<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VOICE CONTROL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 7372 75-1707970
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Identification
Classification Code) Number)
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14140 MIDWAY ROAD, SUITE 100
DALLAS, TEXAS 75244
214-726-1200
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
------------------------
PETER J. FOSTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VOICE CONTROL SYSTEMS, INC.
14140 MIDWAY ROAD, SUITE 100
DALLAS, TEXAS 75244
214-726-1200
(Name, address including zip code, and telephone number, including area
code, of agent for service)
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Copy to:
BRUCE H. HALLETT, ESQ.
CROUCH & HALLETT, L.L.P.
717 N. HARWOOD ST., SUITE 1400
DALLAS, TEXAS 75201
214-953-0053
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Approximate date of commencement of proposed sale to the public: UPON THE
CONSUMMATION OF THE MERGER REFERRED TO HEREIN.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM PROPOSED
AMOUNT OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BEING PRICE AGGREGATE REGISTRATION
SECURITIES BEING REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE
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Common Stock, $0.01 par value.................. 3,500,000 shares(2) $5.6875 $19,906,250 $6,864.21
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(1) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to the provisions of Rule 457(f) under the Securities Act of
1933, as amended, based on the average of the high and low prices of the
registrant's common stock as reported on the Nasdaq National Market on
August 28, 1996.
(2) Reflects the estimated number of shares of the registrant's common stock to
be issued in a merger in exchange for all of the acquired company's common
equivalent shares on an assumed conversion ratio of 0.88 new shares of the
registrant's common stock for every acquired company's common equivalent
share, or 3,500,000 shares of the registrant's common stock for 3,993,671.24
of the acquired company's common equivalent shares assumed to be converted
in connection with the merger.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
VOICE CONTROL SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER , 1996
TO THE STOCKHOLDERS OF
VOICE CONTROL SYSTEMS, INC.:
A Special Meeting of stockholders of Voice Control Systems, Inc., a
Delaware corporation ("VCS"), will be held at ,
Dallas, Texas on October , 1996 at 10:00 a. m. for the following purposes:
(1) To consider and act upon the proposed merger and approve and adopt
the related Agreement and Plan of Merger pursuant to which Voice Processing
Corporation, a Delaware corporation, will merge into VCS, with VCS
remaining as the surviving corporation, all as more particularly described
in the enclosed Joint Proxy Statement/Prospectus;
(2) To consider and act upon a proposed amendment to the 1992 Stock
Option Plan of VCS to increase the number of shares of common stock of VCS
issuable upon exercise of stock options under the plan from 900,000 shares
to 1,300,000 shares of common stock; and
(3) To transact such other business as may properly come before the
Special Meeting and any adjournment thereof.
Stockholders of record at the close of business on August 30, 1996 will be
entitled to receive notice of and to vote at the Special Meeting and any
adjournments thereof.
Whether or not you plan to attend the Special Meeting and regardless of the
number of shares you own, please complete, date, sign and return the enclosed
proxy at your earliest convenience in the enclosed self-addressed, stamped
envelope. You are cordially invited to attend the Special Meeting in person, and
if you attend you may withdraw your proxy and vote your shares personally.
BY ORDER OF THE BOARD OF DIRECTORS
Kim S. Terry,
Secretary
Dated: September , 1996
THE BOARD OF DIRECTORS OF VCS RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
MERGER AND THE AMENDMENT TO THE 1992 STOCK OPTION PLAN.
<PAGE> 3
VOICE PROCESSING CORPORATION
ONE MAIN STREET
CAMBRIDGE, MASSACHUSETTS 02142
September , 1996
Dear Stockholder:
You are cordially invited to attend a special meeting of the stockholders
of Voice Processing Corporation ("VPC") to be held at 1000 Wilson Boulevard,
Suite 800, Upper Mall, Arlington, Virginia on October , 1996 at 10:00 a.m.
local time. Enclosed are a Notice of the Meeting, a proxy card, and a Joint
Proxy Statement/Prospectus containing information about the matter to be acted
upon at the meeting.
At the meeting, you will be asked to vote upon the adoption of the
Agreement and Plan of Merger (the "Agreement") dated July 17, 1996, between VPC
and Voice Control Systems, Inc. ("VCS"), pursuant to which VPC will be merged
with and into VCS. If the Agreement is adopted and the merger becomes effective,
each holder of VPC common stock, other than those demanding appraisal rights,
will receive, in exchange for the VPC stock, common stock of VCS in an amount
determined by the Exchange Ratio as described in the Joint Proxy
Statement/Prospectus.
THE BOARD OF DIRECTORS OF VPC HAS APPROVED THE AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS VOTE IN FAVOR OF ITS ADOPTION.
If you do not plan to attend the meeting, please complete the enclosed
proxy card and return it in the enclosed envelope as soon as possible. Returning
your proxy will not limit your right to vote in person if you later decide to
attend the meeting.
Sincerely,
Merrill Solomon
Chief Executive Officer
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VOICE PROCESSING CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD OCTOBER , 1996
A Special Meeting of stockholders of Voice Processing Corporation, a
Delaware corporation ("VPC"), will be held at 1000 Wilson Boulevard, Suite 800,
Upper Mall, Arlington, Virginia 22209 on October , 1996 at 10:00 a. m. for the
following purposes:
(1) To consider and act upon the adoption of the Agreement and Plan of
Merger pursuant to which VPC will merge into Voice Control Systems, Inc., a
Delaware corporation ("VCS"), with VCS remaining as the surviving
corporation, all as more particularly described in the enclosed Joint Proxy
Statement/ Prospectus; and
(2) To transact such other business as may properly come before the
Special Meeting and any adjournment thereof.
Stockholders of record at the close of business on , 1996 will
be entitled to receive notice of and to vote at the Special Meeting and any
adjournments thereof.
Stockholders may be entitled to appraisal rights pursuant to Section 262 of
the General Corporation Law of Delaware, a copy of which is included as Appendix
C of the enclosed Joint Proxy Statement/Prospectus. For a discussion of
appraisal rights, see page 26 of the Joint Proxy Statement/Prospectus.
Whether or not you plan to attend the Special Meeting and regardless of the
number of shares you own, please complete, date, sign and return the enclosed
proxy at your earliest convenience in the enclosed self-addressed, stamped
envelope. You are cordially invited to attend the Special Meeting in person, and
if you attend you may withdraw your proxy and vote your shares personally.
BY ORDER OF THE BOARD OF DIRECTORS
Merrill Solomon,
Secretary
Dated: September , 1996
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 4, 1996.
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PROXY STATEMENT PROXY STATEMENT
FOR FOR
SPECIAL MEETING OF STOCKHOLDERS SPECIAL MEETING OF STOCKHOLDERS
OF OF
VOICE CONTROL SYSTEMS, INC. VOICE PROCESSING CORPORATION
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PROSPECTUS
OF
VOICE CONTROL SYSTEMS, INC.
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Voice Control Systems, Inc., a Delaware corporation ("VCS"), in connection with
the solicitation of proxies by the Board of Directors of VCS for use at the
Special Meeting of Stockholders to be held at 10:00 a.m., local time, on October
, 1996 at , Dallas, Texas (together with any adjournment or
postponement thereof, the "VCS Special Meeting").
This Joint Proxy Statement/Prospectus is being furnished to stockholders of
Voice Processing Corporation, a Delaware corporation ("VPC"), in connection with
the solicitation of proxies by the Board of Directors of VPC for use at the
Special Meeting of Stockholders to be held at 10:00 a.m., local time, on October
, 1996 at 1000 Wilson Boulevard, Suite 800, Upper Mall, Arlington, Virginia
22209 (together with any adjournment or postponement thereof, the "VPC Special
Meeting").
This document also constitutes a Prospectus of VCS under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the shares of common
stock, $0.01 par value per share (the "VCS Common Stock"), of VCS to be issued
to persons who hold all of the issued and outstanding shares (the "VPC Shares")
of capital stock of VPC . The shares of VCS Common Stock will be issued in
exchange for all of the outstanding shares of all of the two classes of capital
stock of VPC in the merger (the "Merger") of VPC into VCS in accordance with the
Agreement and Plan of Merger, dated as of July 17, 1996, by and between VCS and
VPC (the "Merger Agreement"). As a result of the Merger, the separate corporate
existence of the VPC will cease, and VCS will continue its corporate existence
as the surviving corporation.
The principal executive offices of VCS are located at 14140 Midway Road,
Suite 100, Dallas, Texas 75244 and its telephone number is (214) 726-1200. The
principal executive offices of VPC are located at One Main Street, Cambridge,
Massachusetts, 02142 and its telephone number is (617) 494-0100.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. FOR A SUMMARY
OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY STOCKHOLDERS OF VPC AND VCS,
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
This Joint Proxy Statement/Prospectus is first being mailed on or about
September , 1996, to all stockholders of VCS of record on August 30, 1996, the
record date of the VCS Special Meeting.
This Joint Proxy Statement/Prospectus is first being mailed on or about
September , 1996, to all stockholders of VPC of record on , 1996.
THE VCS SECURITIES TO BE OFFERED IN CONNECTION WITH THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES AUTHORITY NOR HAS THE COMMISSION OR ANY STATE
SECURITIES AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Joint Proxy Statement/Prospectus is September , 1996.
<PAGE> 6
AVAILABLE INFORMATION
VCS is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). These reports, proxy statements and other
information filed with the Commission by VCS under the Exchange Act, can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at
the Regional Offices of the Commission which are located as follows: Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, New York, New York 10049. Copies of such material can also
be obtained from the Commission at prescribed rates. Written requests for such
material should be addressed to the Public Reference Section, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Reports, proxy statements and other information concerning VCS can also be
obtained electronically through a variety of databases, including among others,
the Commission's Electronic Data Gathering, Analysis And Retrieval ("EDGAR")
program, Knight-Ridder Information, Inc., Federal Filings/Dow Jones and
Lexis/Nexis.
The VCS Common Stock is listed and traded on the Nasdaq National Market.
Reports and other information concerning VCS may also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
VPC is not subject to the information requirements of the Exchange Act.
VCS has filed a Registration Statement on Form S-4 (the "Registration
Statement") with the Commission under the Securities Act with respect to the
shares of VCS Common Stock that will be issued in the Merger. As permitted by
the rules and regulations of the Commission, this Joint Proxy
Statement/Prospectus omits certain information, exhibits, and undertakings
contained in the Registration Statement. Reference is made to the Registration
Statement and to the exhibits thereto for further information, which may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington D.C., and copies of which may be obtained from the Commission
at prescribed rates. Statements contained in this Joint Proxy
Statement/Prospectus or in any document incorporated by reference in this Joint
Proxy Statement/Prospectus relating to the contents of any contract or other
document referred to herein or therein are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or such other document. Each such statement is
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following VCS documents (File No. 0-10385) filed with the Commission
under the Exchange Act are incorporated by reference in this Joint Proxy
Statement/Prospectus:
1. Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995.
2. Quarterly Reports on Form 10-QSB for the fiscal quarters ending
March 31 and June 30, 1996.
All documents filed by VCS with the Commission pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date hereof and before the
date of the VCS Special Meeting shall be deemed to be incorporated by reference
herein and shall be a part hereof from the date of filing of such documents. Any
statements contained in a document incorporated by reference herein or contained
in this Joint Proxy Statement/Prospectus shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document which is also incorporated by
reference herein) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except as
so modified or superseded.
<PAGE> 7
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN APPENDICES TO SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE WITHOUT CHARGE UPON REQUEST FROM: INVESTOR
RELATIONS, VOICE CONTROL SYSTEMS, INC., 14140 MIDWAY ROAD, SUITE 100, DALLAS,
TEXAS 75244, (214) 726-1200. TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY OCTOBER , 1996
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE OFFERS MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY VCS. THIS
JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH PERSON'S JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT, SINCE THE DATE OF THIS JOINT PROXY
STATEMENT/PROSPECTUS, THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF VCS AND
AFFILIATES OR OF VPC AND ITS AFFILIATES.
<PAGE> 8
TABLE OF CONTENTS
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Summary of Joint Proxy Statement/Prospectus........................................... 1
Risk Factors.......................................................................... 7
VCS Special Meeting................................................................... 12
VPC Special Meeting................................................................... 13
The Merger............................................................................ 14
Pro Forma Financial Information....................................................... 28
Comparison of Stockholders' Rights.................................................... 33
Amendment to 1992 Stock Option Plan of VCS............................................ 36
Market for and Dividends on the VCS Common Stock...................................... 41
VCS Selected Financial Data........................................................... 42
VCS Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 43
Business of Voice Control Systems..................................................... 46
Description of VCS Capital Stock...................................................... 63
Absence of Market for and Dividends on the VPC Shares................................. 65
VPC' Selected Financial Data.......................................................... 65
VPC Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 66
Business of Voice Processing Corporation.............................................. 69
Security Ownership.................................................................... 72
Legal Opinions........................................................................ 73
Experts............................................................................... 73
Stockholders' Proposals............................................................... 74
Changes in Accountants................................................................ 74
Index to Financial Statements......................................................... F-1
Appendix A Agreement and Plan of Merger............................................... A-1
Appendix B Opinion of First Albany Corporation........................................ B-1
Appendix C Section 262 of Delaware General Corporation Law............................ C-1
</TABLE>
<PAGE> 9
SUMMARY OF JOINT PROXY STATEMENT/PROSPECTUS
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/Prospectus. The summary is necessarily incomplete and
selective and is qualified in its entirety by the more detailed information
contained in this Joint Proxy Statement/Prospectus, including the appendices
hereto.
Risk Factors. The stockholders of VCS and VPC should carefully evaluate
certain risk factors relating to VCS and the Merger. See "Risk Factors".
Matters to be Voted Upon. At the VCS Special Meeting, the stockholders of
VCS will be asked to approve a proposal which approves the Merger and adopts the
related Merger Agreement. In addition, the stockholders of VCS will be asked to
approve and adopt an amendment to the 1992 Stock Option Plan of VCS (the "VCS
Option Plan") to increase the number of shares subject to such plan from 900,000
shares to 1,300,000 shares. At the VPC Special Meeting, the stockholders of VPC
will be asked to vote upon the adoption of the Merger Agreement.
Merger. The stockholders of VCS and VPC are being asked to consider and
act upon the proposed Merger whereby VPC will be merged with and into VCS, the
separate corporate existence of VPC will cease and VCS will continue as the
surviving corporation. Upon completion of the Merger, the holders of the VPC
Shares will receive shares of VCS Common Stock in exchange for their VPC Shares.
In the Merger each share of common stock, $.01 par value (the "VPC Common
Stock"), and each share of preferred stock, $.01 par value (the "VPC Preferred
Stock"), of VPC (as if converted into shares of VPC Common Stock immediately
before the Merger), will be converted into the number (the "Exchange Ratio") of
shares of VCS Common Stock that is equal to the quotient obtained by dividing
(a) 4,000,000 shares, reduced by the "Loan Amount Shares"(as determined below),
by (b) 4,564,195.7, which is the number of shares of VPC Common Stock
outstanding on a fully diluted basis. The "Loan Amount Shares" will be
determined by dividing (1) the difference between (A) the principal balance in
excess of $400,000 that is outstanding on the date that the Merger is
consummated (the "Closing Date") arising under a line of credit provided to VPC
by VCS and (B) the amount of any "Excess Accounts Receivable"(explained below),
by (2)$5.00. The "Excess Accounts Receivable" of VPC will be the lesser of (i)
the amount by which the accounts receivable of VPC on the Closing Date (net of
any reserve for uncollectible accounts) exceeds $740,000 or (ii) the amount by
which the total assets of VPC exceeds the total liabilities of VPC (excluding
the liabilities incurred under the VCS Credit Agreement). See "The Merger".
The stockholders of VCS will not receive any consideration in the Merger,
nor will the Merger affect the number of shares held by any stockholder of VCS.
VCS Credit Agreement. In connection with the transactions contemplated by
the Merger, VCS has agreed to loan VPC up to $750,000 under a revolving line of
credit pursuant to the terms of the Loan Agreement, dated July 9, 1996 (the "VCS
Credit Agreement"), between VCS and VPC. The obligations of VPC under the VCS
Credit Agreement are secured by substantially all of the assets of VPC. The
principal balance of the loan made under the VCS Credit Agreement that is
outstanding at the effective time of the Merger may, subject to reduction for
the Excess Accounts Receivable, reduce the number of shares of VCS Common Stock
that will be issued in the Merger. On August 31, 1996, $500,000 was outstanding
under the VCS Credit Agreement. See "The Merger -- VCS Credit Agreement."
Business of VCS. VCS is engaged in the development and commercialization
of speech recognition and speaker verification technology that enables
individuals to interact with computerized devices through the most natural form
of communication -- human speech. VCS's technology is used by systems
integrators and original equipment manufacturers ("OEMs") to: (i) enable
end-users to use their voice to access, input, update and secure electronic
information, as well as to operate and control electronic devices and (ii) allow
service providers to reduce costs by automating labor intensive aspects of their
business, such as a telephone company providing automated operator assistance
using speech recognition. VCS's technology is primarily used in the
telecommunications industry and is beginning to be commercially integrated into
products in the consumer electronics and desktop computing industries. VCS was
founded in September 1978 and was
1
<PAGE> 10
organized as a Texas corporation in May 1980. VCS 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 Scott whereupon Scott changed its name
to Voice Control Systems, Inc. (the "Scott Merger"). The principal executive
offices of VCS are located at 14140 Midway Road, Suite 100, Dallas, Texas 75244
and its telephone number is (214) 726-1200.
Posi-Ident(R) is a registered trademark, and VRSoft(TM), Cut-Thru(TM),
GoodListener(TM), SpeechPrint ID(TM) and QuikVoice(TM) are trademarks of VCS.
Business of VPC. VPC develops and markets speech recognition products,
primarily for telecommunications applications. The products are sold to OEMs,
value added resellers (VARs), system integrators and independent software
vendors (ISVs), which in turn develop and market a wide variety of
speech-enabled and speech-enhanced applications such as voice activated dialing,
voice mail, voice messaging, interactive voice response, automated attendant and
command and control. The principal executive offices of VPC, which was founded
in 1982, are located at One Main Street, Cambridge, Massachusetts 02142 and its
telephone number is (617) 494-0100.
VPro(R) is a registered trademark, VProContinuous(TM), VPro/XD(TM),
VPro/RT(TM), VProSecure(TM), VProFlex/KD(TM), VProSpeller(TM), VProEdge(TM) and
VProCare(TM) are trademarks, and Voice Processing is a trade name of VPC. All
other trademarks or service marks appearing in this Joint Proxy
Statement/Prospectus are trademarks of the respective companies who own them.
Exchange of VPC Shares for shares of VCS Common Stock. All of the VPC
Shares outstanding immediately prior to the time the Merger becomes effective
will be converted into shares of VCS Common Stock. No fractional shares will be
issued as a result of the Merger. VCS will pay an amount of cash that is equal
to the Exchange Ratio multiplied by the average per share closing price of VCS
Common Stock as reported on the Nasdaq National Market over the twenty trading
days ending on the third trading day immediately preceding the effective date of
the Merger (the "Determination Price") to each stockholder of VPC who would
otherwise be entitled to receive a fraction of a share of VCS Common Stock. See
"The Merger -- Effective Time and Consequences of the Merger" and "The
Merger -- Effect of Merger on VPC Options and Warrants".
Votes Required. At the VCS Special Meeting, the affirmative vote of the
holders of at least a majority of the VCS Common Stock outstanding on the record
date for the VCS Special Meeting is required to approve the Merger and adopt the
Merger Agreement on behalf of VCS. The directors and executive officers of VCS
and their affiliates (who in the aggregate beneficially owned approximately 23%
of the outstanding shares of VCS Common Stock as of August 30, 1996) have
advised VCS that they will vote their shares in favor of the Merger. The
affirmative vote of the holders of at least a majority of the VCS Common Stock
represented in person or by proxy at the VCS Special Meeting is required to
approve and adopt the amendment to the VCS Option Plan. See "VCS Special
Meeting."
At the VPC Special Meeting, the affirmative vote of the holders of at least
a majority of the voting power of the VPC Shares, acting and voting together as
a combined class, that are outstanding on the record date for the VPC Special
Meeting is required to adopt the Merger Agreement on behalf of VPC. In addition,
the affirmative vote of a majority of the outstanding VPC Preferred Stock,
voting separately as a class, will also be necessary to adopt the Merger
Agreement. The directors and executive officers of VPC and their affiliates (who
in the aggregate beneficially owned approximately % of the voting power of
outstanding shares of VPC capital stock, and 100% of the voting power of the VPC
Preferred Stock, as of , 1996, the record date of the VPC Special
Meeting) have advised VCS that they will vote their shares in favor of the
Merger. In addition, Stanley Westreich, Merrill Solomon and Creative Technology
Ltd. ("Creative Technology"), who collectively are the beneficial owners
of % of the voting power of the VPC capital stock, have given proxies to VCS
and have agreed to have their shares voted in favor of the Merger. See "VPC
Special Meeting" and "Security Ownership -- Security Ownership of VPC".
Appraisal Rights of Dissenting Stockholders. The stockholders of VCS are
not entitled to dissenters' rights or an appraisal of their shares in connection
with the Merger because, among other things, the VCS
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<PAGE> 11
Common Stock is listed on the Nasdaq National Market and the holders of VCS will
not exchange or otherwise relinquish any such stock as a result of the Merger.
Subject to certain other conditions, a stockholder of record of VPC who
does not vote his or her VPC Shares in person or by proxy in favor of the Merger
and who files with VPC a written demand for appraisal before the vote at the VPC
Special Meeting will be eligible pursuant to Delaware law for appraisal rights
following the consummation of the Merger. Neither a proxy nor a vote opposing or
abstaining from the Merger will constitute a written demand for appraisal. A VPC
stockholder who files a written demand will not be entitled to appraisal rights
unless such stockholder also takes certain other steps in the manner required by
Delaware law. A vote in favor of the Merger will constitute a waiver of
appraisal rights. See "The Merger -- Appraisal Rights."
If stockholders of VPC holding more than 5% of the outstanding capital
stock of VPC exercise their appraisal rights, VCS has the right under the Merger
Agreement to decline to consummate the Merger. See "The Merger -- Conditions to
the Merger."
Federal Income Tax Consequences. The Merger is intended to be a tax-free
reorganization under federal income tax laws, and, as such, no gain or loss will
be recognized by the stockholders of VPC upon their receipt of the shares of VCS
Common Stock in exchange for their VPC Shares, except for cash received in lieu
of fractional shares. Gain or loss will be recognized, however, by holders of
VPC Shares to the extent of any cash received by VPC stockholders who perfect
their appraisal rights. See "The Merger -- Federal Income Tax Consequences."
Effective Time of the Merger. It is currently contemplated that the Merger
will be consummated as soon as practicable after the VPC Special Meeting and VCS
Special Meeting.
Conditions of the Merger; Termination. In addition to adoption by the
stockholders of VCS and VPC, consummation of the Merger is subject to the
satisfaction or waiver of a number of conditions, including (i) the absences of
material adverse changes to either VCS or VPC, (ii) no more than 5% of the
stockholders of VPC seek to exercise appraisal rights, (iii) that the total
liabilities of VPC (excluding liabilities arising under the VCS Credit
Agreement) do not exceed VPC's total assets as of the Closing Date, and (iv) the
receipt by VCS of a letter from BDO Seidman, LLP stating that the Merger will be
accounted for as a pooling-of-interests. See "The Merger -- Conditions to the
Merger".
Other than approval of the Merger by the VCS stockholders and VPC
stockholders, substantially all of the conditions to the Merger may be waived,
in whole or in part, by the parties for whose benefit they have been created,
without the approval of their respective stockholders. However, after approval
by the stockholders of VCS and VPC, no amendment or modification may be made
which by law requires further approval by such stockholders unless such approval
is obtained. In addition, the Merger may be abandoned under certain
circumstances, and such abandonment will not require stockholder approval. See
"The Merger -- Conditions to the Merger", and "The Merger -- Termination of
Merger Agreement."
VCS Reasons for the Merger. The VCS Board of Directors approved the Merger
based on the potential benefits that could result from an acquisition of VPC.
These benefits included the addition of technology and products that are
compatible, both strategically and technically, with VCS's current products, the
acquisition of a substantial customer base and additional distribution
capability in the telecommunications market, the addition of significant
technical and management support for VCS's operations and the substantial
increase in the size and market capitalization of VCS with its related
competitive benefits.
VPC Reasons for the Merger. The board of directors of VPC has approved the
Merger Agreement and recommends its adoption by the stockholders of VPC because
the surviving corporation will have a more comprehensive range of product
offerings and significantly greater financial resources than VPC; the Merger is
expected to result in significant efficiencies and corresponding expense
reductions for the combined business; the shares of VCS Common Stock to be
issued in exchange for VPC Shares will be freely tradable in the public
over-the-counter market, subject only to certain restrictions applicable to
affiliates of VPC or VCS; and the VPC board believes that the Exchange Ratio is
fair to the stockholders of VPC.
3
<PAGE> 12
Recommendation of Board of Directors of VCS. THE BOARD OF DIRECTORS OF VCS
BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF THE VCS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERGER AND ADOPTION OF THE
MERGER AGREEMENT. See "The Merger -- Background of the Merger" and "The
Merger -- VCS Reasons for the Merger." The Board of Directors of VCS also
unanimously recommends that stockholders vote FOR the amendment to the VCS
Option Plan to increase the number of shares available under the plan.
Recommendation of Board of Directors of VPC. THE BOARD OF DIRECTORS OF VPC
BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF THE VPC STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ADOPTION OF THE MERGER
AGREEMENT. See "The Merger -- Background of the Merger" and "The Merger -- VPC
Reasons for the Merger."
Opinion of Financial Advisor of VCS. First Albany Corporation ("First
Albany") has delivered its written opinion, dated as of September , 1996, to
the Board of Directors of VCS to the effect that, as of the date of its opinion,
the financial terms of the Merger are fair to VCS stockholders from a financial
point of view. A copy of the opinion of First Albany, which sets forth the
assumptions made, is attached to this Joint Proxy Statement/Prospectus as
Appendix B and should be read in its entirety. See "The Merger -- Fairness
Opinion."
Market, Dividend and Share Price Information. On September , 1996, the
last reported closing price of the VCS Common Stock on the Nasdaq National
Market was $ per share. On June 14, 1996, the last day of trading
immediately before VCS and VPC announced a proposed merger, the last reported
sale price of the VCS Common Stock was $10.25 per share. No dividends have been
paid to date on the shares of VCS Common Stock.
No active trading market exists for any of the shares of any class of
capital stock of VPC.
Board of Directors of VCS. In accordance with the Merger Agreement, before
the effective time of the Merger VPC will be entitled to designate two
representatives to be named to the Board of Directors of VCS following the
Merger. For two years thereafter, VCS has agreed to nominate and use its best
reasonable efforts to cause the election of each such representative to the VCS
Board of Directors. See "The Merger -- VCS Board Following the Merger".
Summary of Financial Information. The following tables present selected
summary historical and pro forma financial information for VCS and for VPC (the
tables, which are unaudited and in thousands except for per share amounts,
should be read in conjunction with the historical and pro forma financial
statements and notes thereto included elsewhere herein):
COMBINED SUMMARY PRO FORMA AND HISTORICAL FINANCIAL INFORMATION
The following tables set forth certain unaudited pro forma combined
condensed and historical financial data for VCS and VPC. The pro forma data
gives effect to the Merger under the pooling-of-interests method of accounting
as if the event had occurred on January 1, 1995 with respect to the statement of
operations data, and on December 31, 1995 with respect to the balance sheet
data. For further information on the manner in which the summary pro forma
financial information was derived, see "Pro Forma Financial Statements." The
following data should be read in conjunction with the respective financial
statements and notes thereto of VCS
and VPC and with the pro forma financial statements regarding the Merger,
appearing elsewhere in this Joint Proxy Statement/Prospectus.
4
<PAGE> 13
The unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that could have occurred if the
Merger had been consummated on such dates, nor is it necessarily indicative of
future operating results or financial position.
VOICE CONTROL SYSTEMS, INC.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
DATA 1993 1994 1995 1995 1995
- ------------------------------------------------- ------ ------- ------- ------ -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Sales.......................................... $7,052 $ 6,334 $10,779 $4,922 $ 4,044
Net income (loss).............................. $1,880 $(6,599) $ 967 $ 373 $ 248
Net income (loss) per share.................... $ 0.52 $ (2.29) $ 0.14 $ 0.06 $ 0.03
Cash dividends per share....................... -- -- -- -- --
------ ------- ------- ------ -------
Weighted average shares........................ 3,750 2,881 7,150 6,564 8,611
Balance Sheet Data:
Working capital................................ $1,914 $ 1,673 $ 3,602 $2,092 $17,144
Total assets................................... $2,927 $ 3,030 $ 4,839 $3,512 $19,519
Long-term debt................................. $1,162 $ 1,175 $ 1,162 $1,162 --
Stockholders' equity........................... $1,009 $ 1,008 $ 3,062 $1,411 $17,922
</TABLE>
VOICE PROCESSING CORPORATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
YEAR ENDED -------------------
DATA SEPTEMBER 30, 1995 1995 1996
- ------------------------------------------------------- ------------------ ------- -------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C>
Statement of Operations:
Total revenues....................................... $ 3,705 $ 1,876 $ 2,731
Net income (loss).................................... $ (3,021) $(1,792) $(1,141)
Net income (loss) per share.......................... $ (2.25) $ (1.34) $ (0.84)
Cash dividend per share.............................. -- -- --
Weighted average shares.............................. 1,340 1,339 1,352
Balance Sheet Data:
Working capital...................................... $ (52) $ 408 $(1,443)
Total assets......................................... $ 2,695 2,787 $ 1,869
Long-term debt....................................... -- -- --
----------- -------- --------
--- ---
Stockholders' equity (deficit)....................... $ 2,885 $ 1,425 $ (585)
</TABLE>
5
<PAGE> 14
PRO FORMA COMBINED CONDENSED OF VOICE CONTROL SYSTEMS, INC.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(IN THOUSANDS EXCEPT FOR PER SHARE
DATA)
<S> <C> <C>
Sales.................................................... $ 6,776 $15,304
Net income (loss)........................................ $ (893) $(2,054)
Income (loss) per share.................................. $ (.12) $ (.40)
Cash dividend per share.................................. -- --
Total assets............................................. $21,388 $ 7,534
Long term debt........................................... -- $ 1,162
</TABLE>
COMPARATIVE PER SHARE DATA
The following tables set forth unaudited data concerning the net income
(loss), earnings (loss) per share and book value (deficit) per common share for
VCS and VPC (i) on a combined pro forma basis after giving effect to the Merger,
(ii) on a historical basis for VCS, (iii) on a historical basis for VPC per
equivalent share of VCS Common Stock to be issued in the Merger for the capital
stock of VPC (as though such shares had been issued at the beginning of the
period), and (iv) on a historical basis for VPC. The following comparative per
share data should be read in conjunction with the historical financial
statements of VCS, the historical financial statements of VPC and the Pro Forma
Financial Statements, appearing elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR ENDED
MONTHS ENDED --------------------
JUNE 30, 1996 12/31/95 9/30/95
------------- -------- -------
<S> <C> <C> <C>
Income (Loss) Per Share:
VCS -- Primary.................................... $ .03 $ .14
Fully Diluted.................................. $ .03 $ .14
VPC -- Primary.................................... $(.84) $(2.25)
VPC Equivalent.................................... $(.27) $ .74
Pro Forma Combined................................ $(.12) $ (.40)
Book Value (Deficit) Per Share:
VCS............................................... $2.55 $ .70
VPC............................................... $(.24) $ .36
Pro Forma Combined................................ $1.87 $ .51
</TABLE>
6
<PAGE> 15
RISK FACTORS
The stockholders of VPC and VCS should carefully evaluate all of the
information contained and incorporated by reference in this Joint Proxy
Statement/Prospectus, and in addition, should carefully consider the following
factors relating to VCS, VPC and the Merger:
HISTORY OF LOSSES
Although VCS was profitable in 1995 and during the first six months of
1996, VCS has recorded cumulative losses of approximately $7.6 million through
June 30, 1996. These losses reflect the results of operations of Industries
prior to the Scott Merger and losses incurred by VCS after the Scott Merger. In
addition, Industries' predecessors incurred losses. VCS realized net income of
approximately $967,000 for the year ending December 31, 1995 and $247,000 for
the six months ending June 30, 1996; however, there can be no assurance that VCS
will continue to generate profits. See "VCS Management's Discussion and Analysis
of Financial Condition and Results of Operations." VPC has historically been
unprofitable and has recorded cumulative losses of approximately $10.0 million
through June 30, 1996. See "VPC Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance that
the combined company will be profitable following the Merger.
INTEGRATION OF OPERATIONS
VCS anticipates benefits to be obtained as a result of the Merger,
including the addition of technology and products that are compatible, both
strategically and technically, with VCS's current products, the acquisition of a
substantial customer base and additional distribution capability in the
telecommunications market, the addition of significant technical and management
support for VCS's operations and a substantial increase in the size and market
capitalization of VCS with its related competitive benefits. There can be,
however, no assurance that VCS will be able to achieve the anticipated level of
benefits expected as a result of the Merger or that any benefits, even if
obtained, will be achieved within a period of time currently anticipated by
VCS's management.
The Merger and related acquisition of VPC's operations will materially
increase the scope of VCS's operations. The integration of VPC into VCS will
require dedication of significant management resources in coordinating the
product development and distribution of VCS and VPC products in order to realize
the anticipated benefits of the Merger. The dedication of these management
resources may temporarily detract from attention to the day-to-day business of
VCS. There is no assurance that VCS or the operations acquired from VPC will be
able to sustain its historical levels of performance, whether due to internal
factors or as a result of increased competition.
RELIANCE ON MAJOR CUSTOMERS
VCS is dependent to a significant extent on sales to certain customers.
Four of VCS's customers, Dialogic Corporation ("Dialogic"), InterVoice, Inc.
("InterVoice"), Brite Voice Systems, Inc. ("Brite") and Periphonics Corporation
("Periphonics") collectively accounted for 74% and 81% of VCS's revenue in 1994
and 1995, respectively. Dialogic is a leading supplier of components for
building, assembling and programming voice processing systems. InterVoice, Brite
and Periphonics are suppliers of voice processing systems. The success of VCS in
selling its products to Dialogic, InterVoice, Brite and Periphonics for
incorporation into their products is critical to a strategy which takes
advantage of VCS's telephone-based speech recognition capabilities. If any of
Dialogic, InterVoice, Brite or Periphonics should fail to use VCS as its
principal supplier of speech recognition, VCS's revenue and earnings could be
materially negatively affected. See "VCS Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business of Voice Control
Systems -- Sales and Marketing."
DIALOGIC RELATIONSHIP -- SHIFT TO OPEN ARCHITECTURE; SIGNIFICANT STOCKHOLDER
Prior to 1995, VCS technology was the only speech recognition technology
sold by Dialogic. In 1995, Dialogic began commercial distribution of a new open
architecture platform, Antares, for use in its recently
7
<PAGE> 16
introduced SCSA product line. VCS's Antares Software is currently in production
for two computer operating systems and in beta test for certain other computer
operating systems. VCS is developing support for additional operating systems.
The Antares platform supports several capabilities including speech recognition,
thereby making the technology of VCS's competitors available as an alternative
to VCS's technology in systems using the SCSA architecture. In addition, under
the new architecture, VCS's sales to Dialogic are expected to shift over time
from predominantly hardware to predominantly software. Moreover, customers may
delay purchasing VCS products from Dialogic until they are able to purchase a
Dialogic SCSA product incorporating VCS technology that meets their needs. These
factors may negatively impact VCS's sales and profitability through the Dialogic
distribution channel. See "Business of Voice Control Systems -- Products and
Services -- Telecommunications Products."
In addition, through a wholly owned subsidiary, Dialogic beneficially owns
approximately 16% of the VCS Common Stock, as of the record date of the VCS
Special Meeting. Through such subsidiary, Dialogic is also a creditor of VCS and
has a security interest in the use of VCS's technology. As a result of these
relationships, Dialogic has the ability to influence the business and affairs of
VCS and to otherwise affect the outcome of certain actions that require
stockholder approval, including the adoption of amendments to VCS's Certificate
of Incorporation, mergers, sales of assets and other business acquisitions or
dispositions. Furthermore, dispositions of VCS Common Stock by Dialogic may
adversely affect the market price of the VCS Common Stock.
DEVELOPMENT OF MARKETS REQUIRED FOR SUCCESSFUL PERFORMANCE BY VCS
The market for speech recognition is relatively new. The financial
performance of VCS will depend, in part, on the future development, growth and
ultimate size of this market. VCS's speech recognition products compete with
more conventional means of information processing (e.g., data entry or access by
keyboard or touch-tone phone). There can be no assurance that the market for
VCS's or VPC's current or future products will develop, that its technology will
find general acceptance in the marketplace, or that sales of its products will
be profitable to VCS. See "Business of Voice Control Systems -- Speech
Recognition."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
VCS's sales and profitability may vary significantly from quarter to
quarter due to a variety of factors, including VCS's dependence upon a small
number of customers, timing of customer orders, and changes in VCS's product and
customer mix. VCS 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. See "VCS Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON SALES BY THIRD PARTIES
VCS's revenues are dependent upon the ability of systems integrators and
OEMs to develop and sell systems that incorporate VCS's technology, because VCS
generally does not sell its technology directly to end users. Factors that
adversely affect the revenues of VCS's OEM and systems integrator customers,
such as economic conditions, patent positions, their technology and other
marketing restrictions, may have a substantial impact upon VCS's financial
results. No assurances can be given that VCS's OEM and systems integrator
customers will continue to use VCS as a supplier of speech recognition
technology or that customers of VCS will not experience financial or other
difficulties that will adversely affect their revenues and, in turn, the results
of operations and financial condition of VCS. See "VCS Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business of
Voice Control Systems -- Sales and Marketing."
TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT VCS
The speech recognition field and the voice and communications industry in
which VCS operates are characterized by rapid technological change. The
development of new technology by VCS's competitors may render VCS's technology
obsolete. Competition in the field of speech recognition is based largely on
8
<PAGE> 17
technological superiority. Accordingly, the success of VCS will depend upon its
ability to continually enhance its current products, to develop and introduce
new products which keep pace with technological developments and to address the
changing needs of the marketplace. Although VCS expects to devote significant
resources to research and development activities, there can be no assurance that
these activities will result in the successful development of new technologies
and products or the enhancement of existing technology and products. In
addition, there can be no assurance that the introduction of products, services
or technological developments by others will not have a material adverse effect
on VCS's operations. See "Business of Voice Control Systems -- Speech
Recognition" and "-- Technology Development."
COMPETITION
Competition in all areas of VCS's business is substantial and is expected
to increase. VCS competes with 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, Microsoft, Texas Instruments and Verbex, Inc.; and speech
recognition suppliers, such as Nuance Communications, Lernout & Hauspie Speech
Products, ALTech, Pure Speech, Inc., Speech Systems, Inc. and, before the
Merger, Voice Processing Corporation. Many of VCS's competitors are
substantially larger than VCS, are well established, and have greater financial,
technical, marketing, service and operating resources than VCS. VCS's
competitors can be expected to continue to make substantial commitments to
research and product development. There can be no assurance that following the
Merger VCS will be able to compete successfully in this industry following the
Merger. See "Business of Voice Control Systems -- Competition."
RELIANCE ON KEY PERSONNEL; ATTRACTION AND RETENTION OF PERSONNEL
VCS's success depends upon the continued contributions of its officers and
key personnel, many of whom would be difficult to replace. VCS has employment
agreements with Peter J. Foster, CEO and President, and Thomas B. Schalk, Chief
Technical Officer. These agreements contain customary non-disclosure and non-
competition covenants, but there can be no assurance that these are enforceable
under Texas law, where VCS offices are located. VCS's continued growth depends
on its ability to attract and retain skilled employees, particularly in research
and development, engineering and sales. The market for technical and scientific
personnel is highly competitive, and there can be no assurance that VCS will be
successful in attracting or retaining sufficient numbers of qualified personnel.
DEPENDENCE ON OTHER COMPANIES FOR ASSEMBLY AND COMPONENT PARTS
VCS does not manufacture component parts for its products nor does it have
any plan to do so. VCS's products are assembled by independent contractors.
Other than one component which VCS obtains from NEC Electronics, Inc., it is not
dependent upon a single supplier for any equipment or component parts. VCS
generally does not have long-term contracts with suppliers for the purchase and
delivery of component parts or contractors for the assembly of its products. Any
interruption of supply in the assembly services utilized by VCS or in the supply
of key components, for any reason, could result in significant delivery delays,
thereby adversely affecting VCS's revenues, profitability and customer
relations. See "Business of Voice Control Systems -- Manufacturing."
PROTECTION OF PROPRIETARY RIGHTS REQUIRED FOR SUCCESSFUL OPERATION OF VCS
VCS relies on proprietary technology that it closely guards as trade
secrets. VCS has required nondisclosure and confidentiality agreements to be
executed by its employees, licensees and all parties for whom it presently
provides or contemplates providing engineering or research and development
services, and VCS expects to continue this requirement. However, there can be no
assurance that such non-disclosure and confidentiality agreements will be
sufficient to maintain the secrecy of VCS's proprietary technology. In addition,
there can be no assurance that competitors will not develop this technology
independently or otherwise obtain access to it. The success of VCS will depend
on its ability to maintain confidentiality for its
9
<PAGE> 18
technology and upon third parties not developing similar or better technology.
See "Business of Voice Control Systems -- Patents."
Several of VCS's competitors have obtained and can be expected to obtain
patents that cover products or services directly or indirectly related to those
offered by VCS. There can be no assurance that VCS is aware of all patents
containing claims that may pose a risk of infringement by its products or
services. In addition, patent applications are generally confidential until a
patent is issued and, accordingly, VCS cannot evaluate the extent to which its
products or services may infringe on future patent rights held by others. In
general, if it were determined that any of VCS's products, services or planned
enhancements (the "Offered Products") infringed valid patent rights held by
others, VCS would be required to either: (i) cease marketing the Offered
Products, (ii) obtain licenses to develop and market the Offered Products from
the holders of the patents or (iii) redesign the Offered Products to avoid
infringement. There can be no assurance that VCS would be able to obtain
licenses on commercially reasonable terms, or that it would be able to design
and incorporate alternative technologies, without a material adverse effect on
its business.
SHARES ELIGIBLE FOR FUTURE SALE
The shares of VCS Common Stock that will be issued if the Merger is
consummated have been registered under the Securities Act and will be freely
transferable, except for shares of VCS Common Stock issued to any person who may
be deemed to be an "affiliate" of VPC within the meaning of Rule 145 under the
Securities Act. In general, affiliates of VPC include any person or entity who
controls, is controlled by, or is under common control with VPC. Generally,
directors and executive officers are presumed to be affiliates. Rule 145, among
other provisions, imposes certain restrictions upon the resale of securities
received by affiliates of the acquired company in connection with certain
mergers and other related transactions. The shares of VCS Common Stock received
by affiliates of VPC in the Merger will be subject to the applicable resale
limitations of Rule 145 and Rule 144. Furthermore, certain of VPC's stockholders
will likely be considered affiliates of VCS following the Merger because of
their percentage ownership of VCS Common Stock following the Merger. Such
persons will, in the absence of a registration statement covering the resale of
their shares, be subject to the resale restrictions imposed by Rule 144.
Additionally, consistent with the requirements of a pooling-of-interests
transaction, affiliates of VCS and VPC will be restricted from disposing of any
shares of VCS Common Stock until the publication of financial statements by VCS
which include at least 30 days of post-Merger operating results, which is not
expected to occur until mid-February 1997.
Nevertheless, sales of substantial amounts of VCS Common Stock in the
public market following the Merger, whether by former stockholders of VPC or
other stockholders of VCS, or the perception that such sales could occur, could
adversely affect prevailing market prices and could impair VCS's future ability
to raise capital through the sale of its equity securities. See "The
Merger -- Potential Resales of Shares of VCS Common Stock Received in Merger;
Restrictions on VPC Affiliates", "Security Ownership" and "Description of VCS
Capital Stock."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND STOCKHOLDER AGREEMENT
Certain individuals and institutions that collectively beneficially owned
approximately 23% of the outstanding VCS Common Stock on the record date of the
VCS Special Meeting and who are expected to continue to own beneficially
approximately % of the VCS Common Stock after the consummation of the
Merger (assuming that shares of VCS Common Stock are issued in the
Merger) have agreed to vote their shares of VCS Common Stock for the election of
the current directors (or replacement nominees) until January 1, 1997 (the
"Stockholders Agreement"). The Stockholders Agreement, as well as certain
provisions of Delaware law and certain provisions of VCS's amended Certificate
of Incorporation permitting the issuance of preferred stock, could make a
merger, tender offer or proxy contest involving VCS more difficult, even if such
events would be beneficial to the interests of the stockholders. See
"Description of VCS Capital Stock."
10
<PAGE> 19
VOLATILITY OF STOCK PRICES OF TECHNOLOGY COMPANIES
As is frequently the case with the stock of high technology companies, the
market price of the VCS Common Stock has been and is expected to continue to be
quite volatile. Factors, such as quarterly fluctuations in results of
operations, announcements of technological innovations or the introduction of
new products by VCS or its competitors, as well as economic conditions in
industries using speech recognition technology, may have a significant impact on
the market price of the VCS Common Stock. In addition, prices for many
technology stocks fluctuate widely, often for reasons unrelated to the
performance of the companies. These fluctuations may adversely affect the market
price of the VCS Common Stock. See "Market for and Dividends on the VCS Common
Stock."
TECHNOLOGY ACQUISITION STRATEGY; STRATEGIC ALLIANCES
VCS intends to consider selected strategic acquisitions of technologies
that complement those of VCS. It may also enter into beneficial strategic
alliances to pursue certain market opportunities. There can be no assurance,
however, that VCS will be able to identify and acquire suitable technology on
favorable terms, successfully integrate newly acquired technology with VCS's
technology or create suitable strategic alliances.
11
<PAGE> 20
SPECIAL MEETING OF VCS
The VCS Special Meeting will be held at , Dallas, Texas, at
10:00 a.m., Dallas time, on October , 1996. The VCS proxy being sent to its
stockholders is being solicited on behalf of the Board of Directors of VCS for
use at the VCS Special Meeting and any adjournment thereof.
Matters To Be Voted On. At the VCS Special Meeting the stockholders of VCS
will be asked to approve the Merger and adopt the related Merger Agreement. A
vote for the Merger and adoption of the Merger Agreement will be deemed to be
approval for any related filings made by VCS with the Secretary of State of
Delaware to consummate the Merger. Furthermore, the stockholders of VCS will be
asked to approve and adopt an amendment to the VCS Option Plan to increase the
number of shares subject to such plan from 900,000 shares to 1,300,000 shares.
In addition, any other business as may properly come before the VCS Special
Meeting will be considered and the persons named in the proxies will vote in
accordance with their judgment on such business. The Board of Directors of VCS
knows of no such other business that will be brought before the VCS Special
Meeting as of the date of this Joint Proxy Statement/Prospectus.
Record Date. VCS has fixed the close of business on August 30, 1996 as the
record date for the determination of stockholders entitled to receive notice of
and to vote at the VCS Special Meeting. At the record date, 7,078,107 shares of
the VCS Common Stock were outstanding and entitled to vote at the VCS Special
Meeting.
Required Vote. A majority of the VCS Common Stock outstanding on the
record date will constitute a quorum for the transaction of business at the VCS
Special Meeting. Each share of VCS Common Stock outstanding on the record date
is entitled to one vote. The affirmative votes of a majority of outstanding
shares of VCS Common Stock will be required to approve the Merger and adopt the
Merger Agreement. The affirmative vote of a majority of the shares of VCS Common
Stock represented in person or by proxy at the VCS Special Meeting will be
required to approve the amendment to the VCS Option Plan to increase the number
of shares available.
Proxies. All the shares of VCS Common Stock represented by properly
executed proxies will be voted at the VCS Special Meeting in accordance with the
directions in such proxies. If no contrary instructions are given, the shares of
VCS Common Stock represented thereby will be voted FOR (i) the Merger and
adoption of the Merger Agreement and (ii) the amendment to the VCS Option Plan.
Any person executing a proxy may revoke it at any time prior to its exercise. A
proxy may be revoked by delivery of written notice of such revocation to the
Secretary of VCS, by a subsequent proxy executed by the person executing the
prior proxy and presented before or at the VCS Special Meeting, or by attendance
at the VCS Special Meeting and voting in person by the person executing the
proxy.
Solicitation of Proxies. The cost of the solicitation of proxies for the
management of VCS will be borne by VCS. In addition to solicitation by mail,
some of VCS's directors, officers and regular employees, without extra
compensation, may conduct additional solicitation by facsimile, telephone and
personal interview. VCS may also enlist the assistance of banks, brokerage
houses and nominees in additional solicitation of proxies, particularly from
persons whose shares of VCS Common Stock are not registered in the beneficial
owners' names.
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VPC SPECIAL MEETING
The VPC Special Meeting will be held at 1000 Wilson Boulevard, Suite 800,
Upper Mall, Arlington, Virginia 22209, at 10:00 a.m., Virginia time, on October
, 1996. The VPC proxy being sent to its stockholders is being solicited on
behalf of the Board of Directors of VPC for use at the VPC Special Meeting and
any adjournment thereof.
Matters To Be Voted On. At the VPC Special Meeting the stockholders of VPC
will be asked to adopt the Merger Agreement. In addition, any other business as
may properly come before the VPC Special Meeting will be considered and the
persons named in the proxies will vote in accordance with their judgment on such
business. The Board of Directors of VPC knows of no such other business that
will be brought before the VPC Special Meeting as of the date of this Joint
Proxy Statement/Prospectus.
Record Date. VPC has fixed the close of business on , 1996
as the record date for the determination of stockholders entitled to receive
notice of and to vote at the VPC Special Meeting. At the record date,
shares of the VPC Common Stock and shares of VPC Preferred Stock were
outstanding and entitled to vote at the VPC Special Meeting.
Required Vote. A majority of the VPC Common Stock and VPC Preferred Stock
outstanding on the record date will constitute a quorum for the transaction of
business at the VPC Special Meeting. Each share of VPC Common Stock outstanding
on the record date is entitled to one vote. Each share of VPC Preferred Stock is
entitled to vote with the VPC Common Stock at the VPC Special Meeting and each
outstanding share of VPC Preferred Stock has the number of votes equal to the
number of shares of VPC Common Stock into which such share of VPC Preferred
Stock may be converted. The affirmative votes of a majority of outstanding
shares of VPC Common Stock and outstanding voting power of the VPC Preferred
Stock voting together as a combined class will be required to adopt the Merger
Agreement. In addition, the affirmative vote of a majority of the outstanding
VPC Preferred Stock, voting separately as a class, will be necessary to adopt
the Merger Agreement.
Stanley Westreich, Merrill Solomon and Creative Technology, who
beneficially own in the aggregate % of the voting power of the VPC capital
stock, have given proxies to VCS and have agreed to have their respective shares
voted in favor of the Merger and adoption of the Merger Agreement. Creative
Technology is the beneficial owner of 100% of the outstanding VPC Preferred
Stock. See "Security Ownership -- Security Ownership of VPC."
Proxies. All the shares of VPC Common Stock represented by properly
executed proxies will be voted at the VPC Special Meeting in accordance with the
directions in such proxies. If no contrary instructions are given, the shares of
VPC Common Stock represented thereby will be voted FOR adoption of the Merger
Agreement. Any person executing a proxy may revoke it at any time prior to its
exercise. A proxy may be revoked by delivery of written notice of such
revocation to the Secretary of VPC, by a subsequent proxy executed by the person
executing the prior proxy and presented before or at the VPC Special Meeting, or
by attendance at the VPC Special Meeting and voting in person by the person
executing the proxy.
Solicitation of Proxies. The cost of the solicitation of proxies for the
management of VPC will be borne by VPC. In addition to solicitation by mail,
some of VPC's directors, officers and regular employees, without extra
compensation, may conduct additional solicitation by facsimile, telephone and
personal interview.
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THE MERGER
INTRODUCTION
The terms and conditions of the Merger are set forth in the Merger
Agreement, the text of which is attached to this Joint Proxy
Statement/Prospectus as Appendix A. The summary of the Merger Agreement
contained in this Joint Proxy Statement/Prospectus does not purport to be
complete and is qualified in its entirety by reference to the complete text of
the document.
At the time the Merger becomes effective, VPC will be merged with and into
VCS in accordance with Delaware law. As a result of the Merger, the separate
corporate existence of VPC will cease, and VCS will continue its corporate
existence.
Upon the consummation of the Merger, the VPC Shares outstanding immediately
before the time the Merger becomes effective will be converted into shares of
VCS Common Stock. In the Merger each share of VPC Common Stock, and each share
of VPC Preferred Stock (as if converted into shares of VPC Common Stock
immediately before the Merger), will be converted into such number of shares of
VCS Common Stock that is equal to the quotient obtained by dividing (a)
4,000,000 shares, reduced by the Loan Amount Shares, by (b) 4,564,195.7. The
"Loan Amount Shares" will be determined by dividing (1) the difference between
(A) the principal balance in excess of $400,000 that is outstanding under the
VCS Credit Agreement on the Closing Date and (B) the amount of any Excess
Accounts Receivable, by (2) $5.00. The Excess Accounts Receivable is the lesser
of (i) the amount by which the accounts receivable of VPC on the Closing Date
(net of any reserve for uncollectible accounts) exceeds $740,000 or (ii) the
amount by which the total assets of VPC exceeds the total liabilities of VPC
(excluding the liabilities incurred under the VCS Credit Agreement). Any
fractional shares resulting from such conversion will entitle the holder to
receive an amount of cash that is equal to the product obtained by multiplying
the Exchange Ratio by the Determination Price.
The stockholders of VCS will not receive any consideration in the Merger,
nor will the Merger affect the number of shares held by any stockholder of VCS.
VCS will treat the Merger as a pooling-of-interests for financial reporting
purposes. See "The Merger -- Accounting Treatment".
VPC has agreed in the Merger Agreement that until this Agreement is
terminated or abandoned as provided in the Merger Agreement, VPC will not
directly or indirectly (i) solicit or initiate discussion with or (ii) enter
into negotiations or agreements with, or furnish any information that is not
publicly available to, any person, entity or group (other than VCS) concerning
any proposal for a merger, sale of substantial assets, sale of shares of stock
or securities or other takeover or business combination transaction (an
"Acquisition Proposal") involving VPC. VPC has further agreed that it will
instruct its officers, directors, advisors and its financial and legal
representatives and consultants not to take any action that is contrary to the
foregoing provisions of the Merger Agreement. VPC must notify VCS promptly if
VPC receives any inquiries or proposals with respect to an Acquisition Proposal.
BACKGROUND OF THE MERGER
At a March 1996 strategy meeting of VCS's management, there was a
discussion of the need to strengthen and expand VCS's business in the
telecommunications sector through an acquisition or other strategic alliance.
One of the companies specifically considered at the strategy meeting was VPC,
which VCS considered to be its principal competitor in providing speech
recognition technology to the telecommunications sector, but with whom VCS had
little previous contact. Although other companies were also initially discussed
in the meeting, no serious consideration was given to a transaction with any
other specific potential parties.
In March 1996, VCS retained First Albany, the investment bank that had
underwritten a public offering of VCS Common Stock in February 1996, to assist
VCS in its pursuit of an acquisition candidate by acting as an intermediary on
behalf of VCS and to advise it on any resulting transaction.
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Representatives of First Albany arranged a meeting between Mr. Foster,
VCS's President, and Mr. Levi, VPC's President, which was held in Boston in
April 1996. Mr. Foster reported back to VCS's Board, which concurred with Mr.
Foster's recommendation that a strategic alliance with VPC be pursued. Soon
thereafter, VCS was informed that VPC was not willing to continue discussions
unless VCS was prepared to discuss detailed transaction terms.
At a telephonic meeting of VCS Board of Directors held on May 21, 1996, Mr.
Foster made a detailed presentation regarding the possible acquisition of VPC.
As a result of this meeting, it was determined that management should inform VPC
that VCS was prepared to pursue an acquisition on terms that would involve the
issuance of four million shares of VCS Common Stock in a transaction that
qualified for pooling of interest accounting treatment, subject to completion of
additional due diligence procedures and other conditions. Mr. Foster
communicated this proposal to VPC during several subsequent meetings held in
Boston at the offices of First Albany during May and June of 1996. The
negotiations related to the value of VPC, the form, amount and timing of
consideration to be paid to VPC or its stockholders, the employment status of
senior executives of VPC, potential tax issues for VPC stockholders and the
timing of the transaction. VPC was represented during these negotiations by
Merrill Solomon, VPC's Chairman, and Mr. Levi. Mr. Foster and Kim Terry, VCS's
Vice President Finance, were present at these meeting on behalf of VCS.
These discussions resulted in a memorandum of intent, which outlined the
principal terms of a proposed merger and provided the basis upon which a
definitive agreement could be completed. On June 10, 1996, the Board of
Directors of VCS authorized VCS to enter into the memorandum of intent, which
was executed by both VCS and VPC on June 17, 1996. Thereafter, the parties
instructed their attorneys to commence the drafting of definitive merger and
related agreements. During the following month, representatives of VCS and VPC,
and their respective attorneys and financial advisors negotiated the terms of
the definitive agreements.
On July 2, 1996, the Board of Directors of VPC met and approved the Merger
Agreement.
On July 16, 1996, the management of VCS submitted a draft of the proposed
definitive agreement to the VCS Board of Directors which, following
presentations by VCS management and First Albany, unanimously (i) determined
that the Merger was fair to and in the best interests of VCS and its
stockholders; (ii) approved the Merger Agreement, and (iii) recommend to the
stockholders of VCS that they vote in favor of the Merger and the Merger
Agreement.
The Merger Agreement was executed by both parties on July 17, 1996.
FAIRNESS OPINION
VCS has retained First Albany Corporation to act as its financial advisor
in connection with the Merger and to render an opinion as to the fairness to
VCS's stockholders, from a financial point of view, of the consideration to be
paid by VCS in the Merger to the stockholders of VPC. First Albany assisted in
VCS's discussions and negotiations with VPC leading up to the execution of the
Merger Agreement.
At the July 16, 1996 meeting of VCS's Board of Directors, First Albany
presented an oral report concerning the terms of the Merger and its oral
opinion, to the effect that, as of such date and based on the matters described
therein, the consideration offered to VPC and its stockholders was fair to VCS's
stockholders from a financial point of view. On September , 1996, First Albany
delivered its written opinion (the "FAC Opinion") to the same effect. Although
First Albany assisted VCS in determining the amount consideration to be paid in
the Merger, the exact amount of consideration set forth in the Merger Agreement
was determined through negotiations between VCS and VPC.
The complete text of the FAC Opinion is attached to this Joint Proxy
Statement/Prospectus as Appendix B. VCS stockholders are urged to read FAC
Opinion carefully and in its entirety for a description of the assumptions made,
procedures followed, and other matters considered by First Albany, including
limits on the scope of First Albany's review. The summary of the FAC Opinion set
forth in the Joint Proxy Statement/Prospectus is qualified in its entirety by
reference to the full text of the opinion. The FAC Opinion was prepared for
VCS's Board of Directors, is directed only to the fairness to VCS's stockholders
as of September , 1996, from a financial point of view, of the consideration
that will be paid to the VPC
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stockholders in the Merger, and does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the VCS Special Meeting.
In rendering its opinion, First Albany did not make or seek to obtain
appraisals of VPC's assets in connection with its analyses of the valuation of
VPC or the VPC Common Stock. First Albany relied without independent
verification upon the accuracy and completeness of all of the financial
information reviewed by it for the purposes of its opinion. No limitations were
imposed by the VCS Board upon First Albany with respect to the investigation
made or the procedures followed by First Albany in rendering its opinion.
In rendering its opinion, First Albany, among other things: (i) analyzed
certain available historical financial statements and other information
concerning VPC; (ii) analyzed certain internal financial statements and other
financial and operating data concerning VPC prepared by the management of VPC;
(iii) discussed the past and current operations, financial condition and
prospects of VPC with the management of VPC; (iv) analyzed certain publicly
available financial statements, research reports published by equity analysts
and other information concerning VCS; (v) analyzed certain internal financial
statements and other financial and operating data concerning VCS prepared by the
management of VCS; (vi) discussed the past and current operations, financial
condition and prospects of VCS with the management of VCS, and analyzed the pro
forma impact of the Merger on VCS's earnings per share; (vii) reviewed the
reported prices and trading activity of the VCS Common Stock; (viii) compared
the financial performance of VCS and the prices and trading activity of the VCS
Common Stock with that of certain other comparable publicly traded companies and
their securities; (ix) reviewed the financial terms, to the extent publicly
available, of certain comparable acquisition transactions; (x) reviewed and
discussed with the senior management of VCS the strategic rationale for the
Merger and the benefits of the Merger to VCS; (xi) reviewed the Merger
Agreement; and (xii) performed such other studies, analyses and inquires and
considered such other information as First Albany deemed relevant.
In rendering its opinion to the Board of Directors of VCS, First Albany
prepared and presented certain financial information and comparative analyses,
with such other factors as it deemed relevant, including, among other things:
Analysis of Selected Precedent Transactions. First Albany examined
selected precedent transactions involving computer telephony, voice
processing and allied industry companies. The precedent transactions
examined included Brite Voice Systems Inc.'s acquisitions of both
Touch-Talk and Telecom Services Limited, Syntellect Inc.'s acquisition of
Telecorp Systems Inc., Natural MicroSystems Corporation's acquisition of
VOX, S.A., Dialogic Corporation's acquisition of Spectron Miscrosystems
Inc., EIS International Inc.'s acquisition of Cybernetics System
International Corp., Artisoft Inc.'s acquisition of Stylus Innovation Inc.,
Comdial Corporation's acquisition of both Aurora Systems Inc. and Key Voice
Technologies, and Brooktrout Technology Inc.'s acquisition of Technically
Speaking Inc. Such analysis resulted in a mean transaction valuation of 87
times last 12 months' net income and 2.4 times last 12 months' revenues.
Peer Group Companies. First Albany compared certain financial
information of VPC with a group of several publicly traded companies in the
computer telephony industry, including, but not limited to, Edify
Corporation, InterVoice Inc., Brite Voice Systems, Inc., Periphonics
Corporation, Syntellect Inc. and Microlog Corporation. Such financial
information included, among other things, market value as a multiple of
earnings and market value as a multiple of revenues. In particular, such
analysis showed that on average, as of September , 1996, based on the
closing prices for the respective common stocks, this group of common
stocks traded at times annualized 1995 earnings per share, times
annualized 1996 forecasted earnings per share (based on research analysts'
estimates as reported by Zacks Investment Research) and times the last
12 months reported revenues. Since VPC's most recently reported four fiscal
quarters earnings were negative, a corresponding valuation multiple is not
meaningful. VPC is valued at times 1995 actual earnings and times
1996 forecasted earnings (based on VPC's management 1996 budgets for VPC).
First Albany performed a comparative analysis of these multiples.
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Historical Financial Statement Analysis. First Albany reviewed and
analyzed selected annual and interim income statements and selected annual
balance sheets for each of VCS and VPC. First Albany also reviewed and
analyzed selected product line income statement information of VPC.
Multiple Analysis. First Albany prepared an analysis that reviewed
the aggregate consideration to be paid to the VPC stockholders pursuant to
the Merger Agreement using the closing price of the VCS Common Stock for
the thirty day period before September , 1996, as a multiple of various
financial operating parameters of VPC (and assuming the Merger were not to
occur), including revenue, operating income and net income. Such analysis
indicated that the aggregated consideration to be paid to the stockholders
of VPC Common Stock (1) as a multiple of 199 actual revenue, 199 projected
revenue and 199 projected revenue was __x, __x and __x, respectively; (2)
as a multiple of 199 and 199 projected operating income was __x and __x,
respectively; and (3) as a multiple of 199 and 199 projected net income was
__x and __x, respectively.
Contribution Analysis. First Albany analyzed the pro forma
contribution of each of VPC and VCS to the combined company if the Merger
were consummated. Such analysis was based on historical financial data
provided by the management of VPC and VCS. Such analysis showed that, for
1996, VPC would contribute approximately 42.5% and 6.6% of the revenues and
net income of the combined company, respectively. The analysis further
showed that, for 1997, VPC would contribute approximately 42.3% and 54.2%
of the projected revenues and projected net income of the combined company,
respectively.
The summary of the First Albany analyses set forth above does not purport
to be a complete description of the presentation made by First Albany to the
Board of Directors of VCS. In performing its analyses, First Albany made
numerous assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
VCS and VPC. The analyses performed by First Albany are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. In addition, analyses
relating to value of businesses do not purport to be appraisals or to reflect
the prices at which businesses actually may be sold. The analyses and the
summary set forth above should be considered as a whole as any consideration of
only selected portions of the First Albany analyses, or of the above summary,
could create an incomplete view of the process underlying the analyses performed
by First Albany in connection with the preparation of the FAC Opinion.
The Board of Directors of VCS selected First Albany as its financial
advisor due to its experience in acting as a financial advisor in connection
with mergers and acquisitions and its familiarity with VCS and its business.
Pursuant to certain letter agreements dated , 1996 and ,
1996, between VCS and First Albany (which together constitute the "Engagement
Letter"), VCS has agreed to pay First Albany (i) a cash fee (the "Advisory Fee")
equal to 5% of the consideration paid up to $1 million, 4% of the consideration
paid over $1 million and up to $2 million, 3% of the consideration paid over $2
million and up to $3 million, 2% of the consideration paid over $3 million and
up to $4 million, and 1% of the consideration paid in excess of $4 million for
assisting the VCS Board of Directors in performing its duties under the Merger
Agreement and (ii) a fairness opinion fee of $100,000, which has been paid. The
fee for the FAC Opinion will be credited towards the Advisory Fee. The Advisory
Fee (after reduction for the fairness opinion fee) will be due upon the
consummation of the Merger and is estimated to be approximately $ ,
based on a value of 4 million shares of VCS Common Stock and the closing price
of the VCS Common Stock on August 30, 1996, the record date of the VCS Special
Meeting. VCS also has agreed to reimburse First Albany for its reasonable
out-of-pocket expenses, including its legal fees and travel expenses, and to
indemnify it against certain liabilities under federal securities laws relating
to or arising out of services performed by First Albany under the Engagement
Letter. If such indemnification is subsequently determined to be unavailable,
VCS has agreed to contribute to the settlement, loss or expenses involved in
proportion to the relevant financial interests of VCS and its stockholders and
First Albany's relevant financial interest.
First Albany provides research coverage on, and makes a market in, VCS
Common Stock and may continue to provide investment banking services to VCS in
the future. In the course of its market-making
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activities, First Albany may, from time to time have a long or short position
in, and buy or sell securities of VCS. First Albany, as part of its investment
banking activities, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
First Albany served as lead managing underwriter for VCS's public offering of
VCS Common Stock completed in February 1996.
VCS'S REASONS FOR THE MERGER
VCS's management believes that there are significant potential benefits
that can result from the acquisition of VPC in the Merger. VCS's management
believes that the Merger will reduce the implementation risks associated with
major internal organizational expansion to achieve company growth, and will
improve the certainty of VCS achieving its current growth targets. In addition,
VCS's management believes the Merger will help limit the likelihood of potential
new entrants rapidly gaining an established market position in the market, and
creates the opportunity to increase primary demand for speech recognition.
VCS's management believes that it is currently operating at the minimum
staffing levels required in key technical, sales and marketing areas, and that
VCS's growth objectives will require significant employment increases in these
areas. The available pool of qualified personnel is limited and geographically
dispersed. Efforts to attract qualified personnel with needed expertise will
require significant management resources. The failure to attract and retain key
employees in these areas could restrict VCS's ability for achieving its desired
growth. The acquisition of VPC is expected to reduce the implementation risks
associated with major internal organizational growth because the acquisition of
seasoned, qualified employees reduces the risks associated with multiple
individual hires. It is also anticipated that the acquisition of VPC will add
research and development resources to pursue enhancement of VCS's core
technology to permit recognition of more conversational speech.
The Merger is expected to enhance the ability of VCS to achieve its growth
targets because of the market position of the combined company. Furthermore,
combined sales and marketing and the elimination of duplicative engineering
efforts should reduce costs and improve productivity and result in improved
operating margins.
Additional anticipated benefits include the addition of technology and
products that are compatible with and complementary to, both strategically and
technically, VCS's current products, including vocabulary data bases in 11
continuous languages that VCS will not be required to develop independently, the
acquisition of a substantial customer base and additional distribution
capability in the telecommunications market, the addition of significant
technical and management support for VCS's operations, and the substantial
increase in the size and market capitalization of VCS with its related
competitive benefits.
Each of the directors and executive officers of VCS (who in the aggregate
owned beneficially approximately 23% of the outstanding shares of VCS Common
Stock as of August 30, 1996, record date of the VCS Special Meeting) has advised
VCS that he or she intends to vote all of the shares of VCS Common Stock owned
directly or indirectly by him or her for the approval and adoption of the
Merger.
THE BOARD OF DIRECTORS OF VCS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF THE VCS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR THE
MERGER.
VPC'S REASONS FOR THE MERGER
The board of directors of VPC has approved the Merger Agreement and
recommends its adoption by the stockholders of VPC for the following reasons:
- The surviving corporation will have a more comprehensive range of product
offerings and significantly greater financial resources then VPC.
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- The Merger is expected to result in significant efficiencies and
corresponding expense reductions for the combined business.
- The shares of VCS Common Stock to be issued in exchange for VPC Shares
will be freely tradable in the public over-the-counter market, subject
only to certain restrictions applicable to affiliates of VPC or VCS. See
"The Merger-Potential Resales of Shares of VCS Common Stock Received in
the Merger; Restrictions on VPC Affiliates."
- The board of directors of VPC believes that the Exchange Ratio is fair to
the stockholders of VPC.
THE BOARD OF DIRECTORS OF VPC BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF THE VPC STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR ADOPTION
OF THE MERGER AGREEMENT.
EFFECTIVE TIME AND CONSEQUENCES OF THE MERGER
If approved by the requisite votes of the stockholders of VCS and VPC and
if all other conditions to the consummation of the Merger are satisfied or
waived, the Merger will become effective, unless the Merger Agreement is
terminated as provided therein, upon the making of certain filings with the
Secretary of State of the State of Delaware pursuant to the Delaware General
Corporation Law (the "Effective Time"). At the Effective Time of the Merger, VPC
will be merged with and into VCS. VCS will be the surviving corporation in the
Merger (the "Surviving Corporation"), and the separate corporate existence and
identity of VPC will cease. The corporate existence and identity of VCS will
continue unaffected by the Merger.
It is currently contemplated that the Effective Time of the Merger will
occur as promptly as practicable after the last to occur of the VCS Special
Meeting and the VPC Special Meeting and any adjournments of those special
meetings, subject to the conditions described under "The Merger -- Conditions to
Merger".
If the Merger is consummated, all of the shares of VPC Common Stock and VPC
Preferred Stock issued and outstanding immediately before the Effective Time
will be converted into the shares of VCS Common Stock. In the Merger each share
of VPC Common Stock, and each share of VPC Preferred Stock (as if converted into
shares of VPC Common Stock immediately before the Merger), will be converted
into such number of shares of VCS Common Stock that is equal to the quotient
obtained by dividing (a) 4,000,000 shares, reduced by the Loan Amount Shares, by
(b) 4,564,195.7. The "Loan Amount Shares" will be determined by dividing (1) the
difference between (A) the principal balance in excess of $400,000 that is
outstanding under the VCS Credit Agreement on the Closing Date and (B) the
amount of any Excess Accounts Receivable, by (2) $5.00. The Excess Accounts
Receivable is the lesser of (i) the amount by which the accounts receivable of
VPC on the Closing Date (net of any reserve for uncollectible accounts) exceeds
$740,000 or (ii) the amount by which the total assets of VPC exceeds the total
liabilities of VPC (excluding the liabilities incurred under the VCS Credit
Agreement).
Based on the assumption that the maximum principal amount of $750,000 is
outstanding under the VCS Credit Agreement and that the Excess Accounts
Receivable of VPC are $ (based solely on the assumption that the accounts
receivable of VPC on the Closing Date will be the same as they existed on August
31, 1996), the Exchange Ratio will be shares of VCS Common Stock for
each outstanding share of VPC Common Stock and VPC Preferred Stock. The
foregoing example is for illustrative purposes only, and there is no assurance
that the actual Exchange Ratio resulting in the Merger will not vary materially
from the example.
Any fractional shares resulting from such conversion in the Merger will
entitle the holder to receive an amount of cash equal to the Exchange Ratio
multiplied by the Determination Price.
The stockholders of VCS will not receive any consideration in the Merger,
nor will the Merger affect the number of shares held by any stockholder of VCS.
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EFFECT OF MERGER ON VPC OPTIONS AND WARRANTS
At July 17, 1996, the date of the Merger Agreement, a total of 1,708,447.1
shares of VPC Common Stock were reserved for issuance upon the exercise of
outstanding options and warrants. See Note 3 to Notes to Financial Statements of
VPC. The Merger Agreement provides that all VPC options and warrants to purchase
VPC Common Stock outstanding at the Effective Time, whether or not exercisable
or vested, will remain outstanding following the Merger and will thereafter be a
right to purchase VCS Common Stock. Except for appropriate adjustments in the
exercise price and number of shares (based on the Exchange Ratio) to reflect the
Merger and the substitution of VCS Common Stock for VPC Common Stock upon
exercise, the other terms of each option or warrant, such as the terms of
vesting, will remain the same.
All options and warrants to acquire VPC Common Stock will be converted into
an option or warrant to acquire a number of shares of VCS Common Stock equal to
the product obtained by multiplying (i) the number of shares of VPC Common Stock
covered by such option or warrant by (ii) the Exchange Ratio (rounded up to the
nearest whole share of VCS Common Stock). As a result of the Merger, the per
share exercise price of each option or warrant that is outstanding immediately
before the Effective Time will be adjusted by dividing the exercise price of
such option or warrant by the Exchange Ratio (with the resulting adjusted price
per share being rounded up to the nearest full cent). VCS has agreed to reserve
out of its authorized but unissued VCS Common Stock a sufficient number of
shares to permit the exercise of such converted options and warrants.
The shares of VCS Common Stock that will be issuable upon exercise of the
VPC options and warrants have not been included in the Registration Statement.
Accordingly, this Joint Proxy Statement/Prospectus does not constitute an offer
of VCS Common Stock to the holder of any such VPC option or warrant. VCS has
agreed in the Merger Agreement to file with the Commission a registration
statement on Form S-8 covering the shares of VCS Common Stock issuable upon
exercise of those VPC options that are eligible to be included in a registration
statement on Form S-8. VCS has also agreed to file a registration statement with
respect to the VCS Common Stock that will become issuable upon the exercise of
the the VPC warrants and to use its reasonable best efforts to maintain the
effectiveness of the registration statement for at least 90 days after the date
that financial results covering at least 30 days of combined post-Merger
operations of VCS and VPC are published. VCS has agreed to list on the Nasdaq
National Market all shares of VCS Common Stock that may be issued upon the
exercise of VPC options and warrants.
VCS CREDIT AGREEMENT
In connection with the transactions contemplated by the Merger, VCS has
agreed to loan VPC up to $750,000 under a revolving line of credit pursuant to
the terms of the VCS Credit Agreement. The obligations of VPC under the VCS
Credit Agreement are secured by substantially all of the assets of VPC.
Outstanding principal balances under the VCS Credit Agreement bear interest at a
fluctuating rate of prime plus 2%. The principal balance of the loan and all
accrued interest will become due on (i) the date the Merger Agreement is
terminated, if the agreement is terminated by VCS because of a willful breach by
VPC; (ii) six months after the date the Merger Agreement is terminated, if the
agreement is terminated because (A) VPC fails to satisfy in any material respect
any of the terms, covenants and conditions contained in the Merger Agreement to
be complied with or performed by it on or before the Closing Date, (B) any of
VPC's representations or warranties made in the Merger Agreement are untrue or
incorrect in any material respect, (C) there occurs after March 31, 1996 a "VPC
Material Adverse Change" which is defined to mean (1) the loss of VPC of
business to competitors of a customer or customers that accounted in the
aggregate for more than 15% of VPC's revenues during the year ended September
30, 1995, (2) any damage or destruction to or loss of assets of VPC, or any
impairment of its intellectual property, which has the effect of materially
impairing VPC's ability to conduct its business as previously conducted or (3)
any other change in the business, property or financial condition of VPC that
has a similar adverse effect on VPC (it being understood that a decline in
operating revenues and operating income is not by itself deemed to constitute a
such a material adverse change), (D) more than 5% of the outstanding shares of
VPC capital stock qualifies for appraisal under Delaware law, or (E) the total
liabilities of VPC (excluding those incurred under the VCS Credit Agreement)
exceed the total assets of VPC (each as determined in accordance with generally
accepted
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accounting principles), but such occurrence does not otherwise constitute a
willful breach of the Merger Agreement by VPC; (iii) two years after the date of
termination of the Merger Agreement if the Merger Agreement is terminated
because of the stockholders of VCS fail to approve the Merger or if the Merger
Agreement is terminated because of a breach of the Merger Agreement by VCS; and
(iv) one year after the date that the Merger Agreement is terminated, if the
agreement is terminated because any other condition precedent to the parties
obligations under the Merger Agreement fails to be satisfied. See "The Merger --
Conditions to the Merger."
The principal balance in excess of $400,000 of the loan made under the VCS
Credit Agreement that is outstanding at the effective time of the Merger will,
subject to reduction for the Excess Accounts Receivable, reduce the number of
shares of VCS Common Stock that will be issued in the Merger. On August 31,
1996, $500,000 was outstanding under the VCS Credit Agreement.
EXCHANGE OF CERTIFICATES REPRESENTING VPC SHARES
As of the Effective Time and until surrendered and exchanged, each
outstanding certificate which before the Effective Time of the Merger
represented VPC Shares will be deemed for all corporate purposes to evidence
ownership of the number of whole shares of VCS Common Stock into which such VPC
Shares have been converted.
VCS has authorized Chase Mellon Shareholder Services, Dallas, Texas, its
stock transfer agent, to serve as the exchange agent (the "Exchange Agent").
Instructions regarding the surrender of VPC stock certificates, together with a
letter of transmittal to be used for this purpose, will be mailed to the VPC
stockholders as promptly as practicable after the Effective Time. In order to
receive the shares of VCS Common Stock, the stockholders of VPC will be required
to surrender their stock certificates after the Effective Time, together with a
duly completed and executed letter of transmittal, to the Exchange Agent.
Promptly after the Effective Time, VCS will deposit with the Exchange Agent
certificates representing the number of whole shares of VCS Common Stock to
which VPC stockholders are entitled to receive in the Merger together with cash
sufficient to pay for any fractional shares. Upon receipt from a former
stockholder of VPC of a stock certificate or certificates and a properly
completed letter of transmittal, the Exchange Agent will deliver certificates
representing such holder's shares of VCS Common Stock to the registered holder.
STOCKHOLDERS OF VPC SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL THE INSTRUCTIONS AND LETTER OF TRANSMITTAL ARE RECEIVED.
If the shares of VCS Common Stock are to be delivered to a person other
than the person in whose name the certificates for the shares of VPC capital
stock surrendered for exchange is registered, it will be a condition to delivery
of the certificates representing the shares of VCS Common Stock (i) that the
stock certificate so surrendered be properly endorsed and otherwise in proper
form for transfer, and (ii) that the person requesting such delivery must either
(1) pay in advance any transfer or other taxes required by reason of the
delivery of certificates to a person other than the registered holder of the VPC
shares surrendered or (2) establish to the satisfaction of the Exchange Agent
that such taxes have been paid or are not applicable.
From and after the Effective Time of the Merger, the stock transfer books
of VPC will be closed, and no transfer of VPC Shares will be made or consummated
thereafter.
CONDITIONS TO MERGER
In addition to customary conditions, there are several additional
significant conditions that must be fulfilled (or waived by the party entitled
to the benefit thereof) under the terms of the Merger Agreement, before each of
the parties become obligated to consummate the Merger: (a) approval and adoption
of the Merger Agreement by the affirmative vote of (i) a majority of the
outstanding shares of VCS Common Stock at the VCS Special Meeting and (ii) a
majority of the outstanding VPC Shares and a majority of the VPC Preferred
Stock; (b) the authorization for listing on the Nasdaq National Market of the
shares of VCS Common Stock to be issued in the Merger; (c) receipt of any
governmental or other consents or approvals and the absence of any litigation
seeking to enjoin or otherwise prohibit any of the transactions contemplated by
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the Merger Agreement; (d) after March 31, 1996 there occurs no (i) VPC Material
Adverse Change or (ii) there does not occur (1) any loss by VCS of business to
competitors (other than VPC) of customers which accounted for more than 15% of
VCS's revenues during the year ended December 31, 1995, (2) any damage or
destruction to or loss of assets of VCS, or any impairment of its intellectual
property, which has the effect of materially impairing VCS's ability to conduct
its business in the manner theretofore conducted, or (3) any other change in the
business, property or financial condition of VCS which has a similar adverse
effect, provided that a decline in operating revenues and operating income of
VCS will not by itself be deemed to constitute such a material adverse effect;
(e) no more than 5% of the outstanding shares of VPC capital stock qualifies as
dissenting shares under applicable Delaware law; (f) the receipt by VCS of a
letter from BDO Seidman, LLP addressed to VCS stating substantially to the
effect that such firm concurs that the Merger will be accounted for as a
pooling-of-interests (and BDO Seidman, LLP has received from Arthur Andersen
LLP, the independent auditors of VPC, a letter to the effect that VPC qualifies
for a pooling-of-interests transaction under generally accepted accounting
principles); (g) that as of the Closing Date the total liabilities of VPC
(excluding of those incurred under the VCS Credit Agreement) do not exceed the
total assets of VPC, each as determined in accordance with generally accepted
accounting principles; (h) the receipt by VPC of an opinion of counsel for VCS
that the Merger qualifies as a tax-free reorganization; and (i) David Shipman,
Ed Brody and Roger Zimmerman, key employees of VPC, have entered into employment
and noncompetition agreements with VCS in form acceptable to VCS.
Before the approval of the merger by the stockholders of VCS, any party to
the Merger Agreement has the option to waive any of the conditions to its
obligations without stockholder approval. It is possible that prior to the
consummation of the Merger matters will occur which will require consideration
by one of the parties of a waiver as to the conditions to such party's
obligations to consummate the Merger. However, after approval by the
stockholders of VCS, no amendment or modification may be made which by law
requires further approval by such stockholders unless such approval is obtained
in accordance with the Merger Agreement.
REGULATORY APPROVAL REQUIRED FOR MERGER
Consummation of the Merger is conditioned upon receipt by VCS and VPC of
such regulatory and other approvals as are required under applicable law.
Neither VCS nor VPC knows of any such regulatory or other approvals required by
law, other than as may be required under applicable state securities or "blue
sky" laws.
POTENTIAL RESALES OF SHARES OF VCS COMMON STOCK RECEIVED IN THE MERGER;
RESTRICTIONS ON VPC AFFILIATES
The shares of VCS Common Stock that will be issued if the Merger is
consummated have been registered under the Securities Act and will be freely
transferable, except for shares of VCS Common Stock issued to any person who may
be deemed to be an "affiliate" of VPC within the meaning of Rule 145 under the
Securities Act. In general, affiliates of VPC include any person or entity who
controls, is controlled by, or is under common control with VPC. Generally,
directors and executive officers are presumed to be affiliates. Rule 145, among
other provisions, imposes certain restrictions upon the resale of securities
received by affiliates of the acquired company in connection with certain
mergers and other related transactions and generally permits resales only in
compliance with Rule 144. The shares of VCS Common Stock received by affiliates
of VPC in the Merger will be subject to the applicable resale limitations of
Rule 145 and Rule 144.
Furthermore, certain of VPC's stockholders will likely be considered
affiliates of VCS following the Merger because of their percentage ownership of
VCS Common Stock following the Merger or their service on the VCS Board of
Directors. Such persons will, in the absence of a registration statement
covering the resale of their shares, be subject to the resale restrictions
imposed by Rule 144. In general, affiliates of VCS may only sell within any
three-month period, a number of shares of VCS Common Stock that does not exceed
the greater of 1% of the then outstanding shares of VCS Common Stock or the
average weekly reported trading volume in the VCS Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 also are subject to
certain notice and manner-of-sale requirements and the availability of current
public information about VCS.
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Additionally, consistent with the requirements of a pooling-of-interests
transaction, affiliates of VCS and VPC will be restricted from disposing of any
shares of VCS Common Stock until the publication of financial statements by VCS
which include at least 30 days of post-Merger operating results. VCS has agreed
to publish the appropriate financial information as soon as practicable after
the completion of the first fiscal quarter of VCS which includes at least 30
days of post-Merger results. VCS has received a written undertaking from the
principal stockholders of VPC not to sell any shares of VCS Common Stock owned
directly or indirectly by them until after the publication of these post-Merger
financial statements.
ACCOUNTING TREATMENT
VCS will account for the business combination of VCS and VPC in its
financial statements by the pooling-of-interests method of accounting. Receipt
by VCS of a letter from BDO Seidman, LLP, independent certified public
accountants, concurring with VCS's conclusion as to the appropriateness of
accounting for the Merger with VPC as a pooling-of-interests, is a condition
precedent to the Merger. The receipt by BDO Seidman, LLP of a letter from Arthur
Andersen LLP, independent certified public accountants and the independent
auditors of VPC, to the effect that VPC qualifies for a pooling-of-interests
transaction under generally accepted accounting principles is also a condition
of the Merger. See "The Merger -- Conditions to the Merger."
OPERATION OF THE BUSINESS OF VCS FOLLOWING THE MERGER
VCS will indemnify the former officers and directors of VPC from
liabilities arising out of their former positions with VPC or certain entities
affiliated with VPC, unless such indemnification is prohibited by law or the
matter being indemnified constitutes a breach by VPC of a representation and
warranty contained in the Merger Agreement and the officer or director fails to
prove that he or she had no actual knowledge of the breach at the Effective
Time.
Merrill Solomon, the Chairman and Chief Executive Officer of VPC is not
expected to continue employment with the Surviving Corporation following the
Merger. VCS has agreed to honor the existing employment agreement between VPC
and Mr. Solomon. Among its other provisions, this agreement provides that Mr.
Solomon will continue to be paid at his current level of compensation for a
period of 18 months following the Closing Date. For the fiscal year ended
September 30, 1995, Mr. Solomon received cash compensation that aggregated
$120,000. It is expected that Mr. Solomon will be paid approximately $180,000
following the Merger pursuant to this agreeement. The employment agreement also
requires VCS to maintain an office for Mr. Solomon in the Washington D.C.
metropolitan area during the 18-month period and to transfer to Mr. Solomon any
office furniture and equipment that is located in the Washington, D.C. area
office. The agreement contains a noncompetition covenant that restricts him from
competing with the combined company for a period of 18 months following his
termination as Chairman and Chief Executive Officer of VPC.
VCS BOARD FOLLOWING THE MERGER
Before the Effective Time VPC will be entitled to designate two
representatives to be named to the Board of Directors of VCS following the
Merger. For two years thereafter, VCS has agreed to nominate and use its best
reasonable efforts to cause the election of each such representative to the VCS
Board of Directors.
VPC has notified VCS that Merrill Solomon and Stanley Westreich have been
designated as the representatives of VPC to be named to the VCS Board of
Directors following the Merger.
Merrill Solomon, age 52, is a co-founder of VPC and has served as the
chairman of its board of directors and its chief executive officer since 1982.
He received a B.S. in electrical engineering from George Washington University.
Stanley Westreich, age 59, has been president of Westfield Realty,
Incorporated, a real estate management and development company, since 1963 and
is a general partner of several private commercial real estate development
partnerships. He has been a director of VPC since 1989 and is a director of
Capital One
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Financial Corporation, a credit card issuer. He received a B.A. from the
University of Miami, Florida and a Bachelor of Laws from New York University.
VCS's Board of Directors normally meet on a quarterly basis. Until the 1996
annual meeting of stockholders, non-employee Directors were paid a flat fee of
$1,750 or $2,750 (for international travelers) in lieu of actual expense
reimbursement for meetings attended in person. The VCS Board of Directors has
adopted a revised compensation policy for non-employee Directors which commenced
with the VCS Board meeting that followed the May 1996 annual meeting of
stockholders. Under the new policy, each VCS Board member will receive cash
compensation of $5,000 per year and the right to purchase 10,000 warrants at a
price of $.01 per warrant. Each VCS Board member will receive the right to
purchase an additional 5,000 warrants in each subsequent year of service. Each
warrant will entitle the VCS Board member to purchase one share of VCS Common
Stock at the then-current market price. In addition, VCS Board members will
receive $1,000 and a $1,750 expense allowance for each VCS Board meeting
attended in person. In lieu of the $1,750 expense allowance, VCS Board members
who reside in Europe will receive a roundtrip business class airline ticket and
a $1,000 expense allowance. VCS Board members will receive $500 per telephonic
VCS Board meeting attended and $500 per committee meeting attended. The VCS
Board currently has three standing committees, the Compensation Committee, whose
function is to establish salaries and incentives for executive officers of VCS,
the Stock Option Committee, whose function is to establish option grants for
officers and key employees, and the Audit Committee, whose function is to meet
with the independent auditor of VCS.
VCS's Certificate of Incorporation, as amended, limits the liability of
directors to the fullest extent permitted by the Delaware General Corporation
Law ("DGCL"). The DGCL provides that directors of a company will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, except for liability for (i) any breach of their duty of loyalty to
the company or its stockholders, (ii) acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law, (iii) unlawful
payment of dividends or unlawful stock repurchases or redemptions as provided in
Section 174 of the DGCL or (iv) any transaction from which the director derived
an improper personal benefit.
VCS's By-laws, as amended, provide that directors, trustees, officers,
employees and agents of VCS will be indemnified against all expenses (including
attorneys' fees), judgments, fines and amounts paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, if they acted in good faith and in a manner
they reasonably believed to be in the best interests of VCS.
VCS maintains a policy of insurance under which the directors and officers
of VCS are insured, subject to the limits of the policy, against certain losses
arising from claims made against such directors and officers by reason of any
acts or omissions covered under such policy in their respective capacities as
directors or officers, including liabilities under the Securities Act. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of VCS pursuant to the
foregoing provisions, or otherwise, VCS has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
See "Description of VCS Capital Stock -- Limitation of Liability and
Indemnification of Directors and Officers."
TERMINATION AND AMENDMENT OF MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger abandoned at any time
before the Effective Time of the Merger by the mutual consent of VPC and VCS or
(a) by VCS if there has been a material misrepresentation or breach of warranty
in the representations and warranties of VPC set forth in the Merger Agreement
or a failure to perform in any material respect a covenant on the part of VPC
with respect to its representations, warranties and covenants set forth in the
Merger Agreement, except for any misrepresentations, breaches or failures to
perform which are disclosed in this Joint Proxy Statement/Prospectus; (b) by VPC
if there has been a material misrepresentation or breach of warranty in the
representations and warranties of VCS set forth in the Merger Agreement or a
failure to perform in any material respect a covenant on the part of VCS with
respect to its representations, warranties and covenants set forth in the
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Merger Agreement, except for any misrepresentations, breaches or failures to
perform which are disclosed in this Joint Proxy Statement/Prospectus; (c) by
either VCS or VPC if the transactions contemplated by the Merger Agreement have
not been consummated by October 31, 1996, unless the failure to consummate is
due to the failure of the terminating party to perform or observe the covenants,
agreements and conditions to be performed or observed by it at or before the
Closing Date; or (d) by either VPC or VCS if the transactions contemplated by
the Merger Agreement violate any nonappealable final order, decree or judgment
of any court or governmental body or agency having jurisdiction.
EXPENSES OF THE MERGER
If the Merger is consummated VCS will generally bear the expenses of the
Merger. See Note under the caption "Pro Forma Financial Information." The Merger
Agreement provides that VCS and VPC will generally bear their respective costs
and expenses of the Merger if the Merger is not consummated. If the Merger
Agreement is terminated because of default or breach by VCS or as the result of
the failure of the stockholders of VCS to approve the Merger, then VCS will pay
to VPC, as VPC's sole remedy for any claim against VCS, the sum of $400,000 in
consideration of the expenses incurred by VPC in connection with the Merger. If
the Merger Agreement is terminated for any reason other than because of a
default or breach by VPC, VCS has agreed to pay VPC, as VPC's sole remedy for
any claim against VCS, the sum of $200,000 in consideration of the expenses
incurred by VPC in connection with the Merger.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of certain material federal
income tax consequences anticipated to occur as a result of the Merger and is
based on relevant provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations promulgated thereunder and published
positions of the Internal Revenue Service ("IRS"), all of which is subject to
change. In addition, the conclusions expressed herein are based solely on a
review of the Merger Agreement and related documents, and certain factual
assumptions with respect to the VPC stockholders have been made. The Merger is
not conditioned upon the receipt by VCS or VPC of a ruling of the IRS with
respect to the tax treatment of the Merger. The IRS is not being requested to
issue a ruling as to the tax consequences of the Merger. It is, however, a
condition to VPC's obligation to consummate the Merger that it has received an
opinion from counsel to VCS with respect to the tax treatment of the Merger.
The Merger will be treated as a tax-free reorganization for federal income
tax purposes so that no gain or loss will be recognized by the VPC stockholders,
except for cash received in lieu of fractional shares.
The federal income tax consequences of the Merger to the VPC stockholders
are expected to be as follows:
(i) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A), as described in Section 368(a)(2)(e), of the Code;
(ii) No gain or loss will be recognized to the stockholders of VPC
upon their receipt of the shares of VCS Common Stock in exchange for their
VPC Shares;
(iii) The basis of the shares of VCS Common Stock to be received by
the stockholders of VPC in the Merger will be the same as the basis of such
stockholders in the shares of VPC exchanged for such shares of VCS Common
Stock; and
(iv) The holding period of the shares of VCS Common Stock to be
received by the stockholders of VPC will include the period during which
they held their VPC Shares exchanged for the shares of VCS Common Stock.
A stockholder of VPC who perfects his or her appraisal rights under the
laws of Delaware and receives payment in cash for the "fair value" of his or her
VPC Shares will be treated as having received such payment in a redemption of
VPC Shares subject to the provisions of Section 302 of the Code. In general, a
dissenting stockholder of VPC will recognize capital gain or loss measured by
the difference between the amount of cash
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received by such VPC stockholder in payment for their VPC Shares and the basis
of such stockholder's VPC Shares.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS INTENDED TO
BE A SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX CONSIDERATIONS OF THE
TRANSACTION. IT IS NOT INTENDED AS AN ALTERNATIVE FOR INDIVIDUAL TAX PLANNING.
EACH STOCKHOLDER OF VPC SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING
FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER.
APPRAISAL RIGHTS
Stockholders of VCS. The stockholders of VCS are not entitled to
dissenters' rights or an appraisal of their shares in connection with the Merger
because, among other things, the VCS Common Stock is listed on the Nasdaq
National Market and the holders of VCS will not exchange or otherwise relinquish
any of their stock as a result of the Merger.
Stockholders of VPC. Holders of VPC Shares are entitled to appraisal
rights under Section 262 of the DGCL ("Section 262"). Section 262 is reprinted
in its entirety as Appendix C to this Joint Proxy Statement/Prospectus. All
references in Section 262 and in this discussion to a "stockholder" are to the
record holder of the shares of VPC capital stock as to which appraisal rights
are asserted. A person having a beneficial interest in VPC Shares that are held
of record in the name of another person must act promptly to cause the record
holder to follow the steps discussed below properly and in a timely manner to
perfect whatever appraisal rights the beneficial owner may have.
The following discussion is not a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Appendix C.
THIS DISCUSSION AND APPENDIX C SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO
WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO BECAUSE FAILURE STRICTLY TO COMPLY WITH THE PROCEDURES SET FORTH
HEREIN AND THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
Each stockholder electing to demand the appraisal of his shares shall
deliver to VPC, before the taking of the vote on the Merger, a written demand to
VPC for appraisal of his or her VPC Shares. The demand must reasonably inform
VPC of the identity of the stockholder and that the stockholder intends thereby
to demand the appraisal of his VPC Shares. This written demand for appraisal of
the VPC Shares must be in addition to and separate from any proxy or vote
against the Merger. Voting against, abstaining from voting or failing to vote on
the Merger will not constitute a demand for appraisal within the meaning of
Section 262. Any stockholder electing to demand his appraisal rights will not be
granted appraisal rights under Section 262 if such stockholder has either voted
in favor of the Merger or consented thereto in writing. Additionally, appraisal
rights will not be granted under Section 262 if the stockholder does not
continuously hold through the Effective Time his or her VPC Shares with respect
to which he or she demands appraisal.
A demand for appraisal must be executed by or for the stockholder of
record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing VPC Shares. If the VPC Shares are owned
of record in a fiduciary capacity, such as by a trustee, guardian or custodian,
such demand must be executed by the fiduciary. If the VPC Shares are owned of
record by more than one person, as in a joint tenancy or tenancy in common, such
demand must be executed by all joint owners. An authorized agent, including an
agent for two or more joint owners, may execute the demand for appraisal for a
stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, such person is
acting as agent for the record owner.
A record owner who holds VPC Shares as a nominee for others, may exercise
appraisal rights with respect to the VPC Shares held for all or less than all
beneficial owners of VPC Shares as to which such person is the record owner. In
such case the written demand must set forth the number of VPC Shares covered by
such demand. Where the number of VPC Shares is not expressly stated, the demand
will be
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presumed to cover all VPC Shares outstanding in the name of such record owner.
Beneficial owners who are not record owners and who intend to exercise appraisal
rights should instruct the record owner to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights before the date of
the Special Meeting.
A stockholder who elects to exercise appraisal rights must mail or deliver
his or her written demand to the Secretary of VPC. The written demand for
appraisal must specify the stockholder's name and mailing address, the number of
VPC Shares owned, and that the stockholder is thereby demanding appraisal of his
or her VPC Shares. Within ten days after the Effective Time, VPC must provide
notice to all stockholders who have complied with Section 262 and have not voted
for or consented to adoption of the Merger Agreement.
Within 120 days after the Effective Time, either VPC or any stockholder who
has complied with the required conditions of Section 262 may file a petition in
the Delaware Court of Chancery (the "Delaware Chancery Court") demanding a
determination of the value of the VPC Shares. If a petition for an appraisal is
timely filed, after a hearing on such petition, the Delaware Chancery Court will
determine which stockholders are entitled to appraisal rights and will appraise
the VPC Shares owned by such stockholders, determining the fair value of such
VPC Shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest to be paid, if
any, upon the amount determined to be the fair value. In determining such fair
value, the Delaware Chancery Court is to take into account all relevant factors.
Stockholders considering seeking appraisal should have in mind that the
"fair value" of their VPC Shares determined under Section 262 could be more
than, the same as or less than the consideration to be received by VPC
stockholders in the Merger, and that opinions of investment banking firms as to
fairness, from a financial point of view, are not opinions as to fair value
under Section 262. The cost of the appraisal proceeding may be determined by the
Delaware Chancery Court and taxed against the parties as the Delaware Chancery
Court deems equitable in the circumstances. Upon application of a stockholder,
the Delaware Chancery Court may order that all or a portion of the expenses
incurred by any stockholder in connection with the appraisal proceeding,
including without limitation, reasonable attorneys' fees and the fees and
expenses of experts, be charged pro rata against the value of all VPC Shares
entitled to appraisal.
Any stockholder who has duly demanded appraisal in compliance with Section
262 will not, from and after the Effective Time, be entitled to vote for any
purpose the VPC Shares subject to such demand or to receive payment of dividends
or other distributions on such VPC Shares, except for dividends or distributions
payable to stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any stockholder shall
have the right to withdraw his or her demand for appraisal and to accept the
terms offered in the Merger; after this period, the stockholder may withdraw his
or her demand for appraisal only with the consent of VPC. If no petition for
appraisal is filed with the Delaware Chancery Court within 120 days after the
Effective Time, stockholders' rights to appraisal shall cease, and all holders
of VPC Shares shall be entitled to receive the consideration as provided for in
the Merger Agreement. Any stockholder who desires such a petition to be filed is
advised to file it on a timely basis. However, no petition timely filed in the
Delaware Chancery Court demanding appraisal shall be dismissed as to any
stockholder without the approval of the Delaware Chancery Court, and such
approval may be conditioned upon such terms as the Delaware Chancery Court deems
just.
For a discussion of certain federal income tax consequences resulting from
the exercise of dissenters' appraisal rights see "The Merger -- Federal Income
Tax Consequences".
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PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
assume a business combination between VCS and VPC accounted for on a pooling of
interests basis. The pro forma combined condensed financial statements are based
on the respective historical financial statements and the notes thereto, which
are incorporated by reference or included elsewhere herein. The pro forma
combined balance sheet combines VCS's June 30, 1996 unaudited balance sheet with
VPC's June 30, 1996 unaudited balance sheet. The pro forma combined condensed
statements of operations combine VCS's historical statements of operations for
the fiscal years ended December 31, 1995 and 1994 and the unaudited six month
periods ended June 30, 1996 and 1995 with the corresponding VPC historical
statements of operations for the fiscal years ended September 30, 1995 and 1994
and the unaudited six month periods ended June 30, 1996 and 1995, respectively.
The amounts included as VPC historical amounts have been reclassified to conform
to classifications used by VCS.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the business combination had been consummated at the
beginning of the periods presented, nor is the pro forma financial information
necessarily indicative of future operating results or financial position.
These pro forma combined condensed financial statements and the related
notes should be read in conjunction with the historical financial statements and
the related notes thereto of VCS and VPC included elsewhere herein. See "Index
to Financial Statements."
28
<PAGE> 37
PRO FORMA BALANCE SHEET
(UNAUDITED)
JUNE 30, 1996
ASSETS
<TABLE>
<CAPTION>
VOICE CONTROL VOICE PROCESSING PRO FORMA
SYSTEMS, INC. CORPORATION ADJUSTMENTS PRO FORMA
------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Current:
Cash and cash equivalents.............. $ 16,364,547 $ 9,879 $ 16,374,426
Accounts receivable.................... 1,804,561 777,112 2,581,673
Inventory.............................. 493,284 179,981 673,265
Prepaid expenses....................... 79,027 44,630 123,657
------------ ------------ ------------
Total current assets........... 18,741,419 1,011,602 19,753,021
Net property and equipment............. 720,217 773,960 1,494,177
Other assets........................... 57,211 83,710 140,921
------------ ------------ ------------
Total.......................... $ 19,518,847 $ 1,869,272 $ 21,388,119
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current:
Advances from stockholders............. $ 1,000,000 (1,000,000)A $ 0
Accounts payable and accrued
expenses............................ 266,203 764,669 1,030,872
Deferred revenue....................... 169,115 189,876 1,000,000 A 1,358,991
Convertible debt....................... 1,161,799 500,000 (500,000)B 1,161,799
------------ ------------ ------------
Total current liabilities...... 1,597,117 2,454,545 3,551,662
Long term liabilities.................... -- -- 0
------------ ------------ ------------
Total liabilities.............. 1,597,117 2,454,545 3,551,662
Stockholders' equity
Preferred stock.......................... -- 10,116 (10,116)C 0
Common stock............................. 70,312 14,346 4,000 B 95,214
8,821 C
(2,265)D
Paid-in capital.......................... 25,484,877 9,712,787 496,000B
1,295 C
2,265 D
(189,590)E
Treasury stock........................... -- (189,590) 189,590 E 0
Receivable from stockholders............. (44,068) (76,687) (120,755)
Deficit.................................. (7,589,391) (10,056,245) (17,645,636)
------------ ------------ ------------
Total stockholders' equity............... 17,921,730 (585,273) 17,836,457
Total liabilities & stockholders
equity................................. $ 19,518,847 $ 1,869,272 $ 21,388,119
============ ============ ============
</TABLE>
29
<PAGE> 38
PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1996 1996 COMBINED
VCS VPC 1996
---------- ----------- ----------
<S> <C> <C> <C>
Sales................................................. $4,044,336 $ 2,731,348 $6,775,684
Cost of sales......................................... 791,526 905,074 1,696,600
---------- ----------- ----------
Gross profit.......................................... 3,252,810 1,826,274 5,079,084
Costs and expenses:
Research and development............................ 1,458,887 1,458,730 2,917,617
Selling, general and administrative................. 1,761,952 1,513,690 3,275,642
Interest to affiliates.............................. 59,629 59,629
Other interest expense (income), net................ (275,226) (5,504) (280,730)
---------- ----------- ----------
Total costs and expenses.................... 3,005,242 2,966,916 5,972,158
Net income before taxes............................... 247,568 (1,140,642) (893,074)
Income taxes.......................................... 0
---------- ----------- ----------
Net income (loss)........................... $ 247,568 $(1,140,642) $ (893,074)
========== =========== ==========
Net loss per share.......................... $ (.12)
==========
Weighted average common shares outstanding (Note F)... 7,472,683
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
1995 1995 COMBINED
VCS VPC 1995
---------- ----------- -----------
<S> <C> <C> <C>
Sales................................................ $4,921,903 $ 1,875,527 $ 6,797,430
Cost of sales........................................ 1,609,560 682,565 2,292,125
---------- ----------- -----------
Gross profit......................................... 3,312,343 1,192,962 4,505,305
Costs and expenses:
Research and development........................... 1,234,023 1,438,307 2,672,330
Selling, general and administrative................ 1,644,693 1,560,766 3,205,459
Interest to affiliates............................. 75,689 75,689
Other interest expense (income), net............... (15,546) (13,975) (29,521)
---------- ----------- -----------
Total costs and expenses................... 2,938,859 2,985,098 5,923,957
Net income before taxes.............................. 373,484 (1,792,136) (1,418,652)
Income taxes......................................... 0
---------- ----------- -----------
Net income (loss).......................... $ 373,484 $(1,792,136) $(1,418,652)
========== =========== ===========
Net loss per share......................... $ (.28)
===========
Weighted average common shares outstanding (Note
F)................................................. 5,058,953
</TABLE>
30
<PAGE> 39
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
---------------------------
DECEMBER SEPTEMBER
31, 30,
1995 1995 COMBINED
VCS VPC 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................... $10,737,300 $ 4,566,386 $15,303,686
Cost of sales....................................... 3,455,328 1,527,635 4,982,963
----------- ----------- -----------
Gross profit........................................ 7,281,972 3,038,751 10,320,723
Costs and expenses:
Research and development.......................... 2,508,701 2,843,515 5,352,216
Selling, general and administrative............... 3,549,654 3,253,827 6,803,481
Interest to affiliates............................ 141,428 141,428
Other interest expense (income), net.............. 103,709 (37,477) 66,232
----------- ----------- -----------
Total costs and expenses.................. 6,303,492 6,059,865 12,363,357
Net income before taxes............................. 978,480 (3,021,114) (2,042,634)
Income taxes........................................ 11,000 11,000
----------- ----------- -----------
Net income (loss)......................... $ 967,480 $(3,021,114) $(2,053,634)
=========== =========== ===========
Net income (loss) per share............... $ (.40)
===========
Weighted average common shares outstanding (Note
F)................................................ 5,196,035
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
---------------------------
DECEMBER SEPTEMBER
31, 30,
1994 1994 COMBINED
VCS VPC 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................... $ 6,310,524 $ 4,917,366 $ 1,227,890
Cost of sales....................................... 1,643,519 390,559 2,034,078
----------- ----------- -----------
Gross profit........................................ 4,667,005 4,526,807 9,193,812
Costs and expenses:
Research and development.......................... 1,962,009 2,191,056 4,153,065
Selling, general and administrative............... 2,786,099 2,235,188 5,021,287
Interest to affiliates............................ 141,560 141,560
Acquired R&D/Goodwill............................. 6,251,761 6,251,761
Other interest expense (income), net.............. 124,397 (30,609) 93,788
----------- ----------- -----------
Total costs and expenses.................. 11,265,826 4,395,635 15,661,461
Net income before taxes............................. (6,598,821) 131,172 (6,467,649)
Income taxes........................................
----------- ----------- -----------
Net income (loss)......................... $(6,598,821) $ 131,172 $(6,467,649)
=========== =========== ===========
Net income (loss) per share............... $ (1.60)
===========
Weighted average common shares outstanding (Note
F)................................................ 4,033,782
</TABLE>
31
<PAGE> 40
VOICE CONTROL SYSTEMS, INC. AND VOICE PROCESSING CORPORATION
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma adjustments in the accompanying unaudited pro forma condensed
financial statements are listed below.
A On , Creative Technology, Ltd. converted its advance to
VPC into prepaid royalties.
B On July 31, 1996, $500,000 in convertible notes was converted to
400,000 shares of VPC common stock.
C Assumes each issued and outstanding share of VPC convertible preferred
stock will be exchanged for .872 share of VCS common stock based on the Exchange
Ratio.
D The Exchange Ratio is calculated by dividing (a) 4,000,000 shares,
reduced by the Loan Amount, by (b) 4,564,195.7, which is the number of shares of
VPC Common Stock outstanding on a fully diluted basis. Assumes each issued and
outstanding share of VPC common stock will be exchanged for .872 share of VCS
common stock.
E The treasury stock of VPC is cancelled.
F The pro forma net loss per share is based on the historical weighted
average of VCS common stock, adjusted for anti-dilutive common stock
equivalents, plus the number of shares to be issued based on an assumed Exchange
Ratio for VPC preferred and common stock for all periods presented.
32
<PAGE> 41
COMPARISON OF STOCKHOLDERS' RIGHTS
Both VCS and VPC are incorporated under the laws of the state of Delaware.
The VPC stockholders, whose rights as stockholders are currently governed by
Delaware law and VPC' Certificate of Incorporation and Bylaws, will become upon
consummation of the Merger stockholders of VCS, and their rights will be
governed by VCS's Certificate of Incorporation and Bylaws. Certain differences
between the rights of holders of VCS Common Stock and the VPC capital stock are
summarized below.
The following summary does not purport to be a complete statement of the
rights of VCS stockholders under applicable Delaware law and VCS Certificate of
Incorporation and Bylaws, or the rights of stockholders of VPC under applicable
Delaware law and VPC's Certificate of Incorporation and Bylaws. The summary is
qualified in its entirety by reference to the DGCL and the VCS Certificate of
Incorporation and VPC Certificate of Incorporation.
AUTHORIZED CAPITAL STOCK
VCS is authorized to issue 20,000,000 shares of VCS Common Stock, of which
approximately 7,078,107 shares were outstanding on August 30, 1996, and 300,000
shares of VCS Preferred Stock, none of which are outstanding. See "Description
of VCS Capital Stock."
VPC is authorized to issue (i) 12,000,000 shares of VPC Common Stock, of
which approximately 1,861,972.3 shares were outstanding on August 30, 1996 and
4,000,000 shares of VPC Preferred Stock, of which 1,011,561 shares were
outstanding on August 30, 1996.
VOTING RIGHTS
Holders of VCS Common Stock are entitled to one vote per share on any
matter submitted to the vote or consent of stockholders, and cumulative voting
is prohibited in the election of directors.
The holders of VPC Common Stock are entitled to one vote per share on all
matters on which stockholders of VPC are entitled to vote or consent. The shares
of the VPC Preferred Stock are convertible into VPC Common Stock on a share for
share basis and each outstanding share of VPC Preferred Stock has the number of
votes equal to the number of shares of VPC Common Stock into which such share of
Preferred Stock may be converted. In addition, the VPC Preferred Stock votes
separately as a class when considering any changes to the Certificate of
Incorporation that may affect adversely that class of VPC Preferred Stock and
VPC may not sell substantially all of its assets, merge, pay dividends or take
certain other actions without the approval of the holders of a majority of the
outstanding VPC Preferred Stock.
DIVIDEND AND RELATED ISSUES
Under Delaware law, dividends may be paid by VCS or VPC out of either (1)
surplus or (2) out of its net profits for the fiscal year in which the dividend
is declared and/or the preceding fiscal year, except when the capital is
diminished to an amount less than the aggregate amount of the capital
represented by issued and outstanding stock having a preference on the
distribution of assets. Unless the Certificate of Incorporation provides
otherwise, the stockholders of a Delaware corporation do not have preemptive
rights.
Subject to preferences that may be become applicable to any outstanding VCS
Preferred Stock, the holders of VCS Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. The VCS Common Stock is
non-assessable, not redeemable, does not have any conversion rights and is not
subject to call. Holders of shares of VCS Common Stock have no preemptive rights
to maintain their respective percentage of ownership in future offerings or
sales of stock by VCS.
Subject to certain restrictions discussed below imposed by the outstanding
VPC Preferred Stock, the holders of VPC Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the VPC
board of directors out of funds legally available therefor. The VPC Common Stock
is non-assessable, not redeemable, does not have any conversion rights and is
not subject to call. Holders of
33
<PAGE> 42
shares of VPC Common Stock have no preemptive rights to maintain their
respective percentage of ownership in future offerings or sales of stock by VPC.
The VPC Certificate of Incorporation does not provide for any preemptive rights
to the holders of VPC Common Stock or outstanding VPC Preferred Stock.
VPC may not declare or pay any dividends on the VPC Common Stock, other
than dividends payable solely in shares of VPC Common Stock, without the consent
of the holders of a majority of the outstanding series of VPC Preferred Stock.
In the event of a liquidation of VPC, the holders of the outstanding VPC
Preferred Stock are entitled to receive $3.46 per share before any distribution
can be made to any holder of VPC Common Stock.
AMENDMENTS TO CHARTER AND BYLAWS
Amendments to the VCS or VPC Certificates of Incorporation generally
require the approval of the holders of a majority of all outstanding shares of
capital stock (with, in each case, each stockholder being entitled to one vote
for each share so held). However, in the case of amendments to the VPC
Certificate that alter or change the powers, preferences or special rights of a
class of stock so as to adversely affect the holders thereof, on certain matters
related to the specific rights of a class or series of capital stock, and on all
matters where a separate class vote is required by Delaware law, the holders of
the VPC Common Stock and VPC Preferred Stock, as the case may be, are entitled
to vote as a class, with the result that no such amendment may be effected
without the affirmative vote of the holders of a majority of the total shares of
each such class entitled to vote thereon. Matters on which a class vote is
required include amendments to change the authorized number of shares of such
class, dividend rights, liquidation rights and to change the par value per share
of such class. The Bylaws of both VCS and VPC may be amended by the stockholders
of VCS or VPC, as the case may be, and by the respective Board of Directors of
VCS or VPC, subject to the rights of the stockholders to amend such Bylaws.
APPROVAL OF, AND SPECIAL RIGHTS WITH RESPECT TO, MERGERS OR CONSOLIDATIONS AND
CERTAIN OTHER TRANSACTIONS; APPRAISAL RIGHTS
Pursuant to the Stockholders Agreement, certain individuals and
institutions that beneficially own, in the aggregate, approximately 23% of the
outstanding VCS Common Stock on the record date of the VCS Special Meeting have
agreed to vote their shares of VCS Common Stock for the election of the current
directors (or replacement nominees) until January 1, 1997. This agreement could
make a merger, tender offer or proxy contest involving VCS more difficult, even
if such events would be beneficial to the interests of stockholders.
VCS, as a Delaware corporation, is subject to the provisions of the DGCL,
including Section 203. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (i) prior to such
date, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; or (ii) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or (iii)
subsequent to such date, the business combination is approved by both the Board
of Directors and by holders of at least 66-2/3% of the corporation's outstanding
voting stock, excluding shares owned by the interested stockholder. For these
purposes, the term "business combination" includes mergers, asset sales and
other similar transactions with an "interested stockholder." An "interested
stockholder" is a person who, together with affiliates and associates, owns (or,
within the prior three years, did own) 15% or more of the corporation's voting
stock. Although Section 203 permits a corporation to elect not to be governed by
its provisions, VCS to date has not made this election.
As described above, VCS's Certificate of Incorporation, as amended, permits
shares of VCS Preferred Stock to be issued in the future without further
stockholder approval and upon such terms as the Board of Directors of VCS may
determine. The rights of the holders of VCS Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any VCS Preferred
Stock that may be issued in the future. Although providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, the
issuance of preferred stock could have the effect of making it more difficult
for a third party to
34
<PAGE> 43
acquire, or of discouraging a third party from attempting to acquire, a majority
of the outstanding capital stock of VCS. VCS has no present plan to issue any
shares of VCS Preferred Stock.
VPC is not subject to Section 203 of the DGCL, governing business
combinations with affiliated parties and does not otherwise have any particular
anti-takeover or other provisions in its Certificate of Incorporation, other
than class voting on such transactions, or Bylaws. VPC may not, however, sell or
encumber all or substantially all of its assets, merge or consolidate, without
the approval of the holders of a majority of the outstanding VPC Preferred
Stock.
Under Delaware law, appraisal rights are generally available for the shares
of any class or series of stock of a Delaware corporation in a merger or
consolidation. However, no appraisal rights are available for the shares of any
class or series of stock which, at the record date for the meeting held to
approve such transaction, were either (i) listed on a national security exchange
or designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. ("NASD") or (ii)
held of record by more than 2,000 stockholders. Even if the shares of any class
or series of stock meet the requirements of clause (i) or (ii) above, appraisal
rights are available for such class or series if the holders thereof receive in
the merger or consolidation anything except: (i) shares of stock of the
corporation surviving or resulting from such merger or consolidation; (ii)
shares of stock of any other corporation which at the effective date of the
merger or consolidation is either listed on a national securities change, or
designated as a national market system security on an interdealer quotation
system by the NASD or held of record by more than 2,000 stockholders; (iii) cash
in lieu of fractional shares; or (iv) any combination of the foregoing. No
appraisal rights are available to stockholders of the surviving corporation if
the merger did not require their approval.
SPECIAL MEETINGS; ACTION WITHOUT MEETING
Under Delaware law, special meetings of the stockholders may be called by
the Board of Directors or such other person as may be authorized by the
Certificate of Incorporation or the Bylaws.
Under Delaware law, unless otherwise provided in the Certificate of
Incorporation, any action which may be taken or is required to be taken at any
annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted.
VCS's Bylaws permit special meetings of stockholders to be called by order
of the VCS Board of Directors or by stockholders who hold at least 10% of the
outstanding VCS capital stock.
VPC's Bylaws permit special meetings of stockholders to be called by a
majority of the VPC Directors, by the chief executive officer of VPC or by
stockholders who hold at least a majority of the outstanding VCS capital stock.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
VCS's Certificate of Incorporation, as amended, limits the liability of
directors to the fullest extent permitted by the DGCL. The DGCL provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) any
transaction from which the director derived an improper personal benefit.
VCS's By-laws, as amended, provide that directors, trustees, officers,
employees and agents of VCS will be indemnified against all expenses (including
attorneys' fees), judgments, fines and amounts paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any
35
<PAGE> 44
derivative action, if they acted in good faith and in a manner they reasonably
believed to be in the best interests of VCS.
VPC's By-laws, as amended, provide that directors, trustees, officers,
employees and agents of VPC will be indemnified against all expenses (including
attorneys' fees), judgments, fines and amounts paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, if they acted in good faith and in a manner
they reasonably believed to be in the best interests of VPC.
AMENDMENT TO 1992 STOCK OPTION PLAN OF VCS
The proposed amendment to the VCS Option Plan would increase the number of
shares of VCS Common Stock subject to the plan from 900,000 shares to 1,300,000
shares. Approval of this amendment requires the affirmative vote of the holders
of a majority of the shares of VCS Common Stock represented at the VCS Special
Meeting. THE BOARD OF DIRECTORS OF VCS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE VCS OPTION PLAN.
THE 1992 STOCK OPTION PLAN
The VCS Board of Directors believes that providing selected persons with an
opportunity to invest in VCS will give them additional incentive to increase
their efforts on behalf of VCS and will enable VCS to attract and retain the
best available employees, officers, directors, consultants and independent
contractors. The purpose of the VCS Option Plan is to promote the growth and
profitability of VCS by enabling it to furnish maximum incentive to those
selected persons deemed capable of improving operations and increasing profits
and encouraging such persons to commence or continue working for or with VCS, as
the case may be, and to become owners of shares of VCS Common Stock. The VCS
Option Plan will terminate on March 1, 2002 but may be terminated at any time
before then by the VCS Board of Directors. Any options outstanding at the time
of termination of the VCS Option Plan will remain in effect until they are
exercised or expire.
The Board of Directors of VCS has approved an amendment to the VCS Option
Plan to increase the number of shares of VCS Common Stock reserved for issuance
upon the exercise of options granted under the VCS Option Plan from 900,000 to
1,300,000. The VCS Board of Directors has approved the increase of shares
subject to the VCS Option Plan in view of the significant increase in the number
of employees as a result of the Merger. In order to continue to obtain the
beneficial effects of the VCS Option Plan, it will be necessary to increase the
number of shares available under the plan to provide for future options that may
be granted to employees of VPC who will become employees of VCS as a result of
the Merger, as well as new employees that may subsequently be hired.
Stockholder approval of the amendment to the VCS Option Plan is being
sought to satisfy Section 422 of the Code, which requires stockholder approval
of amendments of the VCS Option Plan in order that options granted under the VCS
Option Plan may qualify as "incentive stock options" ("ISOs") and thus be
entitled to receive special tax treatment under the Code.
The VCS Option Plan is designed so that options granted under the VCS
Option Plan may be designated ISOs, which receive special tax treatment under
the Code, or non-qualified stock options ("NQSOs"). However, ISOs may be granted
only to employees of VCS.
As of August 30, 1996, options to purchase an aggregate of 695,527 shares
of VCS Common Stock (net of options canceled) had been granted pursuant to the
VCS Option Plan, options to purchase 32,355 shares had been exercised, options
to purchase 663,169 shares remained outstanding, and only 204,476 shares
remained available for future grant. As of August 30, 1996, the market value of
all shares of VCS Common Stock subject to outstanding options was approximately
$3,896,118 (based upon the closing sale price of the VCS Common Stock as
reported on the Nasdaq National Market on August 30, 1996). During the 1995
fiscal year, options covering 139,500 shares of VCS Common Stock were granted to
employees of VCS. Shares underlying presently exercisable, but unexercised,
options will constitute outstanding shares of VCS Common Stock for purposes of
calculating VCS's net income per share. The market value of the 1,300,000 shares
of
36
<PAGE> 45
VCS Common Stock to be subject to the VCS Option Plan was approximately
$7,637,500 as of August 30, 1996.
As of August 30, 1996, the following current executive officers named in
its proxy statement for its 1996 annual meeting of stockholders had been granted
options under the VCS Option Plan in the amount indicated: Peter J. Foster,
President and Chief Executive Officer, 139,181 shares; and Thomas B. Schalk,
Chief Technical Officer, 89,181 shares. Since adoption of the VCS Option Plan,
all current executive officers, as a group, have been granted options under the
VCS Option Plan covering 412,259 shares of VCS Common Stock which represents
approximately 59% of the total number of options granted pursuant to the VCS
Option Plan. The foregoing amounts do not include options granted under an
Industries 1986 Incentive Stock Plan which was terminated in 1994, except as to
options previously granted.
Administration of the VCS Option Plan. The VCS Option Plan is administered
by the VCS Board of Directors or, to the extent authorized by a resolution of
the board, the Stock Option Committee of two or more directors (the "Committee")
selected by the VCS Board of Directors. The powers of the VCS Board of Directors
or Committee, as the case may be, include the determination of which persons
shall be granted options under the VCS Option Plan, the number of shares to be
granted to the optionee, whether each option granted is to be an ISO or a NQSO,
the price and term of the options, and all other terms and conditions of an
option pursuant to the VCS Option Plan. In addition, the VCS Board of Directors
has the right to construe and interpret ambiguities in the VCS Option Plan.
While it is within the discretion of the VCS Board of Directors or Committee, as
the case may be, to determine the exercise price and term of the options, no
term of an option shall extend for more than ten years from the date of the
grant and no option may be granted at an exercise price less than the fair
market value of the stock at the time of the grant. Furthermore, as to any
employee owning more than 10% of the voting power of all classes of stock of
VCS, the exercise price must be at least 110% of the fair market value of the
stock at the time of grant and the option term may not be more than five years.
The VCS Option Plan currently provides that options to purchase a maximum
of 900,000 shares of VCS Common Stock (subject to adjustments to reflect changes
in the capitalization of VCS) may be granted to employees, officers, directors,
consultants or independent contractors of VCS as selected by the VCS Board of
Directors or Committee, as the case may be. Under the proposed amendment, the
VCS Option Plan would provide that options to purchase a maximum of 1,300,000
shares of VCS Common Stock might be granted. The shares of VCS Common Stock
issuable upon the exercise of any option shall be either shares authorized but
unissued by VCS or shares issued and reacquired by VCS. The granting of an
option under the VCS Option Plan does not affect VCS's or the stockholders'
existing rights to remove such optionee from the VCS Board of Directors or
terminate the optionee's work for or with VCS.
Payment for shares purchased pursuant to the exercise of an option must be
paid in full in cash or in whatever manner the VCS Board of Directors
authorizes. Within a reasonable time after receipt of such payment, VCS will
issue and deliver certificates representing the purchased shares, provided
federal income tax withholding requirements are met.
No employee may be granted presently exercisable incentive stock options
for shares having an aggregate fair market value greater than $100,000 in any
calendar year.
Options granted under the VCS Option Plan, unless otherwise determined by
the Committee and set forth in the stock option agreement between VCS and the
optionee, shall be exercisable as to 25% thereof on and after the first
anniversary of the date of grant, as to an additional 25% thereof on and after
the second anniversary of the date of grant, as to an additional 25% thereof on
and after the third anniversary of the date of grant, and as to the remaining
unexercised balance on and after the fourth anniversary of the date of grant and
prior to expiration of the option, unless earlier terminated in accordance with
the provisions of the VCS Option Plan or the stock option agreement under which
such option is granted. However, the VCS Board of Directors may, by the
provisions of the stock option agreement between VCS and the optionee, define or
limit the number of shares purchasable under the option to or in any period or
periods of time following the date of grant.
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<PAGE> 46
An option may be exercised only while the optionee is an employee, officer,
director, consultant or independent contractor of VCS, except that (i) if an
optionee's work for or with VCS is terminated by reason of the death or
disability of such optionee, the option may be exercised by the optionee or his
heirs or legal representatives, as the case may be, within 12 months of such
termination or within the remaining term of the option, whichever is less, but
only as to shares which were immediately purchasable by him on the date of such
termination, or (ii) if an optionee's work for or with VCS is terminated for any
reason other than his death or disability or as provided for in Section 23 of
the VCS Option Plan, the option may be exercised by the optionee within three
months of the date of such termination or within the remaining term of the
option, whichever is less, but only as to shares which were immediately
purchasable by him on the date of such termination. Options and/or shares
acquired pursuant to an option granted under the VCS Option Plan may be
forfeitable, with or without consideration, if, in the opinion of the VCS Board
of Directors, an optionee has taken action adverse to VCS's interests, including
but not limited to those actions set forth in Section 23 of the VCS Option Plan.
Options are not assignable or transferable except by will or the laws of
descent and distribution, and are exercisable only by the optionee or by his
heirs or legal representatives.
The VCS Option Plan may be amended, suspended or terminated at any time by
the VCS Board of Directors, without stockholder approval, in such respects as
the VCS Board of Directors may deem advisable in order that the options granted
pursuant thereto may conform to any changes in the law or in any other respect
which the VCS Board of Directors may deem to be in the best interests of VCS;
provided, however, that no amendment may be made without stockholder approval
when such approval is required by Rule 16b-3 promulgated under the Exchange Act,
the requirements of Nasdaq, or any other applicable law, rule or regulation. An
amendment, suspension or termination will not affect any previously granted
option without the consent of the optionee so affected.
The preceding discussion is merely a summary of the VCS Option Plan and is
qualified in its entirety by the text of the VCS Option Plan, the full text of
which is incorporated by reference as an exhibit to the Registration Statement.
FEDERAL INCOME TAX ASPECTS
ISOs. Some options to be issued under the VCS Option Plan will be
designated as ISOs and are intended to qualify under Section 422 of the Code.
Under the provisions of that Section, the optionee will not be deemed to have
received any income at the time an ISO is granted or exercised. However, the
excess, if any, of the fair market value of the shares on the date of exercise
over the exercise price will be treated as a tax preference item and may subject
the optionee to the alternative minimum tax in the year of exercise.
If the optionee disposes of the shares later than two years after the date
of grant and one year after the exercise of the ISO, the gain or loss, if any
(i.e., the difference between the amount of income realized for the shares and
the exercise price), will be long-term capital gain or loss.
If the optionee disposes of the shares acquired on exercise of an ISO
within two years after the date of grant or within one year after the exercise
of the ISO, the disposition will constitute a "disqualifying disposition," and
the optionee will have income in the year of the disqualifying disposition equal
to the excess of the amount received for the shares over the exercise price. Of
that income, the portion equal to the excess of the fair market value of the
shares at the time the ISO was exercised over the exercise price will be
compensation income, and the balance, if any, will be either short-term capital
gain, if the shares are disposed of within one year after the ISO is exercised,
or long-term capital gain, if the shares are disposed of more than one year
after the ISO is exercised.
If the optionee disposes of the shares in a disqualifying disposition at a
price that is below the fair market value of the shares at the time the ISO was
exercised and such disposition is a sale or exchange to an unrelated party, the
amount includible as compensation income to the optionee will be limited to the
excess of the amount of income realized on the sale or exchange over the
exercise price.
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<PAGE> 47
If an ISO is exercised through the payment of the exercise price by the
delivery of VCS Common Stock, to the extent that the number of shares received
exceeds the number of shares surrendered, such excess shares will possibly be
considered as ISO stock with a zero basis.
VCS is not entitled to a deduction as a result of the grant or exercise of
an ISO. If the optionee has compensation income as a result of a disqualifying
disposition, VCS will have a corresponding deductible compensation expense in an
equivalent amount in the taxable year of VCS in which the disqualifying
disposition occurs.
NQSOs. Some options to be issued under the VCS Option Plan will be
designated as NQSOs which receive no special tax treatment, but are taxed
pursuant to Section 83 of the Code. Under the provisions of that Section, if an
option is granted to an employee in connection with the performance of services
and has a "readily ascertainable fair market value" at the time of the grant,
the employee will be deemed to have received compensation income in the year of
grant in an amount equal to the excess of the fair market value of the option at
the time of grant over the amount, if any, paid by the optionee for the option.
However, a NQSO generally has "readily ascertainable fair market value" only
when the option is actively traded on an established market and when certain
stringent Code requirements are met.
If the option does not have a readily ascertainable fair market value at
the time of the grant, the option is not included as compensation income at that
time. Rather, the optionee realizes compensation income at the time the option
is exercised. The amount of income realized is equal to the excess of the fair
market value of the shares at the time the option is exercised over the sum of
the exercise price plus the amount, if any, paid by the optionee for the option.
If a NQSO is exercised through payment of the exercise price by the
delivery of VCS Common Stock, to the extent that the number of shares received
by the optionee exceeds the number of shares surrendered, ordinary income will
be realized by the optionee at that time only in the amount of the fair market
value of such excess shares, and the tax basis of such excess shares will be
such fair market value.
Once a NQSO is subject to tax as compensation income, it is treated as an
investment option or investment shares and becomes subject to the investment
property rules. No gain or loss arises from the exercise of an option that was
taxed at the time of grant. When the optionee disposes of the shares acquired
pursuant to a NQSO, whether taxed at the time of grant or exercise, the optionee
will recognize capital gain or loss equal to the difference between the amount
of income realized for the shares and the optionee's basis in the shares.
Generally, the optionee's basis in the shares will be the exercise price
plus the optionee's basis in the option. The optionee's basis in the option is
equal to the sum of the compensation income realized at the time of grant or
exercise, whichever is applicable, and the amount, if any, paid by the optionee
for the option. In the compensatory option context, optionees normally pay
nothing for the grant of the option so the basis in the option will usually be
the amount of compensation income realized at the time of grant or exercise.
Thus, the optionee's basis in the shares will usually be equal to the exercise
price of the option plus the amount of compensation income realized by the
optionee at the time of grant or exercise. The capital gain or loss will be
short-term if the shares are disposed of within one year after the option is
granted or exercised (depending on which event caused the shares to be included
as compensation income), and long-term if the shares are disposed of more than
one year after the option is granted or exercised, whichever is applicable.
If a NQSO is taxed at the time of grant and expires or lapses without being
exercised, it is treated in the same manner as the lapse of an investment
option. The lapse is deemed to be a sale or exchange of the option on the day
the option expires and the amount of income realized is zero. The optionee
recognizes a capital loss in the amount of the optionee's basis (compensation
income realized at the time of the grant plus the amount, if any, paid by the
optionee for the option) in the option at the time of the lapse. The loss is
short-term or long-term, depending on the optionee's holding period in the
option.
If a NQSO is not taxed at the time of grant and expires without being
exercised, the optionee will have no tax consequences unless the optionee paid
for the option. In such case, the optionee would recognize a loss in the amount
of the price paid by the optionee for the option.
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<PAGE> 48
VCS is entitled to a deductible compensation expense in an amount
equivalent to the amount included as compensation income to the optionee. This
deduction is allowed in VCS's taxable year in which the income is included as
compensation to the optionee. VCS is only entitled to this deduction if VCS
deducts and withholds upon the amount included in an employee's compensation.
The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this Joint Proxy Statement/Prospectus, which are subject
to change, and upon an interpretation of the relevant sections of the Code,
their legislative histories and the income tax regulations which interpret
similar provisions of the Code. Furthermore, the foregoing is only a general
discussion of the federal income tax aspects of the VCS Option Plan and does not
purport to be a complete description of all federal income tax aspects of the
VCS Option Plan. Optionees may also be subject to state and local taxes in
connection with the grant or exercise of options granted under the VCS Option
Plan and the sale or other disposition of shares acquired upon exercise of the
options. EACH PERSON RECEIVING A GRANT OF OPTIONS SHOULD CONSULT WITH HIS OR HER
PERSONAL TAX ADVISOR REGARDING FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF
PARTICIPATING IN THE VCS OPTION PLAN.
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<PAGE> 49
MARKET FOR AND DIVIDENDS ON THE VCS COMMON STOCK
Prior to February 14, 1996, VCS's Common Stock traded on the American Stock
Exchange/Emerging Company Marketplace ("AMEX/ECM"), originally under the ticker
symbol SIC.EC. On August 11, 1994, VCS's ticker symbol was changed to VPS.EC. In
February 1996, VCS filed an application to delist from the American Stock
Exchange with the Commission. Effective February 14, 1996, VCS'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 or on the Nasdaq National Market, as applicable, for the periods
indicated (adjusted for a one for four reverse stock split on August 11, 1994).
<TABLE>
<CAPTION>
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>
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>
<TABLE>
<CAPTION>
FISCAL 1996: HIGH LOW
------------ ----- ----
<S> <C> <C>
1st Quarter................................................. 14.00 7.00
2nd Quarter................................................. 15.13 8.88
3rd Quarter (through September 3, 1996).....................
</TABLE>
As of August 30, 1996, the record date of the VCS Special Meeting, there
were holders of record of outstanding VCS Common Stock.
VCS has not declared or paid any cash or other dividends on the VCS Common
Stock to date and has no intention of doing so in the foreseeable future. The
declaration of dividends, cash or otherwise, is subject to the discretion of
VCS's Board of Directors and will depend on a number of factors, including the
cash position, earnings, financial position and anticipated financial
requirements of VCS and other factors deemed relevant by the Board of Directors.
VCS is limited by law to paying dividends on VCS 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 VCS has no surplus, out of its net profits for the fiscal year
in which the dividend is declared and/or the preceding fiscal year.
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<PAGE> 50
VCS SELECTED FINANCIAL DATA
The following table present selected historical financial data for VCS for
each of the five fiscal years ended December 31,1995, and for the six month
periods ended June 30, 1996 and 1995. The data presented are derived from the
financial statements of VCS and should be read in conjunction with the more
detailed information and financial statements and notes thereto, of VCS, which
are included elsewhere in this Joint Proxy Statement/Prospectus. In the opinion
of the management of VCS, the interim financial information includes all
adjustments (consisting only of normal recurring accruals) that are considered
necessary for a fair presentation of the results of operations for such periods.
Results for the interim periods are not necessarily indicative of results for
the year.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------- ----------------
DATA 1991 1992 1993 1994 1995 1995 1996
- ---- ------- ------ ------ ------ ------- ------ -------
(IN THE THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations:
Sales..................................... $ 2,108 $ 3,558 $7,052 $ 6,334 $10,779 $4,922 $ 4,044
Gross profit.............................. 1,772 2,348 5,001 4,690 7,323 3,312 3,253
Net income (loss)......................... $ (605) $ 276 $1,880 $(6,599) $ 967 $ 373 $ 248
Net income (loss) per share:
Primary................................. $ (.32) $ .15 $ .82 $ (2.29) $ .14 $ .06 $ .03
Fully diluted........................... $ (.32) $ .15 $ .52 $ (2.29) $ .14 $ .06 $ .03
Cash dividends per share.................. -- -- -- -- -- -- --
Weighted average outstanding shares:
Primary................................. 1,880 1,880 2,292 2,881 6,901 6,564 8,605
Fully diluted........................... 1,880 1,880 3,750 2,881 7,150 6,564 8,611
Balance Sheet Data:
Working capital (deficiency).............. $ 53 $ (221) $1,914 $ 1,673 $ 3,602 $2,092 $17,144
Total assets.............................. 909 1,063 2,927 3,030 4,839 3,512 19,519
Long-term debt............................ 1,679 1,162 1,162 1,175 1,162 1,162 --
Stockholders' equity (deficit)............ $(1,439) $(1,163) $1,009 $ 1,008 $ 3,062 1,411 $17,922
</TABLE>
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<PAGE> 51
VCS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception, VCS has focused on the development, commercialization
and application of speech recognition technologies. VCS'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
VCS's technology into its customers' products and systems. Customers who choose
to integrate VCS'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. VCS introduced its commercial
speech recognition hardware product for telecommunications applications in 1987.
Today approximately 90% of VCS's sales are from the telecommunications market
segment. A significant percentage of VCS's sales are made under agreements with
major customers. See "Business of Voice Control Systems -- Sales and Marketing."
VCS's sales and profitability may vary significantly from quarter to
quarter due to a variety of factors, including VCS's dependence upon a small
number of customers, timing of customer orders and changes in VCS's product and
customer mix. VCS 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.
VCS'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, VCS's
gross revenue from Dialogic may decrease while increased royalty revenue should
improve gross margins. See "Business of Voice Control Systems -- Products and
Services -- Telecommunications Products".
RESULTS OF OPERATIONS
Comparison of Results for Six Months ended June 30, 1996 and 1995
Sales decreased 18% from $4,922,000 during the six months ending June 30,
1995 to $4,044,000 during the six months ending June 30, 1996. Three customers,
Dialogic, Brite Voice Systems and Periphonics, accounted for 42%, 17% and 17%,
respectively, of total sales for the six months ending June 30, 1996. Dialogic
accounted for 61% of total sales for the six months ending June 30, 1995.
Royalty, development and license fees, which increased 43% over the six months
ending June 30, 1995, were 38% of total revenues for the six months ending June
30, 1996. A one-time non-refundable fee charged to Brite Voice Systems for a
license to use one of VCS's application patents accounted for approximately 21%
of royalty, development and license fee revenues. Hardware sales, which
decreased 38% over the six months ending June 30, 1995, were 56% of revenues in
the six months ending June 30, 1996. This decrease is a result of VCS's
continued conversion from primarily a hardware/software supplier to become
primarily a software supplier.
Cost of sales includes the cost of components and subcontracted
manufacturing related to hardware products. Gross profit as a percent of sales
increased from 67% in the six months ending June 30, 1995 to 80% in the
comparable 1996 period as a result of the decrease in hardware sales and the
increase in royalty, development and license fees.
Research and development expenses increased 18% from $1,234,000 in the six
months ending June 30, 1995 to $1,459,000 in the six months ending June 30,
1996. This increase reflects costs associated with the retention and recruitment
of highly qualified employees in research and product development.
Selling, general, and administrative expenses increased 8% from $1,629,000
in the six months ending June 30, 1995 to $1,764,000 in the six months ending
June 30, 1996.
Net operating loss ("NOL") carryforwards expiring from 1996 to 2009
totaling approximately $14,799,000 were available as of June 30, 1996 to offset
future periods taxable income. VCS has provided an
43
<PAGE> 52
NOL carry forwards expiring from 1996 to 2009 totaling approximately
$15,047,000 are available as of December 31, 1995, to offset future periods
taxable income. VCS has provided an allowance against its entire deferred tax
asset relating primarily to NOL carry forwards of approximately $5,116,000.
Effective as of August 11, 1994, an ownership change as defined by the Code
Section 382 occurred. The effect of such change limits the use of VCS'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 carry
forwards during 1995.
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 Scott
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.
NOL carry forwards expiring from 1996 to 2009 totaling approximately
$15,047,000 are available as of December 31, 1995, to offset future periods
taxable income. VCS has provided an allowance against its entire deferred tax
asset relating primarily to NOL carry forwards of approximately $5,116,000.
Effective as of August 11, 1994, an ownership change as defined by the Code
Section 382 occurred. The effect of such change limits the use of VCS'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 carry
forwards during 1995.
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.
44
<PAGE> 53
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 Scott
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 Scott Merger. In addition, it
included $2,714,000 of goodwill and $98,000 of capitalized organization costs
related to the Scott 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 Scott 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 Scott 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 carry forwards during 1993. In 1994, VCS incurred
an operating loss and consequently no provision for income taxes was recorded.
LIQUIDITY AND CAPITAL RESOURCES
VCS'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 June 30, 1996 was $17,144,000. Net working capital at December 31,
1994 and December 31, 1995 was $1,673,000 and $3,602,000, respectively. In the
past, VCS's working capital needs were financed primarily through cash flow from
operations and proceeds from the exercise of stock options. A stock offering was
completed during the first quarter of 1996 that provided net proceeds of
$14,430,000 to VCS. VCS anticipates that its working capital needs will increase
along with future sales growth.
At June 30, 1996, VCS held $16,365,000 in cash and cash equivalents. At
December 31, 1994 and 1995, VCS had $1,076,000 and $2,259,000, respectively, in
cash and cash equivalents. Cash and cash equivalents are invested in
institutional cash investment accounts with preservation of capital being the
primary consideration. All investments currently have overnight liquidity.
Historically, VCS's primary source of liquidity has been the timely collection
of its accounts receivable. The average days sales in accounts receivable was 81
days as of June 30, 1996. The average days sales in accounts receivable were 53
days and 35 days at December 31, 1994 and 1995, respectively.
VCS's inventory as of June 30, 1996 was $493,000 and primarily consists of
VCS's Personal Voice Dialer. VCS'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 VCS's introduction of the
Personal Voice Dialer. The Personal Voice Dialer is being sold through
catalogues and other direct marketing avenues that require VCS to carry
sufficient inventory to fill orders in a relatively short period of time.
VCS's debt at June 30, 1996 and December 31, 1995 consisted of a
convertible promissory note due to Dialogic on January 1, 1997. Dialogic
converted accrued interest on its note to shares of VCS Common Stock during 1995
and 1996.
VCS's capital expenditures were $294,000 for the six months ended June 30,
1996. The expenditures were primarily for a new telephone/voice mail system,
office furniture and computer equipment. VCS's capital expenditures were
$240,000 and $208,000 for the year ended December 31, 1994 and 1995,
respectively. VCS has no specific commitments with regard to capital
expenditures.
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<PAGE> 54
VCS believes that its existing sources of liquidity, funds generated by
operations and the funds received from the stock offering will be sufficient to
provide the capital resources necessary to support increased operating needs and
finance continued growth in the foreseeable future.
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. VCS 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.
BUSINESS OF VOICE CONTROL SYSTEMS
GENERAL
The predecessor of VCS was founded in September 1978 and was organized as a
Texas corporation in May 1980. VCS's predecessor reincorporated as a Delaware
corporation in January 1981 under the corporate name Scott Instruments
Corporation. Effective August 11, 1994, Industries merged into Scott whereupon
it changed its name to Voice Control Systems, Inc. After the Scott Merger,
security holders of Industries owned, assuming the exercise of all outstanding
rights to purchase VSC Common Stock, 76% of the outstanding VCS Common Stock and
designees of Industries accounted for a majority of VCS's Board of Directors.
The Scott Merger was accounted for as a reverse acquisition and therefore all
financial information (except for stock prices) included herein for periods
prior to the Scott Merger is that of Industries.
VCS is a leading international supplier of speech recognition and related
speech input technologies. VCS 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.
VCS 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 VCS's technology into their products,
including Dialogic Corporation,
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InterVoice, Brite Voice Systems, Periphonics, OKI Telecom, Hughes Network
Systems, Micronics Computers and OKI Semiconductor.
VCS'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 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. VCS'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.
VCS 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
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in the telecommunications segment. VCS'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
"Business of Voice Control Systems -- Products and Services." Based upon VCS'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, VCS 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 VCS'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. VCS 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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<PAGE> 57
VCS first began commercial delivery of speech recognition in 1986. Since
then VCS's technology has been or is being integrated in many systems and
products including:
<TABLE>
<CAPTION>
SYSTEMS INTEGRATORS/OEMS TYPICAL APPLICATIONS ILLUSTRATIVE USERS/PRODUCTS
- ----------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Apex Voice Communication,
Inc. ...................... Virtual telephone network Telephone companies in
messaging system developing nations
Applied Voice Technology..... Unified messaging on CTI Small and medium businesses
platforms
Auralog...................... Multimedia interactive Language training companies
training software
Brite Voice Systems Inc. .... Wireless network-based voice Telephone companies and
dialing, telephone network cellular and PCS service
voice processing systems providers:
AT&T Wireless VoiceTouch
Ameritech VoiceSelect
Brite/Perception............. Interactive voice response Banks, educational
systems....................... institutions, financial
institutions and call center
operators:
MBNA Account Information
System
Dialogic Corporation......... Call processing components for Systems providers in voice
voice processing systems in mail, voice messaging,
telecommunications and interactive voice response and
computer telephony telephone network intelligent
peripherals:
Digital Equipment Corp.
Offnet
Deutsche Telekom, AG......... Telephone network-based German and Eastern European
interactive voice response telephone companies
Hughes Network Systems....... Cellular, PCS and SMR voice- Automobile manufacturers,
activated telephones cellular equipment retailers
and wireless telephone service
providers:
1996 General Motors Cadillac
IBM Corporation.............. General interactive voice Financial institutions,
response systems information service providers,
call center operators,
airlines and the travel
industry:
DirectTalk
InterVoice, Inc. ............ Interactive voice response Banks, brokerage firms,
systems and intelligent financial institutions,
peripherals in telephone information service providers,
networks 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
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
SYSTEMS INTEGRATORS/OEMS TYPICAL APPLICATIONS ILLUSTRATIVE USERS/PRODUCTS
- ----------------------------- ------------------------------ ------------------------------
<S> <C> <C>
OKI Telecom.................. Voice-activated wireless Automobile manufacturers,
telephones 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 Banks, financial institutions,
systems and intelligent information service providers,
peripherals telephone companies, airlines
and travel related companies:
US IRS 1040EZ telephone tax
return filing system
Precision Systems, Inc. ..... Telephone messaging systems, Telephone companies, call
telephone network-based voice center operators, and wireless
processing systems and call service providers:
center automation "Atlas" Personal
Telecommunications Assistant
Siemens, AG.................. Voice activation in telephone Telephone companies worldwide
network switching systems
Telecorp Systems, Inc. ...... Pay-per-view automated order Cable television companies and
entry subscription television
companies
</TABLE>
STRATEGY
VCS'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. VCS believes it is the
leading supplier of speech recognition technology used in
telecommunications. VCS plans to maintain this position by developing and
deploying new products primarily across its existing distribution network.
Dialogic has historically been VCS'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. VCS 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. VCS 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 VCS derives the majority of its sales by
providing speech recognition technology to the telecommunications market.
VCS plans to expand marketing of its technology to other markets in order
to diversify its revenue base. To this end, VCS has begun to market its
technology to the consumer electronics and desktop computer markets. VCS
believes that systems integrators and OEMs in these markets will
increasingly use speech recognition technologies in their products and that
VCS's experience and reputation in implementing speech recognition in the
telecommunications market positions it favorably to compete in these
emerging markets.
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<PAGE> 59
Improve the man-machine interface. VCS 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, VCS has announced a "Phonetic Dictionary" vocabulary
development system for user-developed speaker-independent vocabularies. See
"Business of Voice Control Systems -- Products and Services -- Enhanced
Technologies."
Emphasize software license revenues. VCS's products consist of
implementations of its software-based speech recognition technologies in
software, hardware or computer chips. Historically, VCS has developed both
hardware and software for its customers. However, as the markets for speech
recognition technologies grow and mature, VCS 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. VCS has recently introduced
its first product marketed directly to the end user. Historically, VCS
developed technology exclusively for integration by systems integrators and
OEMs into their products.
Expand its international presence. VCS'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.
VCS's current technologies include speaker-independent (discrete and
continuous) and speaker-dependent speech recognition, as well as speaker
verification. VCS'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 VCS has designed hardware on which its recognition
software resides, there is no unique hardware required to use VCS'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. VCS 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. VCS's "Phonetic Dictionary" will allow users to select and
create a speaker-independent vocabulary. See "Business of Voice Control
Systems -- Products and Services -- Enhanced Technologies."
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<PAGE> 60
TELECOMMUNICATIONS LANGUAGES PROCESSED
<TABLE>
<CAPTION>
DISCRETE DIGITS & CONTROL WORDS ALPHANUMERIC CONTINUOUS
- ---------------------------------------------- ------------------------- --------------------
<S> <C> <C> <C>
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>
VCS 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. VCS 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.
VCS'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 VCS's technology.
VCS 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. VCS's technology
is capable of supporting the largest channel density of any commercial product
currently on the market.
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<PAGE> 61
CORE TECHNOLOGY PRODUCT SUMMARY
The following table sets forth certain summary information for VCS's
current core technology products.
<TABLE>
<CAPTION>
OPTIONS AND
CORE TECHNOLOGY ENHANCED OPERATING CUSTOMER
APPLICATION FEATURES TECHNOLOGIES ENVIRONMENT VOCABULARIES
- -------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Telecommunications SI, SD, SA, SV User selectable DSP embedded 45 languages --
Continuous speech triggering recognizer discrete digits
input Voice activation DSP library 18 languages --
Discrete speech Word spotting recognizer alphabet
input High rejection Microprocessor 12 languages --
HMM decision vocabularies embedded recognizer continuous
strategy Phonetic dictionary Fixed point support 9 languages --
Phonetic "front-end" Cut-thru (barge-in) Floating point cellular
Vocabulary masking Large vocabulary support 3 languages --
High accuracy in capability(u) Supported phonetic(u)
tele-phone Alphabet recognition processors:
environment Custom vocabulary Texas Instruments
Multi-channel/high development service Intel
density NEC
Software-based OKI
Siemens(u)
Desktop Computing SI, SD, SA, Voice activation Microprocessor 45 languages -- CT
Discrete input Low memory option embedded recognizer digits
Continuous input(u) Custom vocabulary DOS-based system 18 languages -- CT
SAPI interface(u) development service OS/2-based system alphabet(u)
HMM decision Telephone or Supported 12 languages --
strategy(u) desktop speech input processors: continuous(u)
OLE format Alphabet recognition Intel PC control library
software(u) OKI
Accurate in high NEC
noise
"Close talk" or "far
talk" microphone
input
Consumer/Automotive SI, SD, SA, SV Alphabet recognition DSP embedded 45 languages CT(u)
Discrete speech Voice activation recognizer discrete digits(u)
input SI & SD operation DSP library 18 languages -- CT
"Close talk" or "far Celldial interface recognizer alphabet
talk" microphone Custom vocabulary Microprocessor 7 languages --
input development service embedded recognizer automotive
Accurate in high Fixed point support PC control library
noise Floating point military alphabet
Low memory required support library
Phonetic "front-end" Supported machine control
Low "horsepower" processors: library
processor required Texas Instruments
Intel
NEC
OKI
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C>
SI -- speaker-independent SD -- speaker-dependent SA -- speaker-adaptive SV -- speaker verification
u -- under development CT -- computer telephony
</TABLE>
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<PAGE> 62
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. VCS
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. VCS is currently developing vocabularies to
enable natural language input and expects to have beta versions in U.S. English
available in late 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, VCS 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, VCS 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 and vocabulary creation tools are currently available.
Large speech recognition vocabularies, in excess of 2,000 words, are
becoming increasingly feasible due to technology advancements, such as phonetic
dictionary. VCS 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 1997.
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, VCS believes conversational speech recognition has great
potential for being the most accepted technology for automated information
systems. VCS demonstrated initial capabilities in a conversational speech
recognizer in June 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 VCS'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, VCS's latest technologies, including alphanumeric 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
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vocabularies in a variety of languages. VCS also licenses its enhanced
technologies directly to persons who may have acquired VCS's basic speech
recognition technology from one of VCS's distributors/customers.
VCS 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
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, VCS introduced a new speech recognition
software product for Dialogic's AEB architecture called VRSoft. Commercial
shipments of VRSoft by Dialogic began during the first quarter of 1996. VRSoft
is 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. VCS 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 and several UNIX operating environments. VCS
Antares Software for OS/2 and SCO UNIX is currently in production with
additional operating systems in beta test. As a result of adopting an open
architecture platform, the technology of VCS'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. VCS 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.
VCS 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.
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Cellular/Automotive and Consumer Electronics Products. VCS 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.
VCS has developed a state-of-the-art speech recognizer incorporating VCS's
speaker-independent and speaker-dependent speech recognition technologies for
low cost applications. VCS 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 VCS's voice activation
vocabulary 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, VCS 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. While the Personal
Voice Dialer has found acceptance in niche markets such as home automation and
the physically challenged, the general public has not embraced the product.
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VCS PRODUCT SUMMARY
The following table sets forth certain summary information for certain of
VCS's products.
<TABLE>
<CAPTION>
PRODUCT OPTIONS AND
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 Phonetic approach Speaker-dependent Analog or digital alphabet
Dialogic Speaker-adaptive telephone input 8 languages --
AEB D/141 low Speaker verification cellular
density products
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 Phonetic approach Word spotting TI 320C25 or alphabet
Dialogic 2 to 16 recognizers Hi-rejection TI 320C31 8 languages --
PEB products Shared resource Phonetic Dictionary daughtercard cellular
switching Voice activation 12 languages --
HMM decision strategy Cut-thru continuous
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 to 6 recognizers/DSP Speaker verification TI 320C31 18 languages --
Speech recognition continuous Word spotting firmware alphabet(u)
for Dialogic 4 recognizers/DSP Hi-rejection 8 languages --
Antares SCSA discrete Phonetic Dictionary cellular
products 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- No additional Alphabet recognition(u) AEB interface 18 languages --
based low hardware required alphabet(u)
density Dialogic 2 or 4 recognizers 8 languages --
AEB speech per PC system cellular(u)
recognizer
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 8 recognizers/PCB Word spotting Operating system alphabet
proprietary discrete Hi-rejection independent 8 languages --
architecture voice 4 recognizers/PCB Phonetic Dictionary cellular
processing systems discrete 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 Speaker-adaptive High noise accuracy Meets SAE 18 languages -- CT
integrated CT Single chip Single chip package specifications alphabet
speech recognition operation(u) Low cost "on-board" Parallel or serial Machine control
processor Discrete input 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 Speaker-adaptive Voice activation Discrete digits
for PC "voice mouse" Discrete input
operation
</TABLE>
- ---------------
D -- Sold exclusively PCB -- Printed Circuit Board u -- under development
by Dialogic
CT -- computer telephony
58
<PAGE> 67
TECHNOLOGY DEVELOPMENT
VCS believes that enhancements of and improvements to its existing
technologies are critical to its future success. VCS has made substantial
investments in research and development in each of the last three years. During
1995, VCS spent $2,509,000 (23% of revenues) on Company sponsored research and
development. VCS spent $1,962,000 and $1,190,000 (31% and 17% of revenues,
respectively) on VCS sponsored research and development activities during 1994
and 1993, respectively. Currently, VCS 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 VCS works
span more than one year.
VCS'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. VCS 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. VCS 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 VCS's business, operating results and
financial condition.
SALES AND MARKETING
VCS 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, VCS frequently coordinates its
selling efforts with the sales force of a systems integrator or OEM.
VCS'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 VCS 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, VCS 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. VCS 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 VCS's speech
recognition technology products.
Computer/Desktop Markets. In computer and desktop applications, VCS
generally licenses its technology to hardware manufacturers, such as
Micronics (Orchid Technology). VCS receives a royalty for each copy of the
technology shipped with the integrated product.
Cellular and Consumer Electronics Markets. VCS 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 VCS. When VCS sells a
computer chip, a software license for the single copy of VCS's technology
is included with the chip. Under licensing agreements, customers of VCS pay
a royalty for each product sold that incorporates VCS's technology. The
Personal Voice Dialer is distributed through specialty catalogs and
distributors.
Other Emerging Markets. VCS and OKI Semiconductor jointly integrated
VCS's speech recognition technology into the VRP, a low-cost chip being
manufactured and sold by OKI Semiconductor. OKI
59
<PAGE> 68
Semiconductor has indicated to VCS that it is targeting customers for
cellular, automotive and personal computer applications for which the prior
implementation of speech recognition was too expensive or unworkable.
Significant Customers. VCS'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 VCS and Dialogic have historically accounted for most
sales to Dialogic. While VCS 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 VCS
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 VCS 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 VCS and InterVoice.
InterVoice pays VCS 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 "Brite Agreement"). The Brite
Agreement grants Brite a license to use certain VCS technology and sets forth
royalties to be paid to VCS. The Brite Agreement expires August 31, 1999.
VCS's technology is used by many customers in telecommunications, desktop
and consumer electronics markets. A partial list of VCS's major
customers/integrators is as follows:
TELECOMMUNICATIONS
AccessLine Technologies, Inc.
AG Communication Systems
Apex Voice Communication, Inc.
Applied Voice Technology
Brite Voice Systems, Inc.
Comverse Technology, Inc.
Cyberlog, Inc.
Dialogic Corporation
Digital Equipment Corporation
Deutsche Telekom AG
Global Communications, Ltd.
Group 2000
Hewlett Packard Company
IBM Corporation
Intellicall
Intellivoice
InterVoice, Inc.
MicroLog Corporation
Nortel
Parity Software Development Corp.
Periphonics Corporation
Precision Systems, Inc.
Siemens, AG
Stylus Innovation, Inc.
Syntellect, Inc.
TALX Corporation
Telecorp Systems, Inc.
Vicorp Interactive Systems, Inc.
Voicetek Corporation
West Interactive Corporation
CELLULAR AND CONSUMER ELECTRONICS
HighwayMaster
Communications, Inc.
Hughes Network Systems
NEC (U.K.)
OKI Semiconductor
OKI Telecom
Pacific Communication Sciences, Inc. (PCSI)
COMPUTER/DESKTOP
Auralog
Cirrus Logic, Inc.
Health Tech Services Corp.
Micronics Computers, Inc. (Orchid Technology)
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<PAGE> 69
MANUFACTURING
VCS does not engage in any manufacturing operations and does not plan to do
so in the foreseeable future. VCS 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, VCS 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 VCS's competitors have developed speech recognition
technology comparable to VCS's technology, VCS believes that, with respect to
markets targeted by VCS, 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, ALtech, Lernout & Hauspie Speech Products, Pure Speech,
Inc., Speech Systems, Inc., Verbex, Inc. and, before the Merger, VPC. Many of
VCS's competitors are substantially larger than VCS, are well established and
have greater financial, technical, marketing, service and operating resources
than VCS. These competitors can be expected to continue to make substantial
commitments to research and product development.
PATENTS
VCS does not apply for patents on its speech recognition techniques that it
maintains as trade secrets because of the disclosure requirements in doing so.
VCS holds ten 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 VCS's
proprietary technology is implemented in software that is protected under
copyright and trade secret law and subject to licensing agreements.
VCS has recently commenced litigation against a company it believes is
infringing on a patent owned by VCS. See "Business of Voice Control
Systems -- Legal Proceedings."
EMPLOYEES
As of June 30, 1996, VCS had 60 employees, of which 15 are engaged in
research and development, 19 in product development and application engineering,
14 in sales and marketing and 12 in finance and administration. In addition, VCS
employs four people on a part-time basis, three to assist with speech data
processing and one to assist in finance and administration. All of VCS's
employees sign agreements containing standard non-disclosure and invention
assignment provisions. VCS's future success will depend on its ability to
attract, train, retain and motivate highly qualified employees, who are in great
demand. VCS's employees are not represented by any collective bargaining
organization, and VCS has never experienced a work stoppage. VCS believes that
its employee relations are good.
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<PAGE> 70
DESCRIPTION OF PROPERTIES
VCS 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. VCS also leases an office in Waterlooville, Hampshire, England for use by
sales and marketing personnel.
LEGAL PROCEEDINGS
On November 6, 1995, VCS 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." VCS is seeking an injunction to prohibit further
infringement, damages and costs.
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<PAGE> 71
DESCRIPTION OF VCS CAPITAL STOCK
VCS's authorized capital stock consists of 20,000,000 shares of VCS Common
Stock, par value $.01 per share, and 300,000 shares of VCS Preferred Stock, par
value $1.00 per share, of which 7,078,107 shares of VCS Common Stock and no
shares of VCS Preferred Stock were issued and outstanding on August 30, 1996,
the record date of the VCS Special Meeting. All of the issued and outstanding
shares of VCS Common Stock are fully paid and nonassessable. In addition, at the
same date there are reserved for issuance 3,009,140 shares of VCS Common Stock
issuable upon the exercise of outstanding options or warrants or the conversion
of a convertible note.
The following summary description of VCS's capital stock does not purport
to be complete and is qualified in its entirety by this reference to VCS's
Certificate of Incorporation, as amended (the "VCS Certificate of
Incorporation"), and Bylaws of VCS, as amended (the "VCS Bylaws"), copies of
which have been filed or incorporated as exhibits to the Registration Statement
of which this Joint Proxy Statement/Prospectus forms a part.
COMMON STOCK
Each issued and outstanding share of VCS Common Stock entitles the holder
thereof to one vote on all matters submitted to a vote of stockholders. The VCS
Certificate of Incorporation does not permit cumulative voting of shares in the
election of directors or preemptive rights to stockholders to acquire additional
shares, obligations, warrants or other securities of VCS. The VCS Certificate of
Incorporation makes no provision for subscription or conversion rights,
redemption privileges or sinking funds with respect to shares of VCS Common
Stock. Upon any liquidation, dissolution or winding up of the affairs of VCS,
holders of VCS Common Stock are entitled to receive pro rata all of the assets
available for distribution to stockholders, after payment of any liquidation
preference on any VCS Preferred Stock outstanding at the time. Subject to rights
of holders of VCS Preferred Stock, dividends on VCS Common Stock may be paid if,
as and when declared by VCS's Board of Directors out of funds legally available
therefor. VCS has never paid cash or other dividends on shares of VCS Common
Stock and does not expect to pay any dividends in the foreseeable future.
PREFERRED STOCK
The Board of Directors may issue up to 300,000 shares of VCS Preferred
Stock in series by adoption of a resolution or resolutions providing for the
issue of series of VCS Preferred Stock. Each series of preferred stock will have
such distinctive designation or title as may be fixed by the Board of Directors
of VCS prior to the issuance of any shares thereof. Upon issuance, each series
will have those voting powers, if any, and those preferences and relative,
participating, optional or other special rights, with such qualifications,
limitation or restrictions of those preferences or rights, as stated in such
resolution or resolutions providing for the issue of such series of VCS
Preferred Stock. No VCS Preferred Stock is currently outstanding.
OUTSTANDING OPTIONS AND WARRANTS
As of August 30, 1996, the record date of the VCS Special Meeting, there
were outstanding options to purchase shares of VCS Common Stock at prices
ranging from $ to $ per share, with a weighted average
exercise price of $ per share. In addition, there were outstanding
warrants to purchase shares of VCS Common Stock at prices ranging from
$ to $ per share, with a weighted average exercise price of
$ per share. There was also outstanding a convertible note, in the
principal amount of $1,161,798, convertible into shares of VCS Common Stock at a
price of approximately $.92 per share.
VCS has agreed to assume VPC's outstanding options in the Merger. See "The
Merger -- Effect of Merger on VPC Options and Warrants."
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LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The VCS Certificate of Incorporation, as amended, limits the liability of
directors to the fullest extent permitted by the DGCL. The DGCL provides that
directors of a company will not be personally liable for monetary damages for
breach of their fiduciary duties as directors, except for liability for (i) any
breach of their duty of loyalty to the company or its stockholders, (ii) acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) any
transaction from which the director derived an improper personal benefit.
The VCS Bylaws, as amended, provide that directors, trustees, officers,
employees and agents of VCS will be indemnified against all expenses (including
attorneys' fees), judgments, fines and amounts paid or incurred by them for
settlement in any threatened, pending or completed action, suit or proceeding,
including any derivative action, if they acted in good faith and in a manner
they reasonably believed to be in the best interests of VCS.
VCS maintains a policy of insurance under which the directors and officers
of VCS are insured, subject to the limits of the policy, against certain losses
arising from claims made against such directors and officers by reason of any
acts or omissions covered under such policy in their respective capacities as
directors or officers, including liabilities under the Securities Act. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of VCS pursuant to the
foregoing provisions, or otherwise, VCS has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ANTI-TAKEOVER PROVISIONS
Pursuant to the Stockholders Agreement, certain individuals and
institutions who beneficially own, in the aggregate, approximately 23% of the
outstanding VCS Common Stock as of the record date of the VCS Special Meeting,
have agreed to vote their shares of VCS Common Stock for the election of the
current directors (or replacement nominees) until January 1, 1997. This
agreement could make a merger, tender offer or proxy contest involving VCS more
difficult, even if such events would be beneficial to the interests of
stockholders.
VCS, a Delaware corporation, is subject to the provisions of the DGCL,
including Section 203. In general, Section 203 prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which such person became an interested stockholder unless: (i) prior to such
date, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; or (ii) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or (iii)
subsequent to such date, the business combination is approved by both the Board
of Directors and by holders of at least 66 2/3% of the corporation's outstanding
voting stock, excluding shares owned by the interested stockholder. For these
purposes, the term "business combination" includes mergers, asset sales and
other similar transactions with an "interested stockholder." An "interested
stockholder" is a person who, together with affiliates and associates, owns (or,
within the prior three years, did own) 15% or more of the corporation's voting
stock. Although Section 203 permits a corporation to elect not to be governed by
its provisions, VCS to date has not made this election.
As described above, the VCS Certificate of Incorporation permits shares of
VCS Preferred Stock to be issued in the future without further stockholder
approval and upon such terms as the Board of Directors of VCS may determine. The
rights of the holders of VCS Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any VCS Preferred Stock that
may be issued in the future. Although providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, the issuance
of VCS Preferred Stock could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding capital stock. VCS has no present plan to
issue any shares of VCS Preferred Stock.
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<PAGE> 73
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services, Dallas, Texas.
ABSENCE OF MARKET FOR AND DIVIDENDS ON THE VPC SHARES
No active trading market exists with respect to any of the shares of any
class of capital stock of VPC. Such shares are not listed on any exchange and
are not traded in the over-the-counter market. No dividends have been declared
or paid by VPC on its capital stock. The Certificate of Incorporation, as
amended, of VPC restricts the ability of VPC to pay any cash dividends on the
VPC Common Stock without paying at least the same amount per share on the
outstanding VPC Preferred Stock, based upon the number of shares of VPC Common
Stock into which the VPC Preferred Stock is convertible.
VPC had 105 stockholders of record as , 1996, the record date
of the VPC Special Meeting.
VPC SELECTED FINANCIAL DATA
The following table present selected historical financial data for VPC for
each of the five fiscal years ended September 30, 1995, and for the nine month
periods ended June 30, 1996 and 1995. The data presented are derived from the
financial statements of VPC and should be read in conjunction with the more
detailed information and financial statements and notes thereto of VPC, which
are included elsewhere in this Joint Proxy Statement/Prospectus. In the opinion
of the management of VPC, the interim financial information includes all
adjustments (consisting only of normal recurring accruals) that are considered
necessary for a fair presentation of the results of operations for such periods.
Results for the interim periods are not necessarily indicative of results for
the year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------ -----------------
DATA 1991 1992 1993 1994 1995 1995 1996
- ------------------------------------ ------ ------ ------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues.................... $1,446 $1,230 $3,311 $4,917 $ 4,566 $ 2,755 $ 4,404
Income (loss) from operations..... (897) (670) 561 101 (3,059) (2,512) (1,483)
Net income (loss)................. $ (864) $ (648) $ 572 $ 131 $(3,021) $(2,485) $(1,474)
Net income (loss) per share....... $ $ (.46) $ .42 $ .05 $ (2.25) $ (1.86) $ (1.09)
Cash dividends per share.......... -- -- -- -- -- -- --
Weighted average outstanding
shares......................... 1,404 1,371 2,502 1,340 1,339 1,352
Balance Sheet Data:
Working capital (deficiency)...... $ (373) $ 61 $ 379 $2,158 $ (52) $ 408 $(1,443)
Total assets...................... 687 728 1,062 $3,216 $ 2,695 2,787 $ 1,869
Long-term debt.................... -- -- -- -- -- -- --
Stockholders' equity (deficit).... 110 117 781 $2,885 $ 869 $41,425 $ (585)
</TABLE>
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VPC'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the VPC's Financial Statements and Notes thereto appearing elsewhere in this
Joint Proxy Statement/Prospectus.
OVERVIEW
VPC develops and markets speech recognition products. Its principal source
of revenues are from the sale of speech recognition hardware and software
products and providing specialized engineering services to assist in the
integration of VPC's technology into its customers' products and services.
VPC revenues and profitability may vary significantly from quarter to
quarter due to a variety of factors, including dependence upon a small number of
customers, timing of customer orders and changes in product and customer mix.
VPC typically operates with relatively little backlog and substantially all of
its revenues in each quarter result from orders and royalty payments received in
that quarter.
RESULTS OF OPERATIONS
Comparison of Results for Nine Months Ended June 30, 1996 and June 30,
1995.
Total revenues increased 60%, or approximately $1,649,000, to $4,404,000,
during the first nine months of fiscal year 1996 from $2,755,000 during the
first nine months of fiscal year 1995. Three customers, Entex (a Wildfire
subcontract manufacturer), Natural Microsystems and Intellivoice, accounted for
20%, 11% and 10%, respectively, of total revenue for the first nine months of
fiscal year 1996. Three customers, Octel, Natural Microsystems and Wildfire,
accounted for 12%, 8% and 7%, respectively, of total revenues for the first nine
months of fiscal year 1995. Product revenues, were 78% of total revenues in the
first nine months of fiscal year 1996, an increase of 59% or approximately
$1,277,000 over the first nine months of fiscal year 1995. The increase in
product revenue is due to revenue from system integrators developing voice
activated dialing applications for the cellular market. Service accounted for
18% of revenue during the first nine months of fiscal year 1996, an increase of
over 49% or approximately $224,000 over the first nine months of fiscal year
1995. The increase in service revenue was due to increased revenue from voice
mail providers. Other revenues increased 97%, or from approximately $148,000 to
$301,000, in the first nine months of fiscal year 1996 from $153,000 in the
first nine months of fiscal year 1995. The increase in other revenue was
primarily due to increased license fees.
Cost of product expenses includes the cost of components and subcontracted
manufacturing related to hardware products. Cost of product expenses increased
62% to $1,175,000 for the first nine months ending June 30, 1996 from $725,000
for the first nine months ending June 30, 1995. This was due to an increase in
product revenue between fiscal years 1996 and 1995 and an increase in the cost
of memory chip components used in the product.
Research and development expenses stayed constant, with an insignificant
decrease of approximately $3,000, to $2,092,000 in the first nine months of
fiscal year 1996 from $2,095,000 in the first nine months of fiscal year 1995.
Sales and marketing expenses decreased 7%, or approximately $110,000, to
$1,362,000 in the first nine months of fiscal year 1996 from $1,472,000 in the
first nine months of fiscal year 1995. This decrease was primarily due to the
closure of the U.K. sales office and the resulting decrease of three employees.
General and administrative expenses increased 13%, or approximately
$106,000, to $886,000 in the first nine months of fiscal year 1996 from $780,000
in the first nine months of fiscal year 1995, primarily due to the employment of
a chief operating officer and increased legal costs relating to the Merger.
VPC incurred losses of ($1,474,000) and ($2,485,000), respectively, for the
nine months ended June 30, 1996 and June 30, 1995. These losses have been the
result of major investments made in developing products for both current and
future speech recognition markets. At the start of fiscal year 1995, VPC made a
strategic decision to develop a software-only speech recognition product for the
small business and home office market.
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<PAGE> 75
Additional development efforts were underway to upgrade the accuracy of VPC's
existing speech recognizer products for cellular usage and to address the
emerging voice recognition markets that require larger vocabularies. The loss
decreased 41%, or approximately $1,011,000, for the nine months ended June 30,
1996 from the nine months ended June 30, 1995. The decrease is primarily due to
increased product revenues for the nine months ended June 30, 1996 from the nine
months ended June 30, 1995.
Comparison of Results for Fiscal Years Ended September 30, 1995 and 1994.
Total revenues decreased 7%, or approximately $351,000, to $4,566,000 in
fiscal 1995 from $4,917,000 in fiscal 1994. One customer, Intellivoice,
accounted for 19%, of total revenues in 1995, and one customer, Creative
Technology, accounted for 62% of total revenue in 1994.
The decrease in revenue for fiscal 1995 from fiscal 1994 resulted from a
cancellation of a development contract by Creative Technology. The contract
cancellation was the result of a shift in Creative Technology's marketing
strategy. Product revenue increased 160%, or approximately $2,281,000, in fiscal
1995 over fiscal 1994 due to initial revenue from system integrators developing
voice activated dialing applications for the cellular market. Product revenue
were $3,705,000, or 81% of total revenue in fiscal 1995 compared to $1,424,000,
or 29% of total revenue in fiscal 1994. Service revenue decreased by $2,621,000,
to $628,000 for fiscal 1995 from $3,249,000 in fiscal 1994, due to the Creative
Technology contract cancellation.
Cost of product expenses increased 215%, or approximately $842,000, to
$1,233,000 in fiscal 1995 from $391,000 in fiscal 1994 due to the increase in
product revenue.
Research and development expenses increased 30%, or $652,000, to $2,844,000
in fiscal 1995 from $2,191,000 in fiscal 1994, primarily due to the addition of
employees associated with the development of the new desktop product.
Sales and marketing expenses increased 103%, or approximately $1,084,000,
to $2,137,000 in fiscal 1995 from $1,053,000 in fiscal 1994. This increase was
primarily due to the costs associated the first year of full-time operations for
the U.K. revenue office, the addition of U. S. based sales, marketing and
administrative employees and increased expenditures for sales and marketing
programs.
Product services was added as a new function in 1995, focusing on providing
customer support and services for the telephony board product line. The product
services expenses totaled $295,000 in fiscal 1995, which is an increase from $0
for fiscal 1994.
General and administrative expenses decreased 6% or approximately $66,000
to $1,117,000 in fiscal 1995 from $1,182,000 in fiscal 1994. This decrease is
primarily due to a vacancy in the position of chief operating officer, partially
offset by increased general operating costs associated with an overall increase
in personnel.
For fiscal 1995, VPC had a cumulative federal net operating loss
carryforward of approximately $8,464,000 and cumulative federal tax
carryforwards of approximately $402,000, which expire at various dates from 1997
through 2010. Federal income taxes were offset by net operating loss
carryforwards during 1994. In 1995, VPC incurred an operating loss and
consequently no provision for income taxes was recorded.
Comparison of Results for Fiscal Years Ended September 30, 1994 and 1993.
Total revenues increased 49% or approximately $1,606,000, to $4,917,000 in
fiscal 1994 from $3,311,000 in fiscal 1993. Creative Technology accounted for
62% of total revenues in fiscal 1994. Two customers, Creative Technology and
Syntellect, accounted for 30% and 22%, respectively, of total revenues in fiscal
1993. Product revenue were 29%, or $1,424,000 of revenues in fiscal 1994.
Product revenues increased 58%, or approximately $520,000, over fiscal 1993
product revenues of $903,000. Service revenue were 66% of total revenue in both
1993 and 1994.
In the latter half of fiscal 1993, VPC decreased the cost of its hardware
components by 25%. This reduction caused the cost of product expenses to
increase only 5% to $391,000 in fiscal 1994 from $370,000 in fiscal 1993,
although product revenue increased 57%.
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<PAGE> 76
Research and development expenses increased 81%, or approximately $980,000,
to $2,191,000 in fiscal 1994 from $1,211,000 in fiscal 1993, which reflects cost
associated with the addition of engineering personnel.
Sales and marketing expenses increased 200%, or approximately $701,000, to
$1,053,000 in fiscal 1994 from $351,000 in fiscal 1993. The increase is due
primarily to the addition of 6 sales and marketing staff, and increased
expenditures in the areas of trade show, public relations, trade show, travel,
promotional materials and professional fees.
General and administrative expenses increased 45%, or approximately
$365,000, to $1,182,000 in 1994 from $817,000 in 1993. The increase was due
primarily to additional personnel, relocation and severance expenses, increased
expenditures for travel and increased legal and professional fees.
Net income was $131,000 and $572,000, respectively, for the years ended
September 30, 1994 and September 30, 1993. For fiscal 1994, VPC had available
approximately $227,000 of U.S. federal tax credits, expiring through 2006. VPC
has a cumulative a federal net operating loss carryforward which expire at
various dates from 1997 through 2009. Federal income taxes were offset by net
operating loss carryforwards during fiscal 1994 and fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
VPC's principal cash requirements to date have been to fund working capital
and capital expenditures in order to support its sales and new product
development growth. Net working capital at June 30, 1996 and September 30, 1995
was ($1,443,000) and ($52,000), respectively. VPC has financed its working
capital needs primarily through loans and advances from stockholders and sales
of capital stock. VPC anticipates that its working capital needs will increase
along with future sales growth.
At June 30, 1996 and September 30, 1995, VPC had $10,000 and $409,000
respectively, in cash and cash equivalents. VPC's primary sources of liquidity
have been sales of stock, loans and the collection of its accounts receivable.
Since June 30, 1996, VPC has entered into the VCS Credit Agreement and had
outstanding borrowings of $500,000 on the date of this Joint Proxy
Statement/Prospectus.
VPC's inventory as of June 30, 1996 and September 30, 1995 was $180,000 and
$145,000, respectively. The increase in inventory at June 30, 1996 is
attributable to VPC's increased product revenue. VPC subcontracts the
manufacturing of its hardware products and the extended lead time for hardware
from the subcontracted manufacturer require that VPC carry sufficient inventory
to fill orders in a relatively short period of time.
VPC's short term liabilities at June 30, 1996 consisted of accounts
payable, deferred revenue, a $1,000,000 advance from Creative Technology and
$500,000 in convertible short term notes payable to stockholders. As a condition
to VCS's obligation to consummate the Merger, on September , 1996 Creative
Technology converted the $1,000,000 advance owed to one of its subsidiaries into
a prepaid royalty.
VPC's capital expenditures were $110,000 and $420,000 for the nine months
ended June 30, 1996 and the year ended September 30, 1995 respectively. The
capital expenditures were primarily for computer equipment related to research
and development efforts. VPC has no specific commitments with regard to capital
expenditures.
VPC will require additional working capital to support its increased
operating needs and finance continued growth for the foreseeable future.
68
<PAGE> 77
BUSINESS OF VOICE PROCESSING CORPORATION
GENERAL
VPC develops and markets speech recognition products, primarily for
telecommunications applications. The products are sold to OEMs, VARs, system
integrators, and ISVs, which in turn develop and market a wide variety of
speech-enabled and speech-enhanced applications such as voice activated dialing,
voice mail, voice messaging, interactive voice response, automated attendant and
command and control.
VPC was organized in 1982 and shipped its first speech recognition products
in 1984. Its technology development efforts since its inception have been
focused on some of the most difficult challenges in the speech recognition
field, including speaker independence, continuous speech, and effectiveness
within the relatively narrow bandwidth of telephone networks.
PRODUCTS
VCS's VPro product line consists of recognition software and associated
vocabularies and hardware platforms. The products include both
speaker-independent and speaker-dependent software which support operating
environments including MS-DOS, OS/2, several varieties of UNIX and Windows/NT.
The products may be used in both landline and cellular environments.
Software.
VPROCONTINUOUS is a speaker-independent, continuous digit recognizer. It
recognizes digit strings spoken in a natural continuous manner without beeps or
pauses and uses proprietary word-spotting and rejection technologies to spot and
reject extraneous words and phrases often spoken by callers.
VPRO/XD is a speaker-independent discrete or multi-word recognizer which
recognizes isolated words or very short phrases. VPro/XD also utilizes
proprietary word-spotting and rejection technologies.
VPRO/RT is a speaker-dependent discrete or multi-word recognizer for
vocabularies developed by the application developer or end-user. VPro/RT is
useful for prototyping applications and is used by end-users to develop personal
directories in voice-activated dialing applications.
VPROPRL combines speaker-independent and speaker-dependent recognition
software which may be embedded in a wide variety of hardware platforms. It
consists of a library of object modules that can be linked with a user
application or task.
Vocabularies.
VPROCONTINUOUS vocabularies consist of the words "zero" through "nine,"
"yes," "no," and "oh." They are currently available in American English,
Australian English, Brazilian Portuguese, Canadian French, Castilian Spanish,
French, German, Italian, Mexican Spanish, Portuguese, UK English, and several
other languages and dialects.
VPRO/XD pre-trained vocabularies consist of call control and voice
activated dialing words. They are currently available in American English,
Australian English, Austrian German, Brazilian Portuguese, Canadian French,
Castilian Spanish, Central/South American Spanish, German, Mexican Spanish,
Portuguese and several other languages and dialects.
VPROSPELLER is a vocabulary which allows users to spell words. Users may
spell a string of up to 32 letters in a natural manner without prompts or beeps
between each letter. It can recognize easily confused letters by conducting an
automated search of a database of words for the best candidates to match.
VProSpeller is available in American English, Australian English, Brazilian
Portuguese, Canadian French, Castilian Spanish, Italian, Mexican Spanish,
Portuguese, and several other languages and dialects.
Hardware Platforms. The VPro line of hardware platforms provide board
level implementations of VPC VPro software allowing speech recognition functions
to operate independently from host processors. VPro
69
<PAGE> 78
hardware platforms process multiple languages simultaneously and, with dynamic
resource allocation, are able to load and swap languages and vocabularies on
demand. There are three versions of the board, for low (VPro-42), medium
(VPro-84), and high (VPro-88) densities. The platforms are ISA bus-compliant and
support industry standard interfaces. Each board supports four to eight Virtual
Speech Processors (VSPs). Each VSP, depending on load factors, can handle
multiple telephone lines. Application and host computers communicate with each
of the VSPs as separate autonomous units. The VPro platforms use Texas
Instruments TMS320OC31 microprocessors which provide up to 133 MFLOPS of
computing power. The platforms can have up to 8 megabytes of memory shared among
all processors. In addition, each processor has 512K bytes of local memory.
VPro software is also supported on the hardware platforms of certain OEMs,
including the Antares platform of Diologic Corporation and the Diva I and II
platforms of Natural MicroSystems Corporation.
CUSTOMER SERVICE AND SUPPORT
VPC offers its customers a broad range of services and support. ProEdge
consulting services encompass all aspects of speech recognition application
development, from application design through actual deployment. The VProEdge
consultants provide assistance in application design (call flow and vocabulary
development), trial management, test routines and development tools.
Additionally, the program provides provisions for joint sales and marketing
efforts, including cooperative advertising, lead sharing options, information
about return-on-investment for particular applications, and speech recognition
market data. VProCare is a technical support program that offers a range of
services, including warranty service, training classes and software upgrades.
SALES AND DISTRIBUTION
VPC's customers are OEMs, VARs, system integrators and ISVs. Direct sales
of VPC's products, including hardware platforms, are targeted to OEMs, VARs and
systems integrators. VPC relies on ISVs to distribute its products in such
hard-to-reach markets as the smaller or foreign VAR and system integrator
communities. Its software products and vocabularies are also distributed to OEMs
through licensing arrangements for use with the OEM's hardware platform. VPC's
customers include the following:
<TABLE>
<CAPTION>
ILLUSTRATIVE END
CUSTOMER TYPICAL APPLICATION USERS/PRODUCTS
- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Active Voice Voice Mail Distributors to small and
medium businesses
Aspect Telecommunications Automatic call distributor Large business (banks,
interactive voice response financial, travel) for call
platform centers
Boston Technology Voice mail and voice U.S. telephone companies and
messaging International PTT's
Centigram Communications Voice mail and voice Medium and large businesses
messaging
CCS Interactive voice response Banks, financial
institutions, healthcare
organizations
Dialogic Corporation Call processing components Voice mail, voice messaging,
for computer, telephony, interactive voice response
voice processing and system providers for
telecommunications wireline and wireless
telecommunications
Edify Corporation Application generation Large business call centers,
software for interactive banking, financial and
voice response travel applications
Enhanced Systems Voice activated dialing Information service
providers
Ficke & Associates Interactive voice response State and local government
system agencies
</TABLE>
70
<PAGE> 79
<TABLE>
<CAPTION>
ILLUSTRATIVE END
CUSTOMER TYPICAL APPLICATION USERS/PRODUCTS
- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C>
Glenayre Messaging platform for Wireline and wireless
paging, one number and voice telecommunications providers
mail
Hammer Technologies Testing platform Voice mail, voice messaging,
voice dialing, interactive
voice response
Hewlett Packard Enhanced services platform Information service
providers
Homisco Debit card and prepaid Telephone companies,
cellular platform business
Intellivoice Communications Voice activated dialing Cellular providers
platform
Natural MicroSystems Call processing components Voice mail, voice messaging,
for computer telephony, interactive voice response
voice processing and system providers for
telecommunications wireline and wireless
communications
Octel Communications Voice mail platform Medium-large businesses and
institutions, information
service providers, telephone
companies and wireless
providers
Perception Technology Interactive voice response Banks, financial
institutions, colleges and
universities, and retail
organizations
Precision Systems Enhanced services platform Telephone companies,
for voice messaging, voice wireless providers and
dailing, and personal private network providers
assistant applications
Priority Call Management Enhanced services platform Information service
for debit card, one number providers
and voice activated dialing
Technically Speaking Application generator tools Systems providers
(Brooktrout) for interactive voice
response applications
VoiceTech Communications Network-based voice Wireless telecommunications
activated dialing and providers
directory assistance/call
completion platform
Wildfire Personal/Electronic Small -- medium business,
Communications/Extra Assistant telephone companies and
information service bureaus
</TABLE>
EMPLOYEES
As of June 30, 1996, VPC had 53 employees, of which 27 were engaged in
development and engineering, 9 in sales and marketing, 7 in product services,
and 10 in administration and finance. All of VPC's employees have signed
agreements containing standard non-disclosure and invention assignment
provisions. Its employees are not represented by a collective bargaining
organization, and it has never experienced a work stoppage. VPC believes that
its employee relations are good.
71
<PAGE> 80
MANUFACTURING
Varian Electronics in Phoenix, Arizona provides a complete turnkey
operation for the manufacture and assembly of VPC's PC-board-based hardware
products.
FACILITIES AND OPERATIONS
VPC currently leases 18,000 square feet of office space at One Main Street,
Cambridge, Massachusetts in which substantially all of its employees are
headquartered.
SECURITY OWNERSHIP
SECURITY OWNERSHIP OF VCS AFTER THE MERGER
At and after the Effective Time, by reason of the conversion of the VPC
Shares into VCS Common Stock, the equity ownership of VCS will be shared by the
persons who were holders of VCS Common Stock and VPC Shares immediately before
the Effective Time. Accordingly, the equity interest which each holder of VCS
Common Stock or VPC Shares holds in VCS or VPC, as the case may be, immediately
before the Effective Time will be converted into a smaller percentage ownership
interest in a larger company. As a result of the Merger, immediately after the
Effective Time the current holders of VCS Common Stock will hold % of the
then outstanding shares of VCS Common Stock, and the current holders of VPC
Shares will hold [23.9]% of the then outstanding shares of VCS Common Stock,
assuming (1) the exercise of of all outstanding options and warrants to purchase
VCS Common Stock or VPC Common that are currently exercisable or that become
exercisable within 60 days of the date of the VCS Special Meeting and (2)
assuming an Exchange Ratio of .
The percentage of outstanding shares of VCS Common Stock to be beneficially
owned by the current officers and directors of VCS as a group will be %,
and the percentage of outstanding shares of VCS Common Stock to be beneficially
owned by the current officers and directors of VPC as a group will be %,
assuming (1) the exercise of all outstanding options to acquire VCS Common Stock
or VPC Common Stock held by the respective officer and director group which is
currently exercisable or that will be exercisable within 60 days of the date of
the VCS Special Meeting, and that no other such options, including options held
by the other officer and director group are exercised, and (2) assuming an
Exchange Ratio of .
SECURITY OWNERSHIP OF VPC
The following table sets forth information as of , 1996, the
record date of the VPC Special Meeting, with respect to the ownership of VPC
Common Stock by (i) each person known by VPC to be the beneficial owner of more
than 5% of outstanding VPC Common Stock; (ii) each of the chief executive
officer
72
<PAGE> 81
and the two other executive officers of VPC, and (iii) each current director and
all current directors and executive officers of VPC as a group (6 persons at
such date):
<TABLE>
<CAPTION>
VPC COMMON STOCK OWNERSHIP
-------------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
(i) Certain beneficial Owners:
Creative Technology Ltd.(1)......................... 1,171,561 41.0%
1901 McCarthy Boulevard
Milpitas, CA 95035
(ii) Directors and Certain Executive Officers:
K.S.Chay(2)(3)...................................... 1,171,561 41.0
Stanley Westreich(2)(4)............................. 463,657.9 16.1
Merrill Solomon(2)(5)............................... 452,999.5 13.8
Robert Cramer, Jr.(2)(6)............................ 142,791.1 5.0
David Shipman(7).................................... 386,264.9 11.9
David B. Levi(8).................................... 20,000 .7
(ii) All Current Directors and Executive Officers as a
group (6 persons):.................................. 2,622,274.4 70.3%
</TABLE>
- ---------------
(1) Includes shares of VPC Preferred Stock convertible into an equal number of
shares of VPC Common Stock.
(2) A director of VPC.
(3) Consists of shares held by Creative Technology Ltd., of which Mr. Chay is a
director. As such, he may be deemed to share the power to vote and dispose
of such shares.
(4) Includes 24,000 shares which may be acquired within sixty days upon exercise
of options and warrants, including 2,500 which may be acquired by his wife.
(5) Chairman of the Board and Chief Executive Officer of VPC. Includes 416,663.5
shares which may be acquired within sixty days upon exercise of options.
(6) Includes 26,000 shares which may be acquired within sixty days upon exercise
of options and warrants.
(7) Vice President, Technology of VPC. Consists of shares which may be acquired
within sixty days upon exercise of options.
(8) President and Chief Operating Officer of VPC. Consists of shares which may
be acquired within sixty days upon exercise of options. Does not include
100,000 shares subject to options which do not become exercisable until
after sixty days in normal course, but which will become immediately
exercisable upon consummation of the Merger.
LEGAL OPINIONS
The validity of the shares of Common Stock of VCS to be issued in
connection with the Merger is being passed upon for VCS by Crouch & Hallett,
L.L.P., Dallas, Texas.
EXPERTS
The financial statements of VCS at December 31, 1995 and 1994, and for each
of the three years ended December 31, 1995, included in this Joint Proxy
Statement/Prospectus and in the Registration Statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
73
<PAGE> 82
The financial statements of Voice Processing Corporation for the years
ended September 30, 1994 and 1995 included in this Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report which includes an explanatory paragraph that
describes the ability of the Company to continue as a going concern discussed in
Note 1 to the financial statements.
STOCKHOLDERS' PROPOSALS
Any proposals that stockholders of VCS desire to have presented at the 1997
annual meeting of stockholders must be received by VCS at its principal
executive offices no later than November 29, 1996.
CHANGES IN ACCOUNTANTS
Ernst & Young LLP served as independent accountant for Scott for the years
ended December 31, 1993 and 1992. On August 15, 1994, VCS's Board of Directors,
in connection with the change in control of VCS that followed the Scott Merger,
selected BDO Seidman, LLP 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 VCS'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 Scott'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 Scott's continuation as a going concern. VCS 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.
74
<PAGE> 83
INDEX TO FINANCIAL STATEMENTS
Voice Control Systems, Inc.:
<TABLE>
<S> <C>
Independent Auditors' Report........................................................ F-2
Balance Sheets at 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
Note to Financial Statements........................................................ F-7
Balance Sheet (Unaudited) at June 30, 1996.......................................... F-15
Statements of Operations (Unaudited) for the Six Months Ended June 30, 1996
and 1995......................................................................... F-16
Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1996
and 1995......................................................................... F-17
Notes to Financial Statements (Unaudited)........................................... F-18
Voice Processing Corporation, Inc.:
Report of Independent Public Accountants............................................ F-20
Balance Sheets at September 30, 1994 and 1995 and June 30, 1996..................... F-21
Statements of Operations for the years ended September 30, 1994 and 1995 and for the
nine months ended June 30, 1995 and 1996......................................... F-22
Statements of Stockholders' Equity (Deficit) for the years ended September 30, 1994
and 1995 and for the nine months ended June 30, 1996............................. F-23
Statements of Cash Flows for the years ended September 30, 1994 and 1995 and for the
nine months ended June 30, 1995 and 1996......................................... F-24
Notes to Financial Statements....................................................... F-25
</TABLE>
F-1
<PAGE> 84
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.
BDO Seidman, LLP
February 22, 1996
F-2
<PAGE> 85
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
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> 86
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> 87
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTE
--------------------- 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> 88
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> 89
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.
F-7
<PAGE> 90
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-8
<PAGE> 91
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 92
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
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>
F-10
<PAGE> 93
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-11
<PAGE> 94
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-12
<PAGE> 95
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-13
<PAGE> 96
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-14
<PAGE> 97
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $16,364,547
Accounts receivable (net of $1800 allowance for doubtful accounts) (Note 6)... 1,804,561
Inventory..................................................................... 493,284
Prepaid expenses.............................................................. 79,027
-----------
TOTAL CURRENT ASSETS.................................................. 18,741,419
NET PROPERTY AND EQUIPMENT...................................................... 720,217
OTHER ASSETS.................................................................... 57,211
-----------
$19,518,847
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 4)................................ $ 261,418
Deferred revenue.............................................................. 169,115
Convertible note.............................................................. 1,166,584
-----------
TOTAL CURRENT LIABILITIES............................................. 1,597,117
LONG TERM DEBT.................................................................. --
-----------
TOTAL LIABILITIES..................................................... 1,597,117
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; $1.00 par value; 300,000 shares authorized; none issued and
outstanding................................................................ --
Common stock, $.01 par value: 20,000,000 shares authorized; 7,031,184 issued
and outstanding............................................................ 70,312
Paid-in capital............................................................... 25,484,877
Receivable from shareholders.................................................. (44,068)
Deficit....................................................................... (7,589,391)
-----------
TOTAL STOCKHOLDERS' EQUITY............................................ 17,921,730
-----------
$19,518,847
===========
</TABLE>
F-15
<PAGE> 98
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Sales (Note 6)...................................................... $4,044,336 $4,921,903
Cost of Sales....................................................... 791,526 1,609,560
---------- ----------
Gross Profit........................................................ 3,252,810 3,312,343
COSTS AND EXPENSES:
Research and development.......................................... 1,458,887 1,234,023
Selling, general and administrative............................... 1,761,952 1,629,147
Other interest expense (Income), net.............................. (275,226) (15,546)
Interest, to affiliates........................................... 59,629 75,689
---------- ----------
TOTAL COSTS AND EXPENSES.................................. 3,005,242 2,954,405
---------- ----------
NET INCOME BEFORE TAXES............................................. 247,568 373,484
Income Taxes (Note 5)............................................... -- --
---------- ----------
NET INCOME.......................................................... $ 247,568 $ 373,484
========== ==========
Net Income per Share:
Primary........................................................... $ 0.03 $ 0.06
========== ==========
Fully diluted..................................................... $ 0.03 $ 0.06
========== ==========
Weighted Average Outstanding Shares:
Primary........................................................... 8,605,486 6,564,274
========== ==========
Fully diluted..................................................... 8,610,980 6,564,274
========== ==========
</TABLE>
See accompanying notes to financial statements
F-16
<PAGE> 99
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1996 1995
----------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income....................................................... $ 247,568 $ 373,484
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization................................. 91,459 114,206
Changes in operating assets and liabilities:
Accounts receivable......................................... (760,263) (63,712)
Inventory................................................... 319,884 (349,179)
Prepaid expenses............................................ 22,298 (41,154)
Other assets................................................ 46,932 5,769
Accounts payable and accrued expenses....................... (46,188) 92,073
Deferred revenue............................................ (97,956) 100,240
----------- ----------
Net cash provided by operating activities.......................... (176,266) 231,727
----------- ----------
Net Cash Used in Investing Activities:
Capital expenditures............................................. (294,331) (90,941)
----------- ----------
Cash Flows from Financing Activities:
Repayment of principal on notes payable.......................... (1,277) (112,795)
Proceeds from sale of assets..................................... -- 150,200
Proceeds from note receivable.................................... 35,627 --
Net proceeds from common stock issuance (Note 3)................. 14,429,947 --
Proceeds from exercise of stock options.......................... 111,947 29,013
----------- ----------
Net cash provided by financing activities.......................... 14,576,244 66,418
----------- ----------
Net increase in cash and cash equivalents.......................... 14,105,647 207,204
Cash and cash equivalents at beginning of year..................... 2,258,900 1,075,527
----------- ----------
Cash and cash equivalents at June 30............................... $16,364,547 $1,282,731
=========== ==========
Supplemental disclosures of cash flow information
Interest paid.................................................... $ 2,001 $ 16,002
=========== ==========
</TABLE>
See accompanying notes to financial statements
F-17
<PAGE> 100
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Voice Control Systems, Inc. (the "Company" or "VCS") engages in the design
of voice recognition systems that allow for the voice control of electronic
machines and/or devices. Operating results for the six months ending June 30,
1996 are not necessarily indicative of the expected results for the year. The
unaudited financial statements include all adjustments, consisting primarily of
normal recurring accruals, which management considers necessary for a fair
presentation of such information.
2. PER SHARE INFORMATION
Earnings per common and common equivalent share are computed based upon the
weighted average number of outstanding shares of common stock and common stock
equivalents.
3. STOCK OFFERING
On February 14, 1996, the Company completed the sale of 1,269,402 shares of
common stock. In March 1996, the underwriters exercised their overallotment
option for an additional 220,500 shares of common stock. Net proceeds to the
Company from the stock offering totaled $14,430,000.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at June 30,
1996:
<TABLE>
<S> <C>
Accounts payable.......................................................... $118,334
Accrued expenses.......................................................... 143,084
--------
$261,418
========
</TABLE>
5. INCOME TAXES
Net operating loss ("NOL") carry forwards expiring from 1996 to 2009
totaling approximately $14,799,000 are available at June 30, 1996 to offset
future periods taxable income. Effective as of August 11, 1994 an ownership
change as defined by the Internal Revenue Code Section 382 occurred. As a result
of the change, the use of the Company's NOL in future years is limited to
approximately $1,355,000 annually.
The following reconciles income tax expense at the federal statutory rate
to the actual tax expense at June 30:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Income taxes at the statutory rate............................ $ 84,000 $ 127,000
State taxes based on income................................... 11,000 17,000
Effect on taxes resulting from:
Utilization of NOL carry forwards........................... (95,000) (144,000)
-------- ---------
$ -- $ --
======== =========
</TABLE>
The Company has provided an allowance for its entire deferred tax asset,
relating primarily to NOL carry forwards of approximately $5,032,000, as its
realization is dependent upon 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.
F-18
<PAGE> 101
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
6. MAJOR CUSTOMERS
Three customers accounted for 42%, 17% and 17% of total sales revenue for
the six months ended June 30, 1996. One customer accounted for 61% of total
sales revenue for the six months ended June 30, 1995.
The Company's largest customer is also the holder of its short term
convertible debt. Accounts receivable from the largest customer was 7% of the
total receivable balance at June 30, 1996.
F-19
<PAGE> 102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Voice Processing Corporation:
We have audited the accompanying balance sheets of Voice Processing Corporation
(a Delaware corporation) as of September 30, 1995 and 1994, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Voice Processing Corporation as
of September 30, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered cumulative losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Boston, Massachusetts
December 8, 1995 (except with respect to
the matter discussed in Note 8, as to
which the date is June 17, 1996)
F-20
<PAGE> 103
VOICE PROCESSING CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------- JUNE 30,
1994 1995 1996
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 1,963,774 $ 408,524 $ 9,879
Accounts receivable, net of reserves of
approximately $3,200 at September 30, 1994,
$4,900 at September 30, 1995 and $62,000 at June
30, 1996........................................ 333,744 1,161,014 777,112
Inventory.......................................... 121,941 144,923 179,981
Prepaid expenses and other current assets.......... 68,979 59,990 44,630
----------- ----------- ------------
Total current assets....................... 2,488,438 1,774,451 1,011,602
----------- ----------- ------------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment................................. 985,771 1,317,353 1,390,298
Computer software.................................. 37,574 62,804 62,804
Furniture and fixtures............................. 61,134 106,800 143,095
Office equipment................................... 65,469 72,289 73,389
Leasehold improvements............................. 96,338 106,848 106,848
----------- ----------- ------------
1,246,286 1,666,094 1,776,434
Less -- Accumulated depreciation and
amortization.................................... 580,264 813,862 1,002,474
----------- ----------- ------------
666,022 852,232 773,960
----------- ----------- ------------
OTHER ASSETS......................................... 61,742 68,441 83,710
----------- ----------- ------------
$ 3,216,202 $ 2,695,124 $ 1,869,272
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Advance from Creative Technology Ltd............... $ -- $ 1,000,000 $ 1,000,000
Notes payable to stockholders...................... -- -- 500,000
Accounts payable................................... 204,846 625,129 654,300
Accrued expenses................................... 26,554 162,046 110,369
Deferred revenue................................... 99,430 39,042 189,876
----------- ----------- ------------
Total current liabilities.................. 330,830 1,826,217 2,454,545
----------- ----------- ------------
COMMITMENTS AND CONTINGENCY (Note 5)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value --
Authorized -- 4,000,000 shares
Issued and outstanding -- 722,544 shares at
September 30, 1994 and 1,011,561 shares at
September 30, 1995 and June 30, 1996
(liquidation preference of $3,500,001 at
September 30, 1995)............................. 7,225 10,115 10,115
Common stock, $.01 par value --
Authorized -- 12,000,000 shares
Issued and outstanding -- 1,391,013 at September
30, 1994 and 1,409,063 shares at September 30,
1995 and 1,434,563 shares at June 30,1996....... 13,910 14,091 14,346
Additional paid-in capital......................... 8,678,453 9,692,791 9,712,787
Accumulated deficit................................ (5,560,699) (8,581,813) (10,056,244)
Receivable from stockholders for stock issued...... (63,927) (76,687) (76,687)
Treasury stock, at cost -- 65,860 shares of common
stock........................................... (189,590) (189,590) (189,590)
----------- ----------- ------------
Total stockholders' equity (deficit)....... 2,885,372 868,907 (585,273)
----------- ----------- ------------
$ 3,216,202 $ 2,695,124 $ 1,869,272
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 104
VOICE PROCESSING CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------- --------------------------
1994 1995 1995 1996
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Product................................. $1,423,630 $ 3,705,351 $ 2,155,036 $ 3,431,707
Service................................. 3,248,750 628,025 447,623 671,022
Other................................... 244,986 233,010 152,522 300,800
---------- ----------- ----------- -----------
Total revenues.................. 4,917,366 4,566,386 2,755,181 4,403,529
---------- ----------- ----------- -----------
EXPENSES:
Cost of product......................... 390,559 1,232,680 725,009 1,174,768
Cost of product services................ -- 294,955 195,828 372,394
Research and development................ 2,191,056 2,843,515 2,095,317 2,091,610
Sales and marketing..................... 1,052,931 2,137,207 1,471,413 1,361,843
General and administrative.............. 1,182,257 1,116,620 779,746 886,052
---------- ----------- ----------- -----------
4,816,803 7,624,977 5,267,313 5,886,667
---------- ----------- ----------- -----------
Income (loss) from operations........... 100,563 (3,058,591) (2,512,132) (1,483,138)
INTEREST INCOME........................... 30,609 37,477 26,682 8,707
---------- ----------- ----------- -----------
Net income (loss)....................... $ 131,172 $(3,021,114) $(2,485,450) $(1,474,431)
========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARES....................... $ .05 $ (2.25) $ (1.86) $ (1.09)
========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING.... 2,501,954 1,340,236 1,339,236 1,352,133
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 105
VOICE PROCESSING CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- --------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1993
(UNAUDITED).................. -- $ -- 1,370,459 $13,705 $ 6,648,887
Sale of Series A preferred
stock........................ 722,544 7,225 -- -- 1,992,777
Exercise of stock
options....................... -- -- 20,554 205 36,789
Net income..................... -- -- -- -- --
--------- ------- --------- ------- -----------
BALANCE, SEPTEMBER 30, 1994 722,544 7,225 1,391,013 13,910 8,678,453
Sale of Series A preferred
stock........................ 289,017 2,890 -- -- 997,109
Exercise of stock
options....................... -- -- 18,050 181 17,229
Net loss....................... -- -- -- -- --
--------- ------- --------- ------- -----------
BALANCE, SEPTEMBER 30, 1995 1,011,561 10,115 1,409,063 14,091 9,692,791
Exercise of stock
options....................... -- -- 25,500 255 19,995
Net loss (unaudited)........... -- -- -- -- --
--------- ------- --------- ------- -----------
BALANCE, JUNE 30, 1996
(UNAUDITED).................. 1,011,561 $10,115 1,434,563 $14,346 $ 9,712,786
========= ======= ========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
------------------- TOTAL
RECEIVABLE NUMBER STOCKHOLDERS'
ACCUMULATED FROM OF EQUITY
DEFICIT STOCKHOLDERS SHARES AMOUNT (DEFICIT)
------------ ------------ ------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1993
(UNAUDITED).................. $(5,691,871) $(63,927) (65,860) $(189,590) $ 717,204
Sale of Series A preferred
stock........................ -- -- -- -- 2,000,002
Exercise of stock
options....................... -- -- -- -- 36,994
Net income..................... 131,172 -- -- -- 131,172
------------ -------- ------- --------- ------------
BALANCE, SEPTEMBER 30, 1994 (5,560,699) (63,927) (65,860) (189,590) 2,885,372
Sale of Series A preferred
stock........................ -- -- -- -- 999,999
Exercise of stock
options....................... -- (12,760) -- -- 4,650
Net loss....................... (3,021,114) -- -- -- (3,021,114)
------------ -------- ------- --------- ------------
BALANCE, SEPTEMBER 30, 1995 (8,581,813) $(76,687) (65,860) (189,590) 868,907
Exercise of stock
options....................... -- -- -- -- 20,250
Net loss (unaudited)........... (1,474,431) -- -- -- (1,474,431)
------------ -------- ------- --------- ------------
BALANCE, JUNE 30, 1996
(UNAUDITED).................. $(10,056,244) $(76,687) (65,860) $(189,590) $ (585,274)
============ ======== ======= ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 106
VOICE PROCESSING CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
------------------------- --------------------------
1994 1995 1995 1996
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ 131,172 $(3,021,114) $(2,485,450) $(1,474,431)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Depreciation and amortization........ 128,386 233,598 143,517 188,612
Loss on sale of computer equipment... 2,471 -- -- --
Changes in current assets and
liabilities --
Accounts receivable................ (90,575) (827,270) (472,212) 383,902
Inventory.......................... (42,371) (22,982) 9,777 (35,058)
Prepaid expenses and other current
assets.......................... (42,291) 8,989 (31,473) 15,360
Advance from Creative
Technology Ltd.................. -- 1,000,000 1,000,000 --
Notes payable to stockholders...... -- -- -- 500,000
Accounts payable................... 75,244 420,283 79,689 29,171
Accrued expenses................... (9,176) 135,492 28,610 (51,677)
Deferred revenue................... (16,480) (60,388) (77,578) 150,834
---------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities.......... 136,380 (2,133,392) (1,805,120) (293,287)
---------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..... (483,089) (419,808) (412,225) (113,105)
Proceeds from sale of computer
equipment............................ 23,546 -- -- 2,765
Decrease (increase) in other assets..... 3,170 (6,699) (12,565) (15,269)
---------- ----------- ----------- -----------
Net cash used in investing
activities.................... (456,373) (426,507) (424,790) (125,609)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Series A preferred
stock................................ 2,000,002 999,999 1,001,759 --
Proceeds from the exercise of stock
options.............................. 36,994 4,650 2,891 20,251
---------- ----------- ----------- -----------
Net cash provided by financing
activities.................... 2,036,996 1,004,649 1,004,650 20,251
---------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. 1,717,003 (1,555,250) (1,225,260) (398,645)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................. 246,771 1,963,774 1,963,774 408,524
---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.................................. $1,963,774 $ 408,524 $ 738,514 $ 9,879
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 107
VOICE PROCESSING CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Voice Processing Corporation (the Company) was incorporated on February 5,
1982 in the state of Delaware and is engaged in the development of commercial
speech recognition products for the telecommunications, cellular and personal
computer markets. The Company's products, based on its proprietary VPro(tm)
technology, consist of speaker-independent and speaker-dependent continuous and
discrete speech recognition hardware and software. The products are used in
voice mail, voice activated dialing, interactive voice response and command and
control PC applications. The Company is currently developing speech-enabled
software applications in the computer-telephony integration (CTI) market.
The Company has incurred cumulative operating losses of approximately
$10,056,244 through June 30, 1996, as the Company has been primarily engaged in
product development and market expansion. The Company has funded these losses
through issuances of equity securities. The Company also has an outstanding
advance of $1 million from Creative Technology Ltd. (Creative) that is due on
demand. The Company is subject to risks such as the success of selling its
products, competition from other companies, dependence on key individuals and
the ability to obtain additional financing. The Company is exploring various
strategic and financing alternatives. In the absence of the Company achieving
future profitable operations or obtaining additional financing to fund future
operations, there is substantial doubt about the Company's ability to continue
as a going concern. See Note 8 for discussion on subsequent events.
The accompanying financial statements reflect the application of certain
accounting policies described in this note and elsewhere in these notes to
financial statements.
(a) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Revenue Recognition
The Company recognizes software license revenue in accordance with the
provisions of the American Institute of Certified Public Accountants (AICPA)
Statement of Position No. 91-1, Software Revenue Recognition. Revenue for the
licensing of the software is recognized upon shipment of the software if there
are no significant postdelivery obligations and collectibility of the revenue is
deemed probable. If an acceptance period is required, revenues are recognized
upon the earlier of customer acceptance or the expiration of the acceptance
period.
Product revenue from the sale of telephony boards is recognized upon
shipment. The Company has no significant vendor obligations or collectibility
risk associated with its product sales. Service and development contract
revenues are recognized as the services are performed. Royalty revenue is
recognized as earned.
(c) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market,
and consist of short-term, highly liquid investments with original maturities of
less than three months.
F-25
<PAGE> 108
VOICE PROCESSING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(d) Inventory
Inventory, which includes material cost and labor, is stated at the lower
of cost (first-in, first-out) or market and consists of telephony boards.
(e) Depreciation and Amortization
The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts that allocate the cost
of the assets over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -------------
<S> <C>
Computer equipment..................................................... 5 Years
Computer software...................................................... 5 Years
Furniture and fixtures................................................. 7 Years
Office equipment....................................................... 5-7 Years
Leasehold improvements................................................. Life of lease
</TABLE>
(f) Deferred Revenue
The Company prebills certain customers under the terms of certain
development contracts. To the extent the amount of cash received exceeds the
revenues earned, the difference is recorded as deferred revenue in the
accompanying balance sheets.
(g) Research and Development and Software Development Costs
Research and development costs are expensed as incurred. Statement of
Financial Standards (SFAS) No. 86, Accounting for the Costs of Computer Software
To Be Sold, Leased or Otherwise Marketed, requires the capitalization of certain
computer software development costs incurred after technological feasibility is
established. The Company has not capitalized software development costs to date,
as the costs incurred after the technological feasibility of a software product
has been established have not been significant.
(h) Warranty
Warranty expenses are charged to operations in the period incurred. The
Company does not provide for any warranty reserves, as warranty costs incurred
by the Company have not been significant.
(i) Income Taxes
The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Under SFAS No. 109, a deferred tax asset or liability is recorded for all
temporary differences between financial and tax reporting. Deferred tax expense
(benefit) results from the net change in deferred tax assets and liabilities
during the year. A deferred tax valuation allowance is required if it is more
likely than not that all or a portion of recorded deferred tax assets will not
be realized.
(j) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consist primarily of trade accounts receivable. Concentration of credit risk
with respect to accounts receivable is
F-26
<PAGE> 109
VOICE PROCESSING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
limited to certain customers to whom the Company makes substantial sales. To
reduce risk, the Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts receivable credit
risk exposure is limited.
(k) Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable and accounts payable. The carrying amounts of
the Company's cash and cash equivalents, accounts receivable and accounts
payable approximate fair value.
(l) Recently Issued Accounting Standards
During March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, which is effective for fiscal years
beginning after December 15, 1995. During October 1995, the FASB issued SFAS No.
123, Accounting for Stock-Based Compensation, which must be adopted in the
Company's fiscal 1997 financial statements with comparable disclosure for prior
years. The Company does not expect the adoption of these standards to have a
material effect on its financial position or results of operations.
(m) Reclassifications
Certain amounts in the financial statements have been reclassified in order
to present consistent classification.
(n) Interim Financial Statements
The financial statements for the nine months ended June 30, 1995 and 1996
are unaudited. In management's opinion, these unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of only normal recurring adjustments,
necessary for the fair statement of the financial data for such periods.
(2) PREFERRED STOCK
The Company has authorized 4,000,000 shares of preferred stock, of which
1,300,578 shares are designated as Series A preferred stock (Series A). The
Company has issued 1,011,561 shares of Series A to Creative. Creative had the
right to purchase an additional 289,017 shares of Series A at $3.46 per share
upon the completion of certain contract milestones under a development
agreement.
However, the right to purchase these shares has been canceled due to the
termination of this development agreement prior to year-end. Creative also holds
two seats on the Board of Directors, and the preferred stock has the following
respective stock rights and preferences:
(a) Voting
The holder of each share of Series A has the right to one vote for each
share of common stock into which each share of Series A can be converted, and
such holder shall have full voting rights and powers equal to those of the
holders of the Company's common stock.
F-27
<PAGE> 110
VOICE PROCESSING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(b) Dividends
The holder of shares of Series A is entitled to receive, when and as
declared by the Board of Directors, dividends equal to the dividend declared
with respect to the common stock based on the number of shares of common stock
into which the Series A is convertible.
(c) Liquidation
The holder of Series A is entitled to receive, prior and in preference to
any holder of common stock, the distribution of any assets of the Company, an
amount per share equal to the sum of (i) $3.46 per share for each share of
outstanding Series A and (ii) an amount equal to the amount of declared but
unpaid dividends on such issues. As of September 30, 1995, the liquidation
preference was $3,500,001.
(d) Conversion
All shares of Series A shall be convertible at the option of the holder.
There is a provision for automatic conversion upon (i) the sale of the Company's
common stock pursuant to a registration statement on Form S-1 under the
Securities Act of 1933 at an initial public offering price of not less than
$10.00 per share and proceeds of $10,000,000 in the aggregate, or (ii) the date
specified by written consent or agreement of the holders of a majority of the
then outstanding shares of Series A. The conversion price of Series A is subject
to adjustment from time to time as stipulated in the Series A agreement.
(3) COMMON STOCK
(a) Warrants
During 1991, the Company issued warrants to purchase 114,793 shares of
common stock at an exercise price of $1.80 per share. The warrants are fully
vested as of June 30, 1996 and are exercisable through September 30, 1998.
(b) Stock Options
Pursuant to the 1989 Stock Plan (the Plan) the Company may grant incentive
and nonqualified stock options to employees, consultants and advisers of the
Company for the purchase of the Company's common stock. Incentive stock options
are granted at exercise prices not less than the fair market value on the date
of grant. The Plan provides for the granting of options to purchase a total of
1,500,000 shares of common stock. Options generally vest over a four-year period
from the date of grant with the first such vesting (25% of granted options)
occurring one year from the date of grant. However, in certain circumstances,
options may be immediately exercised in full. Options generally have a duration
of 10 years.
F-28
<PAGE> 111
VOICE PROCESSING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Incentive stock option activity for the Plan at September 30, 1994 and 1995
was as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
OPTIONS SHARE
---------- -------------
<S> <C> <C>
Outstanding, September 30, 1993................... 783,860 $ .50 - $1.80
Granted........................................... 97,500 1.24 - 3.46
Exercised......................................... (20,554) 1.80
--------- -------------
Outstanding, September 30, 1994................... 860,806 .50 - 3.46
Granted........................................... 135,275 3.46
Exercised......................................... (18,050) .50 - 1.24
Canceled.......................................... (133,519) .50 - 3.46
--------- -------------
Outstanding, September 30, 1995................... 844,512 .50 - 3.46
Granted........................................... 770,393 1.25 - 3.46
Exercised......................................... (25,500) .50 - 1.25
Canceled.......................................... (69,025) 1.24 - 3.46
--------- -------------
Outstanding, June 30, 1996........................ 1,520,380 $ .50 - $3.46
========= =============
Exercisable, June 30, 1996........................ 1,002,085 $ .50 - $3.46
========= =============
</TABLE>
The Company has issued nonqualified stock options under the Plan covering
116,826 shares of common stock. The purchase price under the options is $.50 to
$1.80. These options expire 10 years and one day subsequent to the date of
issuance.
(c) Receivable from Stockholders for Stock Issued
Receivable from stockholders in the accompanying statements of
stockholders' equity (deficit) represents promissory notes received from
employees for the exercise of their common stock options. These notes mature
five years from their date of issuance and accrue interest until their maturity
date at interest rates ranging from 5.46% to 9%.
(4) INCOME TAXES
The Company provides for income taxes in accordance with the liability
method under the provisions of SFAS No. 109. Under SFAS No. 109, deferred tax
assets or liabilities are computed based on the differences between the
financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate.
The approximate tax effect of each type of temporary difference and
carryforward that gives rise to the Company's deferred tax asset and liability
as of September 30, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Net operating loss........................................ $ 1,864,000 $ 2,878,000
Tax credit carryforward................................... 346,000 402,000
Deferred tax assets....................................... 44,000 25,000
Deferred tax liabilities.................................. (63,000) (39,000)
Valuation allowance....................................... (2,191,000) (3,266,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-29
<PAGE> 112
VOICE PROCESSING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Due to the uncertainty surrounding the timing of the realization of the
benefits of its favorable tax attributes in future tax returns, the Company has
placed a full valuation allowance against its otherwise recognizable net
deferred tax asset. The net operating losses and tax credit carryforwards are
subject to review and possible adjustment by the Internal Revenue Service.
The Company has a cumulative federal net operating loss carryforward of
approximately $8,464,000 and cumulative federal tax credit carryforwards of
approximately $402,300, which expire at various dates from 1997 through 2010.
The Internal Revenue Code contains provisions that may limit the net operating
loss and tax credit carryforwards available to be used in any given year upon
the occurrence of certain events, including changes in the ownership interests
of significant stockholders.
(5) COMMITMENTS AND CONTINGENCY
(a) Operating Leases
The Company leases its facilities and various office equipment under
noncancelable operating leases with terms in excess of one year. Rent expense
charged to operations was approximately $224,000 and $342,000 for the years
ended September 30, 1994 and 1995, respectively. Future minimum lease payments
under these leases as of September 30, 1995 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ------
<S> <C>
1996.................................... $198,000
1997.................................... 45,000
1998.................................... 19,000
1999.................................... 5,000
--------
$267,000
========
</TABLE>
(b) Advance from Creative Technology Ltd.
The Company received a $1,000,000 advance from Creative Technology Ltd.
during 1995 based on arrangements in a development agreement. The agreement has
since been terminated, and the advance is classified as a current liability in
the accompanying financial statements.
(6) EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan under Section
401(k) of the Internal Revenue Code covering all eligible employees, as defined.
Under the plan, a participant may elect to defer receipt of a stated percentage
of compensation, which would otherwise be payable to the participant for any
plan year (the deferred amount), provided, however, that the deferred amount
shall not exceed the maximum amount permitted under Section 401(k) of the
Internal Revenue Code. All participant contributions vest immediately. There was
no discretionary contribution by the Company during fiscal 1994, 1995 or for the
nine months ended June 30, 1996.
(7) SIGNIFICANT CUSTOMER
For the year ended September 30, 1994 revenues from Creative represented
62% of the Company's revenues and for the year ended September 30, 1995 revenues
from Intellivoice represented 19% of the Company's revenues. For the nine months
ended June 30, 1995, revenues from Octel Communications represented 12% of the
Company's revenues and for the nine months ended June 30, 1996 revenues from
Entex Information Services and Natural Micro Systems represented 20% and 11%,
respectively, of the Company's revenues.
F-30
<PAGE> 113
VOICE PROCESSING CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(8) SUBSEQUENT EVENTS
Notes Payable to Stockholders
Subsequent to year-end, certain stockholders loaned funds in the amount of
$500,000 to the Company. The notes are due on July 31, 1996. In the event that
the notes are not paid in full on or before the maturity date, the unpaid
principal amounts shall automatically be converted to shares of common stock at
the rate of $1.25 per share.
Merger of the Company
On June 17, 1996, the Company signed a letter of intent to merge the
Company in a transaction, which is expected to be treated as a pooling of
interests, with another company in the field of speech recognition. As part of
the transaction, the acquiring company has agreed to loan the Company funds up
to $750,000 under a revolving line of credit. The principal balance of the loan
that is outstanding at the effective time of the merger may reduce the number of
shares of common stock that will be issued in the merger.
F-31
<PAGE> 114
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
VOICE CONTROL SYSTEMS, INC.
(A DELAWARE CORPORATION)
AND
VOICE PROCESSING CORPORATION
(A DELAWARE CORPORATION)
DATED: JULY 17, 1996
<PAGE> 115
This Agreement and Plan of Merger (the "Agreement") is made as of the 17th
day of July, 1996, among Voice Control Systems, Inc., a Delaware corporation
("VCS"), and Voice Processing Corporation, a Delaware corporation ("VPC").
In consideration of the mutual covenants and agreements contained herein,
the parties hereto covenant and agree as follows:
ARTICLE 1.
THE MERGER
1.1. Merger. In accordance with the provisions of the business corporation
laws of the State of Delaware, at the Effective Date (as hereinafter defined),
VPC shall be merged (the "Merger") with and into VCS, and VCS shall be the
surviving corporation (the "Surviving Corporation") and as such shall continue
to be governed by the laws of the State of Delaware.
1.2. Continuing of Corporate Existence. Except as may otherwise be set
forth herein, the corporate existence and identity of VCS, with all its
purposes, powers, franchises, privileges, rights and immunities, shall continue
unaffected and unimpaired by the Merger, and the corporate existence and
identity of VPC, with all its purposes, powers, franchises, privileges, rights
and immunities, at the Effective Date shall be merged with and into that of VCS,
and the Surviving Corporation shall be vested fully therewith and the separate
corporate existence and identity of VPC shall thereafter cease except to the
extent continued by statute.
1.3. Effective Date. The Merger shall become effective (the "Effective
Date") upon filing on the Closing Date (as defined herein) of the Certificate of
Merger with the Secretary of State of the State of Delaware pursuant to the
provisions of the Delaware General Corporation Law ("DGCL").
1.4. Corporate Government.
(a) The Certificate of Incorporation of VCS, as in effect on the
Effective Date, shall continue in full force and effect and shall be the
Certificate of Incorporation of the Surviving Corporation.
(b) The Bylaws of VCS, as in effect as of the Effective Date, shall
continue in full force and effect and shall be the Bylaws of the Surviving
Corporation.
(c) The members of the Board of Directors of the Surviving Corporation
and the officers of the Surviving Corporation shall be the persons holding
such offices in VCS as of the Effective Date; provided, however, that the
Board of Directors of the Surviving Corporation will be expanded to include
two designees of VPC as described in Section 5.14 hereof.
1.5. Rights and Liabilities of the Surviving Corporation. The Surviving
Corporation shall have the following rights and obligations:
(a) The Surviving Corporation shall have all the rights, privileges,
immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under the laws of the State of
Delaware.
(b) The Surviving Corporation shall possess all of the rights,
privileges immunities and franchises, of either a public or private nature,
of VPC and VCS and all property, real, personal and mixed, and all debts
due on whatever account, including subscription to shares, and all other
choses in action, and every other interest of or belonging or due to VPC
and VCS shall be taken and deemed to be transferred or invested in the
Surviving Corporation without further act or deed.
(c) At the Effective Date, the Surviving Corporation shall thenceforth
be responsible and liable for all liabilities and obligations of VPC and
VCS and any claim existing or action or proceeding pending by or against
VCS or VPC may be prosecuted as if the Merger had not occurred, or the
Surviving Corporation may be substituted in its place. Neither the rights
of creditors nor any liens upon the property of VCS or VPC shall be
impaired by the Merger.
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<PAGE> 116
1.6. Closing. Consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of VCS in Dallas,
Texas, commencing at 10:00 a.m., local time, on the date (i) on which the
meetings of VCS' and VPC's stockholders described in Sections 5.8 occur or (ii)
as soon as possible thereafter when each of the other conditions set forth in
Articles 6 and 7 have been satisfied or waived, and shall proceed promptly to
conclusion, or at such other place, time and date as shall be fixed by mutual
agreement between VCS and VPC. The day on which the Closing shall occur is
referred to herein as the "Closing Date." Each party will cause to be prepared,
executed and delivered the Certificate of Merger to be filed with the Secretary
of State of Delaware and all other appropriate and customary documents as any
party or its counsel may reasonably request for the purpose of consummating the
transactions contemplated by this Agreement. All actions taken at the Closing
shall be deemed to have been taken simultaneously at the time the last of any
such actions is taken or completed.
1.7. Tax Consequences. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that this Agreement shall constitute a
"plan of reorganization" for the purposes of Section 368(a) of the Code.
1.8. Pooling of Interests. It is the intention of the parties hereto that
the Merger will be treated for financial reporting purposes as a pooling of
interests.
ARTICLE 2.
CONVERSION OF SHARES
2.1. Conversion of Shares. The manner and basis of converting shares of the
capital stock of VPC ("VPC Capital Stock") into Common Stock, $.01 par value, of
VCS ("VCS Common Stock"), shall be as follows:
(a) Each share of common stock, $.01 par value, of VPC ("VPC Common
Stock") and each share of preferred stock, $.01 par value, of VPC ("VPC
Preferred Stock") shall at the Effective Date, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into
such number (the "Exchange Ratio") of shares of VCS Common Stock as is
equal to the quotient determined by dividing (i) 4,000,000 less the "Loan
Amount" by (ii) 4,564,195.7. For the purposes of this provision, the "Loan
Amount" shall mean the quotient obtained by dividing (i) the difference
between (A) the principal balance in excess of $400,000 outstanding on the
Closing Date under the Credit Agreement (defined in Section 5.5 below) less
(B) the amount of any "Excess Accounts Receivable" by (ii) $5.00; and
"Excess Accounts Receivable" shall mean the lesser of (i) the amount by
which the bona fide trade accounts receivable of VPC on the Closing Date
(net of any reserve for uncollectible accounts) exceeds $740,000 and (ii)
the amount (computed in accordance with the provisions of Section 7.10(ii)
hereof) by which the total assets of VPC exceeds the total liabilities of
VPC (exclusive of those incurred pursuant to the Credit Agreement, as
defined hereinafter) on the Closing Date.
(b) Each share of VPC Capital Stock held in the treasury of VPC and
each share of VPC Capital Stock owned by VCS shall automatically be
canceled and extinguished without any conversion thereof and no payment
will be made with respect thereto.
(c) Each share of Common Stock of VCS which shall be outstanding
immediately prior to the Effective Date shall remain unchanged and continue
to represent one share of common stock of the Surviving Corporation.
2.2. Fractional Shares. No scrip or fractional shares of VCS Common Stock
shall be issued in the Merger. All fractional shares of VCS Common Stock to
which a holder of VPC Capital Stock immediately prior to the Effective Date
would otherwise be entitled at the Effective Date shall be aggregated. If a
fractional share results from such aggregation, such stockholder shall be
entitled, after the later of (a) the Effective Date or (b) the surrender of such
stockholder's "Certificate" (as defined in Section 2.5) or Certificates that
represent such shares of VPC Capital Stock, to receive from VCS an amount in
cash in lieu of such fractional share, based on the "Determination Price" (as
defined herein) and the Exchange Ratio. VCS will make
A-3
<PAGE> 117
available to the "Exchange Agent" (as defined in Section 2.5) the cash necessary
for the purpose of paying cash for fractional shares. For purposes of this
Agreement, "Determination Price" shall mean the average per share closing price
of VCS Common Stock as reported on the Nasdaq National Market ("NMS") over the
twenty trading days ending on the third trading day immediately preceding the
Effective Date.
2.3. Dissenting Shares. To the extent that appraisal rights are available
under the DGCL, shares of VPC Capital Stock that are issued and outstanding
immediately prior to the Effective Date and that have not been voted for
adoption of the Merger and with respect of which appraisal rights have been
properly demanded in accordance with the applicable provisions of the DGCL
("Dissenting Shares") shall not be converted into the right to receive the
consideration provided for in Sections 2.1 and 2.2 at or after the Effective
Date unless and until the holder of such shares withdraws his demand for such
appraisal (in accordance with the applicable provisions of the DGCL) or becomes
ineligible for such appraisal. If a holder of Dissenting Shares withdraws his
demand for such appraisal (in accordance with the applicable provisions of the
DGCL) or becomes ineligible for such appraisal, then, as of the Effective Date
or the occurrence of such event, whichever later occurs, such holder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into and represent the right to receive the consideration provided for in
Sections 2.1 and 2.2. If any holder of VPC Capital Stock shall assert the right
to be paid the fair value of such VPC Capital Stock as described above, VPC
shall give VCS notice thereof, and VCS shall have the right to participate in
all negotiations and proceedings with respect to any such demands. VPC shall
not, except with the prior written consent of VCS, voluntarily make any payment
with respect to, or settle or offer to settle, any such demand for payment.
After the Effective Date, VCS will cause the Surviving Corporation to pay its
statutory obligations to holders of Dissenting Shares.
2.4. Stock Options; Warrants.
(a) At the Effective Date, all options (the "Options") then granted
and outstanding under VPC's 1989 and 1996 VPC Stock Option Plans (the "VPC
Stock Option Plans") and outstanding warrants to purchase shares of VPC
Common Stock (the "Warrants") shall remain outstanding following the
Effective Date. At the Effective Date, such Options and Warrants shall, by
virtue of the Merger and without any further action on the part of VPC or
the holder of any such Option or Warrant, be assumed by VCS in accordance
with their terms and conditions as in effect at the Effective Date (and, in
the case of the Options, the terms and conditions of the VPC Stock Option
Plans), except that (i) each such Option and Warrant shall be exercisable
for that whole number of shares of VCS Common Stock (to the nearest whole
share) into which the number of shares of VPC Common Stock subject to such
Option or Warrant immediately prior to the Effective Date would be
converted under Section 2.1; (ii) the exercise price per share of the VPC
Common Stock shall be an amount equal to the exercise price per share of
VPC Common Stock subject to such Option or Warrant in effect immediately
prior to the Effective Date divided by the Exchange Ratio (the price per
share, as so determined, being rounded upward to the nearest full cent);
and (iii) all actions to be taken thereunder by the Board of Directors of
VPC or a committee thereof shall be taken by the Board of Directors of VCS
or a committee thereof. No payment shall be made for fractional interests.
From and after the date of this Agreement, no additional Options shall be
granted by VPC under the VPC Stock Option Plans or otherwise, and no
additional Warrants shall be issued or sold by VPC.
(b) It is intended that the assumed Options and Warrants, as set forth
herein, shall not give to any holder thereof any benefits in addition to
those which such holder had prior to the assumption of the Option or
Warrant. VCS shall take all necessary corporate action necessary to reserve
for issuance a sufficient number of shares of VCS Common Stock for delivery
upon exercise of the Options and Warrants. VCS shall file a registration
statement, or an amendment to an existing registration statement, under the
Securities Act of 1933, as amended (the "Securities Act"), on Form S-8 with
respect to the shares of VCS Common Stock subject to such Options and shall
use its best efforts to maintain the effectiveness of such registration
statement for so long as such Options remain outstanding; and VCS shall
file a registration statement under the Securities Act on Form S-3 with
respect to the shares of VCS Common Stock subject to such Warrants (as well
as certain other shares of VCS Common Stock) and shall use its best efforts
to maintain the effectiveness of such registration statement for at least
90 days
A-4
<PAGE> 118
after the Publication Date (as defined in Section 5.10 herein). In
addition, VCS will cause the shares of VCS Common Stock issuable upon
exercise of the Options and Warrants to be listed on the NMS. Further, VCS
shall use reasonable best efforts to take any actions that may be necessary
so that any Options qualified as incentive stock options for the purposes
of Section 422 of the Code continue to be qualified as incentive stock
options following the Effective Date and assumption by VCS.
(c) Approval by the stockholders of VPC and VCS of this Agreement
shall constitute stockholder authorization and approval of any and all of
the actions described in this Section 2.4.
2.5. Exchange Agent.
(a) VCS shall authorize Chase Mellon Shareholder Services, Dallas,
Texas, to serve as exchange agent hereunder (the "Exchange Agent").
Promptly after the Effective Date, VCS shall deposit or shall cause to be
deposited in trust with the Exchange Agent certificates the number of whole
shares of VCS Common Stock to which the holders of VPC Capital Stock (other
than holders of Dissenting Shares) are entitled pursuant to this Article 2,
together with cash sufficient to pay for fractional shares then known to
VCS (such cash amounts and certificates being hereinafter referred to as
the "Exchange Fund"). The Exchange Agent shall, pursuant to irrevocable
instructions received from VCS, deliver the number of shares of VCS Common
Stock and pay the amounts of cash provided for in this Article 2 out of the
Exchange Fund. Additional amounts of cash, if any, needed from time to time
by the Exchange Agent to make payments for fractional shares shall be
provided by VCS and shall become part of the Exchange Fund. The Exchange
Fund shall not be used for any other purpose, except as provided in this
Agreement, or as otherwise agreed to by VCS and VPC prior to the Effective
Date.
(b) As soon as practicable after the Effective Date, the Exchange
Agent shall mail and otherwise make available to each record holder (other
than holders of Dissenting Shares) who, as of the Effective Date, was a
holder of an outstanding certificate or certificates which immediately
prior to the Effective Date represented shares of VPC Capital Stock (the
"Certificates"), a form of letter of transmittal and instructions for use
in effecting the surrender of the Certificates for payment therefor and
conversion thereof, which letter of transmittal shall comply with all
applicable rules of the NMS. Delivery shall be effected, and risk of loss
and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent and the form of letter of transmittal
shall so reflect. Upon surrender to the Exchange Agent of a Certificate,
together with such letter of transmittal duly executed, the holder of such
Certificate shall be entitled to receive in exchange therefor (i) one or
more certificates as requested by the holder (properly issued, executed and
countersigned, as appropriate) representing that number of whole shares of
VCS Common Stock to which such holder of VPC Capital Stock shall have
become entitled pursuant to the provisions of this Article 2, and (ii) as
to any fractional share, a check representing the cash consideration to
which such holder shall have become entitled pursuant to Section 2.2, and
the Certificate so surrendered shall forthwith be cancelled. No interest
will be paid or accrued on the cash payable upon surrender of the
Certificates. VCS shall pay any transfer or other taxes required by reason
of the issuance of a certificate representing shares of VCS Common Stock;
provided, however, that such certificate is issued in the name of the
person in whose name the Certificate surrendered in exchange therefor is
registered; provided further, however, that VCS shall not pay any transfer
or other tax if the obligation to pay such tax under applicable law is
solely that of the stockholder or if payment of any such tax by VCS
otherwise would cause the Merger to fail to qualify as a tax free
reorganization under the Code. If any portion of the consideration to be
received pursuant to this Article 2 upon exchange of a Certificate (whether
a certificate representing shares of VCS Common Stock or a check
representing cash for a fractional share) is to be issued or paid to a
person other than the person in whose name the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such issuance
and payment that the Certificate so surrendered shall be properly endorsed
or otherwise in proper form for transfer and that the person requesting
such exchange shall pay in advance any transfer or other taxes required by
reason of the issuance of a certificate representing shares of VCS Common
Stock or a check representing cash for a fractional share to such other
person, or establish to the satisfaction of the Exchange Agent that such
tax has been paid or that no such tax is applicable. From the Effective
Date until surrender in accordance with the provisions of this Section 2.5,
each Certificate
A-5
<PAGE> 119
(other than Certificates representing treasury shares of VPC and
Certificates representing Dissenting Shares) shall represent for all
purposes only the right to receive the consideration provided in Sections
2.1 and 2.2. No dividends that are otherwise payable on VCS Common Stock
will be paid to persons entitled to receive VCS Common Stock until such
persons surrender their Certificates. After such surrender, there shall be
paid to the person in whose name VCS Common Stock shall be issued any
dividends on such VCS Common Stock that shall have a record date on or
after the Effective Date and prior to such surrender. If the payment date
for any such dividend is after the date of such surrender, such payment
shall be made on such payment date. In no event shall the persons entitled
to receive such dividends be entitled to receive interest on such
dividends. All payments in respect of shares of VPC Capital Stock that are
made in accordance with the terms hereof shall be deemed to have been made
in full satisfaction of all rights pertaining to such securities.
(c) In the case of any lost, mislaid, stolen or destroyed
Certificates, the holder thereof may be required, as a condition precedent
to the delivery to such holder of the consideration described in this
Article 2, to deliver to VCS a bond in such reasonable sum as VCS may
direct as indemnity against any claim that may be made against the Exchange
Agent, VCS or the Surviving Corporation with respect to the Certificate
alleged to have been lost, mislaid, stolen or destroyed.
(d) After the Effective Date, there shall be no transfers on the stock
transfer books of the Surviving Corporation of the shares of VPC Capital
Stock that were outstanding immediately prior to the Effective Date. If,
after the Effective Date, Certificates are presented to the Surviving
Corporation for transfer, they shall be cancelled and exchanged for the
consideration described in this Article 2.
(e) Any portion of the Exchange Fund that remains unclaimed by the
stockholders of VPC for six months after the Effective Date shall be
returned to VCS, upon demand, and any holder of VPC Capital Stock who has
not theretofore complied with Section 2.5(b) shall thereafter look only to
VCS for issuance of the number of shares of VCS Common Stock and other
consideration to which such holder has become entitled pursuant to this
Article 2; provided, however, that neither the Exchange Agent nor any party
hereto shall be liable to a holder of shares of VPC Capital Stock for any
amount required to be paid to a public official pursuant to any applicable
abandoned property, escheat or similar law.
2.6. Adjustment. If, between the date of this Agreement and the Closing
Date, (i) the outstanding shares of VPC Capital Stock or VCS Common Stock shall
have been changed into a different number of shares or a different class by
reason of any classification, recapitalization, split-up, combination, exchange
of shares, or readjustment or a stock dividend thereon shall be declared with a
record date within such period or (ii) VPC shall have issued additional shares
of VPC Capital Stock (other than upon the exercise of stock options or warrants
granted prior to the date hereof or the conversion of outstanding loans as
described in Section 3.7 or the conversion of outstanding VPC Preferred Stock)
or options or warrants to purchase the same, or securities convertible into the
same, the number of shares of VCS Common Stock issued pursuant to the Merger
shall be adjusted to accurately reflect such change (it being acknowledged that
VPC and VCS elsewhere herein covenant not to take certain of the actions
described in (i) or (ii) above).
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF VPC
VPC represents and warrants to VCS that the statements contained in this
Article 3 are true and correct in all material respects, except as set forth in
the disclosure schedule delivered to VCS by VPC on or before the date of this
Agreement (the "VPC Disclosure Schedule"). The VPC Disclosure Schedule shall be
arranged in paragraphs corresponding to the numbered Sections contained in this
Article 3 and the disclosures in any paragraph shall qualify only the
corresponding Section in this Article 3.
3.1. Organization and Good Standing of VPC. VPC is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
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<PAGE> 120
3.2. VPC Subsidiaries and Other Ownership Interests. VPC has no material
record or beneficial equity or ownership interest in any corporations,
partnerships or other entities.
3.3. Foreign Qualification. VPC is duly qualified or licensed to do
business and is in good standing as a foreign corporation in every jurisdiction
where the failure so to qualify could have a "VPC Material Adverse Effect." For
the purposes of this Agreement, a VPC Material Adverse Effect shall mean (i) the
loss by VPC of business to competitors (other than VCS) of a customer or
customers which accounted in the aggregate for more than 15% of VPC's revenues
during the year ended September 30, 1995; (ii) any damage or destruction to or
loss of assets of VPC, or any impairment of its intellectual property, which
shall have the effect of materially impairing VPC's ability to conduct its
business in the manner heretofore conducted; or (iii) any other change in the
business, property or financial condition of VPC which shall have a similar
adverse effect, provided that a decline in operating revenues and operating
income of VPC shall not by itself be deemed to constitute a VPC Material Adverse
Effect.
3.4. Corporate Power and Authority. VPC has the corporate power and
authority and all material licenses and permits required by governmental
authorities to own, lease and operate its properties and assets and to carry on
its business as currently being conducted. VPC has the corporate power and
authority to execute and deliver this Agreement and the agreements, documents
and instruments contemplated hereby and, subject to the approval of this
Agreement and the Merger by its stockholders, to perform its obligations under
this Agreement and the other documents executed or to be executed by VPC in
connection with this Agreement and to consummate the Merger. The execution,
delivery and performance by VPC of this Agreement and the other documents
executed or to be executed by VPC in connection with this Agreement have been
duly authorized by all necessary corporate action.
3.5. Binding Effect. This Agreement and the other documents executed or to
be executed by VPC in connection with this Agreement have been or will have been
duly executed and delivered by VPC and are or will be, when executed and
delivered, the legal, valid and binding obligations of VPC enforceable in
accordance with their terms except that:
(a) enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of
public policy.
3.6. Absence of Restrictions and Conflicts. Subject only to the approval of
the adoption of this Agreement and the Merger by VPC's stockholders, the
execution, delivery and performance of this Agreement and the other documents
executed or to be executed by VPC in connection with this Agreement and the
consummation of the Merger and the other transactions contemplated by this
Agreement and the fulfillment of and compliance with the terms and conditions of
this Agreement do not and will not, with the passing of time or the giving of
notice or both, violate or conflict with, constitute a breach of or default
under, result in the loss of any material benefit under, or permit the
acceleration of any obligation under, (i) any term or provision of the
Certificate of Incorporation or Bylaws of VPC, (ii) any "VPC Material Contract"
(as defined herein), (iii) any judgment, decree or order of any court or
governmental authority or agency to which VPC is a party or by which VPC or any
of its properties is bound, or (iv) any statute, law, regulation or rule
applicable to VPC. Except for filing of the Certificate of Merger, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any governmental agency or public or regulatory unit, agency, body or
authority with respect to VPC is required in connection with the execution,
delivery or performance of this Agreement by VPC or the consummation of the
transactions contemplated hereby and the ownership and operation by VCS of the
business and properties of VPC after the Effective Date in substantially the
same manner as now owned and operated.
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3.7. Capitalization of VPC.
(a) The authorized capital stock of VPC consists of 12,000,000 shares
of VPC Common Stock and 4,000,000 shares of VPC Preferred Stock. As of the
date hereof, there were 1,444,187.6 shares of VPC Common Stock and
1,011,561 shares of VPC Preferred Stock issued and outstanding, 1,708,447.1
shares of VPC Common Stock reserved for issuance upon the exercise of
outstanding Options and Warrants and 400,000 shares of VPC Common Stock
reserved for issuance upon the conversion of outstanding loans from
shareholders into VPC Common Stock. Each share of VPC Preferred Stock is
convertible into one share of VPC Common Stock. A detailed listing of the
outstanding stock options and warrants, including expiration dates and
vesting information, is set forth on the VPC Disclosure Schedule.
(b) All of the issued and outstanding shares of VPC Capital Stock have
been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights.
(c) To VPC's knowledge, there are no voting trusts, stockholder
agreements or other voting arrangements by the stockholders of VPC.
(d) Except as set forth in subsection (a) above, there is no
outstanding subscription, contract, convertible or exchangeable security,
option, warrant, call or other right obligating VPC to issue, sell,
exchange, or otherwise dispose of, or to purchase, redeem or otherwise
acquire, shares of, or securities convertible into or exchangeable for,
capital stock of VPC.
3.8. Financial Statements and Records of VPC. VPC has made available to VCS
true, correct and complete copies of (i) the balance sheets of VPC as of
September 30, 1994 and 1995 and the statements of income, stockholders' equity
and cash flows for the fiscal years then ended, including the notes thereto, in
each case examined by and accompanied by the report of Arthur Andersen LLP and
(ii) the unaudited balance sheet of VPC as of March 31, 1996 and the unaudited
statements of income for the six months then ended (collectively the "VPC
Financial Statements"). The VPC Financial Statements have been prepared from,
and are in accordance with, the books and records of VPC and present fairly, in
all material respects, the assets, liabilities and financial position of VPC as
of the dates thereof and the results of operations and changes in financial
position thereof for the periods then ended, in each case in conformity with
generally accepted accounting principles, consistently applied, except as noted
therein. Since March 31, 1996, there has been no change in accounting principles
applicable to, or methods of accounting utilized by, VPC, except as noted in the
VPC Financial Statements. The books and records of VPC have been and are being
maintained in accordance with good business practice, reflect only valid
transactions, are complete and correct in all material respects, and present
fairly in all material respects the basis for the financial position and results
of operations of VPC set forth in the VPC Financial Statements. On or before the
20th day of each calendar month following the date of this Agreement, VPC shall
deliver to VCS unaudited financial statements as of the end of the previous
month and for the year to date.
3.9. Absence of Certain Changes. Since March 31, 1996, VPC has not, except
as may result from the transactions contemplated by this Agreement:
(a) incurred any loss of customers or impairment of its intellectual
property which would have a VPC Material Adverse Effect;
(b) suffered any damage or destruction to or loss of the assets of VPC
which has had a VPC Material Adverse Effect;
(c) forgiven, compromised, canceled, released, waived or permitted to
lapse any material rights or claims;
(d) entered into or terminated any material agreement, commitment or
transaction, or agreed or made any changes in material leases or
agreements, other than renewals or extensions thereof and leases,
agreements, transactions and commitments entered into in the ordinary
course of business;
(e) written up, written down or written off the book value of any
material amount of assets;
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(f) declared, paid or set aside for payment any dividend or
distribution with respect to VPC's capital stock;
(g) redeemed, purchased or otherwise acquired, or sold, granted or
otherwise disposed of, directly or indirectly, any of VPC's capital stock
or securities (other than shares issued upon exercise of options and
warrants granted prior to the date hereof or the conversion of outstanding
loans as described in Section 3.7 or the conversion of outstanding VPC
Preferred Stock) or any rights to acquire such capital stock or securities,
or agreed to changes in the terms and conditions of any such rights
outstanding as of the date of this Agreement;
(h) increased the compensation of or paid any bonuses to any employees
or contributed to any employee benefit plan, other than in accordance with
established policies, practices or requirements and as provided in Section
5.1 hereof;
(i) entered into any employment, consulting, compensation or
collective bargaining agreement with any person or group;
(j) entered into, adopted or amended any employee benefit plan;
(k) entered into any transaction other than in the ordinary course of
business; or
(l) entered into any agreement to do any of the foregoing.
3.10. No Material Undisclosed Liabilities. There are no liabilities or
obligations of VPC of any nature, whether absolute, accrued, contingent or
otherwise, other than the liabilities and obligations that are fully reflected,
accrued or reserved against in the VPC Financial Statements, for which the
reserves are appropriate and reasonable, or incurred in the ordinary course of
business and consistent with past practices since March 31, 1996.
3.11. Tax Returns; Taxes. VPC has duly filed all federal, state, county,
local and foreign tax returns and reports required to be filed by it, including
those with respect to income, payroll, property, withholding, social security,
unemployment, franchise, excise and sales taxes and all such returns and reports
are true and correct in all material respects; have either paid in full all
taxes that have become due as reflected on any return or report and any interest
and penalties with respect thereto or have fully accrued on its books or have
established adequate reserves for all taxes payable but not yet due; and have
made cash deposits with appropriate governmental authorities representing
estimated payments of taxes, including income taxes and employee withholding tax
obligations. No extension or waiver of any statute of limitations or time within
which to file any return has been granted to or requested by VPC with respect to
any tax. No unsatisfied deficiency, delinquency or default for any tax,
assessment or governmental charge has been claimed, proposed or assessed against
VPC, nor has VPC received notice of any such deficiency, delinquency or default.
VPC has no material tax liabilities other than those reflected on the VPC
Financial Statements and those arising in the ordinary course of business since
March 31, 1996. VPC will make available to VCS true, complete and correct copies
of VPC's federal tax returns for the last five years and make available such
other tax returns requested by VCS.
3.12. Material Contracts. The VPC Disclosure Schedule sets forth, and VPC
will furnish or make available accurate and complete copies of, the VPC Material
Contracts (as defined herein) to VCS. All of the VPC Material Contracts are
valid, binding and enforceable. There is not under any of the VPC Material
Contracts any existing breach, default or event of default by VPC nor event that
with notice or lapse of time or both would constitute a breach, default or event
of default by VPC nor does VPC know of, and VPC has not received notice of, or
made a claim with respect to, any breach or default by any other party thereto
which would, severally or in the aggregate, have a VPC Material Adverse Effect.
As used herein, the term "VPC Material Contracts" shall mean any of the
following categories of contracts and commitments (including summaries of oral
contracts) to which VPC is a party or bound:
(i) contracts with any labor union; employee benefit plans or
contracts; and employment, consulting or similar contracts, including
confidentiality, invention and non-competition agreements;
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(ii) leases, whether as lessor or lessee; loan agreements, mortgages,
indentures, instruments of indebtedness or commitments in each case
involving indebtedness for borrowed money or money loaned to others; and
guaranty or suretyship, performance bond, indemnification or contribution
agreements involving obligations;
(iii) contracts with third parties that involve aggregate payments by
VPC of more than $100,000;
(iv) insurance policies material to the business of VPC; and
(v) other contracts that are material to the operations, business or
financial condition of VPC taken as a whole.
3.13. Litigation and Government Claims. There is no pending suit, claim,
action or litigation, or administrative, arbitration or other proceeding or
governmental investigation or inquiry, or any pending change in any
environmental, zoning or building laws, regulations or ordinances against VPC to
which its business or assets are subject which would, severally or in the
aggregate, would reasonably be expected to result in a VPC Material Adverse
Effect. To the knowledge of VPC, there are no such proceedings threatened or
contemplated, or any unasserted claims (whether or not the potential claimant
may be aware of the claim) of any nature that might be asserted against VPC
which would, severally or in the aggregate, have a VPC Material Adverse Effect.
VPC is not subject to any judgment, decree, injunction, rule or order of any
court, or, to the knowledge of VPC, any governmental restriction applicable to
it which is reasonably likely (i) to have a VPC Material Adverse Effect or (ii)
to cause a material limitation on VCS' ability to operate the business of VPC
after the Closing.
3.14. Compliance With Laws. VPC has all material authorizations, approvals,
licenses and orders to carry on its business as it is now being conducted, to
own or hold under lease the properties and assets it owns or holds under lease
and to perform all of its obligations under the agreements to which it is a
party, except for instances which would not have a VPC Material Adverse Effect.
VPC has been and is, to the knowledge of VPC, in compliance with all applicable
laws, regulations and administrative orders of any country, state or
municipality or of any subdivision of any thereof to which its business and its
employment of labor or its use or occupancy of properties or any part hereof are
subject, the failure to obtain or the violation of which would have a VPC
Material Adverse Effect.
3.15. Employee Benefit Plans. Each employee benefit plan, as such term is
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), of VPC (collectively the "VPC Employee Plans") complies in
all material respects with all applicable requirements of ERISA and the Code,
and other applicable laws. None of the VPC Employee Plans is an employee pension
benefit plan or a multiemployer plan, as such terms are defined in ERISA.
Neither VPC nor any of its directors, officers, employees or agents has, with
respect to any VPC Employee Plan, engaged in any "prohibited transaction," as
such term is defined in the Code or ERISA, nor has any VPC Employee Plan engaged
in such prohibited transaction which could result in any taxes or penalties or
other prohibited transactions, which in the aggregate could have a VPC Material
Adverse Effect.
3.16. Labor Relations. VPC is in compliance in all material respects with
all laws (including federal and state laws and the laws of another country or
governmental entity thereof) respecting employment and employment practices,
terms and conditions of employment, wages and hours, and is not engaged in any
unfair labor or unlawful employment practice. There is no unlawful employment
practice discrimination charge pending before the EEOC or EEOC recognized state
"referral agency." There is no unfair labor practice charge or complaint against
VPC pending before the National Labor Relations Board. There is no labor strike,
dispute, slowdown or stoppage actually pending or, to the knowledge of VPC,
threatened against or involving or affecting VPC and no National Labor Relations
Board representation question exists respecting its employees. No grievances or
arbitration proceeding is pending and no written claim therefor exists. There is
no collective bargaining agreement that is binding on VPC.
3.17. Intellectual Property. The patents, patent applications, patent
licenses, trade names, trademarks, servicemarks and copyrights identified on the
VPC Disclosure Schedule constitute all such intellectual
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property rights owned by or licensed to VPC which are material to its business
(the "VPC Intellectual Property"). All of the VPC Intellectual Property is being
used or held for use in connection with the business of VPC, without any known
conflict with the rights of others, except for such conflicts as do not have a
VPC Material Adverse Effect. VPC has not received any notice from any other
person pertaining to or challenging the right of VPC to use any VPC Intellectual
Property or any trade secrets, proprietary information, inventions, know-how,
processes and procedures owned or used or licensed to VPC, except with respect
to rights the loss of which, individually or in the aggregate, would not have a
VPC Material Adverse Effect.
3.18. Properties.
(a) VPC has good and marketable title, free and clear of all liens,
claims or encumbrances (other than "Permitted Liens") to all of its
material properties and assets whether tangible or intangible, real,
personal or mixed. All buildings and all fixtures, equipment and other
property and assets which are material to its business held under leases or
subleases by VPC are held under valid instruments enforceable in accordance
with their respective terms. As used herein, the term "Permitted Liens"
includes (i) liens for taxes, assessments or other governmental charges not
yet due and payable; (ii) statutory liens incurred in the ordinary course
of business with respect to liabilities that are not yet due and payable;
(iii) landlord liens contained in leases in the ordinary course of
business; (iv) such imperfections of title and/or encumbrances as are not
material in character, amount or extent and do not materially detract from
the value or interfere with the use of the properties and assets subject
thereto or affected thereby; and (v) liens identified on the VPC Financial
Statements or under the Credit Agreement.
(b) At the Effective Date, none of the shareholders of VPC nor any
Affiliate of such shareholders will have any material interest in, or own,
any material property or right used principally in the conduct of the
business of VPC. The term "Affiliate" shall mean any of the shareholders of
VPC, or any member of the immediate family of a natural person shareholder,
or any corporation, partnership, trust or other entity in which any such
shareholder or family member has a substantial interest or is a director,
officer, partner or trustee.
(c) Substantially all of VPC's equipment and properties has been well
maintained and is in good and serviceable condition, reasonable wear and
tear excepted.
3.19. Environmental Matters. VPC is in compliance in all material respects
with all applicable federal, state, local and foreign laws relating to
emissions, discharged and releases of hazardous materials into the environment
and the generation, treatment, storage, transportation and disposal of hazardous
waste, including without limitation, any applicable provisions of the Resource
Conservation and Recovery Act of 1976 or the Comprehensive Environmental
Response, Compensation and Liability Act of 1980. There are no conditions at,
on, under or related to any real property owned or operated by VPC which
presently or potentially poses a significant hazard to human health or the
environment, and there has been no production, use, treatment, storage,
transportation or disposal by VPC of any "Hazardous Substance" (as defined
below) nor any release or threatened release by VPC of any Hazardous Substance.
As used herein, the term "Hazardous Substance" means any hazardous or toxic
substance, material or waste which is regulated by any applicable federal, state
or local authority.
3.20. Warranty Claims. There are no existing or, to VPC's knowledge,
threatened claims against VPC for services or merchandise which are defective or
for failure to meet and service products or warranties.
3.21. Insurance. VPC is presently insured, and during each of the past two
years has been insured for reasonable amounts against such risks as companies
engaged in similar business would, in accordance with good business practice,
customarily be insured.
3.22. Accuracy of Disclosures. None of the information supplied by VPC for
inclusion in the Registration Statement or Joint Proxy Statement (as such terms
are defined in Section 5.7) will, in the case of the Joint Proxy Statement or
any amendments or supplements thereto, at the time of mailing of the Joint Proxy
Statement and any amendments or supplements thereto, and at the time of the
meetings of the stockholders of
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VPC and VCS in accordance therewith or, in the case of the Registration
Statement at the time it becomes effective and at the Effective Date, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3.23. Brokers and Finders. None of VPC, or to VPC's knowledge, any of its
officers, directors and employees has employed any broker, finder or investment
bank or incurred any liability for any investment banking fees, financial
advisory fees, brokerage fees or finders' fees in connection with the
transactions contemplated hereby. Other than certain fees that may be paid to
VCS' financial advisor as contemplated hereinbelow, VPC is not aware of any
claim for payment of any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby.
3.24. Pooling; Reorganization. Neither VPC nor any of its respective
affiliates has (i) knowingly taken any action, or knowingly failed to take any
action, that would jeopardize the treatment of the Merger as a "pooling of
interest" for accounting purposes or (ii) knowingly taken any action, or
knowingly failed to take any action, that would jeopardize qualification of the
Merger as a reorganization within the meaning of Section 368 of the Code.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF VCS
VCS represents and warrants to VPC that the statements contained in this
Article 4 are true and correct in all material respects, except as set forth in
the disclosure schedule delivered to VPC by VCS on or before the date of this
Agreement (the "VCS Disclosure Schedule"). The VCS Disclosure Schedule shall be
arranged in paragraphs corresponding to the numbered Sections contained in this
Article 4 and the disclosures in any paragraph shall qualify only the
corresponding Section in this Article 4.
4.1. Organization and Good Standing of VCS. VCS is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
4.2. Foreign Qualification. VCS is duly qualified or licensed to do
business and is in good standing as a foreign corporation in every jurisdiction
where the failure so to qualify could have a "VCS Material Adverse Effect." For
the purposes of this Agreement, a VCS Material Adverse Effect shall mean (i) the
loss by VCS of business to competitors (other than VPC) of a customer or
customers which accounted in the aggregate for more than 15% of VCS's revenues
during the year ended December 31, 1995; (ii) any damage or destruction to or
loss of assets of VCS, or any impairment of its intellectual property, which
shall have the effect of materially impairing VCS's ability to conduct its
business in the manner heretofore conducted; or (iii) any other change in the
business, property or financial condition of VCS which shall have a similar
adverse effect, provided that a decline in operating revenues and operating
income of VCS shall not by itself be deemed to constitute a VCS Material Adverse
Effect.
4.3. Corporate Power and Authority. VCS has the corporate power and
authority and all material licenses and permits required by governmental
authorities to own, lease and operate its properties and assets and to carry on
its business as currently being conducted. VCS has the corporate power and
authority to execute and deliver this Agreement and the agreements, documents
and instruments contemplated hereby and, subject to the approval of this
Agreement and the Merger by its stockholders, to perform its obligations under
this Agreement and the other documents executed or to be executed by VCS in
connection with this Agreement and to consummate the Merger. The execution,
delivery and performance by VCS of this Agreement and the other documents
executed or to be executed by VCS in connection with this Agreement have been
duly authorized by all necessary corporate action.
4.4. Binding Effect. This Agreement and the other documents executed or to
be executed by VCS in connection with this Agreement have been or will have been
duly executed and delivered by VCS and are or
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will be, when executed and delivered, the legal, valid, and binding obligations
of VCS, enforceable in accordance with their terms except that:
(a) enforceability may be limited by bankruptcy, insolvency or other
similar laws affecting creditors' rights;
(b) the availability of equitable remedies may be limited by equitable
principles of general applicability; and
(c) rights to indemnification may be limited by considerations of
public policy.
4.5. Absence of Restrictions and Conflicts. Subject only to the approval of
the adoption of this Agreement and the Merger by VCS' stockholders, the
consummation of the Merger and the other transactions contemplated by this
Agreement and the fulfillment of and compliance with the terms and conditions of
this Agreement do not and will not, with the passing of time or the giving of
notice or both, violate or conflict with, constitute a breach of or default
under, result in the loss of any material benefit under, or permit the
acceleration of any obligation under, (i) any term or provision of the
Certificate of Incorporation or Bylaws of VCS, (ii) any "VCS Material Contract"
(as defined herein), (iii) any judgment, decree or order of any court or
governmental authority or agency to which VCS is a party or by which VCS or any
of its properties is bound, or (iv) any statute, law, regulation or rule
applicable to VCS. Except for compliance with the applicable requirements of the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and applicable state
securities laws, no consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental agency or public or
regulatory unit, agency, body or authority with respect to VCS or is required in
connection with the execution, delivery or performance of this Agreement by VCS
or the consummation of the transactions contemplated hereby and the ownership
and operation of VCS (including the business and properties of VPC) after the
Effective Date in substantially the same manner as now owned and operated.
4.6. Capitalization of VCS.
(a) The authorized capital stock of VCS consists of 20,000,000 shares
of VCS Common Stock and 300,000 shares of preferred stock, $.01 par value.
As of June 30, 1996, there were (i) 7,031,184 shares of Common Stock
outstanding, (ii) no shares of preferred stock outstanding, and (iii)
2,694,345 shares reserved for issuance upon the exercise of outstanding
options, warrants and convertible debt.
(b) All of the issued and outstanding shares of VCS Common Stock have
been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights.
(c) To VCS' knowledge, there are no voting trusts, stockholder
agreements or other voting arrangements by the stockholders of VCS.
(d) Except as set forth in subsection (a) above, there is no
outstanding subscription, contract, convertible or exchangeable security,
option, warrant, call or other right obligating VCS to issue, sell,
exchange, or otherwise dispose of, or to purchase, redeem or otherwise
acquire, shares of, or securities convertible into or exchangeable for,
capital stock of VCS.
4.7. VCS SEC Reports. VCS has made available to VPC (i) VCS' Annual Reports
on Form 10-KSB, including all exhibits filed thereto and items incorporated
therein by reference, (ii) VCS' Quarterly Reports on Form 10-QSB, including all
exhibits thereto and items incorporated therein by reference, (iii) proxy
statements relating to VCS' meetings of stockholders and (iv) all other reports
or registration statements (as amended or supplemented prior to the date
hereof), filed by VCS with the SEC since December 31, 1994, including all
exhibits thereto and items incorporated therein by reference (items (i) through
(iv) being referred to as the "VCS SEC Reports"). As of their respective dates,
the VCS SEC Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Since December 31, 1994, VCS has filed all material forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the SEC rules and regulations thereunder,
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each of which complied as to form, at the time such form, report or document was
filed, in all material respects with the applicable requirements of the
Securities Act and the Exchange Act and the applicable rules and regulations
thereunder.
4.8. Financial Statements and Records of VCS. The VCS SEC Reports include
(i) the balance sheets of VCS as of December 31, 1994 and 1995, and the
statements of income, stockholders' equity and cash flows for the fiscal year
then ended, including the notes thereto, examined by and accompanied by the
report of BDO Seidman, LLP and (ii) the unaudited balance sheet of VCS as of
March 31, 1996 and the statements of income and cash flows for the three months
then ended (collectively the "VCS Financial Statements"). The VCS Financial
Statements have been prepared from, and are in accordance with, the books and
records of VCS and present fairly, in all material respects, the assets,
liabilities and financial position of VCS as of the dates thereof and the
results of operations and changes in financial position thereof for the periods
then ended, in each case in conformity with generally accepted accounting
principles, consistently applied, except as noted therein. Since March 31, 1996,
there has been no change in accounting principles applicable to, or methods of
accounting utilized by, VCS, except as noted in the VCS Financial Statements.
The books and records of VCS have been and are being maintained in accordance
with good business practice, reflect only valid transactions, are complete and
correct in all material respects, and present fairly in all material respects
the basis for the financial position and results of operations of VCS set forth
in VCS Financial Statements. On or before the 20th day of each calendar month
following the date of this Agreement, VPS shall deliver to VPC unaudited
financial statements as of the end of the previous month and for the year to
date.
4.9. Absence of Certain Changes. Since March 31, 1996, VCS has not, except
as may result from the transactions contemplated by this Agreement:
(a) incurred any loss of customers or impairment of its intellectual
property which would have a VCS Material Adverse Effect;
(b) suffered any damage or destruction to or loss of the assets of
VCS, whether or not covered by insurance, which has had a VCS Material
Adverse Effect;
(c) written up, written down or written off the book value of any
material amount of assets;
(d) declared, paid or set aside for payment any dividend or
distribution with respect to VCS' capital stock; or
(e) entered into any transaction other than in the ordinary course of
business.
4.10. No Material Undisclosed Liabilities. There are no liabilities or
obligations of VCS of any nature, whether absolute, accrued, contingent or
otherwise, other than the liabilities and obligations that are fully reflected,
accrued or reserved against in the VCS Financial Statements, for which the
reserves are appropriate and reasonable, or incurred in the ordinary course of
business and consistent with past practices since March 31, 1996.
4.11. Material Contracts. The VCS Disclosure Schedule sets forth, and VCS
will furnish or make available accurate and complete copies of, the VCS Material
Contracts to VPC. All of the VCS Material Contracts are valid, binding and
enforceable. There is not under any of the VCS Material Contracts any existing
breach, default or event of default by VCS nor event that with notice or lapse
of time or both would constitute a breach, default or event of default by VCS
nor does VCS know of, and VCS has not received notice of, or made a claim with
respect to, any breach or default by any other party thereto which would,
severally or in the aggregate, have a VCS Material Adverse Effect. As used
herein, the term "VCS Material Contracts" shall mean all of contracts and
agreements filed, or required to be filed, as exhibits to VCS' Annual Report on
Form 10-KSB for the year ended December 31, 1995 and any contract or agreement
entered into since December 31, 1995 which would be required to be filed as an
exhibit to VCS' Annual Report on Form 10-KSB for the year ending December 31,
1996.
4.12. Litigation and Government Claims. Except as disclosed in the VCS SEC
Reports, there is no pending suit, claim, action or litigation, or
administrative, arbitration or other proceeding or governmental
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investigation or inquiry, or any pending change in any environmental, zoning or
building laws, regulations or ordinances against VCS to which its business or
assets are subject which would, severally or in the aggregate, reasonably be
expected to result in a VCS Material Adverse Effect. To the knowledge of VCS,
there are no such proceedings threatened or contemplated, or any unasserted
claims (whether or not the potential claimant may be aware of the claim) of any
nature that might be asserted against VCS which would, severally or in the
aggregate, have a VCS Material Adverse Effect. VCS is not subject to any
judgment, decree, injunction, rule or order of any court, or, to the knowledge
of VCS, any governmental restriction applicable to VCS which is reasonably
likely (i) to have a VCS Material Adverse Effect or (ii) to cause a material
limitation on VCS' ability to operate the business of VPC after the Closing.
4.13. Compliance With Laws. VCS has all material authorizations, approvals,
licenses and orders to carry on its business as it is now being conducted, to
own or hold under lease the properties and assets it owns or holds under lease
and to perform all of its obligations under the agreements to which it is a
party, except for instances which would not have a VCS Material Adverse Effect.
VCS has been and is, to the knowledge of VCS, in compliance with all applicable
laws, regulations and administrative orders of any country, state or
municipality or of any subdivision of any thereof to which its business and its
employment of labor or its use or occupancy of properties or any part hereof are
subject, the failure to obtain or the violation of which would have a VCS
Material Adverse Effect.
4.14. Employee Benefit Plans. Each employee benefit plan, as such term is
defined in Section 3(3) of ERISA, of VCS (collectively the "VCS Employee Plans")
complies in all material respects with all applicable requirements of ERISA and
the Code and other applicable laws. None of the VCS Employee Plans is an
employee pension benefit plan or a multiemployer plan, as such terms are defined
in ERISA. Neither VCS nor any of its directors, officers, employees or agents
has, with respect to any VCS Employee Plan, engaged in any "prohibited
transaction," as such term is defined in the Code or ERISA, nor has any VCS
Employee Plan engaged in such prohibited transaction which could result in any
taxes or penalties or other prohibited transactions, which in the aggregate
could have a VCS Material Adverse Effect.
4.15. Labor Relations. VCS is in compliance in all material respects with
all laws (including federal and state laws and the laws of another country or
governmental entity thereof) respecting employment and employment practices,
terms and conditions of employment, wages and hours, and is not engaged in any
unfair labor or unlawful employment practice. There is no unlawful employment
practice discrimination charge pending before the EEOC or EEOC recognized state
"referral agency." There is no unfair labor practice charge or complaint against
VCS pending before the National Labor Relations Board. There is no labor strike,
dispute, slowdown or stoppage actually pending or, to the knowledge of VCS,
threatened against or involving or affecting VCS and no National Labor Relations
Board representation question exists respecting its employees. No grievances or
arbitration proceeding is pending and no written claim therefor exists. There is
no collective bargaining agreement that is binding on VCS.
4.16. Intellectual Property. The patents, patent applications, patent
licenses, trade names, trademarks, servicemarks and copyrights identified on the
VCS Disclosure Schedule constitute all such intellectual property rights owned
by or licensed to VCS which are material to its business (the "VCS Intellectual
Property"). All of the VCS Intellectual Property is being used or held for use
in connection with the business of VCS, without any known conflict with the
rights of others, except for such conflicts as do not have a VCS Material
Adverse Effect. VCS has not received any notice from any other person pertaining
to or challenging the right of VCS to use any VCS Intellectual Property or any
trade secrets, proprietary information, inventions, know-how, processes and
procedures owned or used or licensed to VCS, except with respect to rights the
loss of which, individually or in the aggregate, would not have a VCS Material
Adverse Effect.
4.17. Properties.
(a) VCS has good and marketable title, free and clear of all liens,
claims or encumbrances (other than "Permitted Liens") to all of its
material properties and assets whether tangible or intangible, real,
personal or mixed. All buildings and all fixtures, equipment and other
property and assets which are material to its business held under leases or
subleases by VCS are held under valid instruments enforceable in accordance
with their respective terms. As used herein, the term "Permitted Liens"
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includes (i) liens for taxes, assessments or other governmental charges not
yet due and payable; (ii) statutory liens incurred in the ordinary course
of business with respect to liabilities that are not yet due and payable;
(iii) landlord liens contained in leases in the ordinary course of
business; (iv) such imperfections of title and/or encumbrances as are not
material in character, amount or extent and do not materially detract from
the value or interfere with the use of the properties and assets subject
thereto or affected thereby; and (v) liens identified on the VCS Financial
Statements.
(b) At the Effective Date, except as set forth in the VCS SEC Reports,
none of the shareholders of VCS nor any Affiliate of such shareholders will
have any material interest in, or own, any material property or right used
principally in the conduct of the business of VCS. The term "Affiliate"
shall mean any of the shareholders of VCS, or any member of the immediate
family of a natural person shareholder, or any corporation, partnership,
trust or other entity in which any such shareholder or family member has a
substantial interest or is a director, officer, partner or trustee.
(c) Substantially all of VCS' equipment and properties has been well
maintained and is in good and serviceable condition, reasonable wear and
tear excepted.
4.18. Accuracy of Disclosures. None of the information supplied by VCS for
inclusion in the Registration Statement or Joint Proxy Statement (as such terms
are defined in Section 5.7) will, in the case of the Joint Proxy Statement or
any amendments or supplements thereto, at the time of mailing of the Joint Proxy
Statement and any amendments or supplements thereto, and at the time of the
meetings of the stockholders of VPC and VCS in accordance therewith or, in the
case of the Registration Statement at the time it becomes effective and at the
Effective Date, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
4.19. Brokers and Finders. None of VCS, or, to VCS' knowledge, any of its
officers, directors and employees has employed any broker, finder or investment
bank or incurred any liability for any investment banking fees, financial
advisory fees, brokerage fees or finders' fees in connection with the
transactions contemplated hereby, except that VCS has engaged First Albany
Corporation as its financial advisor. Other than the foregoing arrangements, VCS
is not aware of any claim for payment of any finder's fees, brokerage or agent's
commissions or other like payments in connection with the negotiations leading
to this Agreement or the consummation of the transactions contemplated hereby.
4.20. Pooling; Reorganization. Neither VCS nor any of its respective
affiliates has (i) knowingly taken any action, or knowingly failed to take any
action, that would jeopardize the treatment of the Merger as a "pooling of
interest" for accounting purposes or (ii) knowingly taken any action, or
knowingly failed to take any action, that would jeopardize qualification of the
Merger as a reorganization within the meaning of Section 368 of the Code.
ARTICLE 5.
CERTAIN COVENANTS AND AGREEMENTS
5.1. Conduct of Business by VPC. From the date hereof to the Effective
Date, VPC will except as required in connection with the Merger and the other
transactions contemplated by this Agreement and except as otherwise disclosed in
VPC's Disclosure Schedule or consented to in writing by VCS:
(a) Carry on its business in the ordinary and regular course in
substantially the same manner as heretofore conducted and not engage in any
new line of business or enter into any agreement, transaction or activity
or make any commitment except those in the ordinary and regular course of
business and not otherwise prohibited under this Section 5.1;
(b) Neither change nor amend its Certificate of Incorporation or
Bylaws;
(c) Other than pursuant to the exercise of the Options outstanding on
the date hereof or pursuant to the conversion of shareholder loans as
described in Section 3.7 above or the conversion of outstanding
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VPC Preferred Stock, not issue, sell or grant options, warrants or rights
to purchase or subscribe to, or enter into any arrangement or contract with
respect to the issuance or sale of capital stock of VPC or rights or
obligations convertible into or exchangeable for any shares of the capital
stock of VPC and not alter the terms of any presently outstanding options
or warrants (or plans pursuant to which they were granted) or make any
changes (by split-up, combination, reorganization or otherwise) in the
capital structure of VPC;
(d) Not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities of
VPC and not redeem, purchase or otherwise acquire any shares of the capital
stock or other securities of VPC or rights or obligations convertible into
or exchangeable for any shares of the capital stock or other securities of
VPC or obligations convertible into such, or any options, warrants or other
rights to purchase or subscribe to any of the foregoing;
(e) Not acquire or enter into any agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity;
(f) Use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of VPC, to keep the officers
and employees of VPC available to VPC and to preserve the relationships of
VPC with suppliers, customers and others having business relations with any
of them, except for such instances which would not have a material adverse
effect on the business, operations and financial condition of VPC;
(g) Not (i) create, incur or assume any long-term debt (including
obligations in respect of capital leases which individually involve annual
payments in excess of $10,000) or, except in the ordinary course of
business under the Credit Agreement (defined herein), create, incur or
assume any short-term debt for borrowed money, (ii) enter into any
contracts or arrangements providing for the payment to VPC of prepaid
royalties, except as contemplated by Section 7.10(i), (iii) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person, (iv) make any loans or advances to any other person except in the
ordinary course of business and consistent with past practice or (v) make
any capital contributions to, or investments in, any person; or
(h) Not (i) enter into, modify or extend in any manner the terms of
any employment, severance or similar agreements with officers and
directors, (ii) grant any increase in the compensation of officers or
directors, whether now or hereafter payable, or (iii) grant any increase in
the compensation of any other employees except for compensation increases
in the ordinary course of business and consistent with past practice.
In connection with the continued operation of the business of VPC between
the date of this Agreement and the Effective Date, VPC shall confer in good
faith and on a regular and frequent basis with one or more representatives of
VCS designated in writing to report operational matters of materiality and the
general status of ongoing operations. In addition, VPC will allow VCS employees
or agents to be present, at reasonable times, at VPC's business locations to
observe the business and operations of VPC. VPC acknowledges that VCS does not
and will not waive any rights it may have under this Agreement as a result of
such consultations nor shall VCS be responsible for any decisions made by VPC's
officers and directors with respect to matters which are the subject of such
consultation.
5.2. Conduct of Business by VCS. From the date hereof to the Effective
Date, VCS will, except as required in connection with the Merger and the other
transactions contemplated by this Agreement and except as otherwise disclosed in
VCS' Disclosure Schedule or consented to in writing by VPC:
(a) Carry on its businesses in the ordinary and regular course in
substantially the same manner as heretofore conducted and not engage in any
new line of business or enter into any agreement, transaction or activity
or make any commitment except in the ordinary and regular course of
business and not otherwise prohibited under this Section 5.2;
(b) Neither change nor amend its Certificate of Incorporation or
Bylaws;
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(c) Other than pursuant to the exercise of stock options outstanding
on the date hereof, not issue, sell or grant options (other than stock
options granted under VCS' existing stock option plans as such plans exist
on the date hereof, provided that the aggregate amount of options granted
pursuant to such plans shall be granted consistent with past practices),
warrants or rights to purchase or subscribe to, or enter into any
arrangement or contract with respect to the issuance or sale of any of the
capital stock of VCS or rights or obligations convertible into or
exchangeable for any shares of the capital stock of VCS and not materially
alter the terms of any presently outstanding option plan or make any
changes (by split-up, combination, reorganization or otherwise) in the
capital structure of VCS;
(d) Not declare, pay or set aside for payment any dividend or other
distribution in respect of the capital stock or other equity securities of
VCS and not redeem, purchase or otherwise acquire any shares of the capital
stock or other securities of VCS, or rights or obligations convertible into
or exchangeable for any shares of the capital stock or other securities of
VCS or obligations convertible into such, or any options, warrants or other
rights to purchase or subscribe to any of the foregoing;
(e) Not acquire or enter into any agreement to acquire, by merger,
consolidation or purchase of stock or assets, any business or entity; and
(f) Use its reasonable efforts to preserve intact the corporate
existence, goodwill and business organization of VCS, to keep the officers
and employees of VCS available to VCS and to preserve the relationships of
VCS with suppliers, customers and others having business relations with any
of them, except for such instances which would not have a material adverse
effect on the business, operations and financial condition of VCS;
In connection with the continued operation of the business of VCS between
the date of this Agreement and the Effective Date, VCS shall confer in good
faith and on a regular and frequent basis with one or more representatives of
VPC designated in writing to report operational matters of materiality and the
general status of ongoing operations. In addition, VCS will allow VPC employees
or agents to be present, at reasonable times, at VCS' business locations to
observe the business and operations of VCS. VCS acknowledges that VPC does not
and will not waive any rights it may have under this Agreement as a result of
such consultations nor shall VPC be responsible for any decisions made by VCS'
officers and directors with respect to matters which are the subject of such
consultation.
5.3. Notice of any Material Change. Each of VPC and VCS shall, promptly
after the first notice or occurrence thereof but not later than the Closing
Date, advise the other in writing of any event or the existence of any state of
facts that would (i) make any of its representations and warranties in this
Agreement untrue in any material respect, or (ii) otherwise constitute a VPC
Material Adverse Effect or VCS Material Adverse Effect, as the case may be.
5.4. Inspection and Access to Information.
(a) Between the date of this Agreement and the Effective Date, each
party hereto will provide each other party and its accountants, counsel and
other authorized representatives full access, during reasonable business
hours and under reasonable circumstances to any and all of its premises,
properties, contracts, commitments, books, records and other information
(including tax returns filed and those in preparation) and will cause their
respective officers to furnish to the other party and its authorized
representatives any and all financial, technical and operating data and
other information pertaining to its business, as each other party shall
from time to time request.
(b) Each of the parties hereto and their respective representatives
shall maintain the confidentiality of all information (other than
information which is generally available to the public) concerning the
other parties hereto acquired pursuant to the transactions contemplated
hereby in the event that the Merger is not consummated. Each of the parties
hereto and their representatives shall not use such information so obtained
to the detriment or competitive disadvantage of the other party hereto. All
files, records, documents, information, data and similar items relating to
the confidential information of VPC, whether prepared by VCS or otherwise
coming into VCS' possession, shall remain the exclusive property of VPC
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and shall be promptly delivered to VPC upon termination of this Agreement.
All files, records, documents, information, data and similar items relating
to the confidential information of VCS, whether prepared by VPC or
otherwise coming into VPC's possession, shall remain the exclusive property
of VCS and shall be promptly delivered to VCS upon termination of this
Agreement. The letter agreement dated May 1, 1996 relative to the
protection of such confidential information of VCS and VPC (the
"Confidentiality Agreement") shall remain in full force and effect through
the Closing Date.
5.5. Credit Agreement. VCS will make available to VPC, at all times through
the Closing Date, a line of credit, covering borrowings by VPC for working
capital purposes from time to time not to exceed an aggregate outstanding
principal balance of $750,000. The agreement respecting such line of credit (the
"Credit Agreement") shall be in the form of Exhibit A hereto. All borrowings by
VPC under the Credit Agreement shall be secured by a pledge in favor of VCS of
all of the tangible and intangible assets of VPC.
5.6. Pooling; Reorganization. From and after the date hereof and until the
Effective Date, neither VCS nor VPC nor any of their respective affiliates shall
(i) knowingly take any action, or knowingly fail to take any action, that would
jeopardize the treatment of the Merger as a "pooling of interest" for accounting
purposes or (ii) knowingly take any action, or knowingly fail to take any
action, that would jeopardize qualification of the Merger as a reorganization
within the meaning of Section 368 of the Code.
5.7. Registration Statement and Joint Proxy Statement.
(a) As promptly as practicable after the execution of this Agreement,
VCS and VPC shall prepare
and file a registration statement on Form S-4 (which registration
statement, in the form it is declared effective by the SEC, together with
any and all amendments and supplements thereto and all information
incorporated by reference therein, is referred to herein as the
"Registration Statement") under and pursuant to the provisions of the
Securities Act for the purpose of registering VCS Common Stock to be issued
in the Merger. VCS (with the assistance of VPC) will use its best efforts
to receive and respond to the comments of the SEC, and, upon the effective
date of the Registration Statement, each shall promptly mail to its
stockholders the proxy statement in its definitive form contained in the
Registration Statement (the "Joint Proxy Statement"). Such Joint Proxy
Statement shall also serve as the prospectus (to be included in the
Registration Statement) with respect to the issuance of VCS Common Stock
pursuant to the Merger. The Joint Proxy Statement shall include the
recommendation of the respective Board of Directors of VCS and VPC in favor
of the Merger.
(b) Each of VCS and VPC agrees to provide as promptly as practicable
to the other such information concerning its business and financial
statements and affairs as, in the reasonable judgment of the other party,
may be required or appropriate for inclusion in the Registration Statement
and the Joint Proxy Statement or in any amendments or supplements thereto,
and to cause its counsel and auditors to cooperate with the other's counsel
and auditors in the preparation of the Registration Statement and the Joint
Proxy Statement.
(c) At the time the Registration Statement becomes effective and at
the Effective Date, as such Registration Statement is then amended or
supplemented, and at the time the Joint Proxy Statement is mailed to VPC's
and VCS' stockholders, VCS and VPC agree that such Registration Statement
and Joint Proxy Statement will (i) not contain any untrue statement of a
material fact, or omit to state any material fact required to be stated
therein as necessary, in order to make the statements therein, in light of
the circumstances under which they were made, not misleading or necessary
and (ii) comply in all material respects with the provisions of the
Securities Act and Exchange Act, as applicable, and the rules and
regulations thereunder; provided, however, no agreement is made by VCS or
VPC with respect to statements made in the Registration Statement and Joint
Proxy Statement based on information supplied by the other party expressly
for inclusion or incorporation by reference in the Joint Proxy Statement or
Registration Statement or information omitted with respect to the other
party.
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5.8. Stockholders' Meetings.
(a) Each of VPC and VCS shall call a meeting of its stockholders to be
held as soon as practicable after the date hereof for the purpose of voting
upon matters relating to this Agreement.
(b) Each of VPC and VCS will use its reasonable efforts to hold its
stockholders' meeting as promptly as practicable and will, through its
Board of Directors, recommend to its stockholders approval of the Merger
and this Agreement at the stockholders' meeting.
5.9. Listing Application. VCS will file a listing application with the NMS
to approve for listing, subject to official notice of issuance, the shares of
VCS Common Stock to be issued in the Merger. VCS shall use its reasonable
efforts to cause the shares of VCS Common Stock to be issued in the Merger to be
approved for listing on the NMS, subject to official notice of issuance, prior
to the Effective Date.
5.10. Affiliates. At least 30 days prior to the Closing Date, VPC shall
deliver to VCS a letter identifying all persons who are, at the time the Merger
is submitted to a vote to the stockholders of VPC, "affiliates" of VPC for
purposes of Rule 145 under the Securities Act. VPC shall use its reasonable
efforts to cause each person who is identified as an "affiliate" in such letter
to deliver to VCS on or prior to the Effective Date a written statement, in form
satisfactory to VCS and VPC, that such person will not offer to sell, transfer
or otherwise dispose of any of the shares of VCS Common Stock issued to such
person pursuant to the Merger, except (i) in accordance with the applicable
provisions of the Securities Act and the rules and regulations thereunder and
(ii) until such time as financial results covering at least 30 days of combined
operations of VCS and VPC have been published (the "Publication Date"). VCS
hereby covenants to satisfy such publication requirement through a press release
and filing under the Exchange Act as promptly as practicable after the
completion of the first fiscal quarter of VCS which includes at least 30 days of
combined operations.
5.11. Reasonable Efforts; Further Assurances; Corporation. Subject to the
other provisions of this Agreement, the parties hereby shall each use their
reasonable efforts to perform their obligations herein and to take, or cause to
be taken or do, or cause to be done, all things necessary, proper or advisable
under applicable law to obtain all regulatory approvals and satisfy all
conditions to the obligations of the parties under this Agreement and to cause
the Merger and the other transactions contemplated herein to be carried out
promptly in accordance with the terms hereof and shall cooperate fully with each
other and their respective officers, directors, employees, agents, counsel,
accountants and other designees in connection with any steps required to be
taken as a part of their respective obligations under this Agreement, including
without limitation:
(a) In the event any claim, action, suit, investigation or other
proceeding by any governmental body or other person is commenced which
questions the validity or legality of the Merger or any of the other
transactions contemplated hereby or seeks damages in connection therewith,
the parties agree to cooperate and use all reasonable efforts to defend
against such claim, action, suit, investigation or other proceeding and, if
an injunction or other order is issued in any such action, suit or other
proceeding, to use all reasonable efforts to have such injunction or other
order lifted, and to cooperate reasonably regarding any other impediment to
the consummation of the transactions contemplated by this Agreement.
(b) Each party shall give prompt written notice to the other of (i)
the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty of VPC or
VCS, as the case may be, contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Date or that will or may result in the failure to satisfy any of
the conditions specified in Article 6 and (ii) any failure of VPC or VCS,
as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder.
(c) VPC will promptly obtain, and will deliver copies to VCS of,
agreements from Stanley Westreich and Merrill Solomon (i) not to perfect
appraisal rights with respect to the Merger (to the extent applicable) and
(ii) to vote all shares of VPC Capital Stock beneficially owned by such
person in favor of the approval of this Agreement and the Merger (which
agreements shall contain a proxy in favor of VCS with respect to the shares
of VPC Capital Stock beneficially owned by such persons). On or
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before July 31, 1996, VPC will have obtained and delivered to VCS a similar
agreement from Creative Labs.
5.12. Public Announcements. The timing and content of all announcements
regarding any aspect of this Agreement or the Merger to the financial community,
government agencies, employees or the general public shall be mutually agreed
upon in advance (unless VCS or VPC is advised by counsel that any such
announcement or other disclosure not mutually agreed upon in advance is required
to be made by law or applicable stock exchange rule and then only after making a
reasonable attempt to comply with the provisions of this Section).
5.13. No Solicitations. From the date hereof until the Effective Date or
until this Agreement is terminated or abandoned as provided in this Agreement,
VPC shall not directly or indirectly (i) solicit or initiate discussion with or
(ii) enter into negotiations or agreements with, or furnish any information that
is not publicly available to, any corporation, partnership, person or other
entity or group (other than VCS) concerning any proposal for a merger, sale of
substantial assets, sale of shares of stock or securities or other takeover or
business combination transaction (the "Acquisition Proposal") involving VPC, and
VPC will instruct its officers, directors, advisors and its financial and legal
representatives and consultants not to take any action contrary to the foregoing
provisions of this sentence. VPC will notify VCS promptly in writing if VPC
becomes aware that any inquiries or proposals are received by, any information
is requested from or any negotiations or discussions are sought to be initiated
with, VPC with respect to an Acquisition Proposal, and VPC shall promptly
deliver to VCS any written inquiries or proposals received by VPC relating to an
Acquisition Proposal.
5.14. Designees to VCS Board of Directors. Prior to the Closing, the Board
of Directors of VPC will designate two representatives to serve on the VCS Board
of Directors. VCS hereby covenants to cause each such representative to be named
to the VCS Board of Directors promptly after the Effective Date to serve until
the next annual meeting of VCS' stockholders. Thereafter, VCS shall nominate and
use its best reasonable efforts to cause the election of each such
representative to the VCS Board of Directors for a period ending on the second
anniversary of the Effective Date.
5.15. Employment Agreement. VCS will honor the existing provisions of the
employment agreement between VPC and Merrill Solomon, whereby Mr. Solomon will
continue to be paid at his current level of compensation for a period of 18
months following the Effective Date.
ARTICLE 6.
CONDITIONS PRECEDENT TO OBLIGATIONS OF VPC
Except as may be waived by VPC, the obligations of VPC to consummate the
transactions contemplated by this Agreement shall be subject to the satisfaction
on or before the Closing Date of each of the following conditions:
6.1. Compliance. VCS shall have, or shall have caused to be, satisfied or
complied with and performed in all material respects all terms, covenants, and
conditions of this Agreement to be complied with or performed by VCS on or
before the Closing Date.
6.2. Representations and Warranties. All of the representations and
warranties made by VCS in this Agreement and in all certificates and other
documents delivered by VCS to VPC pursuant hereto or in connection with the
transactions contemplated hereby, shall have been true and correct in all
material respects as of the date hereof, and shall be true and correct in all
material respects at the Closing Date with the same force and effect as if such
representations and warranties had been made at and as of the Closing Date,
except for changes permitted or contemplated by this Agreement and except that
if information which would constitute a breach of the representations and
warranties of VCS made in this Agreement is disclosed in the Joint Proxy
Statement on the date such Joint Proxy Statement is mailed to VPC's
stockholders, then VPC shall be deemed to have waived this condition to the
performance of its obligations hereunder.
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6.3. Material Adverse Changes. Subsequent to March 31, 1996, there shall
not have occurred any VCS Material Adverse Effect.
6.4. NMS Listing. The VCS Common Stock issuable pursuant to the Merger or
upon exercise of the Options shall have been authorized for listing on the NMS.
6.5. Certificates. VPC shall have received a certificate or certificates,
executed on behalf of VCS by an executive officer of VCS, to the effect that the
conditions contained in Sections 6.2 and 6.3 hereof have been satisfied.
6.6. Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of such percentage of each class
of VPC Capital Stock as may be required by the instruments and agreements
governing such class.
6.7. Effectiveness of Registration Statement. The Registration Statement
shall have become effective and no stop order shall been issued by the SEC or
any other governmental authority suspending the effectiveness of the
Registration Statement or preventing or suspending the use thereof or any
related prospectus.
6.8. Consents; Litigation. Other than the filing of Certificate of Merger
as described in Article 1, all authorizations, consents, orders or approvals of,
or declarations or filings with, any governmental entity, and all required
third-party consents, the failure to obtain which would have a material adverse
effect on VCS, shall have been filed, occurred or been obtained. VCS shall have
received all state securities or Blue Sky permits and other authorizations
necessary to issue VCS Common Stock pursuant to the Merger and the other terms
of this Agreement. In addition, no action, suit or proceeding shall have been
instituted before any court or other governmental entity to restrain, modify,
enjoin or prohibit the carrying out of the transactions contemplated hereby.
6.9. Tax Opinion. VPC shall have received the opinion of Crouch & Hallett,
LLP, dated the Closing Date, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that VPC and VCS will each be a party to that
reorganization within the meaning of Section 368(a) of the Code.
6.10. Corporate Law Opinion. VPC shall have received the opinion of Crouch
& Hallett, LLP, dated the Closing Date, with respect to the enforceability of
this Agreement and the validity of the shares of VCS Common Stock to be issued
pursuant to the Merger.
ARTICLE 7.
CONDITIONS PRECEDENT TO OBLIGATIONS OF VCS
Except as may be waived by VCS, the obligations of VCS to consummate the
transactions contemplated by this Agreement shall be subject to the
satisfaction, on or before the Closing Date, of each of the following
conditions:
7.1. Compliance. VPC shall have, or shall have caused to be, satisfied or
complied with and performed in all material respects all terms, covenants, and
conditions of this Agreement to be complied with or performed by it on or before
the Closing Date.
7.2. Representations and Warranties. All of the representations and
warranties made by VPC in this Agreement and in all certificates and other
documents delivered by VPC pursuant hereto or in connection with the
transactions contemplated hereby, shall have been true and correct in all
material respects as of the date hereof after giving effect to the delivery of
VPC's Disclosure Schedule, and shall be true and correct in all material
respects at the Closing Date with the same force and effect as if such
representations and warranties had been made at and as of the Closing Date,
except for changes permitted or contemplated by this Agreement and except that
if information which would constitute a breach of the representations and
warranties of VPC made in this Agreement is disclosed in the Joint Proxy
Statement on the date such Joint Proxy Statement is mailed to VCS' stockholders,
then VCS shall be deemed to have waived this condition to the performance of its
obligations hereunder.
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7.3. Material Adverse Changes. Since March 31, 1996, there shall have not
occurred any VPC Material Adverse Effect.
7.4. Certificates. VCS shall have received a certificate or certificates,
executed on behalf of VPC by an executive officer of VPC, to the effect that the
conditions in Sections 7.2 and 7.3 hereof have been satisfied.
7.5. Dissenters' Rights. To the extent appraisal rights are available to
VPC's stockholders in connection with the Merger, no more than 5% of the
outstanding shares of VPC Capital Stock shall qualify as Dissenting Shares.
7.6. Stockholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of the holders of a majority of all of the
outstanding shares of VCS Common Stock.
7.7. Consents; Litigation. Other than the filing of the Certificate of
Merger as described in Article 1, all authorizations, consents, orders or
approvals of, or declarations or filings with, any governmental entity, and all
required third-party consents, the failure to obtain which would have a material
adverse effect on VCS, shall have been filed, occurred or been obtained. VCS
shall have received all state securities or Blue Sky permits and other
authorizations necessary to issue VCS Common Stock pursuant to the Merger and
the other terms of this Agreement. In addition, no action, suit or proceeding
shall have been instituted before any court or other governmental entity to
restrain, modify, enjoin or prohibit the carrying out of the transactions
contemplated hereby.
7.8. Receipt of Pooling Letters. VCS shall have received a letter from BDO
Seidman, LLP, dated the Effective Date and addressed to VCS, stating
substantially to the effect that, based on such firm's review of this Agreement
and the other procedures set forth in such letter, such firm concurs that the
Merger will qualify as a pooling of interests transaction under Opinion 16 of
the Accounting Principles Board. In addition, BDO Seidman, LLP shall have
received from Arthur Andersen LLP, independent auditors for VPC, a letter to the
effect that VPC qualifies for a "pooling of interests" transaction under
generally accepted accounting principles.
7.9. Corporate Law Opinion. VCS shall have received the opinion of Choate,
Hall & Stewart, dated the Closing Date, with respect to the enforceability of
this Agreement and the validity of the shares of capital stock of VPC.
7.10. Liabilities of VPC. As of the Closing Date, (i) the liability of VPC
to Creative Labs shall have been converted to a prepaid royalty or shall have
been retired or forgiven and (ii) the total liabilities of VPC (including all
expenses of VPC relating to the Merger and all other accruals required under
generally accepted accounting principals but exclusive of those liabilities
incurred pursuant to the Credit Agreement) shall not exceed the total assets of
VPC, each as determined in accordance with generally accepted accounting
principles.
7.11. Key VPC Employees. The key management and technical employees of VPC
listed on Exhibit B hereto shall have entered into employment and
non-competition agreements with VCS in form acceptable to VCS.
ARTICLE 8.
INDEMNIFICATION OF VPC MANAGERS
In the event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including, without
limitation, any such claim, action, suit, proceeding or investigation in which
any of the present or former officers or directors (the "Managers") of VPC is,
or is threatened to be, made a party by reason of the fact that he or she is or
was a stockholder, director, officer, employee or agent of VPC, or is or was
serving at the request of VPC as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
whether before or after the Effective Date, VPC shall indemnify and hold
harmless, and from and after the Effective Date VCS shall indemnify and hold
harmless, as and to the full extent permitted by applicable law (including by
advancing expenses promptly as
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statements therefor are received), each such Manager against any losses, claims,
damages, liabilities, costs, expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement in connection with any such claim, action,
suit, proceeding or investigation, and in the event of any such claim, action,
suit proceeding or investigation (whether arising before or after the Effective
Date), (i) if VPC (prior to the Effective Date) or VCS (after the Effective
Date) have not promptly assumed the defense of such matter, the Managers may
retain counsel satisfactory to them, and VPC, and VCS after the Effective Date,
shall pay all fees and expenses of such counsel for the Managers promptly, as
statements therefor are received, and (ii) VPC, and VCS after the Effective
Date, will use their respective best efforts to assist in the vigorous defense
of any such matter; provided that neither VPC nor VCS shall be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld); and provided further that VCS shall have no
obligation under the foregoing provisions of this Article 8 to any Manager when
and if a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and non-appealable, (x) that
indemnification of such Manager in the manner contemplated hereby is prohibited
by applicable law, or (y) that VPC has breached a representation or warranty
hereunder with respect to the same matters for which indemnification is being
sought by such Manager and such Manager fails to prove that such Manager had no
actual knowledge of such breach at the Effective Date. Upon the finality of any
such determination that VCS is not liable for any such indemnification claims,
the Manager will reimburse VCS for any fees, expenses and costs incurred by VCS
in connection with the defense of such claims. Any Manager wishing to claim
indemnification under this Article 8, upon learning of any such claim, action,
suit, proceeding or investigation, shall notify VPC and, after the Effective
Date, VCS, thereof (provided that the failure to give such notice shall not
affect any obligations hereunder, except to the extent that the indemnifying
party is actually and materially prejudiced thereby). VCS agrees that all rights
to indemnification existing in favor of the Managers as provided in VPC's
Certificate of Incorporation or Bylaws as in effect as of the date hereof, and
in any agreement between VPC and any Manager with respect to matters occurring
prior to the Effective Date shall survive the Merger. The provisions of this
Article 8 are intended to be for the benefit of, and shall be enforceable by,
each indemnified party and his or her heirs and representatives and shall
survive the Closing.
ARTICLE 9.
MISCELLANEOUS
9.1. Termination. In addition to the provisions regarding termination set
forth elsewhere herein, this Agreement and the transactions contemplated hereby
may be terminated at any time on or before the Closing Date:
(a) by mutual consent of VPC and VCS;
(b) by VCS if there has been a material misrepresentation or breach of
warranty in the representations and warranties of VPC set forth herein or a
failure to perform in any material respect a covenant on the part of VPC or
its board with respect to its representations, warranties and covenants set
forth in this Agreement, except for any such misrepresentation, breach or
failure to perform which was disclosed in the Joint Proxy Statement on the
date it is mailed to VCS' stockholders to the extent that VCS has agreed to
such disclosure;
(c) by VPC if there has been a material misrepresentation or breach of
warranty in the representations and warranties of VCS set forth herein or a
failure to perform in any material respect a covenant on the part of VCS or
its board with respect to its representations, warranties and covenants set
forth in this Agreement, except for any such misrepresentation, breach or
failure to perform which was disclosed in the Joint Proxy Statement on the
date it is mailed to VPC's stockholders to the extent that VPC has agreed
to such disclosure;
(d) by either VCS or VPC if the transactions contemplated by this
Agreement have not been consummated by November 30, 1996, unless such
failure of consummation is due to the failure of the
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terminating party to perform or observe the covenants, agreements, and
conditions hereof to be performed or observed by it at or before the
Closing Date; or
(e) by either VPC or VCS if the transactions contemplated hereby
violate any nonappealable final order, decree or judgment of any court or
governmental body or agency having competent jurisdiction.
9.2. Expenses. If the transactions contemplated by this Agreement are not
consummated, each party hereto shall pay its own expenses incurred in connection
with this Agreement and the transactions contemplated hereby. In the event of
the termination of this Agreement due to a default or breach by VCS or as the
result of the failure of Sections 6.1, 6.2, 6.3, 6.4, 6.5 or 7.6 of this
Agreement to have been satisfied, then VCS shall pay to VPC, as VPC's sole
remedy for any claim against VCS, the sum of $400,000 in consideration of the
expenses incurred by VPC in connection with the Merger. Subject to the preceding
sentence, in the event of the termination of this Agreement for any reason other
than a default or breach by VPC, then VCS shall pay to VPC, as VPC's sole remedy
for any claim against VCS, the sum of $200,000 in consideration of the expenses
incurred by VPC in connection with the Merger.
9.3. Entire Agreement. This Agreement, the Confidentiality Agreement and
the exhibits hereto contain the complete agreement among the parties with
respect to the transactions contemplated hereby and supersede all prior
agreements and understandings among the parties with respect to such
transactions. Section and other headings are for reference purposes only and
shall not affect the interpretation or construction of this Agreement. The
parties hereto have not made any representation or warranty except as expressly
set forth in this Agreement or in any certificate or schedule delivered pursuant
hereto. The obligations of any party under any agreement executed pursuant to
this Agreement shall not be affected by this section.
9.4. Survival of Representations and Warranties. The representations and
warranties of each party contained herein or in any exhibit, certificate,
document or instrument delivered pursuant to this Agreement shall not survive
the Closing.
9.5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, and such counterparts together shall constitute only one original.
9.6. Notices. All notices, demands, requests, or other communications that
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Agreement shall be in writing to the address or facsimile
number (as applicable) set forth below and shall be either (i) mailed by
first-class, registered or certified mail, return receipt requested, postage
prepaid, (ii) transmitted by hand delivery, (iii) sent by nationally recognized
overnight courier or (iv) sent by facsimile transmission (with confirming copy
by regular mail):
(i) If to VCS:
14140 Midway Road, Suite 100
Dallas, Texas 75244
Attention: President
Facsimile: 214-386-5555
(ii) If to VPC:
One Main Street
Cambridge, Massachusetts 02142
Attention: Chief Executive Officer
Facsimile: 617-494-4970
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication may thereafter be so given, served or sent.
Each notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above shall be deemed sufficiently given,
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served, sent and received for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt or the affidavit of
messenger being deemed conclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
9.7. Successors; Assignments. This Agreement and the rights, interests and
obligations hereunder shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned, by operation of law or otherwise, by any of the parties hereto without
the prior written consent of the other.
9.8. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Delaware (except the choice of law
rules thereof).
9.9. Waiver and Other Action. This Agreement may be amended, modified or
supplemented only by a written instrument executed by the parties against which
enforcement of the amendment, modification or supplement is sought.
9.10. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision were never a part hereof; the remaining provisions
hereof shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance; and in lieu of
such illegal, invalid or unenforceable provision, there shall be added
automatically as part of this Agreement, a provision as similar in its terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
9.11. No Third Party Beneficiaries. Article 8 is intended for the benefit
of each "Manager" (as defined in Article 8) and may be enforced by such persons.
Other than as expressly set forth in this Section 9.11, nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any person, firm or corporation other than the parties hereto, any rights,
remedies, obligations or liabilities under or by reason of this Agreement or
result in such person, firm or corporation being deemed a third party
beneficiary of this Agreement.
9.12. Mutual Contribution. The parties to this Agreement and their counsel
have mutually contributed to its drafting. Consequently, no provision of this
Agreement shall be construed against any party on the ground that such party
drafted the provision or caused it to be drafted or the provision contains a
covenant of such party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
VOICE PROCESSING CORPORATION
By:
---------------------------------
VOICE CONTROL SYSTEMS, INC.
By:
---------------------------------
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APPENDIX B
OPINION OF FIRST ALBANY CORPORATION
[TO BE FILED BY AMENDMENT]
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APPENDIX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsections (f) or (g) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
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of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register
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in Chancery, if so ordered by the Court, shall give notice of the time and place
fixed for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the list at
the addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders, entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the registrant's Bylaws expressly directs the registrant to
indemnify any director, officer, employee, or agent of the registrant or any
person serving at the request of the registrant as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, or other
enterprise against expenses (including attorney's fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred in connection with
any threatened, pending or completed action, suit or proceeding (other than an
action by or in the right of the registrant) to which such person is a party by
virtue of such status if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the registrant and,
with respect to any criminal action or proceeding, if he had no reasonable cause
to believe his conduct was unlawful. The termination of such action, suit or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, will not create a presumption that such person did
not act in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the registrant and, with respect to any
criminal action or proceeding, that he had reasonable cause to believe that his
conduct was unlawful.
Article VI also provides that the registrant shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the registrant to procure a
judgment in the registrant's favor by reason of the fact that such person is or
was a director, trustee, officer, employee or agent of the Registrant, or is or
was serving at the request of the registrant as a director, trustee, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) and amounts paid
in settlement actually and reasonably incurred by such person in connection with
the defense or settlement of such action or suit if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the registrant; however, no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable for gross negligence or willful misconduct in the
performance of such person's duty to the registrant unless and only to the
extent that, the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of such liability, but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as such court shall deem proper. The
termination of any action or suit by judgment or settlement shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interest of the registrant.
The Bylaws further provide that any indemnification shall be made only upon
a determination that such indemnification is proper under the standards
described above. Such determination shall be made (i) by a majority vote of a
quorum of the VCS Board, or (ii) if such quorum is not obtainable, by a quorum
of disinterested directors, or (iii) by independent legal counsel or (iv) by the
stockholders. If successful, in whole or in part, on the merits of any action, a
person shall be indemnified for expenses actually and reasonably incurred.
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the registrant, at any time or from time to time in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of the director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the registrant in Article VI of the Bylaws. The indemnification
and advancement of expenses provided by or granted pursuant to Article VI shall
not be deemed exclusive of any other rights to which those indemnified or those
seeking advancement of expenses may be entitled under any law, bylaw, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity while
holding such office and shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and
administrators of such person.
II-1
<PAGE> 145
The Certificate of Incorporation, as amended, of the registrant eliminates
personal liability of directors to the fullest extent permitted by Delaware law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<S> <C> <C>
2.1 -- Agreement and Plan of Merger, dated July 17, 1996, among the Registrant and Voice
Processing Corporation (included as Appendix A to the Joint Proxy
Statement/Prospectus)(1)
2.2 -- Loan Agreement, dated as of July 9, 1996, between Voice Processing Corporation and
the Registrant, together with the Revolving Credit Promissory Note attached as
Exhibit A thereto(1)
2.3 -- 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 Registrant'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 Registrant'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 Registrant'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 Registrant, as amended (filed with the
Securities and Exchange Commission on March 11, 1986, as Exhibit 3.1 to the
Registrant'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
Registrant'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 Registrant'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 Registrant (filed with the Securities and Exchange Commission on
March 11, 1986, as Exhibit 3.2 to the Registrant'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 Registrant'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 Registrant'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 Registrant's Common Stock, $0.01
par value (filed with the Securities and Exchange Commission on December 8, 1995 as
Exhibit 4.1 to the Registrant'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 Registrant and payable to Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.27 to the
Registrant'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 Registrant
and Dialogic Corporation (filed with the Securities and Exchange Commission on
April 11, 1994 as Exhibit 10.28 to the Registrant's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
</TABLE>
II-2
<PAGE> 146
<TABLE>
<S> <C> <C>
4.4 -- Omnibus Amendment Agreement dated March 14, 1994 between the Registrant and
Dialogic Corporation (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.35 to the Registrant's Registration Statement on Form S-4
dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
5 -- Opinion of Crouch & Hallett, L.L.P.(1)
8 -- Opinion of Crouch & Hallett, L.L.P. regarding tax matters described in the Joint
Proxy Statement/Prospectus (1)
10.1 -- 1992 Stock Option Plan of the Registrant (filed with the Securities and Exchange
Commission on March 30, 1993 as Exhibit 10.25 to the Registrant'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 Registrant (filed with the Securities and
Exchange Commission on March 30, 1993 as Exhibit 10.26 to the Registrant'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 Registrant'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
Registrant's Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
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 Registrant'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 Registrant and various directors, officers
and affiliates (filed with the Securities and Exchange Commission on March 31, 1994
as Exhibit 10.18 to the Registrant'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 Registrant in favor
of Dialogic Corporation (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.29 to the Registrant'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 Registrant and an officer (filed with the
Securities and Exchange Commission on March 23, 1995, as Exhibit 10.15 to the
Registrant'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 Registrant'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 Registrant'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 Registrant and Peter J. Foster
(filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit
10.15 to the Registrant's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
</TABLE>
II-3
<PAGE> 147
<TABLE>
<S> <C> <C>
10.11 -- Amendment to employment agreement dated November 14, 1995 between the Registrant
and Peter J. Foster (filed with the Securities and Exchange Commission on December
8, 1995 as Exhibit 10.11 to the Registrant'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 Registrant and Thomas B.
Schalk (filed with the Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.16 to the Registrant'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 Registrant and
Thomas B. Schalk (filed with the Securities and Exchange Commission on November 15,
1995 as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the
fiscal quarter ended September 30, 1995, and incorporated by reference herein).
10.14* -- License Agreement dated June 8, 1990 by and between the Registrant and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.30 to the Registrant'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 Registrant and
Dialogic Corporation (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.31 to the Registrant'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
Registrant and Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.32 to the Registrant'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
Registrant and Dialogic Corporation (filed with the Securities and Exchange
Commission on December 8, 1995 as Exhibit 10.17 to the Registrant'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 Registrant and Dialogic
Corporation (filed with the Securities and Exchange Commission on December 8, 1995
as Exhibit 10.18 to the Registrant's 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 Registrant and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.33 to the Registrant'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
Registrant and Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.34 to the Registrant'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
Registrant and Dialogic Corporation (filed with the Securities and Exchange
Commission on December 8, 1995 as Exhibit 10.21 to the Registrant's Registration
Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
</TABLE>
II-4
<PAGE> 148
<TABLE>
<S> <C> <C>
10.22* -- Omnibus Amendment Agreement dated March 14, 1994 between the Registrant and
Dialogic Corporation (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.35 to the Registrant'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 Registrant and
Dialogic Corporation (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.36 to the Registrant's Registration Statement on Form S-4
dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.24 -- Office Lease Agreement between the Registrant 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 Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated by reference herein).
10.25 -- Amendment to Office Lease Agreement between the Registrant 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 Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1994, and incorporated by
reference herein).
10.26 -- Addendum to Office Lease Agreement between the Registrant 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 Registrant's Quarterly
Report on Form 10-QSB for the fiscal quarter ended September 30, 1995, and
incorporated by reference herein).
10.27 -- Separation agreement dated July 12, 1994 between the Registrant and E. Ray Cotten
(filed with the Securities and Exchange Commission on July 12, 1994 as Exhibit
10.17 to the Registrant'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).
10.28 -- Employment and Consulting Agreement between Voice Processing Corporation and
Merrill Solomon.(1)
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).
23.1 -- Consent of BDO Seidman, LLP(1)
23.2 -- Consent of Arthur Andersen LLP(1)
23.3 -- Consent of Crouch & Hallett, L.L.P. (included in opinion filed as Exhibit 5 hereto)
24 -- Power of Attorney (Set forth on II-7)
99.1 -- Form of Voice Control Systems, Inc. Proxy for Special Meeting(1)
99.2 -- Form of Voice Processing Corporation Proxy for Special Meeting(2)
</TABLE>
- ---------------
(1) Filed herewith.
(2) To be filed by amendment.
* Confidential treatment has been requested for a portion of this exhibit.
(b) Financial Statement Schedules
None filed herewith.
II-5
<PAGE> 149
ITEM 22. UNDERTAKINGS.
(a) The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(d) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
the offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 in this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
<PAGE> 150
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas and State of Texas
on the 3rd day of September, 1996.
VOICE CONTROL SYSTEMS, INC.
By /s/ PETER J. FOSTER
------------------------------------
Peter J. Foster, President and
Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints Peter J. Foster and Kim S. Terry,
and each of them (with full power to act alone), as attorneys and agents for the
undersigned, with full power of substitution, for and in the name, place and
stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933 any and all amendments and exhibits
to this Registration Statement and any and all applications, instruments and
other documents to be filed with the Securities and Exchange Commission
pertaining to the registration of the securities covered hereby, with full power
and authority to do and perform any and all acts and things whatsoever requisite
or desirable.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- -------------------------------- ------------------
<C> <S> <C>
/s/ PETER J. FOSTER President (Chief Executive September 3, 1996
- ----------------------------------- Officer) and Director
Peter J. Foster
/s/ KIM S. TERRY Vice President and Corporate September 3, 1996
- ----------------------------------- Secretary (Chief Financial and
Kim S. Terry Accounting Officer)
Chairman and Director September 3, 1996
- -----------------------------------
John B. Torkelsen
/s/ MELVYN J. GOODMAN Director September 3, 1996
- -----------------------------------
Melvyn J. Goodman
/s/ JOHN LUCAS-TOOTH Director September 3, 1996
- -----------------------------------
John Lucas-Tooth
/s/ NEAL J. ROBINSON Director September 3, 1996
- -----------------------------------
Neal J. Robinson
</TABLE>
II-7
<PAGE> 151
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- --------------- ------------------------------------------------------------------- ------------
<C> <S> <C>
2.2 -- Loan Agreement, dated as of July 9, 1996, between Voice
Processing Corporation and the Registrant, together with the
Revolving Credit Promissory Note attached as Exhibit A
thereto
5 -- Opinion of Crouch & Hallett, L.L.P.
8 -- Opinion of Crouch & Hallett, L.L.P. regarding tax matters
described in the Joint Proxy Statement/Prospectus
10.28 -- Employment and Consulting Agreement between Voice Processing
Corporation and Merrill Solomon.
23.1 -- Consent of BDO Seidman, LLP
23.2 -- Consent of Arthur Andersen LLP
99.1 -- Form of Voice Control Systems, Inc. proxy for Special
Meeting
</TABLE>
<PAGE> 1
EXHIBIT 2.2
LOAN AGREEMENT
This Loan Agreement, dated as of July 9, 1996 (this "Agreement"), is
by and between Voice Processing Corporation, a Delaware corporation
("Borrower"), and Voice Control Systems, Inc. ("Lender").
The parties hereto agree as follows:
1. Certain Definitions. As used herein, the following terms
shall have the following meanings:
(a) "Base Rate" shall mean, for any period, a fluctuating interest
rate per annum as shall be in effect from time to time, which rate shall be
equal to the rate of interest announced publicly by leading money center banks
as its "base" or "prime" rate as published in the Southwestern edition of The
Wall Street Journal.
(b) "Closing Date" shall mean the date on which the Initial Loan
is made pursuant to Section 2.1.
(c) "Highest Lawful Rate" shall mean, at the particular time of
determination, the maximum rate of interest which, under applicable law, Lender
is then permitted to charge with respect to the Loans.
(d) "Initial Loan" shall mean the Loan made on the Closing Date.
(e) "Lien" shall mean any claim, lien, mortgage, deed of trust,
security interest, pledge, charge, encumbrance or other right of a creditor to
have its claim satisfied out of any property or assets, or the proceeds
therefrom, prior to the general creditors of the owner thereof.
(f) "Loan" shall mean each extension of credit by Lender to
Borrower pursuant to Section 2.1 hereof, and "Loans" shall refer collectively
to each Loan.
(g) "Loan Papers" shall mean this Agreement (including the
provisions of the Merger Agreement incorporated herein), the Note and the
Security Agreement.
(h) "Maturity Date" shall mean (i) January 9, 1997, if the Merger
Agreement is not executed on or before July 31, 1996; (ii) the date of
termination of the Merger Agreement, if the Merger Agreement is terminated as
the result of a willful breach by Borrower; (iii) six months after the date of
termination of the Merger Agreement, if the Merger Agreement is terminated as
the result of Borrower's failure to satisfy any of the conditions set forth in
Sections 7.1, 7.2, 7.3, 7.5 or 7.10 of the Merger Agreement but not otherwise
constituting a willful breach of the Merger Agreement by Borrower; (iv) two
years after the date of termination of the Merger Agreement, if the Merger
Agreement is terminated as the result of the failure of Section 7.6 of the
Merger Agreement to have been satisfied or if the Merger Agreement is
terminated as the result of a breach of the Merger Agreement by Lender; and (v)
one year after the
<PAGE> 2
date of termination of the Merger Agreement, if the Merger Agreement is
terminated as the result of the failure of any other condition precedent to the
parties obligations thereunder to be satisfied.
(i) "Maximum Commitment" shall mean $750,000.
(j) "Merger Agreement" shall mean the Agreement and Plan of
Merger, by and between Borrower and Lender, substantially in the form of
Exhibit D hereto.
(k) "Security Agreement" shall mean that certain Security
Agreement, dated the date hereof and in the form of Exhibit C hereto, pursuant
to which substantially all assets of Borrower are being pledged to Lender to
secure payment of the Note.
(l) "Termination Date" shall mean the earlier of (i) the Maturity
Date or (ii) the date on which both (A) all amounts payable hereunder to Lender
shall have been paid in full and (B) Borrower has advised Lender in writing
that it has released Lender from its commitment to make Loans.
2. Revolving Credit Loans.
2.1. Revolving Credit Commitment. Subject to and upon the terms,
conditions, covenants and agreements contained in this Agreement, Lender agrees
to make Loans to Borrower, from time to time during the period from the date
hereof until the Termination Date in an aggregate amount not to exceed at any
time outstanding the Maximum Commitment; provided, however, that if the parties
fail to execute and deliver the Merger Agreement on or before July 31, 1996,
the obligation of Lender to make further loans shall be terminated on the
earlier of (i) the termination of negotiations related to the Merger Agreement
and (ii) July 31, 1996. The Loans will be evidenced by the promissory note
(the "Note") in the form attached hereto as Exhibit A, or any renewal thereof.
2.2. Making the Loans. Each Loan (other than the Initial Loan)
shall be made upon receipt of a notice given by Borrower to Lender not later
than five days prior to the date of the proposed Loan. Each such notice
("Notice of Advance") shall be substantially in the form of Exhibit B hereto
and shall be in an aggregate principal amount of not less than $25,000 or an
integral multiple of $5,000 in excess thereof. Each Notice of Advance shall be
irrevocable and binding on Borrower.
2.3. Repayment. Borrower shall repay the entire unpaid principal
amount of the Loans on the Maturity Date. Borrower shall have the right to
prepay without penalty the principal amount of any Loan, and accrued interest
thereon, at any time prior to the Maturity Date. All prepayments shall be
credited first to unpaid interest and then to unpaid principal.
2
<PAGE> 3
2.4. Interest. Borrower shall pay interest on the unpaid principal
amount of each Loan from and including the date thereof until the principal
amount shall be paid in full at the rate equal to the lesser of (i) the Highest
Lawful Rate or (ii) the Base Rate plus 2%; provided, however, that during the
continuance of an Event of Default, Loans shall bear interest, payable on
demand, equal to the lesser of (i) the Highest Lawful Rate or (ii) 15% per
annum. Interest shall be paid in full on the Maturity Date and each other date
on which the payment of principal has been made. All computations of interest
shall be made by Lender on the basis of a year of 365 days.
2.5. Place of Payment; Taxes. Any and all payments by Borrower
hereunder shall be made in U.S. dollars at the office of Lender set forth
herein (or as otherwise advised in writing by Lender), free and clear of and
without deduction for any and all present or future levies, deductions, stamp
or documentary taxes or similar charges or withholdings and all liabilities
with respect thereto (excluding taxes measured by the net income or capital of
Lender).
3. Conditions Precedent.
3.1. Conditions Precedent to Initial Loan. Except as may be waived
by Lender, the obligations of Lender to make the Initial Loan are subject to
the satisfaction of the conditions precedent that the Lender shall have
received on or before the Closing Date the following:
(a) The Note.
(b) A copy of the resolutions of the board of directors (or
equivalent governing body) of Borrower approving the Loan Papers, certified by
the Secretary of Borrower.
(c) The Security Agreement, duly executed by Borrower.
(d) A lien search respecting Borrower confirming that the Loans
would be secured by a first priority security interest in the assets of
Borrower.
3.2 Additional Conditions Precedent to Subsequent Loans. The
obligation of the Lender to make any Loan after the Initial Loan is subject to
the condition precedent that no Event of Default is continuing or would result
from any Loan being made on such date.
4. Representations and Warranties. To induce Lender to enter
into this Agreement, Borrower represents and warrants to Lender as follows:
3
<PAGE> 4
4.1. Organization and Good Standing of Borrower. Borrower is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware.
4.2. Power and Authority; Licenses. Borrower has the power and
authority and all licenses and permits required by governmental authorities to
own, lease and operate its properties and assets, to carry on its business as
currently being conducted, and to execute, deliver and perform the Loan Papers.
All of the agreements to which Borrower is a party and which are material to
the operations of the business as currently being conducted are in full force
and effect, and Borrower has complied with such agreements (or non-compliance
has been waived) in all material respects. No event has occurred which
(whether with or without notice, lapse of time or the happening or occurrence
of any other event) is reasonably likely to result in the revocation or
termination of any such license or authorization or the imposition of any
restriction of such a nature as might materially and adversely affect the
ownership or operation of Borrower's business as now conducted.
4.3. Binding Effect. Each of the Loan Papers to which Borrower is
a party has been duly authorized, executed and delivered by Borrower, and each
is the legal, valid and binding obligation of Borrower enforceable in
accordance with its terms except that (i) enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting creditors' rights and
(ii) the availability of equitable remedies may be limited by equitable
principles of general applicability.
4.4. Consents; Compliance with Other Instruments. As of the
Closing, Borrower will have obtained all consents, approvals and authorizations
from, and has made all filings with, each governmental instrumentality or other
agency required as a condition to the execution, delivery and performance of
the Loan Papers. Neither the execution and delivery of the Loan Papers by
Borrower nor the consummation by it of the transactions contemplated hereby and
thereby will violate, breach, be in conflict with, or constitute a default
under, or permit the termination or the acceleration of maturity of, or result
in the imposition of any Lien upon any property or asset of Borrower pursuant
to (i) Borrower's Certificate of Incorporation or Bylaws or (ii) any note,
bond, indenture, mortgage, deed of trust, evidence of indebtedness, loan or
lease agreement, other agreement or instrument, judgment, order, injunction, or
decree by which Borrower is bound, to which it is a party or to which its
assets are subject.
4.5. Merger Agreement. The representations and warranties of
Borrower set forth in the Merger Agreement are true and correct in all material
respects.
5. Covenants. From the date hereof until the Maturity Date,
Borrower covenants and agrees as follows:
4
<PAGE> 5
5.1. Merger Agreement Covenants. Borrower shall remain in
compliance with all of its covenants set forth in the Merger Agreement.
5.2. Maintenance of Properties. Borrower shall maintain and
preserve all of its material properties which are used or useful or necessary
in the conduct of its business in good working order and condition. Borrower
shall maintain such insurance with responsible and reputable insurance
companies in such amounts and covering such risks as is carried by companies
engaged in similar businesses or owning similar properties in the same general
areas in which Borrower operates. Borrower shall furnish to Lender from time
to time such information as may be requested as to such insurance. Upon the
request of Lender, Borrower shall also name Lender as an additional insured
with respect to such insurance and shall furnish to Lender an insurance
certificate or endorsement to such effect.
5.3. Maintenance of Priority of Lender's Liens. Borrower shall
perform such acts and duly authorize, execute, deliver, file and record such
additional documents and instruments as Lender may deem reasonably necessary or
appropriate to perfect and maintain the Liens in favor of Lender contemplated
by the Security Agreement as a first priority Lien in the assets of Borrower.
5.4. Use of Proceeds. The net proceeds of each loan shall be used
for working capital purposes only (which shall not include the repayment of
indebtedness of the Borrower other than trade payables).
6. Events of Default. Should any of the following events (each
of which is herein called an "Event of Default") occur, Borrower shall be in
default hereunder:
(a) If the repayment of principal and accrued interest is not made
when due hereunder;
(b) If Borrower shall fail to perform any of its obligations and
covenants in any of the Loan Papers and such default is not cured after 10
days' written notice;
(c) If Borrower's representations and warranties made hereunder
were untrue in a material respect when made; or
(d) If Borrower (X) (i) makes a general assignment for the benefit
of creditors; (ii) files a voluntary bankruptcy petition; (iii) becomes the
subject of an order for relief or is declared insolvent in any federal or state
bankruptcy or insolvency proceedings; (iv) files a petition or answer seeking
for Borrower a reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any law; (v) files an answer
or other pleading admitting or failing to contest the material allegations of a
petition filed against it in a proceeding of the type described in subclauses
(i) through (iv) of this clause (X); or (vi) seeks, consents to, or
5
<PAGE> 6
acquiesces in the appointment of a trustee, receiver, or liquidator of
Borrower's or of all or any substantial part of the Borrower's properties; or
(Y) has filed against it a proceeding seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution, or similar relief under
any law and 30 days have expired without dismissal thereof or with respect to
which, without the Borrower's consent or acquiescence, a trustee, receiver, or
liquidator of the Borrower or of all or any substantial part of the Borrower's
properties has been appointed and 30 days have expired without the
appointment's having been vacated or stayed, or 30 days have expired after the
date of expiration of a stay, if the appointment has not previously been
vacated.
7. Acceleration of Indebtedness. Upon the occurrence of an Event
of Default which is not waived by Lender, the entire unpaid amount of the Loans
shall be due and payable in full.
8. Miscellaneous.
(a) The headings, captions and arrangements used in the Loan
Papers, unless specified otherwise, for convenience only and shall not be
deemed to limit, amplify or modify the terms of the Loan Papers, nor affect the
meaning thereof.
(b) Any notice, consent, demand, request, approval or other
communication to be given hereunder by any party to another shall be deemed to
have been duly given if given in writing and personally delivered or sent by
overnight delivery service, telegram, facsimile transmission, telex or United
States mail, registered or certified, postage prepaid, with return receipt
requested, to the addresses of the parties set forth in the Merger Agreement.
Notice so given shall be in the manner provided in the Merger Agreement.
(c) The Loan Papers are intended to be performed in the State of
Texas, and the laws (other than conflict- of-laws provisions thereof) of such
State and of the United States of America shall govern the rights and duties of
the parties thereto and the validity, construction, enforcement and
interpretation of this Agreement, except to the extent otherwise specified
therein.
(d) If any provision in the Loan Papers is held to be illegal,
invalid or unenforceable, such provision shall be fully severable; the
applicable Loan Paper shall be construed and enforced as if such provision had
never comprised a part thereof; and the remaining provisions thereof shall
remain in full force and effect and shall not be affected by such provision or
by its severance therefrom.
(e) THE LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES OR
6
<PAGE> 7
ANY TERM SHEETS BETWEEN BORROWER AND LENDER (ALL THE TERMS AND CONDITIONS OF
WHICH ARE SUPERSEDED BY THE LOAN PAPERS). THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
(f) Except as otherwise specifically provided, the Loan Papers may
only be amended by an instrument in writing executed jointly by Borrower and
Lender and supplemented only by documents delivered or to be delivered in
accordance with the express terms thereof.
(g) This Agreement may be executed in a number of identical
counterparts, each of which shall be deemed an original for all purposes and
all of which constitute, collectively, one agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
VOICE PROCESSING CORPORATION
By:
-------------------------------------
VOICE CONTROL SYSTEMS, INC.
By:
-------------------------------------
7
<PAGE> 8
EXHIBIT A
REVOLVING CREDIT PROMISSORY NOTE
July 9, 1996
FOR VALUE RECEIVED, the undersigned, Voice Processing Corporation
("Maker"), promises to pay to the order of Voice Control Systems, Inc.
("Payee"), at such place as the holder hereof may designate from time to time,
in lawful money of the United States of America, Loans in an aggregate amount
not to exceed at any one time outstanding the "Maximum Commitment" set forth
under the hereinafter defined Agreement or under the other Loan Papers,
together with interest, as hereinafter described.
This Revolving Credit Promissory Note evidences Loans made pursuant
to, and has been executed and delivered under, and is subject to the terms and
conditions of, that certain Loan Agreement (as hereafter amended, modified,
supplemented, renewed, extended, restated, substituted or replaced, the
"Agreement") dated as of July 9, 1996, between Maker and Payee. Unless
otherwise defined herein or unless the contexts hereof requires, each term used
herein with its initial letter capitalized has the meaning given to such term
in the Agreement. Reference is made to the Agreement and the other Loan Papers
for certain provisions affecting this Revolving Credit Note, including those
relating to the security for the payment hereof.
Principal of and interest on this Revolving Credit Promissory Note
shall be due and payable in the manner specified in the Agreement. Maker may
prepay the full amount or any part of this Note at any time and from time to
time without notice and without the payment of any premium, fee, or penalty.
All payments due to Lender hereunder shall be made at the place, in
the type of money and funds, and in the manner specified in the Agreement.
If this Note or any instrument securing the payment of this Note is
given to an attorney for collection or enforcement, or if suit is brought for
collection or enforcement, or if it is collected or enforced through probate,
bankruptcy, or other judicial proceeding, then Maker shall pay Payee all costs
of collection and enforcement, including reasonable attorneys' fees and court
costs, in addition to other amounts due.
Except as set forth herein, the Maker expressly waives all notices,
demands for payment, presentations for payment, notices of intention to
accelerate maturity, protest and notice of protest, and any other notices of
any kind as to this Note and as to each, every and all installments or part
payments thereof.
It is the intention of the parties to comply with all applicable laws.
Accordingly, it is agreed that, notwithstanding any provisions to the contrary
in this Note, interest
<PAGE> 9
on the debt evidenced by this Note shall not exceed the maximum amount of
nonusurious interest that may be contracted for, taken, reserved, charged or
received under law; any interest in excess of that maximum amount shall be
credited on the principal of the debt or, if that has been paid, refunded. On
any acceleration or required or permitted prepayment, any such excess shall be
cancelled automatically as of the acceleration or prepayment or, if already
paid, credited on the principal of the debt or, if the principal of the debt
has been paid, refunded. This provision overrides and supersedes other
provisions in this and all other instruments concerning the debt. It is
further agreed that, without limitation of the foregoing, all calculations of
the rate of interest contracted for, charged, or received under this Note which
are made for the purpose of determining whether such rate exceeds the maximum
lawful rate of interest shall be made, to the extent permitted by applicable
law, by amortizing, prorating, allocating, and spreading in equal parts during
the period of the full term of the indebtedness evidenced hereby all interest
at any time contracted for, charged, or received from Maker or otherwise by the
holder or holders hereof in connection with such indebtedness.
THIS REVOLVING PROMISSORY CREDIT NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AND THE LAWS
(OTHER THAN CONFLICT OF LAWS PROVISIONS THEREOF) OF SUCH STATE AND OF THE
UNITED STATES OF AMERICA SHALL GOVERN THE RIGHTS AND DUTIES OF THE PARTIES
HERETO AND THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
REVOLVING CREDIT PROMISSORY NOTE.
EXECUTED as of the day and year first above written.
MAKER:
Voice Processing Corporation
By:
-------------------------------------
2
<PAGE> 1
EXHIBIT 5
CROUCH & HALLETT
A REGISTERED LIMITED LIABILITY PARTNERSHIP
ATTORNEYS AND COUNSELORS
717 N. HARWOOD
SUITE 1400
DALLAS, TEXAS 75201
WRITER'S DIRECT DIAL NUMBER (214) 953-0053 TELECOPY - (214) 953-3154
(214) 953-0053
September 4, 1996
Voice Control Systems, Inc.
14140 Midway Road, Suite 100
Dallas, Texas 75244
Gentlemen:
We have served as counsel for Voice Control Systems, Inc. a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-4 covering the issuance of shares (the "Shares") of Common Stock, $.01
par value, of the Company in connection with the merger of Voice Processing
Corporation ("VPC") with and into the Company. As a result of such merger, the
shares of capital stock of VPC will be converted into the right to receive
Shares, as more fully described in the Agreement and Plan of Merger, dated as of
June 17, 1996 (the "Merger Agreement"), to which the Company and VPC are
parties.
We have examined such documents and questions of law as we have deemed
necessary to render the opinion expressed below. Based upon the foregoing, we
are of the opinion that the Shares, when issued and delivered in connection with
the terms of the Merger Agreement, will be duly and validly issued, fully paid
and non-assessable.
We consent to the use of this opinion as Exhibit 5 to the Registration
Statement.
Very truly yours,
<PAGE> 1
EXHIBIT 8
CROUCH & HALLETT
A REGISTERED LIMITED LIABILITY PARTNERSHIP
ATTORNEYS AND COUNSELORS
717 N. HARWOOD
SUITE 1400
DALLAS, TEXAS 75201
WRITER'S DIRECT DIAL NUMBER (214) 953-0053 TELECOPY - (214) 953-3154
(214) 953-0053
September 4, 1996
Voice Control Systems, Inc.
14140 Midway Road
Dallas, Texas 74244
Gentlemen:
This will confirm that we have advised Voice Control Systems, Inc. (the
"Company") with respect to certain federal income tax aspects of the proposed
merger of Voice Processing Corporation ("VPC") into the Company. Such advice
formed the basis for the descriptions of the selected federal income tax
consequences of the proposed merger appearing under the captions "Summary of
Proxy Statement/Prospectus -- Federal Income Tax Consequences" and "The
Merger -- Federal Income Tax Consequences" in the Proxy Statement/Prospectus
included in the Registration Statement on Form S-4 (the "Registration
Statement"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. Such description does not purport to discuss
all possible federal income tax ramifications of the proposed merger. With
respect to the tax consequences which are discussed under the captions "Summary
of Proxy Statement/Prospectus -- Federal Income Tax Consequences" and "The
Merger -- Federal Income Tax Consequences" in the Proxy Statement/Prospectus, we
are of the opinion that the discussion correctly states the material federal
income tax consequences of the proposed merger to the stockholders of VPC and
the applicable principles of existing law.
We consent to the use of this letter as an exhibit to the Registration
Statement. By giving such consent, we do not thereby admit that we are experts
with respect to this letter, as that term is used in the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
<PAGE> 1
EXHIBIT 10.28
EMPLOYMENT AND CONSULTING AGREEMENT
AGREEMENT made as of July 1, 1996 between VOICE PROCESSING CORPORATION
(hereinafter called "VPC") and MERRILL SOLOMON (hereinafter called "Solomon").
WHEREAS, Solomon is Chief Executive Officer of VPC and has served VPC
continuously during the past thirteen years as its principal executive officer;
and
WHEREAS, Solomon's leadership and services have constituted a major factor
in the successful growth and development of VPC; and
WHEREAS, VPC wishes to employ and retain the unique experience, ability and
services of Solomon as a principal executive officer and to retain his services
in an advisory and consulting capacity and to prevent any other competitive
business from securing his services and obtaining the benefit of his experience,
background and expertise.
NOW THEREFORE, in consideration of the premises and of the mutual promises
of the parties, it is agreed as follows:
1. Employment.
(a) Executive Employment. VPC hereby employs Solomon and Solomon
hereby accepts employment as the principal executive of VPC until June
30, 1999 ("Executive Employment"). After January 31, 1997, however, VPC
may at any time terminate Solomon's Executive Employment on ten (10)
days prior written notice to the Solomon.
(b) Advisory Period. If Solomon's Executive Employment is
terminated as provided in Paragraph (a) above, VPC shall retain him as
an advisor and consultant until June 30, 1999 ("Advisory Period").
Notwithstanding the foregoing, in the event that there is a Transfer of
Business, as hereinafter defined in Paragraph 12 below, this Agreement
shall terminate eighteen (18) months after the date of the Transfer of
Business.
2. Compensation.
(a) Salary. VPC shall pay Solomon an annual salary of One Hundred Twenty
Thousand Dollars ($120,000.00) payable in equal semi-monthly installments during
the period of Executive Employment and the Advisory Period. No deduction shall
be made by VPC from payments or benefits to Solomon under this Paragraph 2 for
any compensation which Solomon earns from other employment or for moneys he
otherwise receives subsequent to the period of Executive Employment.
(b) Benefits. During the term of this Agreement, Solomon shall receive
hospitalization and medical insurance for Solomon and his family at no cost to
Solomon or his family for insurance premiums. In addition, during the period of
Executive Employment, Solomon shall have the right to participate in any
employee benefit, stock option or profit sharing plan offered to other employees
of VPC.
3. Duties.
(a) Executive Employment. During the Executive Employment period
Solomon is engaged as Chief Executive Officer of VPC to supervise and
direct all operations of VPC. If, however, in the event of a Transfer of
Business, as hereinafter defined in Paragraph 12 below, Solomon may be
given other, but appropriate for his status, responsibilities. Except as
expressly provided herein, Solomon shall devote his full time,
attention, and energies to the business of VPC, and shall not be engaged
in any other business activity whether or not such business activity is
pursued for gain, profit or other pecuniary advantage which would
interfere with his obligations hereunder; but this shall not be
construed as preventing Solomon from investing his assets in such form
or manner as will not require a material amount of time on the part of
Solomon in the operation of the affairs of the companies in
<PAGE> 2
which such investments are made or preventing Solomon from serving as a
director of any such company.
(b) Advisory Period. During the Advisory Period, Solomon shall
perform all consulting and advisory services that VPC may reasonably
request and Solomon shall be available to advise and counsel VPC's
officers and directors at all reasonable times by telephone, mail, or in
person. Provided, however, Solomon may not be required to provide more
than four (4) hours per week in rendering such consulting and advisory
services. Solomon's failure to render such services or to give such
advice and counsel due to illness or other incapacity shall not affect
his right to receive compensation. Solomon, without his consent, shall
not be required to render advisory services at any place other than the
Washington, D.C. metropolitan area, or the city of his residence if he
moves out of said area.
4. Working Facilities. During the period of Executive Employment,
Solomon shall be furnished with an office and such other facilities and
services suitable to his position and adequate for the performance of his
duties both in Cambridge, Massachusetts and in the Washington, D.C.
metropolitan area (the "Washington Office"). During the Advisory Period
Solomon shall have the exclusive use of the Washington Office; however, the
rent for the Washington Office will be paid by VPC. VPC, at no cost or
expense to Solomon, shall transfer to Solomon all of the office furniture
and office equipment in the Washington Office at the beginning of the
Advisory Period.
5. Expenses. During the term of his Executive Employment, Solomon is
authorized to incur reasonable expenses for the operation of the Washington
Office and for promoting the business of VPC and providing consulting
services, including expenses for entertainment, travel, and similar items.
VPC will reimburse Solomon for all such expenses upon the presentation by
Solomon, from time to time, of an itemized account of such expenditures.
During the Advisory Period, Solomon may incur expenses if requested to do
so by the Chief Executive Officer and such expenses will be reimbursed to
Solomon by VPC upon the presentation by Solomon, from time to time, of an
itemized account of such expenditures.
6. Vacations. During the period of Executive Employment Solomon shall
be entitled each year to a vacation in accordance with VPC's standard
vacation policy, during which time his compensation and benefits shall be
paid in full. All vacations shall be at a time agreed upon by VPC and
Solomon.
7. Disability or Death. Solomon shall receive full compensation for
any period of illness or incapacity during the term of this Agreement. If
Solomon dies during the term of this Agreement, full compensation payments
shall continue and such payments shall be made to Solomon's widow, or, if
she does not survive him, to his estate.
8. Termination. VPC may terminate this Agreement for cause only. For
purposes hereof, "for cause" shall mean Solomon's fraud, misappropriation
or embezzlement of funds or conviction of a crime involving moral turpitude
or Solomon's failure to comply with the provisions of this Agreement. In
the event VPC wishes to terminate this Agreement for cause, it shall give
Solomon thirty (30) days written notice stating the reason for such
termination.
9. Restrictive Covenant. For a period of eighteen (18) months after
the date of the termination of the period of Solomon's Executive
Employment, Solomon will not, within the Continents of North America and
Europe, directly or indirectly, own, manage, operate, control, be employed
by, participate in, or be connected in any manner with the ownership,
management, operation, or control of any business similar to the type of
business conducted by VPC at the time of the termination of this Agreement.
Notwithstanding the foregoing, if VPC shall breach this Agreement, then the
previous sentence shall be null and void. VPC and Solomon agree that the
Employee Agreement dated December 16, 1987 made by VPC and Solomon, a copy
of which is attached hereto, shall be amended by deleting Paragraph 4 and
that except as so modified the Employee Agreement shall remain in full
force and effect.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing, and if sent by certified or
registered mail to his residence in the case of Solomon, or to its
principal office in the case of VPC.
2
<PAGE> 3
11. Waiver of Breach. The waiver by VPC of a breach of any provision
of this Agreement by Solomon shall not operate or be construed as a waiver
of any subsequent breach by Solomon.
12. Binding Effect. This Agreement shall inure to the benefit of, and
be binding upon, VPC, its successors and assigns, including, without
limitation, any person, or corporation which may acquire substantially all
of the assets or business of VPC or with or into which VPC may be
consolidated, merged or otherwise combined ("Transfer of Business").
13. Entire Agreement. This instrument contains the entire agreement of
the parties. It may not be changed orally but only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification,extension or discharge is sought.
IN WITNESS WHEREOF, the parties have executed this Agreement as of July 1,
1996.
ATTEST: VOICE PROCESSING CORPORATION
- ---------------------------- By:
Eugene G. Horowitz --------------------------
Assistant Secretary
(Corporate Seal) -----------------------------
MERRILL SOLOMON
3
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated February 22, 1996
relating to the financial statements of Voice Control Systems, Inc. appearing in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
September 3, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 3, 1996
<PAGE> 1
EXHIBIT 99.1
PROXY
VOICE CONTROL SYSTEMS, INC.
the undersigned hereby (a) acknowledges receipt of the Notice of the
Special Meeting of Stockholders of Voice Control Systems, Inc. (the "Company")
to be held on October __, 1996, at 10:00 a.m., local time, and the Joint Proxy
Statement/Prospectus in connection therewith, and (b) appoints Peter J. Foster
and _____________, and each of them, his proxies with full power of
substitution and revocation, for and in the name, place and stead of the
undersigned, to vote upon and act with respect to all of the shares of Common
Stock of the Company standing in the name of the undersigned or with respect to
which the undersigned is entitled to vote and act at such meeting or at any
adjournment thereof, and the undersigned directs that his proxy be voted as
follows:
PROPOSAL TO APPROVE THE MERGER OF VOICE PROCESSING CORPORATION WITH AND INTO
THE COMPANY AND TO ADOPT THE RELATED AGREEMENT AND PLAN OF MERGER.
__ FOR __ AGAINST __ ABSTAIN
PROPOSAL TO APPROVE THE AMENDMENT TO THE 1992 STOCK OPTION PLAN OF VOICE
CONTROL SYSTEMS, INC. TO INCREASE THE SHARES ISSUABLE UNDER THE PLAN FROM
900,000 TO 1,300,000.
__ FOR __ AGAINST __ ABSTAIN
If more than one of the proxies listed on the reverse side shall be
present in person or by substitute at the meeting or any adjournment thereof,
the majority of said proxies so present and voting, either in person or by
substitute, shall exercise all of the powers hereby given.
<PAGE> 2
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE NAMED PROPOSALS.
The undersigned hereby revokes any proxy or proxies heretofore given to
vote upon or act with respect to such stock and hereby ratifies and confirms
all that said proxies, their substitutes, or any of them, may lawfully do by
virtue hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY.
Dated:
--------------------------------
---------------------------------------
Signature
---------------------------------------
(Signature if held jointly)
Please date the proxy and sign your name
exactly as it appears hereon. Where
there is more than one owner, each
should sign. When signing as an
attorney, administrator, executor,
guardian or trustee, please add your
title as such. If executed by a
corporation, the proxy should be signed
by a duly authorized officer. Please
sign the proxy and return it promptly
whether or not you expect to attend the
meeting. You may nevertheless vote in
person if you do attend.
