FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
Commission File Number: 0-7796
VOICE IT WORLDWIDE, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 83-0203787
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2643 Midpoint Drive, Suite A
Fort Collins, Colorado 80525
(Address of principal (Zip Code)
executive offices)
(970) 221-1705
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
Number of shares outstanding of the Issuer's Common Stock, as of June 30,
1999 was 6,466,502 shares of the Registrant's common stock $.10 par value.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial
Statements
VOICE IT WORLDWIDE, INC.
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales - net ................. $ 893,570 $ 4,072,209 $ 2,151,547 $ 9,802,239
Cost of sales (Note 11) ..... 577,217 2,849,676 1,359,097 7,009,272
----------- ----------- ----------- -----------
Gross profit .............. 316,353 1,222,533 792,450 2,792,967
Operating expenses:
Administrative and general 247,934 382,531 521,683 889,296
Selling & marketing ....... 666,072 340,329 1,230,490 584,364
Research and development .. 149,950 87,764 281,259 244,232
----------- ----------- ----------- -----------
Total operating expenses 1,063,956 810,624 2,033,432 1,717,892
----------- ----------- ----------- -----------
Net operating profit ........ (747,603) 411,909 (1,240,982) 1,075,075
Other income (expense)
Interest income (expense) . (77,745) (9,309) (155,046) (45,072)
----------- ----------- ----------- -----------
Net income (loss) before
income tax ................. (825,348) 402,600 (1,396,028) 1,030,003
Income tax (Note 4) ......... 0 0 0 0
----------- ----------- ----------- -----------
Net income (loss) ........... $ (825,348) $ 402,600 $(1,396,028) $ 1,030,003
=========== =========== =========== ===========
Net earnings(loss) per
common share (Note 7) ...... $ (0.13) $ 0.6 $ (0.22) $ 0.16
=========== =========== =========== ===========
Weighted average number of
shares outstanding ......... 6,466,502 6,466,502 6,466,502 6,466,502
=========== =========== =========== ===========
</TABLE>
- 2 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Balance Sheets
December 31, June 30,
1998 1999
----------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ............. $ 222,339 $ 1,385,028
Accounts receivable, net of allowance
$389,093 (1998) and $100,093 (1999) .. 2,388,152 1,336,309
Other receivables ..................... 65,186 35,314
Inventories (Note 3) .................. 1,509,396 1,654,751
Prepaid expenses and other current
assets ............................... 192,564 78,137
----------- -----------
Total current assets ........... 4,377,637 4,489,539
Tooling, furniture and office equipment,
net of accumulated depreciation
(Note 3) .............................. 195,819 176,672
Other assets-net of accumulated
amortization (Note 3) (Note 13) ....... 270,482 228,258
----------- -----------
Total assets ........................... $ 4,843,938 $ 4,894,469
=========== ===========
Liabilities and Stockholders' Equity
Prepetition liabilities secured
Line of credit (Note 5) ............. $ 88,240 $ 104,213
Prepetition liabilities subject to
compromise (Note 12)
Accounts payable ..................... 1,917,828 2,046,318
Accrued expenses ..................... 0 0
Notes Payable (Note 5) .............. 2,450,000 2,450,000
----------- -----------
4,367,828 4,496,318
Post Petition liabilities
Accounts Payable ..................... 1,373,446 326,611
Accrued expenses (Note 3) ............ 273,078 521,416
Customer deposits .................... 65,438 0
Debtor in possession notes ........... 260,000 0
----------- -----------
1,971,962 848,027
Stockholders' equity (Note 6):
Common stock; $.10 par; 20,000,000
shares authorized; 6,466,502 issued
& outstanding ....................... 646,650 646,650
Preferred stock, 10,000,000 shares
authorized; none issued & outstanding 0 0
Additional paid in capital ........... 6,720,140 6,720,140
Accumulated deficit .................. (8,950,882) (7,920,879)
----------- -----------
Stockholders Equity ......... (1,584,092) (554,089)
----------- -----------
Total liabilities and stockholders'
equity ................................ $ 4,843,938 $ 4,894,469
=========== ===========
- 3 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Statement of Stockholders' Deficit
(unaudited)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance-December 31, 1998 ... 6,466,502 $ 646,650 $ 6,720,140 $(8,950,882) $(1,584,092)
Net profit for the six months
ended June 30, 1999 ........ 0 0 0 1,030,003 1,030,003
----------- ----------- ----------- ----------- -----------
Balance - June 30, 1999 ..... 6,466,502 $ 646,650 $ 6,720,140 $(7,920,879) $ (554,089)
=========== =========== =========== =========== ===========
</TABLE>
- 4 -
<PAGE>
VOICE IT WORLDWIDE, INC.
Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
-----------------------------
1998 1999
------------ ------------
Cash flows from operating activities:
Net income (loss) .................. $(1,396,028) $ 1,030,003
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Allowance for discounts and
bad debts ........................ 75,581 (289,000)
Depreciation and amortization ..... 262,097 101,096
Amortization of deferred loan costs 12,720 16,960
Changes in current assets and
liabilities:
Receivables ...................... 2,248,125 1,390,761
Prepaid expenses ................. (166,524) 114,426
Inventories ...................... (191,994) (165,401)
Customer deposits ................ 0 (65,438)
Accounts payable - pre and post
petition ........................ (595,966) (918,345)
Accrued liabilities - pre and post
petition ........................ (128,122) 248,339
----------- -----------
Cash (used in) provided by
operating activities....... 119,889 1,463,401
----------- -----------
Cash flows from investing activities:
Other assets ....................... (154,538) (2,582)
Acquisition of tooling, furniture
and equipment ..................... (19,636) (54,103)
----------- -----------
Cash used in investing
activities................. (174,174) (56,685)
----------- -----------
Cash flows from financing activities:
Draws (payments) on long term
line-of-credit, net ............... (619,608) 15,973
Payments from Debtor in Possession
notes ............................. 0 (260,000)
----------- -----------
Cash used in financing (619,608) (244,027)
activities.................
----------- -----------
Net increase (decrease) in cash ... (673,893) 1,162,689
Cash - Beginning of period .......... 867,242 222,339
----------- -----------
Cash - End of period ................ $ 193,349 $ 1,385,028
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest was $92,053 (1998) and $56,302
(1999).
-5-
<PAGE>
VOICE IT WORLDWIDE, INC.
Notes to Financial Statements
(unaudited)
Note 1 - Summary of Significant Accounting Policies
The summary of the Company's significant accounting policies are
incorporated by reference to the audited Voice It Worldwide, Inc. financial
reports included in the Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998.
The statements of operations, balance sheets, stockholders' deficit
and cash flows as of June 30, 1999 and 1998 and the periods then ended have not
been audited by independent accountants, but in the opinion of the management,
reflect all normal recurring adjustments and entries necessary for the fair
presentation of the operations of the Company. The results of operations for any
quarter, and quarter-to-quarter trends, are not necessarily indicative of the
results to be expected for any future period.
Note 2 - Letter of Credit
At June 30, 1999, the Company had no irrevocable standby letters of
credit outstanding. However, from time to time, letters of credit are required
by major suppliers.
Note 3 - Selected Balance Sheet Information
December 31, June 30,
1998 1999
----------- -----------
(Unaudited)
Inventories
Raw materials ..................... $ 998,787 $ 2,121,395
Finished goods .................... 1,596,996 146,400
Reserve for obsolescence .......... (1,086,387) (613,044)
----------- -----------
$ 1,509,396 $ 1,654,751
=========== ===========
Tooling, furniture and equipment
Office furniture and equipment .... $ 258,361 $ 270,823
Tooling and manufacturing equipment 243,556 285,196
----------- -----------
501,917 556,019
Less accumulated depreciation . (306,098) (379,347)
----------- -----------
$ 195,819 $ 176,672
=========== ===========
Other assets
Deferred loan costs - net of
accumulated amortization of
$74,199 in 1998 and $91,159
in 1999 .......................... $ 109,194 $ 92,234
Patent costs - net of accumulated
amortization of $177,388 in (1998)
and $205,234 in (1999) ........... 111,288 86,024
Marketable securities - available
for sale (Note 13) ............... 50,000 50,000
----------- -----------
$ 270,482 $ 228,258
=========== ===========
<PAGE>
Note 3 - Selected Balance Sheet Information (continued)
December 31, June 30,
1998 1999
----------- -----------
(Unaudited)
Accrued liabilities
Vacation & 401K ................... $ 39,858 $ 55,860
Advertising ....................... 86,187 40,336
Warranty .......................... 127,780 135,908
Commissions ....................... 2,982 8,487
Interest Payable................... 5,749 0
Licensing fee ..................... 0 199,084
Bonuses ........................... 0 78,370
Other ............................. 10,522 3,371
----------- -----------
$ 273,078 $ 521,416
=========== ===========
<PAGE>
Note 4 - Income Taxes
The Company reports income taxes for interim periods based on annualized
estimates of earnings, tax credits and book/tax differences at the estimated
annual effective tax rate. For federal and state income tax purposes, at
December 31, 1998, the Company had net operating loss carry forwards of
approximately $9,400,000 which substantially expire in fiscal years 2008 through
2012 and general business credits of $46,791 which expire in fiscal year 2009.
The net operating loss carry forwards and other credits generated a deferred tax
asset, which has been fully reserved, due to a lack of profitable operating
history.
Note 5 - Long-Term Debt and Line-of-credit
December 31, June 30,
1998 1999
----------- -----------
(Unaudited)
Prepetition-Secured
$100,000 line-of-credit to financial
institution, interest at prime rate
plus 2.5%, totaling 10.25% at
December 31, 1998. Principal is due
March, 31, 2000. Borrowings are
collateralized by all receivables,
inventory, investment property,
equipment and general intangibles.
Pursuant to the filing of Chapter 11
reorganization, a cash collateral
agreement was signed by both parties
agreeing to monthly interest payments
on the balance outstanding at the
date of filing or $2,500, whichever
is greater. $ 88,240 $ 104,213
Prepetition Liabilities Subject to
Compromise
8% convertible debenture, interest
payable monthly, convertible into one
share of common stock for each $0.95
of principal converted. Principal due
November 1, 2002. Monthly principal
redemption of one percent of the then
outstanding balance was to begin in
November 1998. As of June 30, 1999,
no payments had been made on the
principal balance. $ 2,450,000 $ 2,450,000
<PAGE>
Note 6 - Stockholders' Equity
Convertible Debenture
The Company has issued a $2,450,000 convertible debenture (Note 5).
This debenture is convertible into the Company's common stock at a rate of $0.95
of principal for each share of common stock. Monthly principal redemption of one
percent of the then outstanding balance was to begin in November 1998. As of
June 30, 1999, no payments had been made on the principal balance. The Company
has rejected this convertible debenture as part of its proposed Amended Plan of
Reorganization filed April 21, 1999 pursuant to Chapter 11 of the Bankruptcy
Code. However, no assurances can be made that the Company's Plan will be
accepted. As such, no adjustments have been made to reflect this proposal.
Warrants
Combined with the $2,450,000 convertible debenture, the Company issued
940,000 warrants to buy shares of the Company's common stock at an exercise
price of $1.06 per share. On December 30, 1997, the warrants were exercised at
$1.06 per share resulting in proceeds of $996,400.
During the first half of 1996, the Company used letters-of-credit
issued from individuals with the Company as beneficiary. These letters-of-credit
were used as collateral at the Company's bank for its line-of-credit. As an
incentive to participate in this collateral program, the Company issued 20,000
warrants to acquire the Company's common stock. Each warrant entitles the holder
to purchase one share of the Company's unregistered common stock at an exercise
price of $2.75 per share. These warrants can be exercised at any time prior to
their expiration in May, 2000.
During 1995, the Company completed the sale of 648,880 units of its
common stock. In connection with the private placement and the issuance of
convertible debt, the Company issued an aggregate total of 38,131 warrants to
placement agents. Each warrant entitles the holder to purchase one unregistered
share of common stock at any time from June, 1996 through June, 1999 at an
exercise price of $2.75 per share. However, with the issuance of warrants
pursuant to an employment agreement, the Company lowered the exercise price of
these warrants to $1.06 per share.
Pursuant to an employment agreement with an officer, the Company
issued 40,000 Warrants to acquire common stock. Each warrant entitles the holder
to purchase one share of the Company's unregistered common stock at an exercise
price of $1.06 per share. Warrants for 20,000 of these shares expired on
December 31, 1997; the remaining 20,000 can be exercised at any time prior to
their expiration in December, 1999.
The Company has rejected all outstanding warrants as part of its
amended plan of reorganization filed April 21, 1999 pursuant to Chapter 11 of
the Bankruptcy Code. However, no assurances can be made that the Company's Plan
will be accepted. Therefore, no adjustments have been made that reflect this
proposal.
Stock Options
The Company has reserved a total of 800,000 of its authorized but
unissued common stock for stock option plans (the "Plans") pursuant to which
officers, directors, employees and non-employees of the Company are eligible to
receive incentive and/or non-qualified stock options. Under the terms of the
Plans, options are exercisable based on various vesting schedules with an
exercise price which equals the market price of the common stock on the date of
grant. Through December 31, 1998, the Company had granted (net of cancellations)
426,443 options with various vesting periods and an exercise price of between
$.31 and $3.00 per share. As of June 30, 1998, 384,443 granted options are
vested with exercise prices ranging from $1.06 to $3.00. However, no options
have been exercised.
As part of its amended plan of reorganization filed April 21, 1999
pursuant to Chapter 11 of the Bankruptcy Code, the Company has rejected all
outstanding stock options granted pursuant to the 1994 Stock Compensation Plan.
As of June 30, 1999, the Company has granted 702,200 new incentive
and/or non-qualified stock options to officers, directors, employees, and
non-employees as part of its post reorganization plan. 677,200 of these shares
were issued at an exercise price of $0.19 with an expiration date of January,
13, 2002. 633,700 of these options vested January 13, 1999 and 43,500 options
vest on final acceptance of the Company's Amended Plan of Reorganization by the
U.S. Trustee. 25,000 additional options were granted on March 1, 1999 at $0.48 a
share with three year vesting. These options are dependent on the Company's
Amended Plan of Reorganization being accepted. However, no assurances can be
made that the Company's Plan will be accepted.
Accounting for Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Accordingly, no compensation cost has been
recognized for the stock options and warrants granted. Consistent with the
disclosure-only provisions of SFAS No. 123, the Company must provide pro forma
net earnings and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair value based method
defined in SFAS No. 123 had been applied.
The Company uses one of the most widely used option pricing models,
the Black-Scholes model ("the Model"), for purposes of valuing its stock option
grants. The Model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions including the
expected stock price volatility, expected dividend yields, the risk free
interest rate and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's option, the value determined by the Model is not
necessarily indicative of the ultimate value of the granted options.
Note 7 - Earnings Per Share
The Company adopted Statement of Financial Accounting Standard No. 128
("FAS 128"), Earnings Per Share. All prior period loss per common share data has
been restated to conform to the provisions of this statement. Basic loss per
common share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock, only if their effect is dilutive. Options and warrants to
purchase shares of common stock in 1998 and 1997 were not included in the
computation of diluted loss per common share because their effort would be
antidilutive.
Note 8 - Letters-of-Credit
The Company periodically finances the purchase of their raw materials
through the assignment of letters-of-credit issued by their largest customer,
Dragon Systems, Inc. Dragon issues letters-of-credit to the Company who in turn
assigns the letters-of-credit to vendors to prepay the purchase of raw materials
used in the turnkey manufacturing process. As of June 30, 1999 there were no
outstanding letters-of-credit.
Note 9 - Related Party Transactions
As of March 31, 1999 the Company held $600,000 in various debtor in
possession (`DIP') notes payable to members of the Board of Directors. These
loans were approved by the order of the Bankruptcy Court, provide for an
interest rate of 10% per annum and qualify as costs and expenses of
administration in the bankruptcy proceedings. As of June 30, 1999, these loans
and associated accrued interest had been repaid.
Note 10 - Proposed Reorganization
On November 2, 1998, The Company filed a voluntary petition for
protection under the reorganization provisions of Chapter 11 of the Bankruptcy
Code with the United States Bankruptcy Court, District of Colorado, file number
98-25542 RJB. The Company continues to operate as a Debtor-in-Possession.
On March 2, 1999, the Company submitted its initial proposed Plan of
Reorganization to the United States Bankruptcy Court. Subsequent to this filing,
the Company submitted an amended Plan of Reorganization and Disclosure Statement
to the Bankruptcy Court.
On May 14, 1999, the U.S. Trustee objected to the adequacy of the
Disclosure Statement. In June , 1999 the Company filed the First amended
Disclosure Statement to accompany the First amended Plan of Reorganization dated
April 21, 1999.
Note 11 - Reclassification
Certain costs for warranty, manufacturing overhead, and warehouse/shipping
expenses have been reclassified as cost of sales expense instead of operating
expense in the first six months of 1998. This change was made to conform to the
classification of expenses used in 1999. The change more accurately reflects the
proper categorization of these product related expenses.
Note 12 - Prepetition Liabilities
As of June 30, 1999, the Company had recognized $4,496,318 in prepetition
liabilities subject to compromise. Claims filed by creditors totaled $5,385,442
as of the end of the second quarter 1999. The Company, through its attorneys, is
in the process of challenging creditor claims that it does not believe are
accurate as part of the bankruptcy process. The Company believes that when the
challenges are complete liabilities will be somewhat higher.
Note 13 - Sale of Other Assets
In the third quarter the Company plans to sell marketable securities with a
book value of $50,000. The Company anticipates that it will record a gain on the
sale of assets as a result of this sale.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
Voice It Worldwide, Inc. utilizes a broad range of silicon chip technology
including digital and analog storage devices, flash memory and digital voice
compression integrated circuits. Voice It combines these technologies with
proprietary software which enables the Company to develop leading edge consumer
voice recorder products. The Company protects its proprietary technology through
a combination of pending patents, copyrights and trade secrets.
Until 1998, the Company's products were designed primarily for consumer use
and sold through retail channels in the U. S. Canada and Europe. In 1998, the
Company began development of a Mobile Dictation recorder designed for
professional users and compatible with voice recognition software. The
capabilities of the new Mobile Dictation recorder provided the Company with an
opportunity to enter significant new markets. During 1998, the Company changed
its business strategy to reduce its reliance on the retail market and expand its
business through OEM, VAR, and vertical markets. In June 1998, the Company
entered into an agreement with Dragon Systems Inc., the leading voice
recognition software marketer in the U.S., to supply Mobile Dictation recorders
for bundling with Dragon Systems voice recognition software. Shipments to this
customer began in October 1998. In April 1999, the Company reported a new two
year supply agreement with Dragon which will expire in December 2000. This
agreement commits Dragon to purchase a minimum of 180,000 units of the Company's
Mobile Dictation recorder. This agreement can be terminated by either party with
180 days notice.
The change in business strategy implemented in 1998 led to improved revenue
and earnings performance for the first six months of 1999. During the first half
of 1999, sales increased to $9,802,200 which was 355% higher than the similar
period last year. The Company also showed a profit of $1,030,000 or $.16 per
share. Although future periods may not show similar growth, the Company believes
that its new strategy is working and intends to pursue it aggressively.
In early 1998, the Company lost distribution of its note recorder products in
several important retail customers, resulting in a 31% decline in sales for the
nine months ended September 30, 1998 versus the same period in 1997. The
Company's failure to meet certain financial performance objectives resulted in
the loss of its line of credit. Although the Company continued to invest in the
development of the Mobile Dictation Recorder and had secured a substantial
purchase order from Dragon Systems for this product, the loss of the line of
credit, coupled with impending principle and interest loan payments, and past
due payables to suppliers, resulted in the Company filing a petition for
protection under reorganization provisions of Chapter 11 of the Bankruptcy Code
with the United States Bankruptcy Court, district of Colorado, on November 2,
1998.
The Company continues its operations as a Debtor-in-Possession (`DIP'). On
March 2, 1999, the Company submitted its initial proposed Plan of Reorganization
dated March 2, 1999 to the United States Bankruptcy Court. On April 21, 1999 the
Company submitted a new Plan of Reorganization along with its Disclosure
Statement to the U. S. Bankruptcy Court. The Company continues to meet its
post-petition financial obligations from cash generated from receivables by the
Company's primary customer. In the second quarter the Company paid back $600,000
in DIP loans from Management.
Results of Operations:
The following table sets forth, for the periods indicated, items in the
Statement of Operations expressed as a percentage of net sales:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1998 1999 1998 1999
----- ----- ----- -----
Net sales .................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............. 64.6 70.0 63.2 71.5
----- ----- ----- -----
Gross profit ............. 35.4 30.0 36.8 28.5
----- ----- ----- -----
Operating expenses
Administrative and general 27.8 9.4 24.2 9.1
Selling and marketing .... 74.5 8.4 57.2 6.0
Research and development . 16.8 2.1 13.1 2.4
----- ----- ----- -----
Total operating expenses . 119.1 19.9 94.5 17.5
----- ----- ----- -----
Operating profit (loss) .... (83.7) 10.1 (57.7) 11.0
Other income (expense), net (8.7) (0.2) (7.2) (.5)
----- ----- ----- -----
Net profit (loss) before
income tax ................ (92.4) 9.9 (64.9) 10.5
Income tax (benefit) ....... 0.0 0.0 0.0 0.0
----- ----- ----- -----
Net profit (loss) ....... (92.4)% 9.9% (64.9)% 10.5%
===== ===== ===== =====
Three Months ended June 30, 1999 compared to Three Months ended June 30, 1998:
Net sales for the three months ended June 30, 1999 were $4,072,200 compared
to $893,600 for the three months ended June 30, 1998. The increase in sales were
the result of the successful introduction of the Voice It mobile dictation
recorder that interfaces with the popular continuous voice recognition software.
Sales to Dragon Systems represented 86% of second quarter 1999 revenue. As a
result of the loss of note recorder distribution, sales of the Company's
personal note recorder were slower than anticipated. The Company continues its
strategy of focusing on OEM, VAR and distributor business as opposed to the
retail market that was the emphasis in the first half of 1998. Sales to
international markets represented 8% of total revenue in the second quarter.
Cost of sales for the quarter ended June 30, 1999 increased to $2,849,700 or
70.0% of net sales from $577,200 or 64.6% of net sales during the second quarter
of 1999. The increase in cost of sales is the result of increased sales volume
of mobile digital recorder to Dragon Systems, the leading supplier of voice-to
text software in the United States. These OEM sales to Dragon carry a lower
gross margin than the personal note recorders that represented the majority of
sales in the first six months of 1998. This lower gross margin as a percent of
sales is expected to continue in the next quarter.
General and administrative expenses were $382,500 during the second quarter
of 1999 compared with $247,900 for the same period in 1998. As a percent of
revenue, these expenses were only 9.4% in 1999 versus 27.8% in 1998. The
increase in expenses is primarily due to increased legal, accounting, and
banking expenses resulting from the
Chapter 11 Bankruptcy filing. Additional expenses were also accrued for
severance and relocation as the Company is planning to consolidate its
operations in Rancho Bernardo, California and move out of its Ft. Collins,
Colorado headquarters in the third quarter of 1999.
Sales and marketing expenses for the quarter ended June 30, 1999 decreased
$325,800 to $340,300 from $666,100 during the same quarter in 1998. This
decrease is primarily due to the reduction in coop and consumer advertising and
sales commissions that were required to market personal note recorders to the
retail market in 1998. As a result of the change in business strategy to sell
through OEM and distributor channels, sales and marketing expenses in 1999 have
been greatly reduced. As a percent of net sales, sales and marketing expenses
decreased from 74.5% in the second quarter of 1998 to 8.4% in the comparable
1999 period.
Research and development costs decreased $62,200 to $87,800 for the second
quarter of 1999 from $150,000 for the same quarter in 1998. Research and
Development costs decreased primarily due to timing delays in consulting and
design expenditures for continued development of the Digital Voice Recorder.
Third quarter research and development expenses are expected to be significantly
higher due to development of a new mobile dictation recorder with USB capability
and increased R & D staff. As a percent of net sales, research and development
expenses decreased from 16.8% in 1998 to 2.1% in 1999.
The Company recorded an operating profit of approximately $411,900 for the
second quarter ended June 30, 1999 compared with an operating loss of
approximately $747,600 for the same quarter in 1998. The compounding effect of a
355% sales increase and lower operating expenses more than offset the increase
in cost of sales as a percentage of total sales.
Other income (expense) for the quarter ending June 30, 1999 showed a loss of
$9,300 compared to a net loss of $77,700 during the same period last year. The
primary components of other income (expense) in the second quarter of 1999
include interest on the $104,000 secured line of credit and interest on the DIP
loans. Second quarter 1998 other income (expense) was primarily comprised of
interest expense on the $2.45 million convertible debt entered into the fourth
quarter of 1995 and utilization of its line of credit. After other income
(expense), net profit for the three months ended June 30, 1999 was $402,600 or
$0.06 per share compared to a net loss of $825,300 or $0.13 per share for the
second quarter of 1998.
Six Months ended June 30, 1999 compared to Six Months ended June 30, 1998:
Net sales for the six months ended June 30, 1999 were $9,802,200 compared to
$2,151,500 for the six months ended June 30, 1998. Sales for the first half of
1999 increased over 350% due to the change in marketing strategy where the
Company began primarily selling its mobile dictation recorder as a bundled
product with Dragon systems voice recognition software. Sales in the first half
of 1998 were primarily the result of note recorder sales to retail markets where
the Company had experienced significantly declining distribution and sales.
Sales to Dragon Systems represented 88% of total sales in the first half of 1999
while sales to international markets contributed 7% of the Company's revenue.
Cost of sales for the first six months ended June 30, 1999 increased to
$7,009,300 or 71.5% of net sales from $1,359,100 or 63.2% of net sales during
the six months of 1998. The increase in cost of sales was the result of the
increased sales volume. The lower gross margin as a percent of sales was the
result of 1999 OEM sales of the new digital voice recorder that is compatible
with continuous speech, voice-to-text software. These OEM sales carry a lower
gross margin than note recorder sales that represented the majority of sales in
the first six months of 1998.
General and administrative expenses increased $367,600 to $889,300 during the
first half of 1999 compared with $521,700 for the same period in 1998. As stated
previously, this increase in expenses is primarily due to increased legal,
accounting, and banking expenses resulting from the Chapter 11 Bankruptcy
reorganization proceedings. In addition, expenses were accrued for severance and
relocation costs associated with the Company's decision to consolidate its
operations and relocate its headquarters from Ft. Collins, Colorado to Rancho
Bernardo, California.
Sales and marketing expenses for the six months ended June 30, 1999 decreased
$646,100 to $584,400 from $1,230,500 during the same period in 1998. This
decrease is due to the reduction of cooperative and general print advertising
that was required to support retail sales in 1998. The Company's strategic
decision to market its mobile dictation recorder to OEM, VAR, and Distributor
channels in 1999, significantly reduced its advertising requirements.
Research and development costs decreased $37,100 to $244,200 for the first
half of 1999 from $281,300 for the same period in 1998. A primary reason for
this decrease is due to timing delays associated with software and design
consultants. These savings offset increased amortization of capitalized software
development costs that contributed to increase in research and development costs
in the first half of 1998.
The Company recorded an operating profit of approximately $1,075,100 for the
first six months ended June 30, 1999 compared with an operating loss of
approximately $1,241,000 for the same period in 1998. The 355% increase in sales
and lower operating expenses more than offset the lower gross margin as a
percent of sales due to the change in sales strategy.
Other income (expense) for the six months ending June 30, 1999 showed a loss
of $45,100 compared to other income (expense) during the same period last year
of $155,000. The primary component of interest expense in 1998 was the interest
on the $2.45 million convertible debenture the Company entered into during the
fourth quarter of 1995. Additionally, the Company incurred interest expense from
utilization of its line-of-credit facility as well as interest paid to one of
the Company's vendors for extended payment terms. Other income (expense) in the
the first six months of 1999 primarily reflected interest on DIP loans provided
by Management and interest on the secured line of credit. After interest
expense, the net profit for the six months ended June 30, 1999 was $1,030,000 or
$0.16 per share compared to a net loss of $1,396,000 or $0.22 per share for the
first half of 1998.
Liquidity and Capital Resources:
At June 30, 1999, the Company had cash and cash equivalents of approximately
$1,385,000. The Company also had working capital deficit of approximately
$959,000 at quarter end which is a significant improvement from the working
capital deficit of approximately $2,050,400 at December 31, 1998. The primary
reason for the increase in working capital is the Company's net profit for the
six months ended June 30, 1999 of approximately $1,030,000.
Cash provided by the Company for operating activities during the six months
ended June 30, 1999 was approximately $1,463,400. A primary component of
operating cash was the Company's first half net income of $1,030,000 adjusted
for non-cash adjustments of depreciation and amortization of approximately
($170,900). The largest source of cash for the period was the decrease in
receivables of approximately $1,390,800. Other uses of operating cash for the
second quarter include decreases in the Company's prepaid expenses of
approximately $114,400 and increases in accrued liabilities of approximately
$248,300. Uses of operating cash include the increase in inventories and
customer deposits of $165,400 and $65,400, respectively and decreases in account
payables of $918,300. Additional uses of cash include $54,100 for the
acquisition of tooling and other assets. During the six months ended June 30,
1999, the Company used approximately $260,000 by paying off Debtor in Possession
notes provided by Management.
During the second quarter of 1999, the Company financed its working capital
requirements through letters-of-credit from Dragon Systems, Inc. The Company
believes that it will have sufficient working capital to finance operations
during the third and fourth quarters of 1999 although it may require letters of
credit from Dragon or additional short term financing to fund material purchases
and operating expenditures.
Seasonality:
The Company's business has traditionally been skewed toward the fourth
quarter. In 1998, 61% of sales occurred in the fourth quarter. However, this was
primarily the result of the introduction of the new Digital Voice Recorder
commencing with initial pipeline shipments to its primary OEM customer Dragon
Systems. These pipeline shipments continued for the first three months of 1999.
The Company anticipates that following the initial success and sell through of
its product bundled with Dragon software in the first six months of 1999, that
second half sales to Dragon will be significantly lower due to a full product
pipeline at the wholesale and retail level and increased competition.
Foreign Exchange:
The Company's products are principally purchased from suppliers in the Far
East with its prices negotiated on an annual basis in U.S. dollars at exchange
rates reset annually. Exchange rate fluctuations between the U.S. Dollar and the
Singapore dollar could have an adverse effect on the Company's costs of sales
and gross margins. In the event of extreme exchange rate fluctuations, it may
become uneconomical for the relationship between the Company and its suppliers
to continue.
The Company also historically records less than 10% of its revenues in Europe
and the Middle East. In most countries, the Company sets its sales prices in U.
S. dollars so that any variances are for the purchaser's account. However, if
the exchange rate fluctuates between these other currencies and the U. S.
dollar, it may have an adverse effect on the Company's sales
Inflation:
Management believes that inflation has not and will not have a significant
impact on its business.
<PAGE>
Bankruptcy:
The Company continues its operations as a Debtor-in -Possession (`DIP').
On March 2, 1999, the Company submitted its initial proposed Plan of
Reorganization to the U. S. Bankruptcy Court. On April 21, the Company submitted
a new Plan of Reorganization and Disclosure Statement to the Trustee of the U.S.
Bankruptcy Court.
In May, the U.S. Trustee found that the Company's initial Disclosure
Statement to be inadequate and requested that the Company file an Amended
Disclosure Statement. The Company filed a First Amended Disclosure Statement to
accompany its First Amended Plan of Reorganization dated April 21, 1999. The
Bankruptcy Court ordered that the hearing to consider the adequacy of the
Debtor's First Amended Disclosure Statement originally set for July be reset at
the request of the Company.
The Bankruptcy Court has ordered that the Company file a status report
with the Court on the progress of the Debtor and Renaissance Capital of the
Creditors Committee in formulating a consensual plan of reorganization on or
before September 20, 1999.
Year 2000 Compliance:
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue and is developing an
implementation plan to resolve the issue. The Year 2000 Issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and conversions to new
software, the Year 2000 problem will not pose significant operations problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed in a timely manner, the
Year 2000 problem may have a material impact on the operations of the Company.
The Company has not yet determined the impact if any, that Year 2000
issues may have on its vendors. However, the Company believes there are adequate
alternative vendors that can supply products and services to the Company if
necessary.
The microprocessors used in the Company's products operate on a 99-year
Julian calendar. Thus, there will be no operational issues with these products
related to the Year 2000 issue.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On November 2, 1998, the Company filed a voluntary petition for protection
under the reorganization provisions of Chapter 11 of the Bankruptcy Code with
the United States Bankruptcy Court, District of Colorado, file number 98-25542
RJB. The Company will continue to operate as a Debtor-in-Possession.
On March 2, 1999, the Company filed its initial Plan of reorganization
with the United States Bankruptcy Court.
On April 21, 1999, the Company filed a new Plan of Reorganization and
Disclosure Statement with the United States Bankruptcy Court.
On May 14, 1999 the United States Bankruptcy Trustee objected to the
adequacy of the Company's Disclosure Statement.
In June the Company filed its First Amended disclosure statement
to the U. S. Bankruptcy Court to accompany the First Amended Plan of
Reorganization.
Item 2. Changes in Securities. None
Item 3. Defaults upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOICE IT WORLDWIDE, INC.
Registrant
Date: 08/13/99
/s/J. Frederick Walters
J. Fredrick Walters
Chairman of the Board of Directors
Date: 08/13/99
/s/John H. Ellerby
John H. Ellerby
Chief Financial Officer
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