehabilitation as reasons for the motion to convert.
On October 22, 1999 the Company filed a new Plan of Reorganization and
Disclosure Statement. The new Plan is proposed as a cramdown on unsecured
creditors and shareholders. This Plan will effectively cancel all equity
interest.
The U.S. Bankruptcy Court judge has scheduled a hearing on December 13,
1999 to review the Debtor's new Plan of Reorganization and the U. S. Trustee's
application to convert under Chapter 7 liquidation.
Year 2000 Compliance:
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and conversions to new
software, the Year 2000 problem will not pose significant operations problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed in a timely manner, the
Year 2000 problem may have a material impact on the operations of the Company.
The Company has not yet determined the impact if any, that Year 2000
issues may have on its vendors. However, the Company believes there are adequate
alternative vendors that can supply products and services to the Company if
necessary.
The microprocessors used in the Company's products operate on a 99-year
Julian calendar. Thus, there will be no operational issues with these products
related to the Year 2000 issue.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 2, 1998, the Company filed a voluntary petition for protection
under the reorganization provisions of Chapter 11 of the Bankruptcy Code with
the United States Bankruptcy Court, District of Colorado, file number 98-25542
RJB. The Company will continue to operate as a Debtor-in-Possession.
On March 2, 1999, the Company filed its initial Plan of reorganization
with the United States Bankruptcy Court.
On April 21, 1999, the Company filed a new Plan of Reorganization and
Disclosure Statement with the United States Bankruptcy Court.
On May 14, 1999 the United States Bankruptcy Trustee objected to the
adequacy of the Company's Disclosure Statement.
In June the Company filed its First Amended disclosure statement
to the U. S. Bankruptcy Court to accompany the First Amended Plan of
Reorganization.
On October 6, 1999 the United States Trustee applied to the Bankruptcy
Court for an order to convert to a proceeding under Chapter 7 liquidation.
On October 22, 1999 the Company filed a new Plan of Reorganization and
Disclosure Statement. The new Plan is proposed as a cramdown on unsecured
creditors and shareholders.
Item 2. Changes in Securities. None
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOICE IT WORLDWIDE, INC.
Registrant
Date: 08/13/99 /s/ J. Fredrick Walters
J. Fredrick Walters
Chairman of the Board of Directors
Date: 08/13/99 /s/ John H. Ellerby
John H. Ellerby
Chief Financial Officer
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