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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
_______
Exchange Act of 1934 for the fiscal year ended December 31, 1995.
_______ Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 from the transition period from ________ to __________.
Commission File Number 0-10385
VOICE CONTROL SYSTEMS, INC.
(Name of small business issuer in its charter)
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<S> <C>
DELAWARE 75-1707970
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14140 MIDWAY ROAD
DALLAS, TEXAS 75244
(Address of principal executive (Zip Code)
offices)
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Issuer's telephone number,
including area code: (214) 726-1200
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 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 Securities Exchange Act of 1934 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 the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_____]
The issuer's revenues for its most recent fiscal year $10,778,814.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 15, 1996, was $79,236,697.
The number of shares of the registrant's Common Stock outstanding as of March
15, 1996 was 7,000,123.
The following documents are incorporated by reference into this Annual Report
on Form 10-KSB: Portions of the registrant's Proxy Statement for its 1996
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
Index to Exhibits on Page
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TABLE OF CONTENTS
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ITEM Page
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PART I
1 DESCRIPTION OF BUSINESS
General 3
Speech Recognition 3
Software Development/OEM 4
Strategy 6
Products and Services 6
Technology Development 13
Sales and Marketing 13
Manufacturing 15
Competition 15
Patents 15
Employees 15
2 DESCRIPTION OF PROPERTIES 16
3 LEGAL PROCEEDINGS 16
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock Prices 16
Dividend Policy 16
6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
1995 vs 1994 17
1994 vs 1993 18
Liquidity and Capital Resources 18
Recent Accounting Pronouncement 19
7 FINANCIAL STATEMENTS 19
8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 19
PART III
9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 19
10 EXECUTIVE COMPENSATION 19
11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 19
12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 19
13 EXHIBITS AND REPORTS ON FORM 8-K 20
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Voice Control Systems, Inc. ("VCS" or the "Company") was founded in September
1978 and was organized as a Texas corporation in May 1980. The Company
reincorporated as a Delaware corporation in January 1981 under the name "Scott
Instruments Corporation" ("Scott"). Effective August 11, 1994, VCS Industries,
Inc., an Illinois corporation ("Industries"), merged into the Company whereupon
the Company changed its name to Voice Control Systems, Inc. (the "Merger").
After the Merger, security holders of Industries owned, assuming the exercise
of all outstanding rights to purchase Common Stock, 76% of the outstanding
Common Stock of the Company and designees of Industries accounted for a
majority of the Company's Board of Directors. The Merger was accounted for as
a reverse acquisition and therefore all financial information (except for stock
prices) included herein for periods prior to the Merger is that of Industries.
VCS is a leading international supplier of speech recognition and related
speech input technologies. The Company believes that it offers the widest
selection of speech recognition and speaker verification products and
vocabulary libraries. These products employ a proprietary phonetic approach to
speech recognition developed by VCS over the past 17 years. VCS has a number
of commercial firsts in applying its technology in commercial applications,
including: (i) the first speaker-independent telephone speech recognizer PC
board; (ii) the first speaker-independent cellular telephone voice dialer;
(iii) the first switch-based cellular voice dialer; (iv) the first alphabet
recognizer; and (v) the first simultaneous speaker-independent speech
recognizer and speaker verification system. VCS believes it is the leading
provider of speech recognition technologies in telecommunications applications
worldwide, with more than 300,000 speech recognizers distributed in 30
countries, and plans to expand into other speech recognition markets.
The Company markets its technologies to systems integrators and OEMs in
telecommunications, desktop computing and consumer electronics markets. VCS
technology has been successfully sold into many applications around the world,
including telephone network automation (1-800-COLLECT-U.S.), telephone banking
(National Westminster Bank, Ltd.-United Kingdom), order entry (Amway Home
Products-U.S.), government services (the Internal Revenue Service-U.S. and
Revenue Canada-Canada), computer multimedia sound boards (Micronics
Computers-U.S.), interactive computer software (Auralog-France), travel
information access systems (Lufthansa-Germany and Hong Kong Railways),
network-based cellular telephone voice dialing (AT&T Wireless Services'
VoiceTouch) and automotive-based cellular voice dialing (Mercedes-Benz-U.S.).
Many of the leading equipment manufacturers and systems integrators in their
respective industries incorporate the Company's technology into their products,
including Dialogic Corporation, InterVoice, Brite Voice Systems, Periphonics,
OKI Telecom, Hughes Network Systems, Micronics Computers and OKI Semiconductor.
The Company's principal sources of revenue are from (i) sales of speech
recognition hardware and software products to system developers and original
equipment manufacturers, (ii) royalties and license fees generated from
licensing of speech technologies to system and product developers, and (iii)
providing specialized engineering services, principally to assist in the
integration of its technology into its customers' products and systems.
SPEECH RECOGNITION
Speech is the most natural and convenient means of human communication and,
therefore, a natural means for a person to communicate with a machine. Speech
recognition technology converts spoken inputs into digital electronic signals,
which are then translated by a computer processor into specific computer
instructions or data. For example, words such as "stop" and "go" may be
translated using speech recognition into corresponding digital computer
commands, and words such as "one" and "two" may be translated into numeric
data.
Speech recognition applications are usually divided into two categories by the
type of technology required: speaker-dependent and speaker-independent
applications. Speaker-dependent technology requires a user to train a device
to recognize a particular command. This training process has the disadvantage
of requiring some effort on the part of the user, but has the advantage of
permitting the user to choose his or her own words for any command. For
example, speaker-dependent technology is usually used in telephone
voice-dialing applications since it permits a user to create custom name lists.
Speaker-independent technology allows the recognizer to accept speech input
from virtually any user, regardless of gender, age or regional accent, without
user training. It has found acceptance in applications used by the public,
such as telephone-based automated banking or telephone order entry.
Speech recognition systems or recognizers can require continuous or discrete
articulation of words. Continuous recognition permits users to speak a string
of digits without pausing, which is useful when entering a telephone or account
number. Discrete recognition requires speech to be said with short pauses
between words. This technology is useful in applications
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requiring single word inputs, such as replying "yes" or "no" to questions.
Discrete inputs might include words, letters or numbers. Continuous
recognizers require more computer resources than discrete recognizers and,
therefore, are more expensive.
Speaker verification technology converts speech into digital electronic signals
that are then analyzed by a computer processor for patterns of identifying
characteristics. These patterns are compared to stored memories of speech
patterns to determine if the patterns match. Matching patterns are used to
verify a subject's claimed identity. For example, a speaker verification
system could verify that a person reciting an employee identification number is
in fact that employee.
While various types of speech technology have existed for many years, early
speech technology applications were generally inadequate due to their
relatively high costs and low performance. However, as a result of the
decreased cost of computer processing hardware and the development of more
reliable and efficient technology, as well as increased public familiarity with
computer automated devices, speech recognition is now an accepted feature of
many telecommunications applications. The Company's technology is presently
used in the telecommunications industry and is also increasingly being accepted
into applications designed for desktop computing, including computer telephony
and consumer electronics. Recent implementations of speech recognition in
consumer electronics include control of personal computers, hands-free dialing
of car phones and transaction processing through interactive voice response
systems. The Company believes that speech-based control and operation of
electronic devices will be incorporated in an increasing variety of
applications as speech recognition becomes easier to use and more natural,
accurate and affordable.
VCS views the market for speech recognition as four horizontal or industry
segments and four vertical layers of distribution. The industry segments are
telecommunications, consumer electronics, desktop computing and dictation. VCS
believes that it is the leading provider of speech recognition technology
currently used in the telecommunications segment. The Company's technology is
also used in the desktop computing and consumer electronics segments. VCS does
not currently offer products for the dictation segment of the speech
recognition market and has no current plans to do so.
A recent third party market study defines four vertical levels of market
distribution: (i) licensing, (ii) component sales, (iii) system sales and (iv)
solution sales. Licensing involves providing a core speech recognizer and any
associated vocabulary reference tables in software. Component sales involve
selling the basic speech recognizer embedded in component level hardware such
as a semiconductor or a printed circuit board. System sales consists of
selling finished products which use the recognition technology, and solution
sales consists of selling speech recognition solutions using integrated speech
recognition systems.
VCS distributes its products and services primarily through licensing and
component sales. Its Personal Voice Dialer product is its only system sale.
See "--Products and Services." Based upon the Company's practical experience
as a leader in developing and commercializing speech recognition technology in
the telecommunications market and the quality and diversity of its current
technology, the Company believes that it is well positioned to continue to
participate in the growth of speech recognition in the telecommunications
market while expanding its initial penetration in the desktop computing and
consumer electronic markets.
SOFTWARE DEVELOPMENT/OEM
Delivering VCS speech recognition technology to end users requires that a
systems integrator or OEM first complete a product development program during
which the Company's speech technology is incorporated into a product. This
requires an investment of both time and resources on the part of the systems
integrator or OEM. The Company believes that successful completion of a
product development program with a systems integrator or OEM gives VCS an
advantage at that VCS account.
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VCS first began commercial delivery of speech recognition in 1986. Since then
the Company's technology has been or is being integrated in many systems and
products including:
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Systems Integrators/OEMs Typical Applications Illustrative End Users/Products
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Apex Voice Communication, Inc. Virtual telephone network messaging Telephone companies in developing nations
system
Applied Voice Technology Unified messaging on CTI platforms Small and medium businesses
Auralog Multimedia interactive training software Language training companies
Brite Voice Systems Inc. Wireless network-based voice dialing, Telephone companies and cellular and PCS
telephone network voice processing service providers:
systems AT&T Wireless VoiceTouch
Ameritech VoiceSelect
Brite/Perception Interactive voice response systems Banks, educational institutions, financial
institutions and call center operators:
MBNA Account Information System
Dialogic Corporation Call processing components for voice Systems providers in voice mail,
processing systems in voice messaging, interactive voice
telecommunications and computer response and telephone network intelligent
telephony peripherals:
Digital Equipment Corp.
Offnet
Deutsche Telekom, AG Telephone network-based interactive German and Eastern European telephone
voice response companies
Hughes Network Systems Cellular, PCS and SMR voice-activated Automobile manufacturers, cellular
telephones equipment retailers and wireless telephone
service providers:
1996 General Motors Cadillac
IBM Corporation General interactive voice response Financial institutions, information
systems service providers, call center operators,
airlines and the travel industry: DirectTalk
InterVoice, Inc. Interactive voice response systems Banks, brokerage firms, financial
and intelligent peripherals in telephone institutions, information service
networks providers, telephone companies, and airlines
and travel related companies:
1-800-COLLECT
OKI Semiconductor Speech recognition chip Manufacturers in the automotive, consumer
electronics and computer industries:
MSM 6679 VRP
OKI Telecom Voice-activated wireless telephones Automobile manufacturers, cellular equipment
retailers and wireless telephone service providers:
Mercedes-Benz 500 and 600 series
Micronics Computers, Inc. Multimedia PC sound boards PC retailers:
Orchid Technology sound boards
Periphonics Corporation Interactive voice response systems Banks, financial institutions, information
and intelligent peripherals service providers, telephone companies, airlines
and travel related companies:
US IRS 1040EZ telephone tax return
filing system
Precision Systems, Inc. Telephone messaging systems, Telephone companies, call center operators,
telephone network-based voice and wireless service providers:
processing systems and call center "Atlas" Personal Telecommunications
automation Assistant
Siemens, AG Voice activation in telephone Telephone companies worldwide
network switching systems
Telecorp Systems, Inc. Pay-per-view automated order entry Cable television companies and subscription
television companies
</TABLE>
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STRATEGY
The Company's strategy is to capitalize on its strong base of technology,
practical experience, speech database libraries and established distribution
channels to participate in the increasing use of speech recognition in the
telecommunications market while expanding its presence in other developing
speech recognition markets. The specific elements of its strategy are as
follows:
Maintain leadership in the application of speech recognition technology in the
telecommunications industry
The Company believes it is the leading supplier of speech recognition
technology used in telecommunications. The Company plans to maintain this
position by developing and deploying new products primarily across its existing
distribution network. Dialogic has historically been the Company's largest
distributor/customer in the telecommunications market segment. While Dialogic
represents a large portion of VCS's revenues, speech recognition technology
presently is sold with only a small percentage of Dialogic's product sales.
The Company is working with Dialogic to increase the penetration of speech
recognition by developing new products and marketing programs targeted to
increase penetration of existing VCS products sold by Dialogic. The Company
also plans to increase penetration of its other telecommunications
distributors' sales by joint marketing programs, enhancement of existing
products and new product offerings.
Diversify its markets to include consumer electronics and desktop computer
applications
Presently the Company derives the majority of its sales by providing speech
recognition technology to the telecommunications market. The Company plans to
expand marketing of its technology to other markets in order to diversify its
revenue base. To this end, the Company has begun to market its technology to
the consumer electronics and desktop computer markets. The Company believes
that systems integrators and OEMs in these markets will increasingly use speech
recognition technologies in their products and that the Company's experience
and reputation in implementing speech recognition in the telecommunications
market positions it favorably to compete in these emerging markets.
Improve the man-machine interface
The Company is developing enhancements to its core technology to permit
recognition of more conversational speech. These enhancements will permit end
users to access larger vocabularies and, by spotting key words, to speak in a
more natural and conversational manner. In addition, the Company has announced
a "Phonetic Dictionary" vocabulary development system for user-developed
speaker-independent vocabularies. See "--Products and Services--Enhanced
Technologies."
Emphasize software license revenues
The Company's products consist of implementations of its software-based speech
recognition technologies in software, hardware or computer chips.
Historically, the Company has developed both hardware and software for its
customers. However, as the markets for speech recognition technologies grow
and mature, the Company expects to increase its proportion of revenues from
software sales or licenses to systems integrators and OEMs who will design and
manufacture their own hardware.
Develop end user voice dialer products
The Company has recently introduced its first product marketed directly to the
end user. Historically, the Company developed technology exclusively for
integration by systems integrators and OEMs into their products.
Expand its international presence
The Company's marketing and product strategy is to continue to develop its
products for use internationally. VCS currently has discrete digit and control
word vocabularies for telecommunications applications in 45 languages and
dialects.
PRODUCTS AND SERVICES
Core Technology Products
All VCS speech technology products are based upon VCS's proprietary speech
technology developed over the last 17 years and refined by VCS's field
experience gained by helping its customers implement over 300,000 speech
recognizers. Speech input is typically the most natural and efficient means of
human communication. With the increase in the power of low-cost digital
signal processors ("DSPs") and microprocessors ("chips"), manufacturers of
business and consumer products have begun to use human speech as an interface
to their products.
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The Company's current technologies include speaker-independent (discrete and
continuous) and speaker-dependent speech recognition, as well as speaker
verification. The Company's speaker-independent speech recognition technology
is based on "phonetic unit identification." This technology examines the
features of a spoken word only to the point of recognizing the word's unique
components and disregards the characteristics of a particular speaker's voice,
such as pitch, inflection and accent. VCS's proprietary software then dissects
the word and examines its components to identify the word presented to it,
irrespective of the speaker. Although the Company has designed hardware on
which its recognition software resides, there is no unique hardware required to
use the Company's technology.
For the most demanding speaker-independent applications, including digit
vocabularies for telecommunications or cellular automotive vocabularies, VCS
collects many speech samples in the environment and language of the targeted
application. These speech samples are processed in the laboratory to develop
the specific vocabulary reference tables. The Company believes this methodology
permits a higher degree of accuracy than alternative methods of vocabulary
development. Because customers usually cannot create vocabulary words
themselves, VCS has processed discrete vocabularies in 45 languages,
alphanumeric vocabularies in 18 languages and continuous vocabularies in 13
languages for telecommunications applications. For applications requiring
custom speaker-independent vocabularies, VCS offers a vocabulary development
service program. In the last three years, VCS has processed several hundred
custom vocabularies in connection with this program. The Company's "Phonetic
Dictionary" will allow users to select and create a speaker-independent
vocabulary. See "--Enhanced Technologies."
TELECOMMUNICATIONS LANGUAGES PROCESSED
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Discrete Digits & Control Words Alphanumeric Continuous
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Afrikaans Hungarian Australian English British English
Australian English Italian British English Canadian English
Belgian French Japanese Canadian English Canadian French
Brazilian Portuguese Korean Canadian French Cantonese
British English Malaysian Dutch Dutch
Canadian Cantonese Malaysian English European French European French
Canadian English Mandarin Finnish Finnish
Canadian French N. American Spanish German German
Cantonese Polish German Military Alphabet Hong Kong English
Castilian Puerto Rican English Greek Mexican Spanish
Catalan Puerto Rican Spanish Hebrew N. American Spanish
Danish Russian Hong Kong English S. American Spanish
Dutch Singapore English Italian U.S. English
European French S. African English N. American Spanish
European Portuguese S. American Spanish S. American Spanish
Finnish Swedish Singapore English
Flemish Swiss French U.S. English
German Swiss German U.S. Military Alphabet
Greek Swiss Italian
Hebrew Thai
Hindi Turkish
Hong Kong Cantonese U.S. English
Hong Kong English
</TABLE>
The Company offers speaker-dependent speech recognition technology for
applications which are anticipated to be used by only one or a few speakers,
such as control of a personal computer or voice dialing a cellular phone.
Before using a speaker-dependent system, the user is prompted to introduce
himself to the system by speaking specific utterances; the speech is analyzed
to tune the recognition system to work well with that user. The Company
optionally offers speaker adaptation capabilities in its speaker-dependent
technology products. Speaker adaptation improves accuracy in speaker-
dependent applications by enabling a system to adjust to peculiarities in a
user's voice or pronunciation, such as may occur if the user is suffering from
a cold or hayfever. It may also be used to adapt the recognizer to use by
several persons.
The Company's speaker verification technology (trade named SpeechPrint ID )
allows a system to verify that a user is who he claims to be. Because it has
been designed to run on the same components as VCS's speech recognition
technologies, no additional hardware is required to implement speaker
verification in a recognizer that already employs the Company's technology.
The Company believes that its approach to speech recognition and speaker
verification delivers significant performance advantages in terms of the
requirements for processing power, memory and vocabulary size. The Company's
technology is capable of supporting the largest channel density of any
commercial product currently on the market.
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CORE TECHNOLOGY PRODUCT SUMMARY
The following table sets forth certain summary information for the Company's
current core technology products.
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Core Technology Options and
Application Features Enhanced Technologies
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Telecommunications SI, SD, SA, SV User selectable triggering
Continuous speech input Voice activation
Discrete speech input Word spotting
HMM decision strategy High rejection vocabularies
Phonetic "front-end" Phonetic dictionary
Vocabulary masking Cut-thru (barge-in)
High accuracy in tele- Large vocabulary
phone environment capability(u)
Multi-channel/high Alphabet recognition
density Custom vocabulary
Software-based development service
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Desktop SI, SD, SA, Voice activation
Computing Discrete input Low memory option
Continuous input(u) Custom vocabulary
SAPI interface(u) development service
HMM decision strategy(u) Telephone or
OLE format software(u) desktop speech input
Accurate in high noise Alphabet recognition
"Close talk" or "far talk"
microphone input
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Consumer/ SI, SD, SA, SV Alphabet recognition
Automotive Discrete speech input Voice activation
"Close talk" or "far talk" SI & SD operation
microphone input Celldial interface
Accurate in high noise Custom vocabulary
Low memory required development service
Phonetic "front-end"
Low "horsepower"
processor required
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<CAPTION>
Core Technology Customer
Application Operating Environment Vocabularies
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Telecommunications DSP embedded recognizer 45 languages-- discrete
DSP library recognizer digits
Microprocessor 18 languages-- alphabet
embedded recognizer 12 languages --
Fixed point support continuous
Floating point support 9 languages -- cellular
Supported processors: 3 languages -- phonetic(u)
Texas Instruments
Intel
NEC
OKI
Siemens(u)
- -----------------------------------------------------------------------------------
Desktop Microprocessor 45 languages -- CT
Computing embedded recognizer digits
DOS-based system 18 languages -- CT
OS/2-based system alphabet(u)
Supported processors: 12 languages --
Intel continuous(u)
OKI PC control library
NEC
- -----------------------------------------------------------------------------------
Consumer/ DSP embedded recognizer 45 languages -- CT
Automotive DSP library recognizer discrete digits(u)
Microprocessor 18 languages -- CT
embedded recognizer alphabet
Fixed point support 7 languages --
Floating point support automotive
Supported processors: PC control library
Texas Instruments military alphabet library
Intel machine control library
NEC
OKI
- -----------------------------------------------------------------------------------
</TABLE>
SI -- speaker-independent SD -- speaker-dependent SA -- speaker-adaptive
SV -- speaker verification u -- under development CT -- computer telephony
GLOSSARY OF TERMS
"Back end" -- The portion of the speech recognition algorithm which determines
the word spoken. It uses the information from the "front end" to arrive at its
decision.
"Celldial" -- A VCS parametric-based programming interface to simplify voice
dialing application software.
"Close talk" -- Speaking into a microphone close to the mouth, such as a
telephone handset microphone.
"Far talk" -- Speaking into a microphone at a distance from the speaker, such
as a telephone speakerphone microphone.
"Front end" -- The feature extraction portion of a speech recognizer. The
"features" or speech characteristics desired are computed by this part of the
speech algorithm and passed to the "back end."
"HMM" -- Hidden Markov Modeling. A mathematical database search model which is
commonly used for complex computer database modeling problems, such as speech
recognition.
"OLE" -- Object linking and embedding. A programming environment that
simplifies application software development through the use of software
"libraries" that contain code to implement special program features.
"Phonetic" -- Relating to phonemes, the basic sounds or units of spoken
language.
"SAPI" -- Speech application program interface. This is a standard established
by Microsoft for programmers of speech applications to enable integration of
third party software products with other applications running in a Microsoft
environment.
"Software-based" -- Technology which is embodied in software only and is
thereby capable of operating in any hardware environment.
"Vocabulary masking" -- A technique by which a speech recognizer vocabulary is
divided into smaller sub-vocabularies in "real time" to improve recognition
accuracy.
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Enhanced Technologies
As end users become more accustomed to interacting with products incorporating
speech recognition technologies, firms utilizing speech recognition in their
systems request advanced features, such as continuous digit input, the ability
to override outgoing system prompts with voice commands, natural language
capabilities and conversational speech. The Company currently has several
projects under development or in beta test which are aimed at providing these
enhanced speech recognition solutions.
Natural language refers to the capability of speaking digits combined with
other key numeric words, such as "hundred" or "thousand," in a continuous
manner. Speech recognition technology available today requires that the user
speak digits in a more structured manner. For example, a number such as 2400
must be spoken either discretely or continuously as "two-four-oh-oh." Natural
language technology will permit the user to say "twenty-four hundred" or "two
thousand four hundred" as well. The Company is currently developing
vocabularies to enable natural language input and expects to have beta versions
in U.S. English available in 1996.
Phonetic dictionary technology is another advanced feature being requested by
experienced systems integrators. Using a "phonetic dictionary," a word can be
entered into a speaker-independent system by selecting and linking "phonemes"
(i.e., individual units of sound) from a "dictionary" rather than sampling
hundreds of people speaking the word. In order to develop its phonetic
dictionary technology, the Company must collect thousands of samples of
phonetically rich speech in each language. These samples are processed into a
phonetic dictionary of all the sounds (phonemes) in a language. To develop its
phonetic dictionary technology, the Company must collect many samples of
phonetic representations of speech that then are assembled in VCS's laboratory.
This technology will enable a wider distribution of speech recognition in new
applications that require larger vocabularies of custom or semi-custom words,
such as product names or proper names. This technology will be particularly
useful in applications where the list of vocabulary words changes regularly,
such as employee names in a voice mail/auto attendant system. Phonetic
dictionary technology is currently available in beta form from the Company with
commercial availability of the technology and vocabulary creation tools
expected in 1996.
Large speech recognition vocabularies, in excess of 2,000 words, are becoming
increasingly feasible due to technology advancements, such as phonetic
dictionary. The Company has demonstrated a speaker-independent speech
recognition capability for 500 words and its objective is to complete
development of a 2,500 word speaker-independent product during 1996.
Conversational speech recognition is more complicated than the speech
recognition products described above. Context and grammar rules, which take
advantage of knowledge of a specific application, are implemented in a software
layer above the core recognizer, which aids and guides the recognition process.
Conversational speech systems require extremely expensive hardware to operate
and are inherently inflexible and difficult to maintain in changing application
environments. However, the Company believes conversational speech recognition
has great potential for being the most accepted technology for automated
information systems. VCS plans to develop its initial capabilities in a
conversational speech recognizer during 1996.
Telecommunications Products
VCS licenses software and sells several speech recognizer hardware products for
use in telecommunications environments. VCS speech recognition boards provide
the hardware and software necessary to permit speech recognition and speaker
verification in telecommunications systems. These boards will operate the
Company's speaker-independent and speaker-dependent speech recognition
technologies to provide reliable speech recognition over local and long
distance telephone lines. The boards may be used in analog or digital
environments and in a variety of applications, including customer service,
voice mail, home banking, audiotext, order processing, telemarketing and
telephone company operator services. They are designed for easy incorporation
into most interactive voice processing systems to permit use of these systems
from any touch-tone or rotary dial telephone. This is particularly important
internationally where the touch-tone penetration rate is significantly lower
than in the United States, making speech recognition an enabling factor for
many international voice processing applications. In addition, the Company's
latest technologies, including alphanu meric recognition and SpeechPrint ID
speaker verification, expand the range of opportunities for automation with
voice processing systems.
The same VCS speech recognition software available on its hardware products is
also available under license agreements to persons who wish to integrate the
technology into their own hardware platforms. The available software
technology includes speaker verification as well as discrete, continuous and
alphanumeric vocabularies in a variety of languages. VCS also licenses its
enhanced technologies directly to persons who may have acquired the Company's
basic speech recognition technology from one of the Company's
distributors/customers.
The Company also offers its Voice Cut-Thru technology for use with its
discrete, continuous and phonetic technologies. Voice Cut-Thru allows callers
to override outgoing system prompts with voice commands. Recognition actually
takes place
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during the prompting sequence. This is an advance from the previous VCS
"voice-stop" technology in which the caller must stop the prompt by saying
"stop" and then is required to speak the desired number or command.
In the fourth quarter of 1994, the Company introduced a new speech recognition
software product for Dialogic's AEB architecture called VRSoft . The product
has been in beta test for several months, and commercial shipments of VRSoft by
Dialogic are expected to begin during the first quarter of 1996. VRSoft will
be distributed by Dialogic Corporation and is targeted at inexpensive voice
mail and voice response systems that incorporate Dialogic hardware. Many such
systems are in use but have not previously had a cost effective speech
recognition solution due to the requirement for separate speech recognition
hardware. VRSoft will make speech recognition technology available for these
systems without the requirement that additional hardware be purchased. The
Company believes this will attract interest in speech recognition from systems
integrators in a different segment of the market.
Dialogic's latest product architecture, Signal Computing System Architecture or
"SCSA," is designed with an open DSP platform for speech recognition called
Antares. Dialogic has licensed VCS speech recognition to sell with its Antares
product. VCS developed a new line of software products, VCS Antares Software,
for Dialogic to market under this license agreement. VCS customized its
continuous and discrete speech recognition technology with Cut-Thru technology
capabilities for this program. VCS has released this software to Dialogic for
use in DOS, UNIX and OS/2 environments. VCS Antares Software is currently in
beta test, and the Company expects it to be fully available in the first part
of 1996. As a result of adopting an open architecture platform, the technology
of the Company's competitors will be available as an alternative to VCS's
technology in products incorporating the Antares product. However, with VRSoft
and VCS Antares Software, VCS technology will be the only speech recognition
technology available across Dialogic's entire product line. VCS believes this
is a competitive advantage since it provides systems integrators a seamless
product and programming interface across all Dialogic speech recognition
products.
Computer/Desktop Products
QuikVoice is a speaker-independent speech recognition software package
developed for voice navigation in desktop and mobile computer applications. It
may be used in the Microsoft Windows environment. This product is currently
sold on Micronics Computers' Orchid Technology brand sound boards. In
addition, Cirrus Logic has licensed this product to bundle with its line of
business audio chips. The software is also being used by Auralog in a
multimedia software product for language training called Talk-to-Me .
VCS supports Microsoft's Speech Application Programming Interface ("SAPI")
standard for speech applications which will be implemented in Microsoft
operating systems. The Company plans to release a speech engine (i.e., a
speech recognizer) conforming to SAPI during 1996. This speech engine will be
marketed to software developers whose applications use speech recognition in
Microsoft's Windows 95 and Windows NT operating systems. The speech
recognition engine will initially support desktop and telephone speech input,
making it suitable for both desktop and computer telephony applications. These
applications include any voice driven interactive software applications, such
as interactive games, interactive learning software, interactive multimedia
software, soft telephones (software with telephone capabilities in the PC),
PC-based answering machines, PC-based voice dialers, voice accessed rolodex
software, voice driven window and menu operation and voice driven access to
communications software, such as that used to access the Internet.
The Company also sells a software recognizer capability based upon a
proprietary application programming interface for software developers whose
products do not conform to SAPI. This capability uses a custom made core
recognizer incorporating a VCS-specified API. Because each project is custom
developed, this offering provides software developers with the most flexibility
in choosing any functionality from VCS's broad range of capabilities in speech
technology.
Cellular/Automotive and Consumer Electronics Products
The Company markets speech recognition for cellular telephones, consumer
electronics and automotive applications. VCS has targeted wireless/cellular
telephones, answering machines, VCRs, televisions, personal organizers,
cordless telephones and video games as potential high volume applications of
VCS's speech recognition. Manufacturers can obtain VCS's speech recognition
for these applications either by licensing software or buying chip sets that
embody the recognition software from VCS. Each customer typically also
purchases support and design consulting from VCS in order to develop a product
using the technology.
The Company has developed a state-of-the-art speech recognizer incorporating
VCS's speaker-independent and speaker-dependent speech recognition
technologies for low cost applications. The Company currently markets this
recognizer for both automotive and consumer electronics applications. The
recognizer is used today in cellular telephone voice dialers sold as part of
built-in car phones. Both the 1996 Cadillac and Mercedes-Benz line of
automobiles are sold with these telephones as either standard or optional
accessories. VCS also provides recognizers that enable voice control of non-
critical automobile functions, such as seats, windshield wipers, windows,
radios and mirrors. Using the Company's voice activation vocabulary
10
<PAGE> 11
provides for total "hands-free" operation of the target accessory thus
increasing safety and convenience. To date, these recognizers have been
implemented only in concept cars.
Historically, manufacturers have been required to use a chip set consisting of
several single purpose chips in order to implement all of the necessary
functions for speech recognition. In 1994, OKI Semiconductor introduced a new
single chip speaker-independent speech recognition microcontroller, the MSM6679
Voice Recognition Processor ("VRP"), which incorporates VCS technology. This
offers an integrated "one-chip" implementation for OEMs desiring to add speech
recognition to their products. With the OKI Semiconductor VRP, the necessary
functions for speech recognition are combined on a single chip, which should
reduce cost. OKI Semiconductor is using its international distribution
capabilities to market the VRP to systems developers and OEMs for development
of applications using the VRP in the automotive, personal computer,
telecommunications and consumer electronics industries.
During 1995, the Company developed its Personal Voice Dialer product, which is
targeted at small business and home-office applications. This product is a
speech recognition device that permits callers from home telephones to voice
dial calls to telephone numbers stored in the unit's memory. The Personal
Voice Dialer is available with memories for 20 or 50 telephone numbers. It may
be connected by the purchaser to operate from a single telephone or, with
professional installation of an RJ-31 jack, from any phone in the house. VCS
is selling this product through catalogues and distributors. The Company began
test marketing the units in the fourth quarter of 1995 to determine the best
distribution channels and price points for the Personal Voice Dialer.
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<PAGE> 12
VCS PRODUCT SUMMARY
The following table sets forth certain summary information for certain of the
Company's products.
<TABLE>
<CAPTION>
Options and
Product Name/ Description Features Enhanced Technologies Architecture Vocabularies
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VR/40(D) Speaker-independent Alphabet recognition DOS, UNIX, OS/2 45 languages --
Discrete speech input Custom vocabulary AEB interface discrete digits
Speech recognition 4-recognizer package development service No PC slot required 18 languages --
daughtercard for Dialogic Phonetic approach Speaker-dependent Analog or digital alphabet
AEB D/41 low density Speaker-adaptive telephone input 8 languages --
products Speaker verification cellular
- ------------------------------------------------------------------------------------------------------------------------------------
VR/160p(D) Speaker-independent Speaker-dependent DOS, UNIX, OS/2 45 languages --
Discrete input Speaker-adaptive PEB interface discrete digits
Speech recognition Continuous input Speaker verification Single PC slot 18 languages --
platform for Dialogic Phonetic approach Word spotting TI 320C25 or alphabet
PEB products 2 to 16 recognizers Hi-rejection TI 320C31 8 languages -- cellular
Shared resource Phonetic Dictionary daughtercard 12 languages --
switching Voice activation continuous
HMM decision strategy Cut-thru
Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
VCS Antares Speaker-independent Speaker-dependent DOS, UNIX, OS/2 45 languages --
Software(D) 2 to 32 recognizers Speaker-adaptive SCSA interface discrete digits
2 recognizers/DSP Speaker verification TI 320C31 18 languages --
Speech recognition for continuous Word spotting firmware alphabetu
Dialogic Antares SCSA 4 recognizers/DSP Hi-rejection 8 languages --
products discrete Phonetic Dictionary cellular
8 recognizers/DSP Voice activation 12 languages --
discrete w/cut-thru Cut-thru continuous
2 recognizers/DSP Alphabet recognition
phonetic
- ------------------------------------------------------------------------------------------------------------------------------------
VRSoft(D) Speaker-independent Speaker-dependent(u) DOS, OS/2(u) 45 languages --
Discrete input Speaker-adaptive(u) Intel or equivalent PC discrete digits
PC host processor-based No additional Alphabet recognition(u) AEB interface 18 languages --
low density Dialogic hardware required alphabet(u)
AEB speech recognizer 2 or 4 recognizers 8 languages --
per PC system cellular(u)
- ------------------------------------------------------------------------------------------------------------------------------------
DVM2c and DVM4s Speaker-independent Speaker-dependent 1/4 PC board 45 languages --
2 recognizers/PCB Speaker-adaptive form-factor discrete digits
Speech recognition continuous Speaker verification Flexible VCS API 18 languages --
hardware for proprietary 8 recognizers/PCB Word spotting Operating system alphabet
architecture voice discrete Hi-rejection independent 8 languages --
processing systems 4 recognizers/PCB Phonetic Dictionary cellular
d iscrete w/cut-thru Voice activation(u) 12 languages --
2 recognizers/PCB Cut-thru continuous
phonetic Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
OKI MSM 6679 VRP Speaker-independent VCS "phonetic" Stand-alone speech 45 languages --CT
Speaker-dependent front- end recognition processor discrete digits(u)
Single chip integrated Speaker-adaptive High noise accuracy Meets SAE 18 languages -- CT
speech recognition Single chip operation(u) Single chip package specifications alphabet
processor Discrete input Low cost "on-board" Parallel or serial Machine control
25 word vocabulary interface library(u)
Modular 20 word PC control library
vocab. expansion 7 languages --
Built-in OKI automotive
synthesizer control
Voice activation(u)
Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
QuikVoice Speaker-independent Out of vocabulary DOS, Windows PC command and
Speaker-dependent rejection VCS API control
Speech recognizer for PC Speaker-adaptive Voice activation Discrete digits
"voice mouse" operation Discrete input
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
D -- Sold exclusively by Dialogic PCB -- Printed Circuit Board
u under development CT -- computer telephony
12
<PAGE> 13
TECHNOLOGY DEVELOPMENT
The Company believes that enhancements of and improvements to its existing
technologies are critical to its future success. The Company has made
substantial investments in research and development in each of the last three
years. During 1995, the Company spent $2,509,000 (23% of revenues) on Company
sponsored research and development. The Company spent $1,962,000 and
$1,190,000 (31% and 17% of revenues, respectively) on Company sponsored
research and development activities during 1994 and 1993, respectively.
Currently, the Company employs 16 full-time people in research and development
and 16 people in product development and application engineering. Many of the
research and development projects on which the Company works span more than one
year.
The Company's technology development activities are directed at continued
improvements to its existing core technologies, enhancements to these
technologies and improved implementations of the technologies to reduce the
cost of the hardware required for speech recognition. The Company continues to
develop and adapt its technology to operate in OKI Semiconductor's VRP. VCS is
currently developing new products, including a phonetic dictionary development
system, a large vocabulary phonetic recognizer, improved word spotting
technology, improved voice activation, natural language understanding and a
SAPI-compliant speech engine. The Company believes that the timely development
and enhancement of its technologies is necessary to remain competitive in the
industry. Delays or inabilities to develop new technology features,
enhancements or products could have a material adverse effect on the Company's
business, operating results and financial condition.
SALES AND MARKETING
The Company markets its core speech recognition technologies to systems
integrators and OEMs for incorporation into their products as well as to the
buyers of their products. VCS sells to systems integrators and OEMs through
its own sales force. When marketing to the buyers of their products, the
Company frequently coordinates its selling efforts with the sales force of a
systems integrator or OEM.
The Company's principal marketing activities include participation in industry
trade shows and seminars, advertising in selected trade publications, public
relations activities with the trade and business press, publication of
technical articles and distribution of sales literature. The manner in which
the Company sells technology and products for use in various markets is
summarized below:
Telecommunications Market
VCS provides hardware and software speech recognition products to address the
telecommunications market. For software products, the Company receives license
fees or royalty payments based on the number of recognizers incorporated in the
end user product. All of VCS's hardware products sold include a license for
the software to enable speech recognition on the hardware purchased. VCS
distributes its technology products for the telecommunications market either
through OEM arrangements or through licensing arrangements with systems
integrators. The Company sells telecommunications hardware and software
products to Dialogic, which in turn sells them to systems integrators who
design and sell systems. These sales typically have a significant lead time
between the initial sale and volume purchases by systems integrators due to the
product development cycle required to develop applications that incorporate the
Company's speech recognition technology products.
Computer/Desktop Markets
In computer and desktop applications, the Company generally licenses its
technology to hardware manufacturers, such as Micronics (Orchid Technology).
The Company receives a royalty for each copy of the technology shipped with the
integrated product.
Cellular and Consumer Electronics Markets
The Company sells its technology products directly to cellular telephone
manufacturers, such as OKI Telecom and Hughes Network Systems, for integration
into end user products. The cellular telephone manufacturer typically either
purchases an enabling computer chip or licenses technologies directly from the
Company. When the Company sells a computer chip, a software license for the
single copy of the Company's technology is included with the chip. Under
licensing agreements, customers of the Company pay a royalty for each product
sold that incorporates the Company's technology. The Personal Voice Dialer is
distributed through specialty catalogs and distributors.
Other Emerging Markets
The Company and OKI Semiconductor jointly integrated the Company's speech
recognition technology into the VRP, a low-cost chip being manufactured and
sold by OKI Semiconductor. OKI Semiconductor has indicated to the Company that
it is
13
<PAGE> 14
targeting customers for cellular, automotive and personal computer applications
for which the prior implementation of speech recognition was too expensive or
unworkable.
Significant Customers
The Company's largest customers have historically been Dialogic, Periphonics,
Brite and InterVoice. Sales of hardware to Periphonics are made pursuant to
purchase orders, the form of which are updated from time to time. Sales of
technology or products to Dialogic, Brite and InterVoice are generally made
under agreements that do not obligate such customers to make purchases but set
forth the terms under which purchases will be made.
Sales of hardware products incorporating licensed technologies pursuant to
various agreements between the Company and Dialogic have historically accounted
for most sales to Dialogic. While the Company historically has sold hardware
products incorporating licensed technologies to Dialogic, Dialogic has the
right to manufacture such hardware products. If Dialogic chooses to
manufacture hardware products incorporating licensed technologies, Dialogic
will pay royalties to the Company for each port of recognition incorporated and
sold by Dialogic. It is anticipated that future Dialogic products
incorporating licensed technologies will be manufactured by Dialogic and the
Company will receive royalties for VCS speech recognition technologies
incorporated and sold by Dialogic. While gross sales to Dialogic will decrease
with the transition from hardware sales to royalty revenue, cost of sales will
also decrease as the hardware cost component will be eliminated.
Sales to InterVoice are generated from sales and support of software products
sold pursuant to a License Agreement between the Company and InterVoice.
InterVoice pays the Company a royalty for each port of licensed technologies
integrated and sold in InterVoice systems.
Sales to Brite have historically been made pursuant to a Software Agreement
between VCS and Brite dated August 31, 1992 (the "Agreement"). The Agreement
grants Brite a license to use certain VCS technology, sets forth business
generation fees to be paid to VCS with respect to such uses and sets forth fees
to be paid to VCS for enhanced technologies sold in Brite systems. While Brite
is under no obligation to utilize its license, the Agreement specifies the fees
and royalties to be paid if such use occurs. Although the Agreement expired by
its terms on August 31, 1995, Brite continues to use the licensed technology
and pay royalties to the Company. The Company believes the Agreement will be
renewed as Brite continues to market systems incorporating the technology
licensed pursuant to the Agreement.
The Company's technology is used by many customers in telecommunications,
desktop and consumer electronics markets. A partial list of the Company's
major customers/integrators is as follows:
TELECOMMUNICATIONS
<TABLE>
<S> <C> <C>
AccessLine Technologies, Inc. Global Communications, Ltd. Periphonics Corporation
AG Communication Systems Group 2000 Precision Systems, Inc.
Apex Voice Communication, Inc. Hewlett Packard Company Siemens, AG
Applied Voice Technology IBM Corporation Stylus Innovation, Inc.
Brite Voice Systems, Inc. Intellicall Syntellect, Inc.
Comverse Technology, Inc. Intellivoice TALX Corporation
Cyberlog, Inc. InterVoice, Inc. Telecorp Systems, Inc.
Dialogic Corporation MicroLog Corporation Vicorp Interactive Systems, Inc.
Digital Equipment Corporation Nortel Voicetek Corporation
Deutsche Telekom AG Parity Software Development Corp. West Interactive Corporation
</TABLE>
CELLULAR AND CONSUMER ELECTRONICS
<TABLE>
<S> <C> <C>
HighwayMaster Communications, Inc. NEC (U.K.) OKI Telecom
Hughes Network Systems OKI Semiconductor Pacific Communication Sciences,
Inc. (PCSI)
</TABLE>
COMPUTER/DESKTOP
<TABLE>
<S> <C> <C>
Auralog Health Tech Services Corp. Micronics Computers, Inc.
Cirrus Logic, Inc. (Orchid Technology)
</TABLE>
14
<PAGE> 15
MANUFACTURING
VCS does not engage in any manufacturing operations and does not plan to do so
in the foreseeable future. The Company contracts out the manufacture and
assembly of hardware. VCS's current suppliers include The Gammon Group,
Hamilton/Hallmark Electronics and NEC America.
COMPETITION
The speech recognition industry is highly competitive and characterized by
rapidly advancing technology. In order to maintain or improve its position in
the industry, the Company must continually enhance its current products and
develop and introduce new products which address the rapidly changing needs of
the marketplace.
Speech recognition is a developing field, and competition is largely based on
technological superiority. Examples of the differentiation in technology
include the ability to operate over telephone lines, size of vocabulary,
ability of the user to create speaker-independent vocabularies, noise
suppression and computational efficiency. The cost of speech recognition
technology can also be an important competitive factor.
While certain of the Company's competitors have developed speech recognition
technology comparable to the Company's technology, the Company believes that,
with respect to markets targeted by the Company, it has a competitive advantage
in implementing its technology based on the technical knowledge and practical
experience it has gained in commercializing technology solutions used in the
telecommunications market.
Competitors include entities engaged in a variety of businesses, including:
computer and semiconductor manufacturers, such as Apple Computer, IBM and
Toshiba; telecommunications and cellular equipment suppliers, such as AT&T,
Motorola and Nortel; affiliates of foreign telephone companies, such as British
Telecom, CNET, CSELT, Telefonica de Espana SA and Vocalis; system suppliers,
such as BBN Hark, Dragon Systems, Marconi Speech and Information Systems,
Microsoft and Texas Instruments; and pure speech recognition companies, such as
Nuance Communications, Lernout & Hauspie Speech Products, Pure Speech, Inc.,
Speech Systems, Inc., Verbex, Inc. and Voice Processing Corporation. Many of
the Company's competitors are substantially larger than the Company, are well
established and have greater financial, technical, marketing, service and
operating resources than the Company. These competitors can be expected to
continue to make substantial commitments to research and product development.
PATENTS
The Company does not apply for patents on its speech recognition techniques
that it maintains as trade secrets because of the disclosure requirements in
doing so. The Company holds eight patents relating to certain methods or
systems by or in which speech recognition or speaker verification may be
implemented. The issuance of a patent is not conclusive as to its validity or
enforceability, nor does it prevent another party from designing around the
claimed invention. Much of the Company's proprietary technology is implemented
in software that is protected under copyright and trade secret law and subject
to licensing agreements.
The Company has recently commenced litigation against a company it believes is
infringing on a patent owned by the Company. See "Legal Proceedings."
EMPLOYEES
As of December 31, 1995, the Company had 57 employees, of which 16 are engaged
in research and development, 16 in product development and application
engineering, 15 in sales and marketing and 10 in finance and administration.
In addition, the Company employs six people on a part-time basis, three to
assist with speech data processing and three to assist in finance and
administration. The Company also employs one person on a contract basis to
assist with marketing of the Company's Personal Voice Dialer. All of the
Company's employees sign agreements containing standard non-disclosure and
invention assignment provisions. The Company's future success will depend on
its ability to attract, train, retain and motivate highly qualified employees,
who are in great demand. The Company's employees are not represented by any
collective bargaining organization, and the Company has never experienced a
work stoppage. The Company believes that its employee relations are good.
15
<PAGE> 16
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases 20,581 square feet for its headquarters facility, pursuant
to a lease that expires September 30, 2000, at 14140 Midway Road, Dallas, Texas
75244. The Company also leases offices in Dublin, Ireland and Ridgefield,
Connecticut for use by sales and marketing personnel.
ITEM 3. LEGAL PROCEEDINGS
On November 6, 1995, the Company filed a complaint in the U. S. District Court
for the North District of Texas. VoiceTech Communications, Inc. of Elmhurst,
Illinois was named as the defendant and is alleged to have infringed, directly,
by inducement or by contribution, a Company patent titled "Speech Recognition
System for Electronic Switches in a Cellular Telephone or Personal
Communications Network." The Company is seeking an injunction to prohibit
further infringement, damages and costs. The defendant has not yet answered or
otherwise responded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICES
The Company's Common Stock began trading on the American Stock
Exchange/Emerging Company Marketplace ("AMEX/ECM"), originally under the ticker
symbol SIC.EC on July 16, 1992. On August 11, 1994, the Company's ticker
symbol was changed to VPS.EC. In February 1996, the Company filed an
application to delist from the American Stock Exchange with the Securities and
Exchange Commission. Effective February 14, 1996, the Company's Common Stock
began trading on The Nasdaq National Market under the symbol "VCSI,". The
following table sets forth the quarterly high and low sales prices on the
AMEX/ECM for the periods indicated (adjusted for a one for four reverse stock
split on August 11, 1994).
<TABLE>
<CAPTION>
AMEX/ECM Sales Price
FISCAL 1994: High Low
------------ ---- ---
<S> <C> <C>
1st Quarter 7.24 4.52
2nd Quarter 7.00 3.76
3rd Quarter 8.52 3.76
4th Quarter 3.69 2.63
</TABLE>
<TABLE>
<CAPTION>
AMEX/ECM Sales Price
FISCAL 1995: High Low
------------ ---- ---
<S> <C> <C>
1st Quarter 3.69 2.81
2nd Quarter 4.38 2.50
3rd Quarter 5.75 2.69
4th Quarter 12.50 5.31
</TABLE>
As of March 15, 1996, there were 1,857 holders of record of outstanding Common
Stock of the Company.
DIVIDEND POLICY
No dividends have been declared or paid on the Company's Common Stock to date.
The declaration of dividends is subject to the discretion of the Company's
Board of Directors and will depend on a number of factors including the cash
position, earnings, financial position and anticipated financial requirements
of the Company and other factors deemed relevant by the Board of Directors.
The Company is limited by law to paying dividends on its Common Stock (i) out
of its surplus, which is the excess, if any, of the net assets over the stated
capital, or (ii) in case the Company has no surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year.
16
<PAGE> 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception, the Company has focused on the development,
commercialization and application of speech recognition technologies. The
Company's principal sources of revenues are from: (i) sales of speech
recognition hardware and software products to systems integrators and OEMs,
(ii) licensing of speech technology to system and product developers and (iii)
providing specialized engineering services to systems integrators, principally
to assist in the integration of the Company's technology into its customers'
products and systems. Customers who choose to integrate the Company's speech
recognition technologies into products usually pay a license fee for the right
to integrate the technology and a per unit royalty for each speech recognizer
incorporated into products. The Company introduced its commercial speech
recognition hardware product for telecommunications applications in 1987.
Today approximately 90% of the Company's sales are from the telecommunications
market segment. A significant percentage of the Company's sales are made under
agreements with major customers. See "Sales and Marketing."
The Company's sales and profitability may vary significantly from quarter to
quarter due to a variety of factors, including the Company's dependence upon a
small number of customers, timing of customer orders, and changes in the
Company's product and customer mix. The Company typically operates with
relatively little backlog and substantially all of its revenues in each quarter
results from orders and royalty payments received in that quarter.
The Company's sales to Dialogic are expected to shift over time from
predominantly hardware to predominantly software, as the market demand for
Dialogic SCSA products increases. With the shift from hardware sales to
software sales, the Company's gross revenue from Dialogic may decrease while
increased royalty revenue should improve gross margins. See "Products and
Services--Telecommunications Products".
RESULTS OF OPERATIONS
Comparison of Results for Fiscal Years Ended December 31, 1995 and 1994
Sales increased 70% from $6,334,000 during 1994 to $10,779,000 during 1995.
Two customers, Dialogic and Periphonics, accounted for 60% and 10%,
respectively, of total sales in 1995. Three customers, Dialogic, Brite and
InterVoice, accounted for 44%, 13% and 10%, respectively, of total sales for
1994. Hardware sales, which increased 90% over 1994, were 73% of revenues in
1995. The increase in hardware sales accounted for 90% of the increase in
total sales. Virtually all of the increase in hardware sales resulted from an
increase in telecommunications speech recognition board sales to Dialogic.
Royalty, development and license fees, which increased 47% over 1994, were 25%
of total sales for 1995. This increase resulted primarily from increased
revenues from processing custom vocabularies for existing customers, as well as
increased development revenue from several new and previous customers.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales decreased
from 74% in 1994 to 70% in 1995 as a result of the increase in lower-margin
hardware sales as a percent of total sales.
Research and development expenses increased 28% from $1,962,000 in 1994 to
$2,509,000 in 1995. This increase reflects costs associated with the addition
of eleven employees in research and product development.
Selling, general and administrative expenses increased 26% from $2,934,000 in
1994 to $3,695,000 in 1995. This increase was due primarily to costs
associated with the addition of six employees, increased costs in connection
with Industries becoming a public company upon the consummation of the Merger
and increased professional fees. Selling, general and administrative expenses
as a percent of sales decreased 12%, as increased sales during 1995 did not
require a commensurate increase in expenses.
Net operating loss ("NOL") carryforwards expiring from 1996 to 2009 totaling
approximately $15,047,000 are available as of December 31, 1995 to offset
future periods taxable income. The Company has provided an allowance against
its entire deferred tax asset relating primarily to NOL carryforwards of
approximately $5,116,000. Effective as of August 11, 1994, an ownership change
as defined by the Internal Revenue Code Section 382 occurred. The effect of
such change limits the use of the Company's NOL in future years to
approximately $1,355,000 annually. Revenue in 1995 triggered a federal
alternative minimum tax liability resulting in an increase in federal
alternative minimum taxes of approximately $11,000. Federal income taxes and
state franchise taxes based on income were offset by net operating loss
carryforwards during 1995.
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<PAGE> 18
Comparison of Results for Fiscal Years Ended December 31, 1994 and 1993
Sales decreased 10% from $7,052,000 in 1993 to $6,334,000 in 1994. Three
customers, Dialogic, Brite and InterVoice, accounted for 44%, 13% and 10%,
respectively, of total sales in 1994, and two customers, Dialogic and
InterVoice, accounted for 55% and 13%, respectively, of total sales in 1993.
The decrease in sales from 1993 to 1994 resulted from a decrease in the
purchase of speech recognition boards by Dialogic for incorporation in
audiotext applications in Europe, partially offset by an increase in the sale
of such boards for incorporation in other applications. Hardware sales were
65% of total sales in 1994 compared to 67% of total sales in 1993. Royalty,
development and license fees were 35% of total sales in 1994, compared to 33%
in 1993.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased
from 71% in 1993 to 74% in 1994 as a result of the decrease in lower-margin
hardware sales as a percent of total sales.
Research and development expenses increased 65% from $1,190,000 in 1993 to
$1,962,000 in 1994, primarily due to the addition of employees associated with
the Merger and related expenses.
Selling, general and administrative expenses increased 75% from 1993 to 1994.
This increase is primarily due to the costs associated with the addition of
eleven sales, marketing and administrative employees, increased expenditures
for sales and marketing programs and other expenses associated with the Merger.
Acquired R&D/Goodwill included: (i) $3,060,000 of acquired research and
development, (ii) $234,000 of Scott's capitalized software costs and patents
and (iii) $146,000 of other expenses related to the Merger. In addition, it
included $2,714,000 of goodwill and $98,000 of capitalized organization costs
related to the Merger which were written off in December 1994. Management
determined the write-off was necessary after reappraising the factors
contributing to the value of goodwill acquired in the Merger. Factors that
contributed to the impairment of the goodwill included loss of key technical
personnel from Scott, litigation with a former officer and director of Scott
and customer decisions not to implement technology developed by Scott pursuant
to contracts acquired in the Merger.
The provision for federal and state taxes decreased by $98,000 from 1993 to
1994. Net income in 1993 triggered a federal alternative minimum tax liability
and state franchise tax based on net taxable income. Federal income taxes were
offset by net operating loss carryforwards during 1993. In 1994, VCS incurred
an operating loss and consequently no provision for income taxes was recorded.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements to date have been to fund working
capital and capital expenditures in order to support its sales growth. Net
working capital at December 31, 1994 and December 31, 1995 was $1,673,000 and
$3,602,000, respectively. The Company has financed its increasing working
capital needs primarily through cash flow from operations and proceeds from the
exercise of warrants and stock options. The Company anticipates that its
working capital needs will increase along with future sales growth.
At December 31, 1994 and 1995, the Company had $1,076,000 and $2,259,000,
respectively, in cash and cash equivalents. The Company's primary source of
liquidity is the timely collection of its accounts receivable. The average
days sales in accounts receivable were 53 days and 35 days at December 31, 1994
and 1995, respectively.
The Company's inventory as of December 31, 1994 and December 31, 1995 was
$286,000 and $813,000, respectively. The increase in inventory at December 31,
1995 is attributable to the Company's introduction of the Personal Voice
Dialer. The Personal Voice Dialer is being sold through catalogues and other
direct marketing avenues which require that the Company carry sufficient
inventory to fill orders in a relatively short period of time.
The Company's debt at December 31, 1995 consisted of a convertible promissory
note due to Dialogic on January 1, 1997. Dialogic converted accrued interest
on its note to Common Stock during 1995.
The Company's capital expenditures were $240,000 and $208,000 for the year
ended December 31, 1994 and 1995, respectively. The Company has no specific
commitments with regard to capital expenditures.
On February 14, 1996 the Company completed the sale of 1,269,402 shares of
common stock with net proceeds to the Company of approximately $11,500,000.
The Company believes that its existing sources of liquidity, funds generated
from operations and the net proceeds of the offering will be sufficient to
provide the capital resources necessary to support its increased operating
needs and finance continued growth for the foreseeable future.
18
<PAGE> 19
RECENT ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board ("FASB") has recently issued Statement
of Financial Accounting Standards ("SFAS") No. 123 -- "Accounting for
Stock-Based Compensation," which is required for transactions entered into in
fiscal years that begin after December 15, 1995. SFAS No. 123 provides that an
entity may elect to continue to measure compensation costs using APB Opinion
No. 25 -- "Accounting for Stock Issued to Employees." However, for fiscal years
beginning after December 15, 1995, pro forma disclosures in accordance with
SFAS No. 123 must be included for all awards granted in fiscal years beginning
after December 15, 1994. The statement requires a fair value based method of
accounting for an employee stock option or similar equity instrument as
compared to the intrinsic value based method of accounting prescribed by APB
Opinion No. 25. The Company has not fully evaluated the effects of
implementing this statement but expects that they will not be material. In
addition, no decision has been made with regard to applying SFAS No. 123 to
transactions prior to December 15, 1995 or continuing to apply APB Opinion No.
25 for those transactions.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item begin at page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Ernst & Young served as independent accountant for the Company for the years
ended December 31, 1993 and 1992. On August 15, 1994, the Company's Board of
Directors, in connection with the change in control of the Company, selected
BDO Seidman to serve as its independent accountant with respect to the year
ending December 31, 1994. The Board of Directors failure to select Ernst &
Young as the Company's independent accountants constitutes their being
"dismissed" as such term is used in Item 304 of Regulation S-K, under the
Securities Act of 1933, as amended.
Ernst & Young's reports on the Company's financial statements for the years
ended December 31, 1993 and 1992, did not contain an adverse opinion or
disclaimer of opinion and were not qualified as to audit scope or accounting
principles. Ernst & Young's reports for 1993 and 1992, however, did disclose
the uncertainty surrounding the Company's continuation as a going concern. The
Company has not had any disagreement with Ernst & Young on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which disagreement if not resolved to the satisfaction of
Ernst & Young, would have caused Ernst & Young to make reference to the subject
matter of the disagreement in connection with its report.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The discussion under "Directors, Executive Officers, promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act" in the Company's
definitive Proxy Statement for its 1996 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 10 EXECUTIVE COMPENSATION
The discussions under "Compensation of Directors" and "Executive Compensation"
in the Company's definitive Proxy Statement for its 1996 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement for its 1996 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement for its 1996 Annual Meeting of
Stockholders is incorporated herein by reference.
19
<PAGE> 20
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the Annual
Report on Form 10-KSB.
1. Financial Statements
The financial statements filed as part of the Annual
Report on Form 10-KSB are listed in the "Index to
Financial Statements" on page F-1 hereof.
2. Exhibits
The exhibits filed as part of the Annual Report on Form
10-KSB are listed in the "Index to Exhibits" on page 16
hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this report.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 CONTROL SYSTEMS, INC.
Date: March 27, 1996
By: /s/ Peter J. Foster
-----------------------------------
Peter J. Foster,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Date
- ---------- ----
<S> <C>
/s/ John B. Torkelsen March 27, 1996
- --------------------------------------------------
John B. Torkelsen
Chairman and Director
/s/ Peter J. Foster March 27, 1996
- --------------------------------------------------
Peter J. Foster
President, Chief Executive Officer and Director
/s/ Kim S. Terry March 27, 1996
- --------------------------------------------------
Kim S. Terry
Vice President Finance and Corporate Secretary
(Principal Financial and Accounting Officer)
/s/ Melvyn J. Goodman March 27, 1996
- --------------------------------------------------
Melvyn J. Goodman
Director
/s/ John Lucas-Tooth March 27, 1996
- --------------------------------------------------
John Lucas-Tooth
Director
/s/ Neal J. Robinson March 27, 1996
- --------------------------------------------------
Neal J. Robinson
Director
</TABLE>
21
<PAGE> 22
INDEX OF EXHIBITS
Exhibit No. Exhibit Description
2.1 Agreement and Plan of Reorganization between Scott Instruments
Corporation and VCS Industries, Inc. dated April 11, 1994, as
amended (filed with the Securities and Exchange Commission on
April 11, 1994 as Exhibit 2.1 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and amendment thereto filed on June 1, 1994, as
Exhibit 2.1a to the Company's Amendment No. 1 to the
Registration Statement on Form S-4 dated June 1, 1994,
Registration No. 33-77658, and amendment thereto filed on July
12, 1994, as Exhibit 2.1b to the Company's Amendment No. 2 to
the Registration Statement on Form S-4 dated July 12, 1994,
Registration No. 33-77658, and incorporated by reference
herein).
3.1 Certificate of Incorporation of the Company, as amended (filed
with the Securities and Exchange Commission on March 11, 1986,
as Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1985, and amendment thereto
filed on March 30, 1987, as Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1986, and amendments thereto filed July 8, 1993 as Exhibit
4.3 to Form S-8 Registration Statement of Scott, as further
amended by the Certificate of Merger between Scott Instruments
and VCS Industries, Inc., dated August 9, 1994 filed on March
23, 1995, as Exhibit 3.1 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994 and
incorporated by reference herein).
3.2 By-Laws of the Company (filed with the Securities and Exchange
Commission on March 11, 1986, as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1985, and amendment thereto filed on March 30, 1987, as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986, and amendment thereto
filed on March 23, 1995, as Exhibit 3.2 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated by reference herein).
4.1 Specimen certificate representing shares of the Company's
Common Stock, $0.01 par value (filed with the Securities and
Exchange Commission on December 8, 1995 as Exhibit 4.1 to the
Company's Registration Statement on Form SB-2 dated December
8, 1995, Registration No. 33-64835, and incorporated by
reference herein).
4.2 Promissory Note dated September 20, 1991 in the principal
amount of $1,161,798.90 executed by the Company and payable to
Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.27 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference
herein).
4.3 Loan and Security Agreement dated September 20, 1991 by and
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.28 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
4.4 Omnibus Amendment Agreement dated March 14, 1994 between the
Company and Dialogic Corporation (filed with the Securities
and Exchange Commission on April 11, 1994 as Exhibit 10.35 to
the Company's Registration Statement on Form S-4 dated April
11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.1 1992 Stock Option Plan of the Company (filed with the
Securities and Exchange Commission on March 30, 1993 as
Exhibit 10.25 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992 and incorporated
by reference herein).
10.2 1992 Stock Option Agreement of the Company (filed with the
Securities and Exchange Commission on March 30, 1993 as
Exhibit 10.26 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1992 and incorporated
by reference herein).
10.3 Industries 1986 Incentive Stock Plan (filed with the
Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.37 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.4 Form of 1986 Incentive Stock Option Agreement of Industries,
(filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.38 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and incorporated by reference herein).
22
<PAGE> 23
10.5 Form of Stock Option Agreement between Industries and various
non-employee option holders (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.39 to the
Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.6 Form of Warrant Agreement between the Company and various
directors, officers and affiliates (filed with the Securities
and Exchange Commission on March 31, 1994 as Exhibit 10.18 to
the Company's Registration Statement on Form S-4 dated April
11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.7 Stock Option Agreement dated September 20, 1991 executed by
the Company in favor of Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.29 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.8 Form of Convertible Note between the Company and an officer
(filed with the Securities and Exchange Commission on March
23, 1995, as Exhibit 10.15 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994, and
incorporated by reference herein).
10.9 Form of subscription agreement for the private offering of the
Company's Common Stock in March and June 1994 (filed with the
Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.43 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.10 Employment agreement dated June 18, 1993 between the Company
and Peter J. Foster (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.15 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference
herein).
10.11 Amendment to employment agreement dated November 14, 1995
between the Company and Peter J. Foster (filed with the
Securities and Exchange Commission on December 8, 1995 as
Exhibit 10.11 to the Company's Registration Statement on Form
SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.12 Employment agreement dated June 18, 1993 between the Company
and Thomas B. Schalk (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.16 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference
herein).
10.13* Amendment to employment agreement dated July 20, 1995 between
the Company and Thomas B. Schalk (filed with the Securities
and Exchange Commission on November 15, 1995 as Exhibit 10.2
to the Company's Quarterly Report on Form 10-QSB, and
incorporated by reference herein).
10.14* License Agreement dated June 8, 1990 by and between the
Company and Dialogic Corporation (filed with the Securities
and Exchange Commission on April 11, 1994 as Exhibit 10.30 to
the Company's Registration Statement on Form S-4 dated April
11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.15* Amendment to License Agreement dated September 20, 1991
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.31 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.16* Amendment No. 2 to the Licensee Agreement dated September 20,
1991 between the Company and Dialogic Corporation (filed with
the Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.32 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.17* Amendment No. 4 to the License Agreement dated October 1, 1995
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on December 8, 1995 as
Exhibit 10.17 to the Company's Registration Statement on Form
SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.18* License Agreement dated October 7, 1994 between the Company
and Dialogic Corporation (filed with the Securities and
Exchange Commission on December 8, 1995 as Exhibit 10.18 to
the Company's
23
<PAGE> 24
Registration Statement on Form SB-2 dated December 8, 1995
Registration No. 33-64835, and incorporated by reference
herein).
10.19* Support Agreement dated September 20, 1991 between the Company
and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.33 to the
Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.20* Addendum No. 1 to the Support Agreement dated January 31, 1993
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.34 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.21* Addendum No. 3 to the Support Agreement dated October 1, 1995
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on December 8, 1995 as
Exhibit 10.21 to the Company's Registration Statement on Form
SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.22* Omnibus Amendment Agreement dated March 14, 1994 between the
Company and Dialogic Corporation (filed with the Securities
and Exchange Commission on April 11, 1994 as Exhibit 10.35 to
the Company's Registration Statement on Form S-4 dated April
11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.23* VR/xx-PEB letter agreement dated January 31, 1992 between the
Company and Dialogic Corporation (filed with the Securities
and Exchange Commission on April 11, 1994 as Exhibit 10.36 to
the Company's Registration Statement on Form S-4 dated April
11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.24* Software Agreement between the Company and Brite Voice Systems
(filed with the Securities and Exchange Commission on June 29,
1995 as Exhibit 10.29 to Amendment No. 1 to the Company's
Annual Report on Form 10-KSB/A for the fiscal year ended
December 31, 1994, and incorporated by reference herein).
10.25 Office Lease Agreement between the Company and Laborers
National Pension Fund dated July 17, 1986 (filed with the
Securities and Exchange Commission on March 23, 1995, as
Exhibit 10.30 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, and incorporated
by reference herein).
10.26 Amendment to Office Lease Agreement between the Company and
Laborers National Pension Fund dated March 25, 1994 (filed
with the Securities and Exchange Commission on March 23, 1995,
as Exhibit 10.31 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, and incorporated
by reference herein).
10.27 Addendum to Office Lease Agreement between the Company and
Laborers National Pension Fund dated September 8, 1995 (filed
with the Securities and Exchange Commission on November 15,
1995, as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-QSB, and incorporated by reference herein).
10.28 Separation agreement dated July 12, 1994 between the Company
and E. Ray Cotten (filed with the Securities and Exchange
Commission on July 12, 1994 as Exhibit 10.17 to the Company's
Amendment No. 2 to the Registration Statement on Form S-4
dated July 12, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.29* License Agreement between the Company and InterVoice, Inc.
dated August 31, 1994 (filed with the Securities and Exchange
Commission on November 10, 1994 as Exhibit 10.2 to Form 10-QSB
for the quarter ended September 30, 1994, and incorporated by
reference herein).
16.1 Letter regarding Change in Certifying Independent Accountant
(filed with the Securities and Exchange Commission on
September 13, 1994 as Exhibit 16.1 to Form 8-K/A, and
incorporated by reference herein).
* Confidential treatment has been requested for a portion of this exhibit.
24
<PAGE> 25
VOICE CONTROL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
ITEM 13 (A)
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors Report F-2
Balance Sheets as of December 31, 1995 and 1994 F-3
Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1995 F-4
Statements of Stockholders' Equity for Each of the Three Years
in the Period Ended December 31, 1995 F-5
Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1995 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE> 26
Independent Auditors' Report
The Board of Directors and Stockholders
Voice Control Systems, Inc.
Dallas, Texas
We have audited the accompanying balance sheets of Voice Control Systems,
Inc. as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. 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 Control Systems, Inc.
at December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
February 22, 1996
F-2
<PAGE> 27
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
ASSETS
December 31,
-------------------------------
1995 1994
------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,258,900 $ 1,075,527
Accounts receivable (net of $59,000 and
$35,000 allowance for doubtful accounts
in 1995 and 1994, respectively) 1,044,299 920,820
Assets held for sale (Note 2) -- 150,000
Inventory (Note 4) 813,168 286,273
Prepaid expenses 101,325 87,075
------------- --------------
TOTAL CURRENT ASSETS 4,217,692 2,519,695
NET PROPERTY AND EQUIPMENT (NOTE 5) 517,345 484,097
OTHER ASSETS 104,143 25,770
------------- --------------
$ 4,839,180 $ 3,029,562
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Convertible debentures-related party (Note 6) $ -- $ 200,000
Accounts payable and accrued expenses (Note 7) 348,482 481,800
Deferred revenue 267,070 56,250
Current portion of long-term debt (Note 6) -- 108,857
------------- --------------
TOTAL CURRENT LIABILITIES 615,552 846,907
LONG TERM DEBT (NOTES 3 AND 6) 1,161,799 1,174,607
------------- --------------
TOTAL LIABILITIES 1,777,351 2,021,514
------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY (NOTES 2, 3, 6 AND 8):
Preferred stock; $1.00 par value; 300,000 shares authorized;
none issued and outstanding
Common stock, $.01 par value: 20,000,000 shares
authorized; Issued and outstanding shares -
4,356,360 in 1995 and 3,877,979 in 1994 43,564 38,780
Paid-in capital 10,934,918 9,853,401
Receivable from shareholders (79,695) (79,695)
Deficit (7,836,958) (8,804,438)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 3,061,829 1,008,048
------------- --------------
$ 4,839,180 $ 3,029,562
============= ==============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 28
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
SALES (NOTE 11) $ 10,778,814 $ 6,333,829 $ 7,052,239
COST OF SALES 3,455,328 1,643,519 2,051,490
------------- ------------ ------------
GROSS PROFIT 7,323,486 4,690,310 5,000,749
COSTS AND EXPENSES:
Research and development 2,508,701 1,962,009 1,190,323
Selling, general and administrative 3,694,877 2,933,801 1,673,017
Acquired R&D/Goodwill (Note 2) -- 6,251,761 --
Interest, to affiliates (Note 6) 141,428 141,560 159,517
------------- ------------ ------------
TOTAL COSTS AND EXPENSES 6,345,006 11,289,131 3,022,857
------------- ------------ ------------
NET INCOME (LOSS) BEFORE TAXES 978,480 (6,598,821) 1,977,892
------------- ------------ ------------
INCOME TAXES (NOTE 9) 11,000 -- 98,000
------------- ------------ ------------
NET INCOME (LOSS) $ 967,480 $ (6,598,821) $ 1,879,892
============= ============ ============
NET INCOME (LOSS) PER SHARE:
Primary $ .14 $ (2.29) $ .82
============= ============ ============
Fully diluted $ .14 $ (2.29) $ .52
============= ============ ============
WEIGHTED AVERAGE OUTSTANDING SHARES:
Primary 6,900,963 2,881,195 2,291,558
============= ============ ============
Fully diluted 7,149,836 2,881,195 3,750,075
============= ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 29
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
NOTE
COMMON STOCK PAID-IN RECEIVABLE
STOCK DOLLARS CAPITAL FROM S/Hs DEFICIT TOTAL
--------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993 1,880,017 $ 18,800 $ 2,904,510 -- $ (4,085,509) $(1,162,199)
Issuance of 316,047 shares
in exchange for Convertible
Debt (Note 6) 316,048 3,161 287,230 -- -- 290,391
Exercised Options 326 3 497 -- -- 500
Net Income -- -- -- -- 1,879,892 1,879,892
--------- --------- ----------- ----------- ------------ -----------
BALANCE, December 31, 1993 2,196,391 21,964 3,192,237 -- (2,205,617) 1,008,584
Acquisition of Scott
Instruments (Note 2) 1,481,194 14,812 6,314,883 (79,695) -- 6,250,000
Issuance of shares in exchange
for Convertible Debt (Note 6) 154,057 1,541 279,471 -- -- 281,012
Exercised Options 46,337 463 66,810 -- -- 67,273
Net Loss -- -- -- -- (6,598,821) (6,598,821)
--------- --------- ----------- ----------- ------------ -----------
BALANCE, December 31, 1994 3,877,979 $ 38,780 $ 9,853,401 $ (79,695) $ (8,804,438) $ 1,008,048
Issuance of 50,633 shares
in exchange for Convertible
Debt and accrued interest (Note 6) 185,360 1,854 321,933 -- -- 323,787
Exercised Options and Warrants 293,021 2,930 759,584 -- -- 762,514
Net Income -- -- -- -- 967,480 967,480
--------- --------- ----------- ----------- ------------ -----------
BALANCE, December 31, 1995 4,356,360 $ 43,564 $10,934,918 $ (79,695) $ (7,836,958) $ 3,061,829
========= ========= =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 30
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1994 1993
--------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 967,480 $ (6,598,821) $ 1,879,892
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
R&D acquired -- 3,060,000 --
Write-off of goodwill and other assets acquired -- 2,942,814 --
Depreciation and amortization 174,834 284,147 101,624
Provision for bad debts 23,806 35,000 --
Changes in operating assets and liabilities:
Accounts receivable (144,082) 678,300 (1,089,548)
Other assets 6,937 (9,715) --
Prepaid expenses (91,619) 1,720 (42,612)
Inventory (526,895) (5,528) (62,517)
Accounts payable and accrued expenses (8,867) (155,484) 237,841
Other (11,808) -- --
Deferred revenue 210,820 32,350 (59,000)
--------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 600,606 264,783 965,680
--------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (208,082) (240,376) (137,804)
Proceeds from sale of Denton building 150,000 -- --
--------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (58,082) -- --
--------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease
obligations and notes payable (121,665) (12,925) (195,795)
Proceeds from exercise of stock options 762,514 67,273 500
--------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 640,849 54,348 (195,295)
--------------- ------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,183,373 78,755 632,581
CASH AND CASH EQUIVALENTS at beginning of year 1,075,527 996,772 364,191
--------------- ------------- -------------
CASH AND CASH EQUIVALENTS at end of year $ 2,258,900 $ 1,075,527 $ 996,772
=============== ============= =============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 145,223 $ 41,788 $ 163,215
Income taxes paid 11,000 65,000 28,000
Non Cash Investing and Financing Activities:
Conversion of debt and accrued interest to
185,360, 154,057 and 316,047 shares
of stock--all issued to affiliates
(Notes 3 and 6) 323,787 281,012 290,391
Acquisition of Scott in exchange for
1,481,194 shares of stock (Note 2) $ -- $ 6,250,000 $ --
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 31
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Presentation
Voice Control Systems, Inc. (the "Company") engages in the design of speech
recognition systems which allow for the voice control of electronic machines
and/or devices. The Company's revenues are historically derived from the
design of speech recognition systems as value added features for products
manufactured and marketed by others, both domestically and internationally. In
addition to this source of revenue, the Company is currently marketing products
on its own behalf, principally in the telecommunications industry.
Scott Instruments Corporation ("Scott") and VCS Industries, Inc.
("Industries") entered into an Agreement and Plan of Reorganization (the
"Agreement"), approved on August 9, 1994 by each Company's stockholders of
record, pursuant to which Industries was merged into Scott with Scott remaining
as the surviving corporation. The acquisition was effective as of August 11,
1994. Scott's name was changed to Voice Control Systems, Inc. (the "Company").
The transaction was accounted for as a purchase with Industries acquiring Scott
in a reverse acquisition. As a result of the purchase, Scott's assets were
revalued to approximate fair market value (see Note 2).
Certain reclassifications have been made to conform prior years' data to
the current presentation. Each share of Industries common stock was converted
into and exchanged for 2.61209 (.65302 after the effect of the one-for-four
reverse stock split) shares of Scott's common stock. In addition, unless
otherwise noted, all share figures, option and warrant exercise prices have
been adjusted to reflect the effects of the reverse stock split.
Revenue Recognition
Other than for long-term contracts, revenue is generally recorded when
products are shipped to customers. Warranty expense is insignificant.
Technology and prototype development revenue, derived from long-term
contracts, is recognized when earned under the terms of the related contract.
The intent of the contracts is to develop the application of the Company's
technology to products to be manufactured and marketed by others. Such
programs usually culminate in the delivery of a prototype unit. The contracts
for such programs generally provide for the payment of a specified portion of
the total fee at certain stages in the completion of the project, and sometimes
provide for an advance payment at the commencement of the project.
Accordingly, fees billed or received prior to the completion of the related
stage of the project, and those subject to forfeiture in the event of a delay
in project completion, are presented as deferred revenue in the accompanying
balance sheets.
The Company also grants licenses to customers to use the Company's
technologies in their products. Depending on the type of license, customers
pay annual or one-time license fees. Licensees pay royalties to the Company
based on the volume of products sold by the licensee utilizing the licensed
technology. Royalty revenue is reported to the Company by licensees pursuant
to contractual obligations, monthly or quarterly, and is recognized as revenue
when reported by the customer.
Property and Equipment
Property and equipment are recorded at cost. Additions and major
improvements are capitalized while expenditures for maintenance and repairs are
charged to expense when incurred. Depreciation is provided by the
straight-line method over estimated useful lives ranging from three to five
years.
Inventory
Inventory consists of speech recognition products and raw materials used in
the construction of speech recognition products. Inventory is stated at the
lower of cost or market value. Cost is determined on a first-in, first-out
basis.
F-7
<PAGE> 32
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). In
1992, the Company accounted for income taxes in accordance with Statement of
Financial Accounting Standards No. 96, Accounting for Income Taxes.
Under SFAS No. 109, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities. Adoption of
SFAS No. 109 had no material effect on the financial statements (see Note 9).
Earnings Per Share
Net income (loss) per share is based on the weighted average number of
shares of common stock outstanding. Options, warrants and conversion rights to
acquire stock are included as common stock equivalents, when dilutive, using
the treasury stock method. Primary earnings per share is calculated by
measuring dilution applicable to common stock equivalents based on the average
share value for the period, while fully diluted earnings per share measures
dilution based on the share value at the end of the period and assumes the
conversion of the convertible debt due to a customer. Earnings per share in
1994 and 1993 have been adjusted to reflect the stock splits described in Note
2.
Cash Flows
For purposes of the statement of cash flows, the Company considers money
market instruments with original maturities of three months or less to be cash
equivalents.
Concentration of Credit Risk
The Company sells products and licenses technology to customers in
diversified industries. A significant portion of the Company's sales are to
two customers (see Note 11). The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Receivables are generally due within 30 days. Credit losses from
customers have been within management's expectations, and management believes
the allowance for doubtful accounts adequately provides for any expected
losses.
Approximately one-third of the Company's cash and cash equivalents are in
one bank. Thus, the balance over $100,000 exceeds the federally insured
deposit limit.
NOTE 2 -- BUSINESS ACQUISITION
Effective August 11, 1994, the Company acquired all of the stock of
Industries in a reverse acquisition accounted for using the purchase method of
accounting (see Note 1). Each outstanding share of Industries common stock was
converted into and exchanged for 2.61209 (.65302 after giving effect to the
one-for-four reverse stock split) shares of Scott's common stock.
Concurrently, all outstanding shares of common stock were subject to a
one-for-four reverse stock split. Each of the stock splits referred to above
have been retroactively reflected in the financial statements for all periods
presented.
For financial reporting purposes, the results of operations of Scott have
been included in the Company's financial statements since the effective date of
acquisition.
F-8
<PAGE> 33
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 2 -- BUSINESS ACQUISITION (CONTINUED)
Scott's assets were revalued to approximate fair market value based on
Scott's average market capitalization from the date of the negotiated
transaction, January 28, 1994, to the effective date of acquisition, August 11,
1994, which approximates $6.25 million. The revaluation of the assets consist
of the following:
<TABLE>
<S> <C>
Goodwill $2,780,309
Research and development 3,060,000
Land and building 150,000
Remaining net assets 259,691
----------
$6,250,000
==========
</TABLE>
Goodwill was amortized using the straight-line method over a period of
seven years. Goodwill amortization during 1994 totalled $66,198. In December
1994, the Company reappraised the factors contributing to the value of the
goodwill acquired and wrote-off goodwill totalling $2,714,111. Factors
contributing to the impairment of the goodwill include the loss of key
technical personnel from Scott, litigation with a former officer and director
of Scott, and customer decisions not to implement technology developed by Scott
pursuant to contracts acquired in the Merger. While these factors had a
detrimental effect on the Company in 1994, management believes they will not
have a continuing negative impact on operations. The Company sold the land and
building in 1995 for $150,000.
The following summarized unaudited proforma results of operations for the
twelve months ended December 31, 1994 assumes the acquisition occurred as of
the beginning of the period. These proforma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the combination been in
effect on the dates indicated, or which may result in the future.
<TABLE>
<CAPTION>
1994
(Unaudited)
-----------
<S> <C>
Revenue $ 7,104,000
Net income(loss) before write-off of
acquired R&D and goodwill (1,388,000)
Write-off of acquired R&D and goodwill (6,252,000)
-----------
Net loss $(7,640,000)
===========
Net loss per share $ (2.04)
===========
Weighted average shares outstanding 3,741,967
===========
</TABLE>
NOTE 3 -- ISSUANCE OF CONVERTIBLE DEBT
In September 1991, the Company issued a three year promissory note to a
major customer (the "Lender") in the principal amount of $1,161,799 in exchange
for certain demand notes previously issued by the Company. The note bears
interest at a floating rate with a New Jersey bank plus 2%; interest is payable
annually and principal was due on September 20, 1994. On March 14, 1994, the
due date of the note was extended to January 1997. The promissory note is
convertible at any time into common stock of the Company with one share of
common stock issued for every $.9188 of principal and unpaid interest
converted, subject to adjustment in the event of certain dilutive actions of
the Company.
The Company granted the Lender a security interest in the use of its
non-exclusive technology and products. As a part of the Security Agreement,
the Company granted Lender an option (the "Majority Option") to purchase from
the Company a sufficient number of shares which, together with other shares the
Lender then owns or has the ability to acquire by conversion of the note or a
purchase from Lone Star Ventures, would amount to 51% of the common stock of
the Company on a fully diluted basis. For financial reporting purposes, no
value was assigned to the option or convertibility feature. In March 1994
F-9
<PAGE> 34
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 3 -- ISSUANCE OF CONVERTIBLE DEBT (CONTINUED)
the Majority Option was terminated. As consideration for the termination of
the Majority Option, the Company agreed to fix the price of the Incentive
Options at $.6125 per share (see below).
In addition to the right to convert the note and acquire the stock options
described in the Security Agreement, the Lender was granted an option to
purchase up to an additional 914,231 shares of common stock of the Company (the
"Incentive Option"). The number of shares which the Lender was permitted to
purchase was dependent upon the Lender purchasing certain levels of product
from the Company over a period of three years. All of the Incentive Options
were earned as of December 31, 1993. No Incentive Options were exercised as of
December 31, 1994. The exercise price fluctuated based on a valuation of the
Company which was dependent on net after tax earnings and was designed to
approximate fair market value. As such, for financial reporting purposes, no
value was assigned to the Incentive Options. In connection with the
termination of the Majority Option, the exercise date of the Incentive Options
was extended to December 31, 1998 and the exercise price was fixed at $.6125.
The Company accounted for the cost of terminating the Majority Option as an
equity transaction.
NOTE 4 -- INVENTORY
<TABLE>
<CAPTION>
Inventory consists of the following at December 31:
1995 1994
-------- --------
<S> <C> <C>
Raw material $ 44,109 $ 9,670
Finished goods 769,059 276,603
-------- --------
$813,168 $286,273
======== ========
</TABLE>
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Research and development equipment $ 1,335,310 $1,145,848
Furniture and fixtures 211,947 193,327
----------- ----------
1,547,257 1,339,175
Less accumulated depreciation (1,029,912) (855,078)
----------- ----------
$ 517,345 $ 484,097
=========== ==========
</TABLE>
NOTE 6 -- NOTES PAYABLE AND CONVERTIBLE DEBT
Notes payable and convertible debt consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Prime plus 2% (10.5% at December 31, 1995)
convertible note to a major customer (see Note 3) $1,161,799 $1,161,799
11% note payable to bank, due in monthly
installments of $2,972 principal and interest,
collateralized by first lien on assets held for sale -- 107,799
Other notes payable -- 13,866
---------- ----------
Total notes payable and convertible debentures 1,283,464
Less current maturities -- 108,857
---------- ----------
Long term debt $1,161,799 $1,174,607
========== ==========
</TABLE>
F-10
<PAGE> 35
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 6 -- NOTES PAYABLE AND CONVERTIBLE DEBT (CONTINUED)
On August 31, 1993, the Company issued unsecured, convertible debentures to
affiliates totaling $380,000 in exchange for previously issued debentures and
demand notes. The debentures were due in August 1994 and earned interest at
prime plus 4 percent. The debentures were convertible at one share for each
$3.95 in principal and interest converted. In August 1994, the Company issued
45,997 shares of common stock to affiliates in exchange for convertible debt
and accrued interest totaling $181,726. In October, 1994, the remaining
$200,000 convertible debt due to an officer was extended to August 1, 1995. On
August 1, 1995, the Company issued 50,633 shares of common stock to an officer
in exchange for convertible debt.
As discussed in Note 3, on March 14, 1994, the Company obtained an
extension of its convertible note of $1,161,799 to January 1997. In September
1994, accrued interest relating to convertible note totaling $99,286 was
exchanged for 108,060 shares of common stock. In September 1995, accrued
interest relating to the convertible note totaling $123,787 was exchanged for
134,727 shares of common stock.
NOTE 7 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Trade accounts payable $155,396 $205,839
Accrued payroll 84,884 215,228
Accrued interest payable 34,814 32,777
Miscellaneous accrued expenses 62,388 27,956
Federal income tax payable 11,000 --
-------- --------
$348,482 $481,800
======== ========
</TABLE>
NOTE 8 -- COMMON STOCK
STOCK OPTIONS
At the Annual Meeting of Scott's Stockholders in May 1992, the stockholders
approved the 1992 Stock Option Plan (the "1992 Plan") which was assumed by the
Company in connection with its acquisition of Scott. Under the 1992 Plan,
600,000 shares are available for grant; the exercise price per share of options
granted cannot be less than the fair market value of the Company's common stock
at the date of grant; the exercise period of options granted is up to ten years
and options vest 25% per year beginning one year from date of grant, unless
vesting is changed by the Board of Directors. Information relating to stock
options granted to employees is as follows:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price per Share
--------- ------------------
<S> <C> <C>
Balance, January 1, 1993 145,547 $1.75 - $2.00
Options granted 507,855 $1.94 - $2.13
Options cancelled or forfeited (65,084) $1.94 - $2.13
Options exercised -- --
--------
Balance, December 31, 1993 588,318 $1.75 - $2.00
Options granted 71,429 $5.00
Options cancelled or forfeited (430,269) $1.94 - $2.13
Options exercised -- --
--------
Balance, August 11, 1994 229,478 $1.75 - $5.00
1 for 4 reverse split (172,109) $7.00 - $8.00
Options granted 355,404 $3.00 - $3.38
Options cancelled or forfeited (15,160) $7.00 - $8.00
Options exercised -- --
--------
Balance, December 31, 1994 397,613 $3.00 - $8.00
Options granted 178,000 $3.00 - $5.38
Options cancelled or forfeited 156,467 $3.00 - $8.00
Options exercised -- --
--------
Balance, December 31, 1995 419,146 $3.00 - $8.52
========
Options exercisable 86,289 $3.00 - $8.52
========
</TABLE>
F-11
<PAGE> 36
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 8 -- COMMON STOCK (CONTINUED)
STOCK OPTIONS (CONTINUED)
In 1986, Industries established an employee incentive stock plan which
consists of a Stock Purchase Plan, Stock Award Plan, Incentive Stock Option
Plan, Non-qualified Stock Option Plan and Stock Appreciation Rights Plan.
Industries granted key employees incentive stock options at an exercise
price not less than the fair market value of the shares on the date of grant.
The shares are vested over a four year period. As of August 11, 1994, the
Company assumed as a result of the merger described in Note 2, stock options
totalling 471,808 at an exercise price ranging from $1.15 to $1.53 per share.
At December 31, 1995, there were 383,201, employee options outstanding of which
357,482 were exercisable, at prices ranging from $1.15 to $1.53 per share.
Industries had also granted to directors and officers options to purchase
shares of stock at exercise prices not less than fair market value of the
shares on the date of grant. On August 11, 1994, as a result of the merger
described in Note 2, the Company assumed the 694,682 outstanding options. At
December 31, 1995, in addition to the options described in Note 3, there were
403,904 officers and directors options outstanding and exercisable at prices
from $1.15 to $1.53 per share.
STOCK WARRANTS
As of August 11, 1994, Scott had outstanding warrants to purchase 231,404
shares of common stock at prices ranging from $4.00 to $8.00.
On October 1994, the Company issued five year warrants to certain Directors
to purchase 120,000 shares of the Company's common stock for $3.375 per share.
At December 31, 1995 warrants to purchase 322,500 shares of the Company's
common stock were outstanding at prices from $3.375 to $8.00 per share.
The warrant agreements require that the exercise price per share of
warrants granted cannot be less than the fair market value of the Company's
stock at the date of grant and provide for adjusting both the exercise price
and the number of shares purchasable based on various criteria, including the
Company's issuing shares of common stock, convertible securities, or certain
options at less than market price or the warrant exercise price.
NOTE 9 -- INCOME TAXES
Federal and state income taxes consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------------- ------------
<S> <C> <C> <C>
Current
Federal $ 11,000 $ -- $ 33,000
State -- -- 65,000
----------- --------------- ------------
$ 11,000 $ -- $ 98,000
=========== =============== ============
</TABLE>
The following reconciles income tax expense at the federal statutory rate
to the actual tax expense.
<TABLE>
<CAPTION>
1995 1994 1993
------------ --------------- ---------------
<S> <C> <C> <C>
Income taxes at the statutory rate $ 333,000 $ -- $ 672,000
Effect on taxes resulting from:
Utilization of NOL carryforwards (333,000) -- (672,000)
Federal alternative minimum taxes 11,000 -- 33,000
State taxes -- -- 65,000
------------ --------------- ---------------
$ 11,000 $ -- $ --
============ =============== ===============
</TABLE>
F-12
<PAGE> 37
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 9 -- INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred tax assets for federal
and state income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ---------
<S> <C> <C> <C>
Net operating losses $ 5,116,000 $ 5,449,000 $ 935,000
Valuation allowance (5,116,000) (5,449,000) (935,000)
----------- ----------- ---------
$ -- $ -- $ --
=========== =========== =========
</TABLE>
Net operating loss (NOL) carryforwards, expiring from 1996 to 2009,
totalling approximately $15,047,000 are available at December 31, 1995 to
offset future years taxable income, if any. In connection with the Agreement
(see Note 2) an ownership change as defined by the Internal Revenue Code
Section 382 occurred. The effect of such change is to limit the use of the
Company's NOL in future years to approximately $1,355,000 annually.
The Company has provided an allowance for its entire deferred tax asset as
its realization is dependent upon the future generation of taxable income.
Until such realization can be reasonably determined, management will continue
to provide an allowance for the entire deferred tax asset.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company rents offices and equipment under noncancelable and cancelable
operating agreements. Minimum future rental obligations under noncancelable
agreements as of December 31, 1995 are $211,066 annually through 1999. Related
rental expense was $216,191, $173,994, and $166,959 in 1995, 1994, and 1993
respectively.
NOTE 11 -- MAJOR CUSTOMERS
In 1995, two customers accounted for 60% and 10% of total sales revenue.
Three customers accounted for 44%, 13%, and 10% of total sales revenue for the
year ended December 31, 1994, and two customers accounted for 55% and 13% of
total sales revenue for the year ended December 31, 1993. The Company's largest
customer is also the holder of the convertible debt and option agreement
described in Note 3. Accounts receivable from the largest customer were 5%,
2%, and 62% of the total receivable balance at December 31, 1995, 1994, and
1993, respectively.
NOTE 12 -- SUBSEQUENT EVENTS
In February 1996, the Company completed the sale of 1,269,402 shares of
common stock in a registered offering at a price to the public of $10.00 per
share. Dialogic's option for 914,231 shares was sold and exercised in February
1996 in conjunction with the offering.
F-13
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,258,900
<SECURITIES> 0
<RECEIVABLES> 1,103,299
<ALLOWANCES> 59,000
<INVENTORY> 813,168
<CURRENT-ASSETS> 4,217,692
<PP&E> 1,547,257
<DEPRECIATION> 1,029,912
<TOTAL-ASSETS> 4,839,180
<CURRENT-LIABILITIES> 615,552
<BONDS> 0
<COMMON> 43,564
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,839,180
<SALES> 10,778,814
<TOTAL-REVENUES> 10,778,814
<CGS> 3,455,328
<TOTAL-COSTS> 3,455,328
<OTHER-EXPENSES> 6,203,578
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,428
<INCOME-PRETAX> 978,480
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 967,480
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
