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, 1998
Commission File Number 0-7796
VOICE IT WORLDWIDE, INC.
(Name of small business issuer in its charter)
Colorado 83-0203787
(State or other jurisdiction of (I.R.S. Employer Identifica-
incorporation or organization) tion Number)
2643 Midpoint Drive, Suite A
Fort Collins, Colorado 80525
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (970) 221-1705
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.10 Par Value
(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
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: $7,317,479.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant: As of March 29, 1999: $980,927*.
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 29, 1999.
Transitional Small Business Disclosure Format: Yes ___ No X
* 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 $0.30,
the closing price of the Registrant's common stock as of March 29, 1999,
such date being within 60 days prior to the date of filing.
<PAGE>
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.
General
Voice It Worldwide, Inc. (the "Company") was founded in April 1993 to design,
develop and market a line of portable electronic products which digitally record
and store voice information on solid state memory.
The Company's first product, a 75-second credit-card sized personal note
recorder, was introduced through The Sharper Image in November 1993 and into
broad based retail distribution in office superstores, electronic specialty
stores and other channels in 1994 and 1995. Due to the limitations of digital
recording technology, memory chips and IC power management, the Company's early
product line was characterized by low recording capacities. As technology has
advanced, the recording capacity of the Company's personal note recorders has
been increased substantially and important new features such as electronic file
folders to organize notes and memos by category have been added.
With the advent of new audio digital signal processing, download, removable
memory and other technologies, the Company has developed a new generation Mobile
Dictation Recorder which it believes has significant potential in the large and
growing voice recognition and professional transcription markets. This new
recorder was introduced in the third quarter of 1998.
The new Mobile Dictation Recorder provides up to 75 minutes of internal voice
storage and offers removable memory cards for additional recording and archiving
capacity. The product includes Voice It Link, a PC-based software program, that
enables compressed voice files to be transferred from the recorder to a PC
through the serial port, allowing minutes of dictation to be transferred in
seconds. Downloaded digital voice data can then be stored, manipulated and/or
transferred through e-mail and other electronic means much like ASCII files.
Once downloaded, the voice files can be transcribed manually or automatically
via voice recognition software. The PC-based Voice It Link software provides an
on-screen window that runs on top of any word processing program, allowing
manual transcription of the recorded voice data. Importantly, this new recorder
also uses sampling and compression technology compatible with the mobile
voice-to-text software systems marketed by Dragon Systems, Inc. and IBM. Once
voice files are downloaded from the recorder to the PC, they can be
automatically transcribed using these software programs.
The capabilities of the new Mobile Dictation Recorder provide the Company with
an opportunity to enter significant new markets. During 1998, the Company had
changed its business strategy to reduce its reliance on the retail market and to
expand its business to original equipment manufacturers ("OEM") and vertical
markets.
New Markets
Concurrent with advances in portable digital recording technology, a variety of
technological developments and demographic trends have emerged which the Company
believes will enhance the market for its Mobile Dictation Recorder.
o The PC Revolution. It is estimated that over 100 million personal computers
are in use in the U.S. New penetration spurred by lower price points and a
brisk replacement market fueled by faster and more powerful processors
drive sales of about 30 million new PCs annually - half sold to business
users, half to consumers for home use. Almost half of U.S. households now
have a personal computer and doing work at home is the primary reason for
consumer PC purchases.
o Voice Recognition. The development of faster, more powerful processors and
expanded RAM capacity in desktop computers have made voice-to-text a
reality for PC users. The first continuous voice-to-text software at
consumer price points was launched in mid-1997 and voice-to-text is now one
of the fastest growing software categories.
o Increasing Mobile Workforce. The era of downsizing and corporate cost
cutting has resulted in explosive growth in the number of Americans working
outside corporate office environments. In the ten years between 1988 and
1997, the number of telecommuter and home-office based employees grew from
5.2 million to over 22 million. In the same period, self-employed home and
mobile office workers have increased from 7.7 million to over 21 million.
This creates a new market of over 43 million workers with limited
secretarial support and extensive need for fast and cost efficient document
creation and communication.
o The Internet Explosion. Previously the domain of computer wizards and
academicians, the Internet has expanded to become a vast communications
center where some 90 million people swap information daily. Companies and
industries are increasingly recognizing the time and cost efficiencies of
transferring information digitally through Internet, Intranet and Extranet
networks that link geographically dispersed internal operation, customers
and suppliers. Hard text and analog voice data once carried by slow and
costly telecommunications can be transferred, in seconds,
computer-to-computer in digital formats.
The above trends combine to create both a ready market and significant new
applications for the Company's Mobile Dictation Recorder. The Company has
identified the following primary targets that have substantial synergies
and overlap.
o The Professional Transcription Market. The U.S. market for transcription
services and equipment, where free-form voice dictation is transcribed into
electronic or hard copy text, is estimated by independent sources to be
$9.0 billion annually. Primary users of transcription services are the
healthcare industry ($6.6 billion), legal and court reporting ($1.0
billion) and smaller segments including law enforcement, insurance
providers, real estate brokers, financial planners and others. This market
is expected to grow 15% to 20% annually as the result of the increased use
of electronic patient records to facilitate the management and sharing of
patient records in an increasingly decentralized healthcare industry.
In addition to the transcription services industry described above, many
physicians, lawyers and other professionals hire internal personnel to type
dictated reports. In a busy medical practice it is not uncommon for each
doctor to have a full time transcriptionist on the payroll. This creates a
significant cost center that is not, in the case of medical practices,
reimbursable. The advent of voice-to-text programs with specific
professional dictionaries from Dragon Systems, IBM and Lernout & Hauspie
could dramatically reduce the cost of internal transcription in legal and
medical offices. Rather than laborious and repetitive typing, fewer
transcriptionists will be required to review and edit electronically
transcribed documents on an exception basis. There are over 400,000
physicians and surgeons in the U.S. and almost 500,000 attorneys. These
markets hold significant unit sales potential for the Company's Mobile
Dictation Recorder that interfaces with voice-to-text software programs.
The market for dictating equipment is estimated by independent sources to
approach $1.0 billion annually. Replacement sales, which currently
represent 75% of the total market, are estimated to be approximately 1
million units annually. The Company believes that market share can be
captured and unit growth can be accelerated due to the fact that digital
recording provides this market with several important advantages. End users
will have the flexibility of recording their reports while mobile, rather
than sitting at dictation stations. Transfer of the voice recordings can be
accomplished via low cost inter- or intra-net communications rather than
costly telephone lines. Compressed digital files can be archived more
easily than bulky tapes.
o The Voice Recognition Market. Voice-to-text software systems free PC users
from their keyboards but not from sitting in front of the PC. The ability
to dictate into a portable digital recorder and then download voice files
to the PC for voice-to-text transcription represents a significant
opportunity to meet the needs of increasingly mobile and decentralized
business people.
The first continuous voice recognition software was introduced into retail
channels in July 1997. The market for voice recognition systems in
professional, consumer and business applications is projected to grow to
between $4.0 and $6.0 billion by the year 2001.
Business Strategy
To take advantage of the above trends the Company began implementing a new
business strategy in 1998 designed to reduce its dependence on the retail market
and expand its business in professional, vertical and voice recognition markets.
In early 1998, the Company began exploring partnerships with voice-to-text
market leaders to bring its products to market. Additionally, the Company
pursued development of the vertical and professional transcription markets
through a variety of tactics. These efforts resulted in revenue growth in the
fourth quarter of 1998. Based on this initial success, the Company intends to
continue to aggressively pursue its new strategy.
o Voice Recognition Software Partnerships. In June 1998, the Company entered
into an agreement with Dragon Systems, Inc. ("Dragon"), the U.S. market
share leader in voice recognition software, to introduce the first voice
recognition package bundled with a portable recorder. The product is
marketed under the Dragon brand name and distributed through the software
departments of major office superstores, computer superstores, electronic
specialty stores and other retail channels. Although the Company's
contractual relationship with Dragon precludes bundling by the Company of
its recorder with voice recognition software marketed by other companies,
the Company continues to work with IBM and Lernout & Hauspie to make its
products compatible with mobile versions of their software programs. Users
of these software products provide a significant opportunity for sales of a
stand-alone mobile recorder that can interface with the voice-to-text
software.
o Vertical and Professional Transcription Markets. The Company believes that
its significant expertise in the production of low cost hand-held recorders
and its proprietary file protocols, which allow for customization of the
voice files, will give the Company a substantial early and sustainable
advantage in the vertical transcription market.
The Company began marketing efforts to reach the valued added reseller
("VAR") and end-user markets in the fourth quarter of 1998. In November
1998, the Company introduced its recorder at COMDEX, the leading computer
technology show in the U.S. This show generated leads from over 300 VARs,
end-users and others. The Company also implemented a public relations
program during the fourth quarter. This effort, combined with a similar
program implemented by Dragon Systems for the bundled product, resulted in
a variety of articles featuring the recorder in magazines and newspapers,
including Business Week ("The Best Products of 1998"), Fortune, Forbes,
U.S. News & World Report and The Wall Street Journal. The Company has
secured distribution with three distributors serving the VAR market and is
implementing beta-site programs with major end-users and transcription
suppliers. These programs will be aggressively pursued and expanded in
1999.
Marketing and Sales
The Company's single largest customer is Dragon Systems, Inc. which accounted
for $3,599,827 or 49.2% of net sales for the year ended December 31, 1998.
Although the Company has developed and maintained a good relationship with
Dragon Systems, Inc., the loss of Dragon Systems, Inc. as a customer or a
significant reduction in its orders would have materially adverse effect on the
Company.
In the U.S., the Company sells its Personal Note Recorders to a select number of
high end and catalog retailers through a combination of direct sales and a small
number of independent manufacturer representatives who are paid on a
commission-only basis. The Company also markets these products in Canada and
Europe through exclusive distributors in major countries.
The Mobile Dictation Recorder will be sold in the U.S. through a combination of
OEM sales, electronics distributors, and VARs serving targeted end-users. The
Company intends to employ a variety of tactics to generate awareness and demand
for the product at each level of the supply chain. These programs include direct
sales to OEMs and distributors, trade show exhibits, public relations, direct
mail and trade advertising to VARs and targeted end-users. Internationally, the
product will be sold through a network of exclusive distributors.
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. The Company routinely second sources manufacturing assembly to assure
supply. The Company takes an active role in quality assurance by selecting
manufacturers who are ISO Certified and by employing on-site quality control
personnel to conduct in-process and final inspections and release goods for
shipment.
In order to protect key proprietary aspects of the product, the Company
purchases certain component parts directly from third parties. In addition, the
Company relies on its contract manufacturers to purchase critical components
from third parties. Primary suppliers of chip technology used in the Company's
products include Lucent Technologies, Toshiba, Samsung and Microchip.
Products are shipped in bulk from the contract manufacturer to the Company's
warehouse in Fort Collins, Colorado or, in some cases, directly to customers in
the U.S. and Europe, where final quality inspections are conducted and the
products are packaged for sale.
Competition
Competition in the Company's target markets comes from both traditional tape
recorders and transcription systems and newly introduced digital products from a
variety of manufacturers. Many competitive companies are much larger than Voice
It and have significantly greater resources.
At least five products are currently available that compete directly with the
Company's Mobile Dictation Recorder in the voice-to-text and vertical
transcription markets. These products are marketed by Sony, Olympus, Dictaphone
and Norcom. The Company believes that its product provides important advantages
over other digital recorders designed for PC interface and voice-to-text
transcription and that it does so at much lower cost. Key advantages include two
memory options (internal and removable cards), direct PC interface through the
serial port, advanced compression technology, multiple transcription options and
fully digital enrollment for greater voice-to-text accuracy. The suggested end
user price of the Mobile Dictation Recorder is $199, significantly below
competitive products which range in price from $299 to $679.
The Company's Mobile Dictation Recorder competes in vertical markets with
dictation and transcription systems sold by companies such as Lanier and
Dictaphone. The Company's products also compete with tape and low-end digital
recorders sold through retail channels. Primary manufacturers of retail products
include Sony, Olympus and Panasonic. Indirect competition includes a variety of
computer peripherals designed for remote PC interface, some of which include a
voice recording feature.
Patents and Trademarks
The Company seeks to protect its proprietary technologies through a combination
of trade secrets, patents and copyrights. A patent application for Voice It
products was filed with the U.S. Patent and Trademark Office in March 1993 and
this application, as well as two continuations, are currently pending.
Additional patents have been filed in 15 other countries. A separate application
was filed in July 1996 and is currently pending. This latter application covers
new art in the development of the Company's Voice Manager product. These patent
applications do not appear to infringe on any currently issued patents in the
U.S. and internationally.
The Company has been issued one U.S. patent, issued in August 1998, covering a
voice recognition timekeeping device. Contained in the scope of this patent are
speech recognition command and query functions for portable and tabletop clock
products, using both speaker-independent and user-trainable voice recognition
technologies.
The Company's proprietary software and firmware programs are maintained as trade
secrets. The Company's brand name, Voice It(R), is a registered trademark in the
United States and various other countries.
Employees
The Company currently employs nineteen persons, including its six executive
officers. Management believes that it maintains good relationships with its
employees. The Company's employees are not unionized.
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.
On November 2, 1998, Voice It Worldwide, Inc. filed a 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 its operations as a Debtor-in-Possession.
On March 2, 1999, the Company submitted its proposed Plan of Reorganization
dated March 2, 1999 to the United States Bankruptcy Court. The Company intends
to file its Disclosure Statement to accompany its Plan of Reorganization by
April 21, 1999.
Except as set forth above, 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 currently
quoted on the Electronic Bulletin Board under the symbol "MEMO." The Common
Stock was quoted on the Nasdaq SmallCap Market under the symbol "MEMO"
until it was delisted effective April 8, 1998. For the past two fiscal
years, the high and low closing bid prices of the Common Stock were as
follows:
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
FYE 1998 Quarter Ended: High Low
March 31, 1998 $1.38 $0.69
June 30, 1998 0.88 0.25
September 30, 1998 1.06 0.31
December 31, 1998 0.38 0.10
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, 1999, 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.
(d) During the fiscal year ended December 31, 1998, the Company did not sell
any equity securities that were not registered under the Securities Act of
1933, as amended (the "Securities Act").
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
Voice It Worldwide, Inc. designs, develops and markets a line of portable
electronic devices which digitally record, store and play voice information
using solid state memory. The Company utilizes a broad range of silicon chip
technology, including flash memory and digital voice compression integrated
circuits, and combines these technologies with proprietary software which
enables the Company to develop leading edge voice recorder products. The Company
protects its proprietary technology through a combination of issued and 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 provide 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 and vertical market sales. 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 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 payments for interest and past due payables to
suppliers, resulted in the Company filing a petition for protection under the
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 proposed Plan of Reorganization dated March
2, 1999 to the United States Bankruptcy Court. The Company intends to file its
Disclosure Statement to accompany its Plan of Reorganization by April 21, 1999.
The Company continues to meet its post-petition financial obligations through a
combination of DIP loans from Management and cash flow from payments by the
Company's primary customer. Additional receivables financing is being sought to
assure continued production and shipments to customers.
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:
Years Ended December 31,
------------------------
1997 1998
--------- -----------
Net Sales 100.0% 100.0%
Cost of Goods Sold 57.4 63.3
Cost of obsolete goods &
related charges 0.0 16.7
--------- -----------
Gross Margins 42.6 20.0
Operating Expenses
Administrative 16.4 19.6
Selling and Marketing 31.0 25.1
Research and Development 12.1 20.7
--------- -----------
Total operating expenses 59.5 65.4
--------- -----------
Operating (loss) (16.9) (45.4)
Other income, net (4.4) (3.7)
Net (loss) before income tax benefit (21.3) (49.1)
--------- -----------
Income tax benefit 0.0 0.0
--------- -----------
Net (loss) (21.3)% (49.1)%
========= ===========
Year ended December 31, 1998 Compared to Year ended December 31, 1997
Sales for the year ended December 31, 1998 decreased 3.5% to $7,317,479 from
$7,584,379 for the year ended December 31, 1997. Sales of the Company's note
recorder products sold through retail channels declined by approximately $4.0
million as a result of the loss of distribution in several important customers
in the U.S., Canada and Europe. The loss of this business was largely offset by
U.S. sales of the new Mobile Dictation Recorder designed for vertical and
transcription markets. This product began shipping in October 1998 and resulted
in $3,740,877 in sales during third and fourth quarters. Of this, shipments to
Dragon Systems represented $3,599,827 or 96.2%.
Cost of sales for the twelve months ended December 31, 1998 increased $277,843
to $4,630,105 or 63.3% of net sales from $4,352,262 or 57.4% of net sales in
1997. The increase is the result of the shift in product mix toward the Mobile
Dictation Recorder which is sold at lower margins as an OEM product to Dragon
Systems. Cost of sales in the fourth quarter 1998 was 70.4% of net sales largely
due to shipments to Dragon Systems. Management believes that margins will
improve in 1999 due to declines in the cost of flash memory, more efficient
production and increased sales of the Mobile Dictation Recorder to distributors
and professional customers at higher margins.
In 1998, the Company changed its business strategy to focus on Mobile Dictation
Recorders designed for OEM and vertical markets. As a result of this change in
strategy and the decline in retail distribution, the Company discontinued
production of six of its nine note recorder products sold through retail
channels. Additionally, the Company was unable to market the Voice Commander
voice recognition software, a product licensed from Applied Voice Recognition,
Inc., due to technical problems with the software. The Company had prepaid, in
1997, the purchase of 10,000 licenses through the issuance of common stock to
Applied Voice Recognition Inc. In anticipation of the disposal of raw materials,
packaging and non-saleable returned goods inventories resulting from the
discontinuation of the note recorder products and the write off of prepaid
licenses for the Voice Commander software, the Company reserved $1,221,050 in
the fourth quarter of 1998.
Administrative expenses increased $190,113 to $1,435,424 in 1998 from $1,245,311
in 1997. The increase is primarily due to an increase in warranty reserves, the
write off of capitalized tooling associated with discontinued note recorder
models and increased legal, accounting and banking expenses resulting from the
Chapter 11 Bankruptcy filing. As a percent of net sales, administrative expenses
increased to 19.6% in 1998 from 16.4% in 1997.
Sales and marketing expenses for the year ended December 31, 1998 decreased by
$509,391 to $1,838,221 from $2,347,612 in 1997. The decrease is due, in part, to
the decrease of variable expenses, such as coop and sales commissions, related
to the decrease in retail sales of note recorder products. As a result of the
change in business strategy, lower retail sales and reduced distribution, the
Company eliminated consumer advertising during the second half of 1998. A
restructuring of retail marketing and sales management also resulted in a
reduction of salaries, travel and other employee related expenses. As a percent
of net sales, sales and marketing expenses declined to 25.1% in 1998 from 31% in
1997.
Research and development costs increased by $597,395 to $1,517,783 in 1998 from
$920,388 in 1997. The majority of this increase is the result of a $493,148
write off of capitalized product software development expense associated with
discontinued and declining retail products. In 1999, the Company intends to
adopt a more conservative approach and will amortize software development costs
over a shorter period of time. As a percent of net sales, research and
development expenses increased to 20.7% in 1998 from 12.1% in 1997.
The operating loss for the year ended December 31, 1998 was $3,325,104 compared
with an operating loss of $1,281,194 in 1997. Non-cash related reserves and
charges to operations relating to discontinued products comprised approximately
$1.8 million of the 1998 loss. Reduced sales during the first three quarters of
the year, higher cost of sales during the fourth quarter and increased bad debt
reserves also contributed significantly. Management believes that higher sales
levels resulting from OEM and vertical markets, combined with expense controls
and product cost reductions, will result in improved earnings performance in
1999.
Other income (expense) for the year ended December 31, 1998 consisted primarily
of interest expense on borrowed funds as well as amortizing a portion of the
deferred loan costs associated with the $2.4 million convertible debt. Net loss
for the year ended December 31, 1998 was $3,598,958 or $0.56 per share compared
with the net loss for the same period in 1997 of $1,616,385 or $0.32 per share.
Quarterly Operating Results
The following tables set 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>
1998 Quarters Ended
March 31 June 30 September 30 December 31,
------------ ----------- ------------ ------------
$000 % $000 % $000 % $000 %
------ ---- ------ ---- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales-Net 1,258 100 894 100 651 100 4,515 100
Gross profit before
obsolete charge to
operations 629 50 444 50 278 43 1,337 30
Operating expenses before
write down of capitalized
R&D expenses 1,122 89 1,191 133 755 116 1,230 27
Operating profit before
non-cash charges to
operations (493) (39) (748) (84) (477) (73) 107 2
Obsolete goods non-cash
charge to operations - - - - - - (1,221) (27)
Write off of capitalized
R&D expenses - - - - - - (493) (11)
Net operating income
(loss) (493) (39) (748) (84) (477) (73) (1,607) (36)
</TABLE>
Liquidity and Capital Resources
At December 31, 1998 the Company had cash and cash equivalents of $222,339. The
Company had a working capital deficit, at December 31, 1998, of 2,050,393.
Cash used by the Company for operations during the year ended December 31, 1998
was $185,764. The primary component of this use of cash during the period was
the Company's net loss of $3.6 million, which was off-set by non-cash items
including (1) depreciation and amortization of $298,687, (2) reserves of
$1,221,050 for obsolete inventory and related items, (3) write off of $493,148
for product software development costs, (4) an increase of $278,837 in reserves
for discounts and bad debts and (5) a $42,983 loss on disposition of tooling
assets. Uses of operating cash included a decrease in inventories of $941,099
and lower accrued liabilities of $15,616. Additional uses of cash included
investing activities of $29,989 for tooling, property and equipment and $8,874
for other assets.
Additional sources of operating cash were the decrease in receivables and
prepaid expenses of $332,947 and $145,011, respectively, the increase of
accounts payable of $1,491,808 and deferred revenue of $65,438. Cash provided by
financing activities include borrowing of DIP funds from management totaling
$260,000, which was offset by payments on the Company's line of credit of
$680,276.
Seasonality
The Company's business has traditionally skewed toward the fourth quarter. In
1998, 61% of sales occurred in the fourth quarter. This is primarily the result
of the introduction of a new model during that period and first shipments to the
primary OEM customer for the model. The Company anticipates that its business
will become less seasonal. Although the Company's primary OEM customer uses the
product in a retail product for which sales are skewed toward the second and
fourth quarters due to gift giving, sales to professional and vertical markets
are not expected to exhibit a heavy seasonal skew.
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.
In 1998, sales to customers outside the U.S. represented 18% of the Company's
total net sales. 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 and hardware, 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 on
time, 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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
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
<PAGE>
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, 1997 and 1998, 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 responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Voice It Worldwide Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company experienced continued losses in 1997 and 1998
and filed a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code on November 2, 1998. Based on the Chapter 11 filing, the
continued losses and the stockholders' deficit of $1,584,092, substantial doubt
exists about the Company's ability to continue as a going concern. The plan for
reorganization was filed by the Company on March 2, 1999 and has yet to be
approved by the court. The accompanying financial statements do not include
adjustments relating to the amounts and classifications of liabilities that may
be compromised under the Chapter 11 relief.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
March 12, 1999
Denver, Colorado
<PAGE>
VOICE IT WORLDWIDE, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998
----------- ------------
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents ................................. $ 867,242 $ 222,339
Accounts receivable, net of allowance of
$110,256 (1997) and $389,093 (1998) (Note 5) ............. 2,814,035 2,388,152
Other receivables ......................................... 251,087 65,186
Inventories (Notes 4 and 5) ............................... 1,789,347 1,509,396
Prepaid expenses and other current assets ................. 337,575 192,564
----------- -----------
Total current assets .................................. 6,059,286 4,377,637
Tooling, furniture and equipment, net of
accumulated depreciation (Notes 4 and 5) .................. 429,758 195,819
Other assets, net of accumulated amortization
(Notes 4 and 5) ............................................ 832,499 270,482
----------- -----------
Total assets ................................................ $ 7,321,543 $ 4,843,938
=========== ===========
Liabilities and Stockholders' Equity (Deficit)
Prepetition liabilities secured
Line-of-credit ............................................ $ 768,517 $ 88,240
Prepetition liabilities subject to compromise
Accounts payable .......................................... 1,799,466 1,917,828
Accrued expenses .......................................... 288,694 --
Notes payable (Note 5) .................................... 2,450,000 2,450,000
----------- -----------
4,538,160 4,367,828
Post petition liabilities
Accounts payable .......................................... -- 1,373,446
Accrued expenses .......................................... -- 273,078
Customer deposits ......................................... -- 65,438
Debtor in possession notes (Note 5) ....................... -- 260,000
----------- -----------
-- 1,971,962
Commitments (Notes 3, 7 and 10)
Stockholders' equity (deficit) (Note 8)
Preferred stock; $.10 par value; 10,000,000
shares authorized; 0 shares issued and
outstanding .............................................. -- --
Common stock; $.10 par value; 20,000,000
shares authorized; 6,466,502 shares issued
and outstanding .......................................... 646,650 646,650
Additional paid in capital ................................ 6,720,140 6,720,140
Accumulated deficit ....................................... (5,351,924) (8,950,882)
----------- -----------
2,014,866 (1,584,092)
Total liabilities and stockholders' equity
(deficit) .................................................. $ 7,321,543 $ 4,843,938
=========== ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
VOICE IT WORLDWIDE, INC.
Statements of Operations
Years Ended
December 31,
----------------------------
1997 1998
----------- -----------
Net sales ................................. $ 7,584,379 $ 7,317,479
Cost of sales ............................. (4,352,262) (4,630,105)
Provision for obsolete goods and
related charges .......................... -- (1,221,050)
----------- -----------
Gross profit .............................. 3,232,117 1,466,324
----------- -----------
Operating expenses
Administrative and general .............. 1,245,311 1,435,424
Selling and marketing ................... 2,347,612 1,838,221
Research and development ................ 920,388 1,517,783
----------- -----------
Total operating expenses ............. 4,513,311 4,791,428
----------- -----------
Operating loss ............................ (1,281,194) (3,325,104)
Other income (expense)
Interest expense ........................ (340,528) (284,424)
Interest income ......................... 5,337 10,570
----------- -----------
Net other expense .................... (335,191) (273,854)
----------- -----------
Net loss .................................. $(1,616,385) $(3,598,958)
=========== ===========
Basic and diluted net loss per common share $ (.32) $ (.56)
=========== ===========
Weighted average number of shares
outstanding - basic and diluted .......... 5,062,537 6,466,502
=========== ===========
See notes to financial statements.
F-3
<PAGE>
VOICE IT WORLDWIDE, INC.
Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
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 8) ....... 940,000 94,000 902,400 -- 996,400
Sale of common stock at
$1.06 per share (Note 8) . 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
Net loss .................. -- -- -- (3,598,958) (3,598,958)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 6,466,502 $ 646,650 $ 6,720,140 $(8,950,882) $(1,584,092)
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
VOICE IT WORLDWIDE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------
1997 1998
----------- ------------
<S> <C> <C>
Cash flows from operating activities
Net loss ..................................... $(1,616,385) $(3,598,958)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities
Provision for obsolete inventory and
related items .............................. -- 1,221,050
Write off of product software development
costs ...................................... -- 493,148
Allowance for discounts and bad debts ....... (16,291) 278,837
Depreciation and amortization ............... 423,924 298,687
Loss on disposition of fixed assets ......... -- 42,983
Changes in current assets and liabilities
Receivables ................................ 231,829 332,947
Prepaid expenses ........................... (92,740) 145,011
Inventories ................................ 781,285 (941,099)
Accounts payable - pre petition and post
petition .................................. (443,960) 1,491,808
Accrued liabilities - pre petition
and post petition ......................... (157,806) (15,616)
Customer deposits .......................... -- 65,438
----------- -----------
726,241 3,413,194
Net cash used in operating activities ... (890,144) (185,764)
----------- -----------
Cash flows from investing activities
Other assets ................................ (382,604) (8,874)
Acquisition of tooling, furniture and
equipment .................................. (243,619) (29,989)
----------- -----------
Net cash used in investing activities ... (626,223) (38,863)
----------- -----------
Cash flows from financing activities
Borrowings (payments) on line of credit - net 501,795 (680,276)
Proceeds from related party notes ........... -- 260,000
Proceeds from issuance of stock, net ........ 300,000 --
Proceeds from exercise of common stock
warrants ................................... 996,400 --
----------- -----------
Net cash provided by (used in)
financing activities ................... 1,798,195 (420,276)
----------- -----------
Net increase (decrease) in cash and cash
equivalents .................................. 281,828 (644,903)
Cash and cash equivalents - beginning of year . 585,414 867,242
----------- -----------
Cash and cash equivalents - end of year ....... $ 867,242 $ 222,339
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information
Cash paid during the year for interest was $406,040 (1997) and $197,711
(1998).
Non-cash investing and financing activities
During 1997, $200,000 of the $500,000 value of stock issued (Note 8) was
recorded as prepaid licensing fees (Note 7). There were no non-cash
investing or financing transactions for 1998.
See notes to financial statements.
F-5
<PAGE>
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 marketable securities available-for-sale.
Available-for-sale securities are recorded at fair value. 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.
Realized gains and losses for securities classified as available-for-sale 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.
F-6
<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. During 1998, the Company
wrote off all capitalized software due to the large decrease in the number and
types of products being marketed for future sales (Note 4).
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company looks primarily to the undiscounted future cash flows
in its assessment of whether or not long-lived assets have been impaired. At
December 31, 1998, the Company determined no impairment was needed other than
the write-off of the capitalized software (Note 3).
Deferred Loan Costs
Deferred loan costs are amortized over the life of the convertible debenture.
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.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
Loss Per Common Share - Basic and Diluted
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 505,000 shares of common stock in 1997 and 1998, respectively, were not
included in the computation of diluted loss per common share because their
effect would be antidilutive.
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, 1998 exceeded that amount by approximately
$2,300.
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, 1997, the Company's top five customers together
represented 44% of sales.
For the year ended December 31, 1998, two customers, Dragon Systems, Inc.
("Dragon") and Office Depot individually represented 49% and 13% of sales,
respectively.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
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, 1997 and 1998, approximately $310 and $18,240 of foreign currency
translation losses and $50 and $0 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.
Reclassifications
Certain items in the 1997 financial statements have been reclassified to conform
with the 1998 presentation.
Recently Issued Accounting Pronouncements
In February of 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" (SFAS No. 132), which supersedes SFAS No.'s 87, 88, and 106. SFAS No.
132 addresses disclosure only and is effective for fiscal years beginning after
December 15, 1997. Restatement of disclosures for prior periods is required. The
adoption of SFAS No. 132 will have no current impact on the Company's financial
statements, as no prior disclosures under SFAS No. 87, 88, or 106 were
applicable.
During June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement 133 establishes new standards by
which derivative financial instruments must be recognized in any entity's
financial statements. Besides requiring derivatives to be included on balance
sheets at fair value, Statement 133 generally requires that gains and losses
from later changes in a derivative's fair value be recognized currently in
earnings. Statement 133 also unifies qualifying criteria for hedges involving
all kinds of derivatives, requiring that a company document, designate and
assess the effectiveness of its hedges. Statement 133 is required to be adopted
by the Company in 2000. Management, however, does not expect the impact from
this statement to have a material impact on the financial statement
presentation, financial position or results of operations.
The Company has not determined what additional disclosures, if any, may be
required by the provisions of Statements 132 and 133 but does not expect
adoption of these statements to have a material effect on its results of
operations.
<PAGE>
Note 1 - Summary of Significant Accounting Policies (continued)
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, 1998 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.
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 occur.
Note 2 - Continued Operations
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. During the year ended December
31, 1998, the Company continued to suffer recurring losses from operations in
excess of $3,300,000, resulting in an accumulated deficit of approximately
$8,951,000 and a stockholders' deficit of approximately $1,584,000.
In November 1998, the Company filed for protection under Chapter 11 of the
Federal Bankruptcy Code. The Company filed its plan of reorganization in March
1999 and believes it will be successful. As such, the accompanying financial
statements have been presented on a going concern basis and do not include
adjustments necessary to reflect the amounts at which liabilities will be
satisfied.
Note 3 - Marketable Securities
As of December 31, 1998, the cost, gross unrealized gains and losses, and market
value of marketable securities (Note 4) are as follows:
The Company owns 206,400 shares of USA Talks.com, Inc. ("USAT") which were
originally acquired for $50,000. USAT's shares trade on the over-the-counter
Bulletin Board and have had limited trading activity. As such, the Company has
continued to value their investment at their original cost rather than market.
For the year ended December 31, 1998, there were no realized gains or losses or
any sales proceeds.
<PAGE>
Note 4 - Selected Balance Sheet Information
December 31,
----------------------------
1997 1998
----------- -----------
Inventories
Raw materials .......................... $ 1,150,884 $ 998,787
Finished goods ......................... 922,882 1,596,996
----------- -----------
2,073,766 2,595,783
Less reserve for obsolescence .......... (284,419) (1,086,387)
----------- -----------
$ 1,789,347 $ 1,509,396
=========== ===========
Tooling, furniture and equipment
Office furniture and equipment ......... $ 247,072 $ 258,361
Tooling and manufacturing equipment .... 679,122 243,556
----------- -----------
926,194 501,917
Less accumulated depreciation .......... (496,436) (306,098)
----------- -----------
$ 429,758 $ 195,819
=========== ===========
Other assets
Deferred loan costs - net of accumulated
amortization of $52,999 (1997) and
$21,200 (1998) ........................ $ 130,394 $ 109,194
Product software development costs,
written off in 1998 .................. 493,148 --
Patent costs - net of accumulated
amortization of $120,846 (1997) and
$177,388 (1998) ...................... 158,957 111,288
Marketable securities - available for
sale (Note 3) ........................ 50,000 50,000
----------- -----------
$ 832,499 $ 270,482
=========== ===========
Accrued liabilities
Vacation .............................. $ 40,608 $ 39,858
Advertising ........................... 101,489 86,187
Warranty .............................. 38,694 127,780
Commissions ........................... 101,738 2,982
Interest payable ...................... -- 5,749
Other ................................. 6,165 10,522
----------- -----------
$ 288,694 $ 273,078
=========== ===========
<PAGE>
Note 5 - Line-of-Credit and Long-Term Debt
Prepetition - Secured
December 31,
-----------------------
1997 1998
----------- ---------
$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. $768,517 $ 88,240
Prepetition Liabilities Subject to
Compromise
8% convertible debenture, interest
payable monthly, convertible into one
share of common stock for each $.95
of principal (Note 8). Principal due
November 1, 2002. Monthly principal
redemption of one percent of the then
outstanding balance was to begin in
November 1998. As of December 31,
1998, no payments had been made on
the principal balance. 2,450,000 2,450,000
Postpetition - Unsecured
Debtor in possession note payable
to an individual. Interest accrued
at a rate of 10% per annum and is
payable at maturity on May 12, 1999. - 75,000
Debtor in possession note payable to
an individual. Interest accrued at a
rate of 10% per annum and is payable
at maturity on May 24, 1999. - 30,000
Debtor in possession note payable
to an individual. Interest accrued
at a rate of 10% per annum and is
payable at maturity on May 16, 1999. - 75,000
<PAGE>
Note 4 - Line-of-Credit and Long-Term Debt
Postpetition - Unsecured (continued)
December 31,
-----------------------
1997 1998
----------- ---------
Debtor in possession note payable to an
individual. Interest accrued at a rate of 10%
per annum and is payable at maturity which is
callable by lender. - 30,000
Debtor in possession note payable to an
individual. Interest accrued at a rate of 10%
per annum and is payable at maturity on
May 16, 1999 - 50,000
-------- --------
3,218,517 2,798,240
Less current portion (48,755) (581,573)
-------- --------
Total long-term debt $3,169,762 $2,216,667
========== ==========
Required annual principal payments are:
Years Ended December 31,
1999 $581,573
2000 506,541
2001 214,347
2002 1,672,259
2003 -
---------
$2,974,720
==========
Note 6 - 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 6 - 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:
Year Ended
December 31,
------------------------
1997 1998
----------- ----------
Statutory federal income tax rate (benefit) (34.0)% (34.0)%
Valuation allowance for net operating loss 34.0 34.0
------ ------
Effective tax rate - % - %
====== ======
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:
December 31,
------------------------
1997 1998
----------- ----------
Total deferred current tax asset $1,845,882 $3,075,160
Total deferred tax liability (24,691) (34,099)
Valuation allowance (1,821,191) (3,041,061)
---------- ----------
$ - $ -
========== ==========
For federal and state income tax purposes, the Company has net operating loss
carryforwards 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 carryforwards and other credits
generated a deferred tax asset which has been fully reserved for due to a lack
of profitable operating history.
Note 7 - 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 $64,060 and $78,788 in 1997 and 1998,
respectively.
<PAGE>
Note 7 - Commitments (continued)
Leases (continued)
Required minimum lease payments are as follows:
1999 $ 55,476
2000 45,979
2001 -
2002 -
2003 -
Thereafter -
---------
$101,455
=========
As of December 31, 1998, none of the leases had been rejected or affirmed in
connection with the Chapter 11 filing in November 1998.
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
In 1997, the Company entered into a Joint Product Development Agreement with
Applied Voice Recognition, Inc.'s (AVRI) which was to integrate the Voice It
Digital Recorder hand held unit with voice-to-text software, called Voice
Commander, supplied by AVRI. The Company entered into a purchase commitment
related to this agreement for the licensing rights to sell the voice-to-text
software. For the year ending December 31, 1998, the Company had to purchase
50,000 licenses at $20 per license. The Company had prepaid the purchase of
10,000 licenses through the issuance of common stock (Note 8).
During 1998, the Company was unable to market the Voice Commander voice
recognition software due to technical problems with the software. As such, no
additional licenses have been purchased and the prepaid licenses amount was
written off.
<PAGE>
Note 8 - 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 7).
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 $.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
December 31, 1998, no payments had been made on the principal balance. The
Company intends to reject this convertible debenture as part of its proposed
plan of reorgnization 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 their intentions.
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 8 - 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 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 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.
Pursuant to its proposed Chapter 11 Plan of Reorganization (Note 2), the Company
intends to reject all previously issued and outstanding options granted.
However, no assurances can be made that the Company's Plan will be accepted. As
such, no adjustments have been made to reflect their intentions.
The following is a summary of options and warrants granted:
Exercise Price
Options Warrants Per Share
----------- ----------- -----------------
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
Options granted 80,000 - .3125-.437
Options canceled (295,500) - 1.06-2.75
Options expired - - .3125-.300
Warrants exercised - - 1.06-2.75
Warrants expired - - 1.06-2.75
---------- ---------- ---------------
Outstanding December 31, 1998 426,443 78,131 .3125-3.00
========== ========== ===============
<PAGE>
Note 8 - Stockholders' Equity (continued)
Stock Options and Warrants (continued)
The Company has the following stock options and warrants outstanding at December
31, 1998:
Currently Exercisable
Options Warrants Exercise Expiration -----------------------
Outstanding Outstanding Price Date Options Warrants
------------ ---------- ---------- ------------ ---------- -----------
- 38,131 $ 1.06 June 1999 - 38,131
60,243 - 1.56 December 1999 60,243 -
84,000 - 2.00 January 1999 84,000 -
15,000 - 2.20 September 15,000 -
1999
46,700 - 2.20 December 1999 46,700 -
5,000 - 2.20 December 1999 5,000 -
20,000 - 2.75 April 2000 20,000 -
6,500 - 3.00 July 2000 6,500 -
45,000 - 1.75 February 2001 33,333 -
24,000 - 1.69 July 2001 18,166 -
40,000 - 1.75 February 2001 40,000 -
20,000 - .31 June 2003 - -
10,000 - .44 August 2003 - -
50,000 - .44 August 2003 - -
- 20,000 1.06 December 1999 - 20,000
- 20,000 2.75 May 2000 - 20,000
---------- --------- ---------- --------- ----------
426,443 78,131 $ 1.74 328,942 78,131
========== ========= ========== ========= ==========
The weighted average exercise price is $1.63. The weighted average remaining
contractual life is 20.4 months.
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.
<PAGE>
Note 8 - Stockholders' Equity (continued)
Stock Options and Warrants (continued)
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 1997 and 1998
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:
Years Ended
December 31,
-------------------------
1997 1998
----------- -----------
Net loss - as reported $(1,616,385) $(3,598,958)
Net loss - pro forma $(1,641,342) $(3,618,441)
Loss per share - as reported $ (.32) $ (.56)
Loss per share - pro forma $ (.32) $ (.56)
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 5.5%; and expected lives of up to 2 years.
Note 9 - 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, 1997 and 1998. 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, 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 - Geographic Segment Information (continued)
<TABLE>
<CAPTION>
Europe/ Corporate
United Middle and
States East Other Other Consolidated
---------- ---------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1998:
Net sales to unaffiliated
customers $6,031,038 $1,083,224 $203,217 $ - $ 7,317,479
Operating profit (loss) $1,337,376 $ 384,489 $ 38,482 $(4,996,166)$(3,235,819)
Identifiable assets $2,981,814 $ 300,913 $ 35,213 $ 1,568,983 $ 4,886,923
</TABLE>
Note 10 - Letters-of-Credit
The Company finances the purchase of their raw materials through the assignment
of letters-of-credit issued by their largest customer, Dragon. Dragon issues
letters-of-credit to the Company who in turn assign the letters-of-credit to
their vendors to prepay the purchase of raw materials used in their turnkey
manufacturing process. As of December 31, 1998, there were no unassigned
letters-of-credit.
Note 11 - Related Party Transactions
The Company holds various debtor in possession ("DIP") notes payable to members
of the Board of Directors. As of December 31, 1998, a total of $260,000 was
outstanding. Subsequent to year end, an additional $340,000 of DIP notes were
issued under similar terms.
Note 12 - Significant Fourth Quarter Adjustments
In December 1998, the Company increased their reserve for obsolete inventory by
$1,086,387, wrote off $200,000 of prepaid licenses and $493,148 of capitalized
product software development expense. These adjustments were made in
anticipation of the disposal of raw materials, packaging and non-sealable
returned goods resulting from the discontinuation of the note recorder products.
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:
Name Age Position
Ajit Kumar 51 Chief Executive Officer and Director
J. Fredrick Walters 51 Chairman of the Board of Directors
and President - International Division
Anil K. Agarwal 45 President - U.S. Division, Vice President
of Technology Development
Timothy L. Walters 43 Vice President of Business Development
Dale A. Dreckman 47 Vice President of Finance and Controller
John H. Ellerby 59 Chief Financial Officer, Secretary,
Treasurer and Director
Larry D. Holt 58 Director
Michelle L. Morgan 49 Director
Gary E. Nordic 55 Director
Patricia R. Westbrook 46 Director
The only family relationship among the executive officers and directors of the
Company is J. Fredrick Walters and his brother, Timothy L. Walters. Other than
the directors and executive officers, the Company has no promoters or control
persons.
Ajit Kumar serves as Chief Executive Officer and a director of the Company since
January 13, 1999. From 1986 to 1996, Mr. Kumar served as president of the
Europe, Middle East and Africa Division (1986 to 1994) and senior vice president
- - international operations (1994 to 1996) of Bausch & Lomb, Inc. From 1996 to
1997, he served as president of Revlon Consumer Products - International, with
responsibility for the strategic planning, marketing, staffing and operating
leadership of Revlon's international consumer cosmetics, toiletries and
fragrance business. Mr. Kumar received his Bachelor of Engineering from Birla
Institute of Technology & Science in 1969 and his Masters of Business
Administration from Columbia University in 1971.
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(R)
plaque removal instrument. This business was sold to Bausch & Lomb in 1989.
Dr. Anil K. Agarwal is a founder of the Company and serves as President - U.S.
Division and Vice President of Technology Development of the Company. Dr.
Agarwal is the co-inventor of the original 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 Electron ic
Packaging, Inc.
Timothy L. Walters is a founder of the Company and serves as President of U.S.
Division 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.
Dale A. Dreckman serves as Vice President of Finance and Controller of the
Company since March 1, 1999. From 1994 to 1998, Mr. Dreckman held positions as
director of business and financial planning at Comstream, Inc. From 1988 to
1994, Mr. Dreckman held various positions in financial planning and analysis and
was a division controller for Fijitsu Systems of America, Inc. Mr. Dreckman
earned his B.S. in Finance and Accounting at San Diego State University in 1974
and his M.S. in finance at California State University, Northridge, in 1977.
John H. Ellerby serves as Chief Financial Officer, Secretary, Treasurer and a
director of the Company. From 1985 until shortly after the merger of Lander
Energy Co. with Voice It in December 1994, Mr. Ellerby served as president of
Lander Energy Co. 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 May
1997. 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.
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. Ms. Westbrook is currently a principal
of MainSpring Marketing LLC, a marketing consulting firm. Ms. Westbrook is a
graduate of Colorado State University and 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 John H. Ellerby. 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.
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 Ajit Kumar and John H. Ellerby. 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 Timothy L. Walters, whose Forms 4 for February 11,
1998 and March 19, 1998 were filed on April 7, 1998 and April 28, 1998,
respectively.
<PAGE>
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, 1998, December 31, 1997 and December 31, 1996 and (ii) each
executive officer who received total annual salary and bonus for the fiscal year
ended December 31, 1998 in excess of $100,000.
Long-Term
Annual Compensation Compensation
- -------------------------------------------------------------- ------------
Name and
Principal Fiscal Other Annual Options
Position Year Salary Compensation Granted
- ---------------------- ----------- ----------- ------------- ----------
J. Fredrick Walters,
Chairman of the Board
and President -
International Division 1998 $101,038 $0 0
Anil Agarwal,
President - U.S.
Division, and
Vice President of
Technology Development 1998 $105,440 $0 0
Dennis W. Altbrandt,
Chief Executive Officer(1) 1998 $89,760 $0 0
1997 $160,000 $0 0
1996 $94,833 $0 185,000
Michelle L. Morgan,
Chief Executive
Officer(2) 1996 $72,000 $0 0
(1) Mr. Altbrandt was elected as Chief Executive Officer of the Company on
November 26, 1996 and served as Chief Executive Officer until July 9, 1998.
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.
No stock options were granted to the Company's Chief Executive Officer
during the fiscal year ended December 31, 1998.
The 1994 Stock Compensation Plan
The Company and its shareholders 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, 1998, the Company did not grant any
options under the 1994 Plan to any of its executive officers. Pursuant to its
proposed Chapter 11 Plan of Reorganization, the Company intends to reject all
previously issued and outstanding options granted pursuant to the 1994 Plan.
Effective January 13, 1999, the Company approved the grant of 527,100 new
options under the 1994 Plan to a total of 20 persons, including the following
executive officers and directors: Ajit Kumar - 208,400 options; J. Fredrick
Walters - 48,400 options; and John H. Ellerby - 30,100 options.
The Outside Directors Stock Option Plan
The Company and its shareholders adopted the Outside Directors Stock Option Plan
(the "Plan") 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 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. A total of 200,000 shares of Common Stock have been authorized and
reserved for issuance under the Plan.
During the fiscal year ended December 31, 1998, the Company did not grant any
options under the Plan. Pursuant to its proposed Chapter 11 Plan of
Reorganization, the Company intends to reject all previously issued and
outstanding options granted pursuant to the Plan. Effective January 13, 1999,
the Company approved the grant of 180,100 new options under the Plan to a total
of four directors, including: Larry Holt - 30,000 options; Michelle Morgan -
20,000 options; Gary Nordic - 55,100 options; and Patricia Westbrook - 75,000
options.
The Lander Nonqualified Stock Option Plan
The Company and its shareholders adopted the Lander Nonqualified Stock Option
Plan (the "Lander Plan") for the benefit of the former directors of Lander
Energy Co. Pursuant to the Lander Plan, each of the three former directors of
Lander Energy Co. (including Messrs. Ellerby and Nordic) was granted an option
to purchase 20,081 shares of Common Stock. The options had a term of five years
and were exercisable until January 21, 1999. No options have been exercised
under the Lander Plan and the Lander Plan has expired by its own terms effective
January 21, 1999.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Set forth below is certain information as of March 31, 1999 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.
Pursuant to its proposed Chapter 11 Plan of Reorganization, the Company intends
to reject all previously issued and outstanding options granted pursuant to the
1994 Plan and the Plan. The following information gives effect to the grant of
new options under the 1994 Plan and the Plan effective January 13, 1999. Shares
of Common Stock subject to options currently exercisable or exercisable within
60 days of March 31, 1999 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.
Name of Number of Percentage
Beneficial Owner(1) Common Shares Owned
- -------------------- ------------- ----------
Ajit Kumar 218,400 (2) 3.3%
J. Fredrick Walters 414,067 (3) 6.4%
Timothy L. Walters 205,117 3.2%
Anil K. Agarwal 331,767 5.1%
Dale A. Dreckman 25,000 (4) *
John H. Ellerby 96,738 (5) 1.5%
Larry D. Holt 103,250 (6) 1.6%
Michelle L. Morgan 375,300 (7) 5.8%
Gary E. Nordic 121,506 (8) 1.9%
Patricia R. Westbrook 385,900 (9) 5.9%
Renaissance Capital Growth
& Income Fund III, Inc. 940,000 (10) 14.5%
Applied Voice Recognition, Inc. 471,700 7.3%
All directors and executive
officers as a group (10 persons) 2,277,045 32.7%
* 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 208,400 shares of Common
Stock.
(3) Includes options currently exercisable to acquire 48,400 shares of Common
Stock.
(4) Includes options currently exercisable to acquire 25,000 shares of Common
Stock.
(5) Includes options currently exercisable to acquire 30,100 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.
(6) 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.
(7) Includes options currently exercisable to acquire 20,000 shares of Common
Stock. Michelle L. Morgan is the spouse of Christopher W. Elkins and is
deemed to beneficially own the 35,000 shares of Common Stock owned by Mr.
Elkins.
(8) Includes options currently exercisable to acquire 55,100 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.
(9) Includes options currently exercisable to acquire 75,000 shares of Common
Stock.
(10) Does not include a $2,450,000 8% Convertible Debenture which is convertible
into 2,578,947 shares of Common Stock. The Company intends to reject this
Convertible Debenture as part of its proposed Plan of Reorganization
pursuant to Chapter 11 of the Bankruptcy Code.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with the Company's filing of a petition for protection under the
reorganization provisions of Chapter 11 of the Bankruptcy Code, the Bankruptcy
Court approved the borrowing of funds by the Company as Debtor-in-Possession.
The Company borrowed an aggregate of $600,000 from certain of its executive
officers and directors as follows:
J. Fredrick Walters $ 145,000
Ajit Kumar $ 275,000
Gary Nordic $ 75,000
Patricia Westbrook $ 75,000
Michelle Morgan $ 30,000
The loans have been approved by 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.
The Company has retained MainSpring Marketing LLC to provide consulting services
to the Company. MainSpring Marketing invoiced the Company for a total of $33,000
during 1998 and expects to invoice the Company for consulting services during
1999 for up to $72,000. Patricia Westbrook, a director of the Company, is a
principal and 50% owner of MainSpring Marketing.
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.*
3.5 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 The Registrant's 1994 Stock Compensation Plan.*
10.2 The Registrant's Outside Directors Stock Option Plan.*
10.3 Lease agreement dated January 5, 1995 covering the Registrant's
executive offices.*
10.4 Joint Product Development Agreement effective December 31, 1997
between the Company and Applied Voice Recognition, Inc.**
10.5 Agreement dated June 29, 1998 between the Company and Dragon Systems,
Inc.
10.6 Example of Debtor-in-Possession Promissory Notes.
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 and 333-12713) of
their report dated March 12, 1999, included in the Registrant's
Report on Form 10-KSB for the fiscal year ended December 31, 1998.
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, 1997, file number 0-7796.
(b) Reports on Form 8-K. During the last quarter of the period covered by this
Report on Form 10-KSB, the Company filed a Current Report on Form 8-K dated
November 2, 1998, reporting in Item 3 thereof that (i) it had filed a
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; and (ii) it will continue operations as
a Debtor-in-Possession.
<PAGE>
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 14, 1999 By:/s/ AJIT KUMAR
Ajit Kumar, 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.
Name Title Date
/s/ J. FREDRICK WALTERS Chairman of the Board of Directors April 14, 1999
J. Fredrick Walters and President - International
Division
/s/ AJIT KUMAR Chief Executive Officer and
Ajit Kumar Director April 14, 1999
/s/ JOHN H. ELLERBY Chief Financial Officer,
John H. Ellerby Secretary, Treasurer and April 14, 1999
Director
/s/ LARRY D. HOLT Director April 14, 1999
Larry D. Holt
/s/ MICHELLE L. MORGAN Director April 14, 1999
Michelle L. Morgan
/s/ GARY E. NORDIC Director April 14, 1999
Gary E. Nordic
/s/ PATRICIA R. WESTBROOK Director April 14, 1999
Patricia R. Westbrook
Mail to: Secretary of State
Corporations Section
1560 Broadway, Suite 200
Denver, CO 80202
(303) 894-2251
Fax (303) 894-2242
MUST BE TYPED
FILING FEE: $25.00
MUST SUBMIT TWO COPIES
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
Please include a typed
Self-addressed envelope
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is Voice It Worldwide, Inc.
SECOND: The following amendment to the Articles of Incorporation
was adopted on June 12, 1998, as prescribed by the Colorado Business
Corporation Act, in the manner marked with X below:
_____ No shares have been issued or Directors Elected - Action by
Incorporators
_____ No shares have been issued but Directors Elected - Action
by Directors
_____ Such amendment was adopted by the board of directors where shares
have been issued and shareholder action was not required.
X Such amendment was adopted by a vote of the shareholders. The number
of shares voted for the amendment was sufficient for approval.
Paragraph (a) of Article Fourth is amended to read in its entirety as follows:
(a) The aggregate number of shares which the corporation shall have the
authority to issue is 20,000,000 (twenty million) shares of common stock, each
having a par value of $.10 (ten cents) and 10,000,000 (ten million) shares of
preferred stock. The Board of Directors is vested with the authority to
authorize by resolution from time to time the issuance of the preferred shares
in one or more series and to prescribe the number of preferred shares within
each such series and the voting powers, designations, preferences, limitations,
restrictions and relative rights of each such series.
THIRD: If changing corporate name, the new name of the corporation
is: not applicable.
FOURTH: The manner, if not set forth in such amendment, in which
any exchange, reclassification, or cancellation of issued
shares provided for in the amendment shall be effected, is
as follows: not applicable.
If these amendments are to have a delayed effective date, please list that date:
not applicable.
(Not to exceed ninety (90) days from the date of filing) Voice It Worldwide,
Inc.
By: /s/ DENNIS W. ALTBRANDT
Dennis W. Altbrandt, Chief
Executive Officer
AGREEMENT
This Agreement is made as of the 19th day of June, 1998 by and between VOICE IT
Worldwide, Inc., a Colorado corporation with a principal place of business in
Fort Collins, Colorado ("VOICE IT") and Dragon Systems, Inc. having its
principal place of business at 320 Nevada Street, Newton, Massachusetts 02460
("DRAGON").
The following are the terms and conditions under which VOICE IT sells and
licenses a certain VOICE IT product (hereinafter referred to as "PRODUCT") to
DRAGON.
1. APPOINTMENT/PRODUCT
VOICE IT hereby appoints DRAGON as an authorized reseller for the PRODUCT
specified in the attached Exhibit B and made a part of this Agreement.
2. TERM
2.1 This Agreement shall become effective on the date stated above and,
unless terminated as herein provided, shall continue in full force and
effect on a year to year basis.
3. ADDED VALUE
3.1 DRAGON certifies that, in the regular course of its business, the
PRODUCT purchased hereunder will be significantly enhanced by
integrating computer products that are manufactured, marketed, and
supported by DRAGON. Notwithstanding the previous sentence, DRAGON may
sell the PRODUCT to its installed base of customers as an upgrade
without including its ADDED VALUE.
4. TERRITORY
4.1 Except as set forth in Exhibit A, DRAGON will have the NON-EXCLUSIVE
right to market, sell, and promote the PRODUCT on a worldwide basis.
4.2 Except as set forth in Exhibit A, VOICE IT expressly reserves the
right to market, solicit sales, sell, lease, rent or otherwise dispose
of the PRODUCT to others in the Territory, including, but not limited
to, VOICE IT national accounts, commercial customers, or other
resellers.
5. PRICE AND PAYMENT TERMS
5.1 Prices for the PRODUCT purchase/licensed under this Agreement shall be
as specified in Exhibit B to this Agreement. VOICE IT warrants that
the prices charged to DRAGON shall not exceed the lowest prices
offered to any other customer purchasing the same or similar products
for the same or similar quantities. In the event VOICE sells or offers
to sell the same or similar products for less than the price paid by
DRAGON, then VOICE IT shall immediately credit DRAGON for the amount
of any difference in price from the time the lower price was first
offered.
<PAGE>
5.2 Prices are exclusive of all sales, use and like taxes. DRAGON shall
pay all taxes associated with the sale and licensing of all VOICE IT
PRODUCTS purchased or licensed under this Agreement, exclusive of
taxes based on Voice IT's income.
5.3 Subject to VOICE IT's credit approval, payment is due within
forty-five (45) days from the date of shipment, except for the initial
order of 46,000 units which shall have payment terms in accordance
with Section 5.4 below.
5.4 Within forty-five (45) days of the execution of this Agreement, DRAGON
will make an advance payment to VOICE IT in the amount of one hundred
thousand dollars ($100,000). This advance will be credited from the
initial payment due from DRAGON. To assist VOICE IT in delivering the
initial payment due from DRAGON. To assist VOICE IT in delivering the
initial 23,000 units, DRAGON will post a commercial letter-of-credit
in the amount of one million, seven hundred fifty thousand dollars
($1,750,000). This will be a sight draft for the initial 23,000 units.
The second 23,000 units shall have payment terms of thirty (30) days
from the date of shipment. Any fees associated with obtaining the
letter-of-credit shall be the responsibility of VOICE IT.
6. PURCHASE ORDERS, SHIPMENT AND CHANGES
6.1 All PRODUCTS shall be delivered to one location designated by DRAGON,
on an F.O.B. origin basis upon transfer to a common carrier. All
transportation, insurance, rigging and drayage charges shall be paid
by VOICE IT.
6.2 Upon execution of this Agreement, DRAGON will submit a non-cancelable
purchase order for an initial quantity of forty-six thousand (46,000)
units of PRODUCT to be delivered in September, October, November and
December of 1998. Thereafter, DRAGON may submit non-cancelable orders
on a monthly basis for delivery with a ninety (90) day lead time.
DRAGON will provide VOICE IT with a rolling, non-binding 6 month
forecast on a monthly basis.
6.3 If any order is delayed and not shipped within ten (10) days from the
original schedule ship date, then DRAGON may cancel such order and
will have no liability for any payment for such order. If any order is
not shipped within twenty-five (25) days from the original scheduled
ship date, DRAGON may cancel the Agreement immediately. DRAGON's
rights of cancellation in this section shall no t apply in the event
of circumstances beyond the control of VOICE IT, such as "acts of
God". Upon such cancellation and termination, in addition to any other
rights DRAGON may have as stated in this Agreement or at law or in
equity, DRAGON shall be refunded the amount of any advance payments
not repaid.
7. RELATIONSHIP
7.1 DRAGON's relationship to VOICE IT will be that of an independent
contractor engaged in purchasing and licensing PRODUCTS for resale to
DRAGON's end-user customers. DRAGON and its employees are not agents
for legal representatives of VOICE IT for any purpose and have no
authority to act for, bind or commit VOICE IT.
<PAGE>
7.2 Any commitment made by DRAGON to its customers with respect to
quantities, delivery, modifications, interfacing capability,
suitability of software, or suitability in specific applications will
be DRAGON's sole responsibility. DRAGON has not authority to modify
the warranties contained in this Agreement or to make any other
commitment on behalf of VOICE IT, and DRAGON will indemnify and defend
VOICE IT from any liability, suit or proceeding for any such modified
warranty or other commitment by DRAGON.
7.3 DRAGON has the right to determine its own resale prices, and no VOICE
IT representative will require that any particular price by charged by
DRAGON or grant or withhold any treatment to DRAGON based on DRAGON's
pricing policies. DRAGON agrees that it will promptly report directly
to a VOICE IT officer any effort by VOICE IT personnel to interfere
with its pricing policies.
7.4 This Agreement applies only to the PRODUCT listed on the Exhibit B
attached hereto. DRAGON acknowledges that VOICE IT may market products
other than those listed on said Exhibit B without making them
available to DRAGON.
8. LIMITATION OF LIABILITY
8.1 VOICE IT and DRAGON may not institute any action in any form arising
out of or in any way connected with this Agreement more than eighteen
(18) months after the cause of action has arisen.
8.2 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
SPECIAL, INDIRECT, INCIDENTAL, RELIANCE OR CONSEQUENTIAL DAMAGES,
INCLUDING BUT NOT LIMITED TO, ANY DAMAGES RESULTING FROM LOSS OF USE,
DATA OR PROFITS, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR
OTHERWISE.
9. INDEMNITY
9.1 VOICE IT will defend DRAGON against a claim that a PRODUCT supplied
hereunder infringes any patent, copyright, or other proprietary right
of a third party. VOICE IT will indemnify DRAGON and hold it harmless
from and against any loss, liability and any costs, expenses and
reasonable attorneys' fees awarded, provided that: DRAGON promptly
notifies VOICE IT in writing of the claim; VOICE IT has sole control
of the defense and all related settlement negotiations; and DRAGON
provides VOICE IT complete information concerning the claim.
9.2 VOICE IT's obligation hereunder is conditioned on DRAGON's agreement
that if any PRODUCT becomes or in VOICE IT's opinion is likely to
become the subject of such a claim, DRAGON will permit VOICE IT, at
its option and expense either to procure the right for DRAGON to
continue using the PRODUCT or to replace or modify the same so that it
becomes non-infringing.
<PAGE>
10. QUALITY
10.1 VOICE IT agrees to deliver defect fee materials to DRAGON at all
times, which will conform to the specification contained in Exhibit C.
VOICE IT agrees to provide relevant outgoing inspection, quality, and
reliability data upon DRAGON's request.
10.2 All PRODUCTS delivered shall have received all necessary governmental
approvals.
11. WARRANTY
11.1 VOICE IT warrants (1) that title to all PRODUCTS delivered to DRAGON
under this Agreement shall be free and clear of all liens,
encumbrances, security interests or other claims; (2) that all
PRODUCTS shall be free from defects in material, workmanship, and
design for a period of nine (9) months from the date of delivery; (3)
that all PRODUCTS shall conform to applicable specifications,
drawings, samples and descriptions provided by VOICE IT shall operate
on a reliable and stable basis and shall be of merchantable quality
and suitable for the purpose intended, per the relevant
specifications; and (4) all PRODUCTS shall be new and unused. VOICE IT
warrants that it shall make all necessary changes to the PRODUCTS to
enable said PRODUCTS to comply with all federal, state and local laws,
rules and regulations, free of charge, provided such changes are
technically feasible in VOICE IT's reasonable judgment. In the event a
PRODUCT is defective under this warranty, DRAGON shall have the option
of having VOICE IT, at VOICE IT's expense, (1) promptly repair or
replace the defective PRODUCTS; or (2) issue a credit for the full
purchase price of the defective PRODUCTS. The warranty for replaced or
repaired PRODUCTS will be the same as the original warranty for the
PRODUCTS. The foregoing warranty shall not apply for failures or
defects in PRODUCTS due to accident, neglect, misuse or unauthorized
modification.
12. TERMINATION
12.1 Either DRAGON or VOICE IT may terminate this Agreement if the other
party commits a breach of any obligation hereunder which is not
remedied within thirty (30) days of receipt of written notice
specifying such breach.
12.2 EITHER PARTY shall have the right to terminate this Agreement
immediately in the event that THE OTHER PARTY becomes insolvent, or
has filed against it a petition under any bankruptcy code (or any
similar petition under any insolvency law of any jurisdiction),
proposes any dissolution, liquidation, composition, financial
reorganization or recapitalization with creditors, makes assignment or
trust mortgage for the benefit of creditors, or if a receiver,
trustee, custodian or similar agent is appointed or takes possession
with respect to any property or business of that party.
12.3 Each party acknowledges that the other has made no commitments
regarding duration or renewal of this Agreement beyond those expressly
stated herein. Either party may terminate this Agreement or any
purchase order placed pursuant to this Agreement, with or without
cause, at any time upon ninety (90) days written notice.
<PAGE>
12.4 Termination of this Agreement shall not affect any of either party's
pretermination obligations hereunder. Orders shipped after the term of
this Agreement shall be subject to all terms and conditions of this
Agreement. Any termination of this Agreement shall be without
prejudice to the enforcement of any un-discharged obligation existing
at the time of termination.
12.5 In the event that this Agreement is terminated by DRAGON for material
breach or per Section 6.3 of the Agreement or VOICE IT is unable or
unwilling to fulfill any of its obligations hereunder, VOICE IT will
promptly provide DRAGON with all necessary information, including but
not limited to manufacturing plans, product design drawings, and
intellectual property licenses as well as access to Vendors to allow
DRAGON, or its designee, to manufacture and distribute the PRODUCTS.
DRAGON will pay VOICE IT a license fee equal to twelve percent (12%)
of DRAGON's actual production costs of DRAGON or its designee
manufacture the PRODUCTS. DRAGON will obtain title to all work in
process for any orders it has placed and which have not been shipped
at the time of termination. All material will be paid for by DRAGON at
the lesser of VOICE IT's actual cost or fair market value.
13. NOTICES
13.1 All notices or other communications given by either party to the other
under this Agreement shall be in writing and shall be personally
delivered or sent by registered or certified mail, return receipt
requested, to the other party at its address set forth below or such
other address as a party may subsequently designate in writing. The
date of personal delivery or the date of mailing, as the case may be,
shall be deemed to be the date on which such notice is given.
DRAGON: with copy to:
Dragon Systems, Inc. Hale & Dorr
320 Nevada St. 60 State Street
Newton, MA 02160 Boston, MA 02109
Attention: Janet Baker Attention: Michael Bevilacqua
VOICE IT: with copy to:
Voice It Worldwide, Inc. Andrew N. Bernstein, P.C.
2463 Midpoint Drive, Suite A 5445 DTC Parkway, Suite 520
Ft. Collins, CO 80525 Greenwood Village, CO 80111
Attention: Dennis Altbrandt
14. GENERAL PROVISIONS
14.1 Neither party may assign or transfer this Agreement, except in
conjunction with the sale or transfer of all or substantially of the
assets of a party. Either party will advise the other of any change in
its ownership, control or operating arrangements.
14.2 Either party's failure to enforce any provisions of this Agreement
will not be deemed a waiver of that provision or of the right to
enforce it in the future.
<PAGE>
14.3 This Agreement, including the attached Exhibits, contains the entire
and only understanding between the parties and supersedes all prior
agreements either written or oral relating to the subject matter
hereof. DRAGON hereby gives notice of objection to any additional or
inconsistent terms set forth in any purchase order or other document
issued by VOICE IT and VOICE IT agrees that any shipments made by
VOICE IT shall be governed exclusively by the terms and conditions of
this Agreement. No modifications of this Agreement will be binding on
either party, unless made in writing and signed by persons authorized
to sign agreements on behalf of DRAGON and VOICE IT.
14.4 No United States Government procurement regulations will be deemed
included hereunder or binding on either party, unless specifically
accepted in writing and signed by both parties.
14.5 If any part of this Agreement shall be adjudged by any court of
competent jurisdiction to be invalid, such judgment will not affect or
nullify the remainder of this Agreement, but the effect thereof will
be confined to the part immediately involved in the controversy
adjudged.
14.6 Neither VOICE IT nor DRAGON shall be liable for its failure to perform
hereunder due to contingencies beyond its reasonable control,
including, but not limited to, strikes, riots, wars, fire, acts of
God, or acts in compliance with any law or government regulation.
14.7 This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts. Any lawsuit relating to
any matter arising under, or related to this Agreement, initiated by
or on behalf of VOICE IT against DRAGON, its employees, ex-employees,
officers, agents, or affiliates shall be initiated in the appropriate
state or Federal Court serving Middlesex County in the Commonwealth of
Massachusetts.
Any lawsuit relating to any matter arising this Agreement initiated by
DRAGON may be initiated in a state or Federal Court located in the
Commonwealth of Massachusetts or in any court having jurisdiction over
the matter, and accordingly, Licensee irrevocably consents to the
jurisdiction and to the service of process, pleadings, and notices in
connection with any and all actions and processes initiated in a state
or Federal court located in the Commonwealth of Massachusetts.
14.8 In the event that either VOICE IT or DRAGON brings suit against the
other party for any matter arising out of or in connection with this
Agreement, and the party which is sued is ultimately adjudicated to
not have liability, then the party bringing suit agrees to pay the
other party's reasonable attorneys' fees and litigation costs.
14.9 Any terms of the agreements between VOICE IT and Applied Voice
Recognition, Inc. and VOICE IT and Hexaglot are specifically excluded
from applying to any provisions in this Agreement.
14.10Paragraph titles are for reference purposes only and shall not
control or alter the meaning of this Agreement as set forth in the
text.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal
as of the day and year indicated above.
DRAGON SYSTEMS, INC. VOICE IT Worldwide, Inc.
By:/s/Duane Hudson By:/s/Dennis Altbrandt
Duane Hudson Dennis Altbrandt
Chief Executive Officer Chief Executive Officer
<PAGE>
EXHIBIT A
During the initial term of this Agreement, there shall be a Limited
Exclusivity as follows:
VOICE IT agrees that it will not make the PRODUCT available for
bundling to any major competitor (including, but not limited to, IBM,
and L&H) of DRAGON's in the retail market for a period of one year
from the date of first shipment under this Agreement. Notwithstanding
the previous sentence, VOICE IT may:
1. Offer products under the VOICE IT brand name with any other software into
the retail distribution channel.
2. Offer products under a non-DRAGON brand name to any software supplier in a
non-retail environment.
3. Offer products under the VOICE IT brand name as a stand-alone product to
VARs of any software supplier.
4. Offer upgrade solutions involving products to current owners of any voice
to text software.
DRAGON may offer upgrade solutions involving the PRODUCT to current owners of
any voice to text software.
DRAGON agrees that it will not manufacture products that utilize confidential
technology disclosed by VOICE IT to DRAGON pursuant to the Non Disclosure
Agreement signed between the parties.
For the Limited Exclusively to be effective, DRAGON must purchase a minimum of
5,000 units per month beginning in April 1999.
<PAGE>
EXHIBIT B
PRODUCT:
Hand-held voice recorder with functionality meeting or exceeding the
functionality of VOICE IT Model No. ____________ which tested by DRAGON,
including Cable and Speech Link Software (master to be provided to DRAGON upon
completion).
The PRODUCT will be provided with a custom color exterior, DRAGON's logo on the
unit, and DRAGON's name on the screen at no extra charge. (Artwork to be
mutually agreed upon)
Pricing:
Price
Monthly Volume Annual Volume Per Unit
5,000 to 7,000 50,000 to 90,000 $ 80
7,501 to 10,000 90,001 to 120,000 $ 78
10,001 to 12,500 120,001 to 150,000 $ 77
12,501 to 15,000 150,001 to 180,000 $ 76
15,001 to 17,500 180,001 to 210,000 $ 75
17,501 to 20,000 210,001 to 240,000 $ 74
Over 20,000 Over 240,000 $ 73
<PAGE>
EXHIBIT C
Technical Specifications
The PRODUCT will be DRAGON-certified and will conform to the following
requirements:
VOICE IT WORLDWIDE, INC.
PROMISSORY NOTE
$25,000.00 Fort Collins, Colorado
February 18, 1999
FOR VALUE RECEIVED, the undersigned, Voice It Worldwide, Inc. ("Borrower"),
hereby unconditionally promises to pay on or before August 18, 1999 ("Maturity
Date") to the order of Gary E. Nordic, 4901 Hogan Drive, Fort Collins, CO 80525,
in lawful money of the United States of American, immediately available funds,
the principal amount of this Note, $25,000.00, and the aggregate amount of fees,
accrued and unpaid interest and costs accrued thereon.
The Borrower further agrees that this Note shall accrue interest in like money
on the principal amount advanced hereunder from the date hereof at the rate of
10% per annum until such amount shall become due and payable, whether at the
stated maturity, by acceleration or otherwise. Interest shall be payable on the
Maturity Date of the Note. All unpaid and outstanding interest shall be due upon
payment, including prepayment, in full of the unpaid principal amount advanced
hereunder. In the Event of Default, interest shall accrue and be payable to the
Lender at the rate of 18% per annum computed on the outstanding balance of the
loan.
An Event of Default shall have occurred under this Note if the Borrower fails to
pay or perform within ten (10) days of the Maturity Date any of the payments or
obligations created by this Note. Upon occurrence of an Event of Default, all
sums due hereunder shall be accelerated and shall be immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by Borrower.
Unless the outstanding balance due under this Note is paid on or before the
Maturity Date, the Borrower shall have the right at its option to extend the
Maturity Date for an additional six month term or until a Plan of Reorganization
is confirmed in the Borrower's Chapter 11 case, Bankruptcy Case No.
98-25542-RJB, U.S. Bankruptcy Court, District of Colorado, whichever occurs
first.
If an Event of Default occurs, the Borrower shall pay all expenses incurred by
the Lender including reasonable attorneys fees and disbursements of Lender's
counsel in connection with such Event of Default, collection, and other
enforcement proceedings resulting therefrom.
This Note shall be issued pursuant to a specific Order entered in the Borrower's
Chapter 11 bankruptcy case. The loan advanced under this Note shall, upon Court
approval, be a cost and expense of administration in such bankruptcy case.
VOICE IT WORLDWIDE, INC.
By: /s/ John H. Ellerby
John H. Elerby
Secretary - Treasurer
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 and 333-12713) of
our report dated March 12, 1999 appearing in the Annual Report on Form 10-KSB of
Voice It Worldwide, Inc. for the year ended December 31, 1998.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
April 14, 1999
Denver, Colorado
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 222,339
<SECURITIES> 50,000
<RECEIVABLES> 2,388,152
<ALLOWANCES> (389,093)
<INVENTORY> 1,509,396
<CURRENT-ASSETS> 4,377,637
<PP&E> 195,819
<DEPRECIATION> (306,098)
<TOTAL-ASSETS> 4,843,938
<CURRENT-LIABILITIES> 6,428,030
<BONDS> 0
0
0
<COMMON> 646,650
<OTHER-SE> (2,230,742)
<TOTAL-LIABILITY-AND-EQUITY> 4,843,938
<SALES> 7,317,479
<TOTAL-REVENUES> 7,317,479
<CGS> 4,630,105
<TOTAL-COSTS> 10,642,583
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,424
<INCOME-PRETAX> (3,598,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,598,958)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
