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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1996
REGISTRATION NO. 33-64835
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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
VOICE CONTROL SYSTEMS, INC.
(Exact name of issuer as specified in its charter)
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DELAWARE 7372 75-1707970
(State or other jurisdiction Primary Standard Industrial (I.R.S. Employer
of incorporation or
organization)................ Classification Code Number Identification No.)
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14140 MIDWAY ROAD, SUITE 100
DALLAS, TEXAS 75244
(214) 386-0300
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices and principal place of business)
PETER J. FOSTER, PRESIDENT
VOICE CONTROL SYSTEMS, INC.
14140 MIDWAY ROAD, SUITE 100
DALLAS, TEXAS 75244
(214) 386-0300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
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ROBERT E. NEIMAN, ESQUIRE STUART M. CABLE, ESQUIRE
DICKINSON, WRIGHT, MOON, VAN DUSEN & FREEMAN GOODWIN, PROCTER & HOAR
225 W. WASHINGTON, SUITE 400 EXCHANGE PLACE
CHICAGO, IL 60606 BOSTON, MA 02109-2881
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The Prospectus contained in this Registration Statement relates also to the
Registration Statements on Form S-2 (No. 33-47692) and Form S-4 (No. 33-77658)
of the Registrant, and is intended to be the combined prospectus referred to in
Rule 429 under the Securities Act of 1933, as amended. Such Registration
Statements on Forms S-2 and S-4 are accordingly amended to reflect the
information contained herein.
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED(1) SHARE(2) PRICE(1)(2) FEE(3)
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Common Stock
$.01 par value............ 299,000 $7.875 $2,354,625 $811.87
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(1) Includes shares of Common Stock which may be purchased by the Underwriters
to cover over-allotments, if any. These shares are in addition to the
2,541,500 shares covered by the Registration Statement filed on December 8,
1995.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee and based on the closing price per share on January 9,
1996.
(3) A registration fee of $7,996.32 was paid on filing of the Registration
Statement on December 8, 1995.
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 SECTION 8(A) OF THE
SECURITIES ACT OF 1933, MAY DETERMINE.
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CROSS REFERENCE SHEET
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LOCATION OR CAPTION
ITEM NUMBER OF FORM SB-2 IN PROSPECTUS
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1. Front of Registration Statement and Outside
Front Cover Page of Prospectus........... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Not Applicable
6. Dilution................................... Not Applicable
7. Selling Security-Holders................... Principal and Selling Stockholders
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Legal Proceedings.......................... Business--Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons...................... Management
11. Security Ownership of Certain Beneficial
Owners and Management.................... Principal and Selling Stockholders
12. Description of Securities.................. Outside Front Cover Page; Description of
Capital Stock
13. Interest of Named Experts and Counsel...... Experts; Legal Matters
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Description of Capital Stock--Limitation of
Liability and Indemnification of
Directors and Officers; Underwriting;
Part II
15. Organization Within Last Five Years........ Not Applicable
16. Description of Business.................... Business
17. Management's Discussion and Analysis or
Plan of Operation........................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property.................... Business--Facilities
19. Certain Relationships and Related
Transactions............................. Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters...................... Outside Front Cover Page; Price Range of
Common Stock and Dividend Policy;
Description of Capital Stock
21. Executive Compensation..................... Management--Executive Compensation
22. Financial Statements....................... Financial Statements
23. Changes in and Disagreement with
Accountants on Accounting and Financial
Disclosure............................... Change in Registrant's Certifying
Accountant
24. Indemnification of Directors and
Officers................................. Description of Capital Stock--Limitation of
Liability and Indemnification of
Directors and Officers; Part II
25. Other Expenses of Issuance and
Distribution............................. Part II
26. Recent Sales of Unregistered Securities.... Part II
27. Exhibits................................... Part II; Exhibits
28. Undertakings............................... Part II
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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
PRELIMINARY PROSPECTUS DATED JANUARY 16, 1996
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2,470,000 SHARES
VOICE CONTROL SYSTEMS, INC. LOGO
COMMON STOCK
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The 2,470,000 shares of Common Stock offered hereby consist of (i) 1,251,533
shares being sold by the Company, (ii) 200,117 shares being sold by certain of
the selling securityholders named herein (the "Selling Stockholders") and (iii)
1,018,350 shares (the "Option Shares") resulting from the exercise of options
(the "Options") to be sold by certain Selling Stockholders to the Underwriters
in connection with the offering. The Company will not receive any of the
proceeds from the sale of shares or Options by the Selling Stockholders or from
the sale of Option Shares, except that the Company will receive the proceeds
from the exercise of the Options. See "Principal and Selling Stockholders."
The Company's Common Stock is traded on the American Stock Exchange/Emerging
Company Marketplace under the symbol VPS.EC. On January 9, 1996, the closing
sales price for the Common Stock as quoted on such exchange was $7.875. The
Common Stock has been approved for listing on The Nasdaq National Market under
the symbol "VCSI," subject to official notice of issuance.
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. FOR A SUMMARY OF
CERTAIN FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS TO
TITLE OF EACH CLASS OF PRICE TO UNDERWRITING PROCEEDS TO SELLING
SECURITIES TO BE REGISTERED PUBLIC DISCOUNTS(1) COMPANY(2) STOCKHOLDERS(3)
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Per Share.............................. $ $ $ $
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Total(4)............................... $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $275,000. The
total proceeds to the Company set forth above exclude an aggregate of
$1,068,342 to be received upon exercise of the Options, as well as proceeds
from the exercise of other options or warrants by Selling Stockholders in
connection with the delivery by them of shares.
(3) The proceeds to each Selling Stockholder will equal (i) for each share sold
by such Selling Stockholder, $ and (ii) for each Option Share sold
that is attributable to an Option sold to the Underwriters by such Selling
Stockholder, an amount equal to $ minus the exercise price paid by
the Underwriters to acquire such Option Share.
(4) The Company has granted to the Underwriters a 30-day option to purchase up
to 220,500 additional shares of Common Stock and a Selling Stockholder has
granted to the Underwriters a 30-day option to purchase up to 150,000
additional shares of Common Stock solely to cover over-allotments, if any.
If all such shares are purchased, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
------------------------------
The shares of Common Stock are offered by the Underwriters subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996 in New York, New York. See
"Underwriting."
FIRST ALBANY CORPORATION FIRST ANALYSIS SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1996.
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(VCS logo) pioneering R&D * The first speaker-independent telephone speech recognizer PC board
efforts have produced a number of * The first speaker-independent cellular telephone voice dialer
commercial firsts in speech recognition. * The first alphabet speech recognizer
The Company's technologies are * The first simultaneous speaker-independent speech recognizer and
incorporated in the products and speaker verification system.
services listed below.
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One photograph of a satellite dish labeled Telecommunications
One photograph of a person in an automobile holding a cellular phone labeled
Consumer Electronics/Automotive
One photograph of a person sitting in front of a computer with a microphone
labeled Desktop Computing.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is not intended to be complete and is qualified in its
entirety by reference to more detailed information contained elsewhere in this
Prospectus or incorporated herein by reference. Except as otherwise noted,
references to "VCS" or the "Company" shall mean Voice Control Systems, Inc. and
its predecessors.
THE COMPANY
The Company 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. The Company'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. The Company'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.
The Company entered the speech recognition industry in 1978 and began commercial
sales in 1986. The Company believes that it offers the speech industry's widest
selection of speech recognition and speaker verification products and vocabulary
libraries. The Company's technology is now used in a broad range of commercial
applications in the telecommunications market, with more than 300,000 speech
recognizers installed in 30 countries in a wide variety of applications
including: voice dialing, such as AT&T Wireless Services' VoiceTouchTM;
automated operator services, such as 1-800-COLLECTTM; interactive travel
information access, such as Lufthansa's flight information system and the Hong
Kong Railways' train information system; government services, such as Revenue
Canada's social service information system; telephone order entry, such as Amway
Home Products' automated order service; and telephone banking, such as that
provided by National Westminster Bank, Ltd. in the United Kingdom. The Company's
technology is also used in the desktop computing and consumer electronics
industries. For example, Micronics Computers, Inc. uses the Company's technology
in its Orchid TechnologyTM brand sound board products for multimedia personal
computers, and OKI telecom, a division of OKI America, Inc. ("OKI Telecom"), and
Hughes Network Systems use the Company's technology in their voice-activated
cellular telephones. The Company believes that it has the largest installed base
of speaker-independent speech recognizers in the industry.
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, together with increased public familiarity with computer automated
devices, speech recognition is now an accepted feature of many
telecommunications applications. The Company believes that the acceptance and
use of speech recognition technology in the telecommunications, desktop
computing and consumer electronics industries will occur at an accelerated rate
for the foreseeable future. Given the Company's practical experience as a leader
in developing and commercializing speech recognition technology in
telecommunications and the quality and breadth of its current technology, the
Company believes that it is well positioned to continue to participate in the
growth of speech recognition in the telecommunications market while expanding
into the desktop computing and consumer electronics markets.
The Company provides a wide range of technologies so that systems integrators
and OEMs can select the appropriate functionality and cost for a particular
application. Such technologies include "speaker-independent" recognition, which
can recognize words from any speaker; "speaker-dependent" recognition, which can
recognize words from a user-defined vocabulary; and "speaker verification",
which enables a computer to confirm the identity of a speaker.
Speaker-independent recognition is available in "discrete" input, in which the
spoken words are separated by pauses, or "continuous" input, in which the words
are spoken naturally. Because the Company's technology incorporates a
proprietary phonetic approach, it is adaptable to any language, capable of
operating on low cost processors and usable in a wide variety of environments
from quiet
3
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offices to noisy automotive interiors. The Company has built the industry's
largest "off the shelf" vocabulary offering with speaker-independent, discrete
digit vocabularies available for telecommunications applications in 45
languages. VCS also develops custom vocabularies for its customers to support
their particular needs.
The Company supplies its technology to many of the leading telecommunications
systems integrators in the voice processing industry and large OEMs, including
Dialogic Corporation, InterVoice, Inc., Brite Voice Systems, Inc., Periphonics
Corporation, Hughes Network Systems, Inc. and OKI Telecom. Customers either
license the Company's software technology or purchase hardware components from
the Company that incorporate such software.
The Company's strategy is to capitalize on the technical knowledge and practical
experience it has gained in applying its core speech recognition technologies in
the telecommunications industry to:
- Maintain leadership in the application of speech recognition technology
in the telecommunications industry
- Diversify its markets to include consumer electronics and desktop
computer applications
- Improve the man-machine interface
- Emphasize software license revenues
- Develop end user voice dialer products
- Expand its international presence
The Company's pioneering research and development efforts have resulted in what
the Company believes to be a number of commercial firsts in speech recognition,
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 speech
recognizer; and (v) the first simultaneous speaker-independent speech recognizer
and speaker verification system. The Company continues to develop hardware and
software products that it believes will accelerate the use of speech recognition
technology in new and existing applications.
THE OFFERING
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Common Stock offered by the Company........ 1,251,533 shares
Common Stock offered by the
Selling Stockholders..................... 1,218,467 shares(1)
Common Stock to be outstanding after
the offering............................. 6,734,086 shares(2)
Use of Proceeds............................ To develop and market new technology and products
and enhancements to existing technology and
products; to acquire technology complementary to
its existing technology; to redesign certain of
its products to enable the Company to achieve a
lower cost; and to provide working capital.
AMEX symbol................................ VPS.EC
Nasdaq National Market symbol(3)........... VCSI
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(1) Includes 1,000,000 shares owned by Dialogic or issuable upon the exercise of
options owned by Dialogic. See "Risk Factors--Dialogic Relationship,"
"Principal and Selling Stockholders" and "Certain Relationships--Dialogic
Relationship."
(2) Based on the number of shares outstanding on December 31, 1995 after giving
effect to the exercise of options and warrants which will be exercised in
connection with the offering. Excludes, as of December 31, 1995, 1,132,147
shares of Common Stock issuable upon the exercise of stock options
outstanding, 158,354 additional shares reserved for issuance pursuant to the
Company's stock option plan, 252,000 additional shares issuable upon the
exercise of outstanding warrants and 1,302,365 shares issuable upon
conversion of debt. If all outstanding options and warrants were exercised
and the convertible debt converted, there would be 9,578,952 shares of
Common Stock outstanding after the offering.
(3) The Common Stock has been approved for listing on The Nasdaq National
Market, subject to official notice of issuance.
4
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SUMMARY FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
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1993 1994 1994 1995
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STATEMENT OF OPERATIONS DATA:
Sales........................................ $7,052 $ 6,334 $ 4,182 $7,840
Net income................................... $1,880 $(6,599)(2)(3) $(3,988)(2) $ 681
Earnings per share........................... $ .52 $ (2.29)(2)(3) $ (1.57)(2) $ .10
Weighted average shares...................... 3,750 2,881 2,545 6,754
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SEPTEMBER 30, 1995
DECEMBER 31, -------------------------
1994 ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Working capital......................................... $1,673 $3,090 $ 13,431
Total assets............................................ $3,030 $4,290 $ 14,631
Long-term debt.......................................... $1,175 $1,162 $ 1,162
Stockholders' equity.................................... $1,008 $2,412 $ 12,753
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(1) The Company was founded in September 1978 and was organized as a Texas
corporation in May 1980. The Company reincorporated as a Delaware
corporation in January 1981 under the name "Scott Instruments Corporation"
("Scott"). Effective August 11, 1994, VCS Industries, Inc., an Illinois
corporation ("Industries"), merged into the Company whereupon the Company
changed its name to Voice Control Systems, Inc. (the "Merger"). After the
Merger, security holders of Industries owned, assuming the exercise of all
outstanding rights to purchase Common Stock, 76% of the outstanding Common
Stock of the Company and designees of Industries accounted for a majority
of the Company's Board of Directors. The Merger was accounted for as a
reverse acquisition and therefore all financial information (except for
stock prices) included herein for periods prior to the Merger is that of
Industries.
(2) Includes $3,508 of acquired research and development expensed in connection
with the Merger.
(3) Includes $2,744 of goodwill acquired in the Merger and subsequently written
off.
(4) Adjusted to give effect to the sale of 1,251,533 shares of Common Stock
offered by the Company hereby (at an assumed price of $7.875 per share,
after deduction of the estimated underwriting discount and offering
expenses payable by the Company) and the exercise of options and warrants
for 1,119,663 shares of Common Stock currently held by Selling Stockholders
(which shares are being offered hereby) and the exercise of options and
warrants for 136,571 shares exercised after September 30, 1995 and prior to
the date of this Prospectus.
Except as otherwise specified, all information in this Prospectus reflects stock
splits and recapitalizations effected prior to the date of this Prospectus and
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
The principal executive offices of the Company are located at 14140 Midway Road,
Suite 100, Dallas, Texas 75244, and its telephone number is (214) 386-0300.
Posi-Ident(R) is a registered trademark, and VRSoftTM, Cut-ThruTM,
GoodListenerTM, SpeechPrint IDTM and QuikVoiceTM are trademarks of the Company.
All other trademarks or service marks appearing in this Prospectus are
trademarks of the respective companies who own them.
5
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RISK FACTORS
In addition to other information contained in this Prospectus, investors should
carefully consider the following factors relating to the Company and its
business.
HISTORY OF LOSSES
The Company has recorded cumulative losses of approximately $8.8 million through
December 31, 1994. These losses reflect the results of operations of Industries
prior to the Merger and losses incurred by the Company after the Merger. In
addition, Industries' predecessors incurred losses. The Company realized net
income of approximately $681,000 for the nine months ending September 30, 1995;
however, there can be no assurance that the Company will continue to generate
profits. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RELIANCE ON MAJOR CUSTOMERS
The Company is dependent to a significant extent on sales to certain customers.
Four of the Company's customers, Dialogic Corporation ("Dialogic"), InterVoice,
Inc. ("InterVoice"), Brite Voice Systems, Inc. ("Brite") and Periphonics
Corporation ("Periphonics") collectively accounted for 81% and 74% of the
Company's revenue in 1993 and 1994, respectively. For the nine month period
ended September 30, 1995, Dialogic and Periphonics accounted for 60% and 10% of
the Company's revenues, 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 the Company in selling its products to Dialogic, InterVoice, Brite
and Periphonics for incorporation into their products is critical to a strategy
which takes advantage of the Company's telephone-based speech recognition
capabilities. If any of Dialogic, InterVoice, Brite or Periphonics should fail
to use the Company as its principal supplier of speech recognition, the
Company's revenue and earnings could be materially negatively affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--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, AntaresTM, for use in its recently introduced SCSATM
product line. VCS's Antares Software is currently in beta test for certain
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 the Company's competitors
available as an alternative to VCS's technology in systems using the SCSA
architecture. In addition, under the new architecture, the Company'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 the Company's sales and profitability through the Dialogic
distribution channel. See "Business--Products and Services--Telecommunications
Products." In addition, through a wholly owned subsidiary, Dialogic beneficially
owns approximately 37% of the Company's Common Stock and will beneficially own
approximately 18% after completion of this offering. Through such subsidiary,
Dialogic is also a creditor of the Company and has a security interest in the
use of the Company's technology. As a result of these relationships, Dialogic
has the ability to influence the business and affairs of the Company and to
otherwise affect the outcome of certain actions that require stockholder
approval, including the adoption of amendments to the Company's Certificate of
Incorporation, mergers, sales of assets and other business acquisitions or
dispositions. Furthermore, dispositions of Common Stock by Dialogic beyond this
offering may adversely affect the market price of the Common Stock. See "Certain
Relationships and Related Transactions--Dialogic Relationship" and "Principal
and Selling Stockholders."
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DEVELOPMENT OF MARKETS REQUIRED FOR SUCCESSFUL PERFORMANCE BY THE COMPANY
The market for speech recognition is relatively new. The financial performance
of the Company will depend, in part, on the future development, growth and
ultimate size of this market. The Company'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 the Company'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 the Company. See "Business--The Speech
Recognition Market."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's sales and profitability may vary significantly from quarter to
quarter due to a variety of factors, including the Company's dependence upon a
small number of customers, timing of customer orders, and changes in the
Company's product and customer mix. The Company typically operates with
relatively little backlog and substantially all of its revenues in each quarter
results from orders and royalty payments received in that quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON SALES BY THIRD PARTIES
Since the Company generally does not sell its technology directly to end users,
the Company's revenues are dependent upon the ability of systems integrators and
OEMs to develop and sell systems that incorporate the Company's technology.
Factors that adversely affect the revenues of the Company's OEM and systems
integrator customers, such as economic conditions, patent positions, their
technology and other marketing restrictions, may have a substantial impact upon
the Company's financial results. No assurances can be given that the Company's
OEM and systems integrator customers will continue to use the Company as a
supplier of speech recognition technology or that customers of the Company will
not experience financial or other difficulties that will adversely affect their
revenues and, in turn, the results of operations and financial condition of the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sales and Marketing."
TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT THE COMPANY
The speech recognition field and the voice and communications industry in which
the Company operates are characterized by rapid technological change. The
development of new technology by the Company's competitors may render the
Company's technology obsolete. Competition in the field of speech recognition is
based largely on technological superiority. Accordingly, the success of the
Company 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 the Company 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 the Company's
operations. See "Business--The Speech Recognition Market" and "--Technology
Development."
COMPETITION
Competition in all areas of the Company's business is substantial and is
expected to increase. The Company 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
7
<PAGE> 10
Speech Products, Pure Speech, Inc., Speech Systems, Inc. and Voice Processing
Corporation. Many of the Company's competitors are substantially larger than the
Company, are well established, and have greater financial, technical, marketing,
service and operating resources than the Company. The Company's competitors can
be expected to continue to make substantial commitments to research and product
development. There can be no assurance that the Company will be able to compete
successfully in this industry. See "Business--Competition."
RELIANCE ON KEY PERSONNEL; ATTRACTION AND RETENTION OF PERSONNEL
The Company's success depends upon the continued contributions of its officers
and key personnel, many of whom would be difficult to replace. The Company 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. The Company'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 the Company
will be successful in attracting or retaining sufficient numbers of qualified
personnel. See "Management--Employment Agreements."
DEPENDENCE ON OTHER COMPANIES FOR ASSEMBLY AND COMPONENT PARTS
The Company does not manufacture component parts for its products nor does it
have any plan to do so. In addition, the Company's products are assembled by
independent contractors. Other than one component which the Company obtains from
NEC Electronics, Inc., it is not dependent upon a single supplier for any
equipment or component parts. The Company 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 the Company or in the supply of key components,
for any reason, could result in significant delivery delays, thereby adversely
affecting the Company's revenues, profitability and customer relations. See
"Business--Manufacturing."
PROTECTION OF PROPRIETARY RIGHTS REQUIRED FOR SUCCESSFUL OPERATION OF THE
COMPANY
The Company relies on proprietary technology that it closely guards as trade
secrets. The Company 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 the Company 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 the Company'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 the
Company will depend on its ability to maintain confidentiality for its
technology and upon third parties not developing similar or better technology.
See "Business--Patents."
Several of the Company's competitors have obtained and can be expected to obtain
patents that cover products or services directly or indirectly related to those
offered by the Company. There can be no assurance that the Company 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, the Company 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 the
Company's products, services or planned enhancements (the "Offered Products")
infringed valid patent rights held by others, the Company 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 the Company 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.
8
<PAGE> 11
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock of the Company in the public market
following this offering, whether by purchasers in the offering or other
stockholders of the Company, or the perception that such sales could occur,
could adversely affect prevailing market prices and could impair the Company's
future ability to raise capital through the sale of its equity securities. After
giving effect to the sale of the 1,251,533 shares and the 1,218,467 shares
offered by the Company and the Selling Stockholders, respectively, hereby
(assuming no exercise of the Underwriters' over-allotment option), there will be
6,734,086 shares outstanding of which 6,159,846 shares will be freely
transferable and may be resold without further registration under the Securities
Act of 1933, as amended (the "Act"), including 487,207 of such shares (the
"Restricted Shares") which will be eligible for sale subject to compliance with
Rule 144 under the Act. In addition, following the offering 2,686,512 additional
shares will be subject to issuance upon exercise of outstanding options or
warrants or the conversion of a convertible note (the "Issuable Shares").
Restricted Shares of 68,160, as well as 305,446 shares that are not currently
eligible for sale under Rule 144 and 1,554,365 Issuable Shares, are entitled to
certain registration rights, and the Company intends to file a shelf
registration statement providing for their resale following the offering. Of the
shares which will be outstanding or issuable following the offering,
approximately 3,031,857 shares (2,881,857 shares if the Underwriters'
over-allotment option is exercised in full) will be beneficially owned by
officers, directors and certain stockholders of the Company (including Dialogic)
and will be subject to "lock-up" agreements under which the owners of such
shares have agreed not to sell or otherwise dispose of any shares of Common
Stock for a period of 180 days following the offering without the prior written
consent of the Underwriters. Such shares of Common Stock will be eligible for
resale after the expiration of the lock-up period, subject to the provisions of
Rule 144 under the Act. Any shares subject to these lock-up agreements may be
released from such restrictions prior to the end of the lock-up period with the
consent of the Underwriters. See "Principal and Selling Stockholders," "Certain
Relationships and Related Transactions," "Description of Capital Stock" and
"Underwriting."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND STOCKHOLDER AGREEMENT
Certain individuals and institutions that collectively will beneficially own
approximately 25.2% of the outstanding Common Stock after the consummation of
this offering (assuming that the Underwriters over-allotment option is not
exercised) have agreed to vote their shares of Common Stock for the election of
the current directors (or replacement nominees) until January 1, 1997 (the
"Stockholders Agreement" ). See "Management." This agreement, as well as certain
provisions of Delaware law and certain provisions of the Company's amended
Certificate of Incorporation permitting the issuance of preferred stock, could
make a merger, tender offer or proxy contest involving the Company more
difficult, even if such events would be beneficial to the interests of the
stockholders. See "Description of Capital Stock."
VOLATILITY OF STOCK PRICES OF TECHNOLOGY COMPANIES
As is frequently the case with the stock of high technology companies, the
market price of the Company's 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 the Company 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 Company's 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 Company's Common Stock. See "Price Range of Common Stock and
Dividend Policy."
TECHNOLOGY ACQUISITION STRATEGY; STRATEGIC ALLIANCES
The Company intends to consider selected strategic acquisitions of technologies
that complement those of the Company. It may also enter into beneficial
strategic alliances to pursue certain market opportunities. See "Use of
Proceeds." There can be no assurance, however, that the Company will be able to
identify and acquire suitable technology on favorable terms, successfully
integrate newly acquired technology with the Company's technology or create
suitable strategic alliances.
9
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,251,533 shares of Common
Stock offered by the Company hereby, at an assumed offering price of $7.875 per
share, when aggregated with the $1,068,342 in proceeds from the exercise of
options or warrants to acquire shares that will be exercised in connection with
the offering, are estimated to be $9,959,256 in the aggregate ($11,574,143 if
the Underwriters' over-allotment option is exercised in full), after deducting
the estimated underwriting discount and offering expenses payable by the
Company. The Company will not receive any proceeds from the sale of shares of
Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Company expects to use the net proceeds of this offering to (i) develop and
market new technology and products and enhancements to existing technology and
products, (ii) acquire technology complementary to its existing technology,
(iii) redesign certain of its products to achieve lower costs and (iv) provide
working capital.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since July 16, 1992, the Company's Common Stock has traded on the American Stock
Exchange/Emerging Company Marketplace ("AMEX/ECM"), originally under the ticker
symbol SIC.EC. On August 11, 1994, the Company's ticker symbol was changed to
VPS.EC. The Common Stock has been approved for listing on The Nasdaq National
Market under the symbol "VCSI," subject to official notice of issuance. The
following table sets forth the quarterly high and low sales prices on the
AMEX/ECM for the periods indicated (adjusted for a one for four reverse stock
split on August 11, 1994).
<TABLE>
<CAPTION>
AMEX/ECM SALES
PRICE
----------------
HIGH LOW
------ -----
<S> <C> <C>
FISCAL 1994
1st Quarter.................................... 7.24 4.52
2nd Quarter.................................... 7.00 3.76
3rd Quarter.................................... 8.52 3.76
4th Quarter.................................... 3.69 2.63
FISCAL 1995
1st Quarter.................................... 3.69 2.81
2nd Quarter.................................... 4.38 2.50
3rd Quarter.................................... 5.75 2.69
4th Quarter.................................... 12.50 5.31
FISCAL 1996
1st Quarter (through January 9, 1996).......... 8.00 7.06
</TABLE>
As of November 30, 1995, there were 1,865 holders of record of Common Stock of
the Company.
The Company has not declared or paid any cash or other dividends on its 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 the
Company's Board of Directors and will depend on a number of factors, including
the cash position, earnings, financial position and anticipated financial
requirements of the Company and other factors deemed relevant by the Board of
Directors.
10
<PAGE> 13
CAPITALIZATION
The following table sets forth the Company's total capitalization as of
September 30, 1995, and as adjusted to reflect the sale of the 1,251,533 shares
of Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term convertible debt............................................. $ 1,162 $ 1,162
Stockholders' equity:
Preferred stock, $1.00 par value: 300,000 shares authorized; none
issued and outstanding.
Common stock, $.01 par value: 20,000,000 authorized; 4,226,319 issued
and outstanding; 6,734,086 issued and outstanding as
adjusted(1)....................................................... 42 67
Paid-in capital(1)................................................... 10,574 20,891
------- -----------
Receivable from stockholders......................................... (80) (80)
Deficit.............................................................. (8,124) (8,124)
------- -----------
Total stockholders' equity................................... 2,412 12,754
------- -----------
Total capitalization......................................... $ 3,574 $13,916
======= =========
</TABLE>
- ---------
(1) Assumes no exercise of outstanding stock options or warrants (other than the
1,119,663 options and warrants to be exercised in connection with this
offering and 136,571 options and warrants exercised after September 30,
1995 and prior to the date of this Prospectus). Upon consummation of the
offering there will be reserved 2,686,512 shares of Common Stock for
issuance upon the exercise of outstanding options or warrants or the
conversion of a convertible note.
11
<PAGE> 14
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and the notes thereto included elsewhere herein.
The statement of operations data with respect to the years ended December 31,
1992, 1993 and 1994, and the balance sheet data at December 31, 1993 and 1994
have been derived from the financial statements of the Company, which have been
audited by BDO Seidman, LLP, independent auditors, and are included elsewhere
herein. The statement of operations data with respect to the years ended
December 31, 1990 and 1991, and the balance sheet data at December 31, 1990,
1991 and 1992, have been derived from the financial statements of the Company,
which have been audited by BDO Seidman, LLP, independent auditors, that are not
included in this Prospectus.
The statement of operations data for the nine month periods ended September 30,
1994 and 1995, and the balance sheet data at September 30, 1995, are derived
from the unaudited financial statements of the Company included in this
Prospectus. In the opinion of management, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for such periods. Results for the nine months ended September 30,
1995 are not necessarily indicative of the results to be expected for the fiscal
year ended December 31, 1995. The selected financial data should be read in
conjunction with, and is qualified in its entirety by, the Company's financial
statements, related notes and other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------- -------------------
1990 1991 1992 1993 1994 1994 1995
------- ------- ------- ------ ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................... $ 2,496 $ 2,108 $ 3,558 $7,052 $ 6,334 $ 4,182 $7,840
Cost of sales................. 384 336 1,210 2,051 1,644 1,013 2,626
------- ------- ------- ------ ------- ------- ------
Gross profit.................. 2,112 1,772 2,348 5,001 4,690 3,169 5,214
Costs and expenses:
Research and development.... 1,231 1,160 927 1,190 1,962 1,280 1,879
Selling, general and
administrative............ 1,299 1,217 937 1,673 2,934 2,261 2,534
Acquired R&D/Goodwill....... -- -- -- -- 6,252(1)(2) 3,508(1) --
Interest, to affiliates..... 207 160 142 108 110
------- ------- ------- ------ ------- ------- ------
Net income (loss) before
taxes....................... $ (418) $ (605) $ 276 $1,978 $(6,599) $(3,988) $ 691
------- ------- ------- ------ ------- ------- ------
Income taxes.................. -- -- 98 -- -- 10
------- ------- ------- ------ ------- ------- ------
Net income (loss)............. $ (418) $ (605) $ 276 $1,880 $(6,599) $(3,988) $ 681
======== ======== ======== ====== ======== ======== ======
Net income (loss) per share:
Primary..................... $ (.22) $ (.32) $ .15 $ .82 $ (2.29) $ (1.57) $ .11
======== ======== ======== ====== ======== ======== ======
Fully diluted............... $ (.22) $ (.32) $ .15 $ .52 $ (2.29) $ (1.57) $ .10
======== ======== ======== ====== ======== ======== ======
Weighted average outstanding
shares:
Primary..................... 1,880 1,880 1,880 2,292 2,881 2,545 6,493
======== ======== ======== ====== ======== ======== ======
Fully diluted............... 1,880 1,880 1,880 3,750 2,881 2,545 6,754
======== ======== ======== ====== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1990 1991 1992 1993 1994 1995
------- ------- ------- ------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 260 $ 324 $ 364 $ 997 $ 1,076 $ 1,478
Working capital (deficiency)... (1,026) 53 (221) 1,914 1,673 3,090
Total assets................... 804 909 1,063 2,927 3,030 4,290
Long-term debt................. -- 1,679 1,162 1,162 1,175 1,162
Total stockholders' equity
(deficit).................... (834) (1,439) (1,163) 1,009 1,008 2,412
</TABLE>
- ---------
(1) Includes $3,508 of acquired research and development expensed in connection
with the Merger.
(2) Includes $2,744 of goodwill acquired in the Merger and subsequently written
off.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception, the Company has focused on the development,
commercialization and application of speech recognition technologies. The
Company's principal sources of revenues are from: (i) sales of speech
recognition hardware and software products to systems integrators and OEMs, (ii)
licensing of speech technology to system and product developers and (iii)
providing specialized engineering services to systems integrators, principally
to assist in the integration of the Company's technology into its customers'
products and systems. Customers who choose to integrate the Company's speech
recognition technologies into products usually pay a license fee for the right
to integrate the technology and a per unit royalty for each speech recognizer
incorporated into products. The Company introduced its commercial speech
recognition hardware product for telecommunications applications in 1987. Today
approximately 90% of the Company's sales are from the telecommunications market
segment. A significant percentage of the Company's sales are made under
agreements with major customers. See "Sales and Marketing."
RECENT DEVELOPMENTS
On January 16, 1996, the Company announced preliminary unaudited results for the
fiscal year ended December 31, 1995. The Company reported sales of approximately
$10.8 million with net income of approximately $957,000, and fully diluted
earnings per share of $.14. The reported results are unaudited and there can be
no assurance that they will not vary from the final audited financial
information for the year ended December 31, 1995.
RESULTS OF OPERATIONS
Comparison of Results for Nine Months Ended September 30, 1995 and September 30,
1994
Sales increased 87% from $4,182,000 during the first nine months of 1994 to
$7,840,000 during the first nine months of 1995. Two customers, Dialogic and
Periphonics, accounted for 60% and 10%, respectively, of total sales for the
first nine months of 1995. Three customers, Dialogic, Brite and InterVoice,
accounted for 44%, 14% and 12%, respectively, of total sales for the first nine
months of 1994. Hardware sales, which increased 140% over the first nine months
of 1994, were 76% of revenues in the first nine months of 1995. The increase in
hardware sales accounted for 95% 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 9% over the first nine months of
1994, were 24% of total sales for the first nine months of 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
76% in the first nine months of 1994 to 67% in the comparable 1995 period as a
result of the increase in lower-margin hardware sales as a percent of total
sales.
Research and development expenses increased 47% from $1,280,000 in the first
nine months of 1994 to $1,879,000 in the first nine months of 1995. This
increase reflects costs associated with the addition of eleven employees in
research and product development.
Selling, general and administrative expenses increased 12% from $2,261,000 in
the first nine months of 1994 to $2,535,000 in the first nine months of 1995.
This increase was due primarily to costs associated with the addition of six
employees, increased costs in connection with Industries becoming a public
company upon the consummation of the Merger and increased professional fees.
Selling, general and administrative expenses as a percent of sales decreased
22%, as increased sales during the nine months ended September 30, 1995 did not
require a commensurate increase in expenses.
Net operating loss ("NOL") carryforwards expiring from 1996 to 2010 totaling
approximately $15,258,000 are available as of September 30, 1995 to offset
future periods taxable income. The Company has provided an
13
<PAGE> 16
allowance against its entire deferred tax asset relating primarily to NOL
carryforwards of approximately $5,188,000. Effective as of August 11, 1994, an
ownership change as defined by the Internal Revenue Code Section 382 occurred.
The effect of such change limits the use of the Company's NOL in future years to
approximately $1,355,000 annually. Revenue in the first nine months of 1995
triggered a federal alternative minimum tax liability resulting in an increase
in federal alternative minimum taxes of $10,000. Federal income taxes and state
franchise taxes based on income were offset by net operating loss carryforwards
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.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased from
71% in 1993 to 74% in 1994 as a result of the decrease in lower-margin hardware
sales as a percent of total sales.
Research and development expenses increased 65% from $1,190,000 in 1993 to
$1,962,000 in 1994, primarily due to the addition of employees associated with
the Merger and related expenses.
Selling, general and administrative expenses increased 75% from 1993 to 1994.
This increase is primarily due to the costs associated with the addition of
eleven sales, marketing and administrative employees, increased expenditures for
sales and marketing programs and other expenses associated with the Merger.
Acquired R&D/Goodwill included: (i) $3,060,000 of acquired research and
development, (ii) $234,000 of Scott's capitalized software costs and patents and
(iii) $146,000 of other expenses related to the Merger. In addition, it included
$2,714,000 of goodwill and $98,000 of capitalized organization costs related to
the Merger which were written off in December 1994. Management determined the
write-off was necessary after reappraising the factors contributing to the value
of goodwill acquired in the Merger. Factors that contributed to the impairment
of the goodwill included loss of key technical personnel from Scott, litigation
with a former officer and director of Scott and customer decisions not to
implement technology developed by Scott pursuant to contracts acquired in the
Merger.
The provision for federal and state taxes decreased by $98,000 from 1993 to
1994. Net income in 1993 triggered a federal alternative minimum tax liability
and state franchise tax based on net taxable income. Federal income taxes were
offset by net operating loss carryforwards during 1993. In 1994, VCS incurred an
operating loss and consequently no provision for income taxes was recorded.
Comparison of Results for Fiscal Years Ended December 31, 1993 and 1992
Sales increased 98% from $3,558,000 in 1992 to $7,052,000 in 1993. Two
customers, Dialogic and InterVoice, accounted for 49% and 13%, respectively, of
sales in 1992 and 55% and 13% of sales, respectively, in 1993. Hardware sales
were 67% of revenues in 1993 and increased 48% over 1992. Virtually all of the
increase in hardware revenue resulted from increased sales of telecommunications
speech recognition boards to Dialogic. Royalty, development, license fees and
other revenues were 31% of total sales in 1992 and 33% of sales in 1993. The
increase from 1992 to 1993 is primarily due to increased royalty revenues from
InterVoice.
Cost of sales includes cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased from
66% in 1992 to 71% in 1993 as a result of the revenue mix between hardware sales
and royalty revenues.
14
<PAGE> 17
Research and development expenses increased 28% from $927,000 in 1992 to
$1,190,000 in 1993, which reflects costs associated with the addition of seven
research and applications engineers.
Selling, general and administrative expenses increased to $1,673,000 in 1993, a
79% increase over 1992. The increase is due primarily to payroll costs related
to the reinstatement of payroll reductions taken in 1992 by sales and
administrative personnel, increased expenditures for travel and entertainment,
advertising and conferences, and consulting and professional fees.
The 1993 provision for income taxes of $98,000 was attributable to an
alternative minimum tax of $33,000 and a state franchise tax based on net income
of $65,000. Federal income taxes and state franchise tax based on income were
offset by the realization of net operating loss carryforwards in 1992.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements to date have been to fund working
capital and capital expenditures in order to support its sales growth. Net
working capital at December 31, 1994 and September 30, 1995 was $1,673,000 and
$3,090,000, respectively. The Company has financed its increasing working
capital needs primarily through cash flow from operations and proceeds from the
exercise of stock options. The Company anticipates that its working capital
needs will increase along with future sales growth.
At December 31, 1994 and September 30, 1995, the Company had $1,076,000 and
$1,478,000, respectively, in cash and cash equivalents. The Company's primary
source of liquidity is the timely collection of its accounts receivable. The
average days sales in accounts receivable were 39 days and 47 days at December
31, 1994 and September 30, 1995, respectively.
The Company's inventory as of December 31, 1994 and September 30, 1995 was
$286,000 and $645,000, respectively. The increase in inventory at September 30,
1995 is attributable to the Company's introduction of the Personal Voice Dialer.
The Personal Voice Dialer is being sold through catalogues and other direct
marketing avenues which require that the Company carry sufficient inventory to
fill orders in a relatively short period of time.
The Company's debt at September 30, 1995 consisted of a convertible promissory
note due to Dialogic on January 1, 1997. Dialogic converted accrued interest on
its note to Common Stock during 1995.
The Company's capital expenditures were $240,000 and $137,000 for the year ended
December 31, 1994 and the nine months ended September 30, 1995, respectively.
The Company has no specific commitments with regard to capital expenditures.
The Company believes that its existing sources of liquidity, funds generated
from operations and the net proceeds of this offering will be sufficient to
provide the capital resources necessary to support its increased operating needs
and finance continued growth for 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. The Company has not fully evaluated the effects of implementing this
statement but expects that they will not be material. In addition, no decision
has been made with regard to applying SFAS No. 123 to transactions prior to
December 15, 1995 or continuing to apply APB Opinion No. 25 for those
transactions.
15
<PAGE> 18
BUSINESS
The Company is a leading international supplier of speech recognition and
related speech input technologies. The Company believes that it offers the
widest selection of speech recognition and speaker verification products and
vocabulary libraries. These products employ a proprietary phonetic approach to
speech recognition developed by VCS over the past 17 years. VCS has a number of
commercial firsts in applying its technology in commercial applications,
including: (i) the first speaker-independent telephone speech recognizer PC
board; (ii) the first speaker-independent cellular telephone voice dialer; (iii)
the first switch-based cellular voice dialer; (iv) the first alphabet
recognizer; and (v) the first simultaneous speaker-independent speech recognizer
and speaker verification system. VCS believes it is the leading provider of
speech recognition technologies in telecommunications applications worldwide,
with more than 300,000 speech recognizers distributed in 30 countries, and plans
to expand into other speech recognition markets.
The Company markets its technologies to systems integrators and OEMs in
telecommunications, desktop computing and consumer electronics markets. VCS
technology has been successfully sold into many applications around the world,
including telephone network automation (1-800-COLLECT-U.S.), telephone banking
(National Westminster Bank, Ltd.-United Kingdom), order entry (Amway Home
Products-U.S.), government services (the Internal Revenue Service-U.S. and
Revenue Canada-Canada), computer multimedia sound boards (Micronics
Computers-U.S.), interactive computer software (Auralog-France), travel
information access systems (Lufthansa-Germany and Hong Kong Railways),
network-based cellular telephone voice dialing (AT&T Wireless Services'
VoiceTouch) and automotive-based cellular voice dialing (Mercedes-Benz-U.S.).
Many of the leading equipment manufacturers and systems integrators in their
respective industries incorporate the Company's technology into their products,
including Dialogic, InterVoice, Brite Voice Systems, Periphonics, OKI Telecom,
Hughes Network Systems, Cirrus Logic, Micronics Computers and OKI Semiconductor.
VCS believes that, with its broad product offerings, extensive experience and
established distribution channels, it is well positioned to participate in the
projected growth of the speech recognition industry.
THE SPEECH RECOGNITION MARKET
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
16
<PAGE> 19
of speech patterns to determine if the patterns match. Matching patterns are
used to verify a subject's claimed identity. For example, a speaker verification
system could verify that a person reciting an employee identification number is
in fact that employee.
While various types of speech technology have existed for many years, early
speech technology applications were generally inadequate due to their relatively
high costs and low performance. However, as a result of the decreased cost of
computer processing hardware and the development of more reliable and efficient
technology, as well as increased public familiarity with computer automated
devices, speech recognition is now an accepted feature of many
telecommunications applications. The Company's technology is presently used in
the telecommunications industry and is also increasingly being accepted into
applications designed for desktop computing, including computer telephony and
consumer electronics. Recent implementations of speech recognition in consumer
electronics include control of personal computers, hands-free dialing of car
phones and transaction processing through interactive voice response systems.
The Company believes that speech-based control and operation of electronic
devices will be incorporated in an increasing variety of applications as speech
recognition becomes easier to use and more natural, accurate and affordable.
VCS views the market for speech recognition as four horizontal or industry
segments and four vertical layers of distribution. The industry segments are
telecommunications, consumer electronics, desktop computing and dictation. VCS
believes that it is the leading provider of speech recognition technology
currently used in the telecommunications segment. The Company's technology is
also used in the desktop computing and consumer electronics segments. VCS does
not currently offer products for the dictation segment of the speech recognition
market and has no current plans to do so.
A recent third party market study defines four vertical levels of market
distribution: (i) licensing, (ii) component sales, (iii) system sales and (iv)
solution sales. Licensing involves providing a core speech recognizer and any
associated vocabulary reference tables in software. Component sales involve
selling the basic speech recognizer embedded in component level hardware such as
a semiconductor or a printed circuit board. System sales consists of selling
finished products which use the recognition technology, and solution sales
consists of selling speech recognition solutions using integrated speech
recognition systems.
VCS distributes its products and services primarily through licensing and
component sales. Its Personal Voice Dialer product is its only system sale. See
"--Products and Services." Based upon the Company's practical experience as a
leader in developing and commercializing speech recognition technology in the
telecommunications market and the quality and diversity of its current
technology, the Company believes that it is well positioned to continue to
participate in the growth of speech recognition in the telecommunications market
while expanding its initial penetration in the desktop computing and consumer
electronic markets.
SOFTWARE DEVELOPMENT/OEM
Delivering VCS speech recognition technology to end users requires that a
systems integrator or OEM first complete a product development program during
which the Company's speech technology is incorporated into a product. This
requires an investment of both time and resources on the part of the systems
integrator or OEM. The Company believes that successful completion of a product
development program with a systems integrator or OEM gives VCS an advantage at
that VCS account.
17
<PAGE> 20
VCS first began commercial delivery of speech recognition in 1986. Since then
the Company's technology has been or is being integrated in many systems and
products including:
<TABLE>
<CAPTION>
SYSTEMS INTEGRATORS/OEMS TYPICAL APPLICATIONS ILLUSTRATIVE END USERS/PRODUCTS
- ------------------------------------- ---------------------------------- --------------------------------------
<S> <C> <C>
Apex Voice Communication, Inc. Virtual telephone network Telephone companies in developing
messaging system nations
Applied Voice Technology Unified messaging on CTI platforms Small and medium businesses
Auralog Multimedia interactive training Language training companies
software
Brite Voice Systems Inc. Wireless network-based voice Telephone companies and cellular and
dialing, telephone network voice PCS service providers:
processing systems AT&T Wireless VoiceTouch
Ameritech VoiceSelectTM
Brite/Perception Interactive voice response systems Banks, educational institutions,
financial institutions and call center
operators:
MBNA Account Information System
Dialogic Corporation Call processing components for Systems providers in voice mail, voice
voice processing systems in messaging, interactive voice response
telecommunications and computer and telephone network intelligent
telephony peripherals:
Digital Equipment Corp.
Offnet
Deutsche Telekom, AG Telephone network-based German and Eastern European telephone
interactive voice response companies
Hughes Network Systems Cellular, PCS and SMR voice- Automobile manufacturers, cellular
activated telephones equipment retailers and wireless
telephone service providers:
1996 General Motors Cadillac
IBM Corporation General interactive voice response Financial institutions, information
systems service providers, call center
operators, airlines and the travel
industry:
DirectTalkTM
InterVoice, Inc. Interactive voice response systems Banks, brokerage firms, financial
and intelligent peripherals in institutions, information service
telephone networks providers, telephone companies, and
airlines and travel related companies:
1-800-COLLECT
OKI Semiconductor Speech recognition chip Manufacturers in the automotive,
consumer electronics and computer
industries:
MSM 6679 VRP
OKI Telecom Voice-activated wireless Automobile manufacturers, cellular
telephones equipment retailers and wireless
telephone service providers:
Mercedes-Benz 500 and 600 series
Micronics Computers, Inc. Multimedia PC sound boards PC retailers:
Orchid Technology sound boards
Periphonics Corporation Interactive voice response systems Banks, financial institutions,
and intelligent peripherals information service providers,
telephone companies, airlines and
travel related companies:
US IRS 1040EZ telephone
tax return filing system
Precision Systems, Inc. Telephone messaging systems, Telephone companies, call center
telephone network-based voice operators, and wireless service
processing systems and call center providers:
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 entry Cable television companies and
subscription television companies
</TABLE>
18
<PAGE> 21
STRATEGY
The Company's strategy is to capitalize on its strong base of technology,
practical experience, speech database libraries and established distribution
channels to participate in the increasing use of speech recognition in the
telecommunications market while expanding its presence in other developing
speech recognition markets. The specific elements of its strategy are as
follows:
Maintain leadership in the application of speech recognition technology in the
telecommunications industry
The Company believes it is the leading supplier of speech recognition technology
used in telecommunications. The Company plans to maintain this position by
developing and deploying new products primarily across its existing distribution
network. Dialogic has historically been the Company's largest
distributor/customer in the telecommunications market segment. While Dialogic
represents a large portion of VCS's revenues, speech recognition technology
presently is sold with only a small percentage of Dialogic's product sales. The
Company is working with Dialogic to increase the penetration of speech
recognition by developing new products and marketing programs targeted to
increase penetration of existing VCS products sold by Dialogic. The Company also
plans to increase penetration of its other telecommunications distributors'
sales by joint marketing programs, enhancement of existing products and new
product offerings.
Diversify its markets to include consumer electronics and desktop computer
applications
Presently the Company derives the majority of its sales by providing speech
recognition technology to the telecommunications market. The Company plans to
expand marketing of its technology to other markets in order to diversify its
revenue base. To this end, the Company has begun to market its technology to the
consumer electronics and desktop computer markets. The Company believes that
systems integrators and OEMs in these markets will increasingly use speech
recognition technologies in their products and that the Company's experience and
reputation in implementing speech recognition in the telecommunications market
positions it favorably to compete in these emerging markets.
Improve the man-machine interface
The Company is developing enhancements to its core technology to permit
recognition of more conversational speech. These enhancements will permit end
users to access larger vocabularies and, by spotting key words, to speak in a
more natural and conversational manner. In addition, the Company has announced a
"Phonetic Dictionary" vocabulary development system for user-developed
speaker-independent vocabularies. See "--Products and Services--Enhanced
Technologies."
Emphasize software license revenues
The Company's products consist of implementations of its software-based speech
recognition technologies in software, hardware or computer chips. Historically,
the Company has developed both hardware and software for its customers. However,
as the markets for speech recognition technologies grow and mature, the Company
expects to increase its proportion of revenues from software sales or licenses
to systems integrators and OEMs who will design and manufacture their own
hardware.
Develop end user voice dialer products
The Company has recently introduced its first product marketed directly to the
end user. Historically, the Company developed technology exclusively for
integration by systems integrators and OEMs into their products.
Expand its international presence
The Company's marketing and product strategy is to continue to develop its
products for use internationally. VCS currently has discrete digit and control
word vocabularies for telecommunications applications in 45 languages and
dialects.
19
<PAGE> 22
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.
The Company's current technologies include speaker-independent (discrete and
continuous) and speaker-dependent speech recognition, as well as speaker
verification. The Company's speaker-independent speech recognition technology is
based on "phonetic unit identification." This technology examines the features
of a spoken word only to the point of recognizing the word's unique components
and disregards the characteristics of a particular speaker's voice, such as
pitch, inflection and accent. VCS's proprietary software then dissects the word
and examines its components to identify the word presented to it, irrespective
of the speaker. Although the Company has designed hardware on which its
recognition software resides, there is no unique hardware required to use the
Company's technology.
For the most demanding speaker-independent applications, including digit
vocabularies for telecommunications or cellular automotive vocabularies, VCS
collects many speech samples in the environment and language of the targeted
application. These speech samples are processed in the laboratory to develop the
specific vocabulary reference tables. The Company believes this methodology
permits a higher degree of accuracy than alternative methods of vocabulary
development. Because customers usually cannot create vocabulary words
themselves, VCS has processed discrete vocabularies in 45 languages,
alphanumeric vocabularies in 18 languages and continuous vocabularies in 13
languages for telecommunications applications. For applications requiring custom
speaker-independent vocabularies, VCS offers a vocabulary development service
program. In the last three years, VCS has processed several hundred custom
vocabularies in connection with this program. The Company's "Phonetic
Dictionary" will allow users to select and create a speaker-independent
vocabulary. See "--Enhanced Technologies."
20
<PAGE> 23
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>
The Company offers speaker-dependent speech recognition technology for
applications which are anticipated to be used by only one or a few speakers,
such as control of a personal computer or voice dialing a cellular phone. Before
using a speaker-dependent system, the user is prompted to introduce himself to
the system by speaking specific utterances; the speech is analyzed to tune the
recognition system to work well with that user. The Company optionally offers
speaker adaptation capabilities in its speaker-dependent technology products.
Speaker adaptation improves accuracy in speaker-dependent applications by
enabling a system to adjust to peculiarities in a user's voice or pronunciation,
such as may occur if the user is suffering from a cold or hayfever. It may also
be used to adapt the recognizer to use by several persons.
The Company's speaker verification technology (trade named SpeechPrint IDTM)
allows a system to verify that a user is who he claims to be. Because it has
been designed to run on the same components as VCS's speech recognition
technologies, no additional hardware is required to implement speaker
verification in a recognizer that already employs the Company's technology.
The Company believes that its approach to speech recognition and speaker
verification delivers significant performance advantages in terms of the
requirements for processing power, memory and vocabulary size. The Company's
technology is capable of supporting the largest channel density of any
commercial product currently on the market.
21
<PAGE> 24
CORE TECHNOLOGY PRODUCT SUMMARY
The following table sets forth certain summary information for the
Company's current core technology products.
<TABLE>
<S> <C> <C> <C> <C>
CORE TECHNOLOGY OPTIONS AND
APPLICATION FEATURES ENHANCED TECHNOLOGIES OPERATING ENVIRONMENT CUSTOMER VOCABULARIES
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications SI, SD, SA, SV User selectable DSP embedded recognizer 45 languages -- discrete
Continuous speech input triggering DSP library recognizer digits
Discrete speech input Voice activation Microprocessor 18 languages -- alphabet
HMM decision strategy Word spotting embedded recognizer 12 languages --
Phonetic "front-end" Fixed point support continuous
Vocabulary masking High rejection vocabularies Floating point support 9
High accuracy in tele- Phonetic dictionary Supported processors: languages -- cellular
phone environment Cut-thru (barge-in) Texas Instruments 3
Multi-channel/high Large vocabulary Intel languages -- phonetic(u)
density capability(u) NEC
Software-based Alphabet recognition OKI
Custom vocabulary Siemens(u)
development service
- ------------------------------------------------------------------------------------------------------------------------------------
Desktop SI, SD, SA, Voice activation Microprocessor 45 languages -- CT
Computing 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(u) alphabet(u)
HMM decision strategy(u) Telephone or Supported processors: 12 languages --
OLE format software(u) desktop speech input Intel continuous(u)
Accurate in high noise Alphabet recognition OKI PC control library
"Close talk" or "far NEC
talk"
microphone input
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer/ SI, SD, SA, SV Alphabet recognition DSP embedded recognizer 45 languages -- CT
Automotive Discrete speech input Voice activation DSP library recognizer discrete digits(u)
"Close talk" or "far SI & SD operation Microprocessor 18 languages -- CT
talk" Celldial interface embedded recognizer alphabet
microphone input Custom vocabulary Fixed point support 7 languages --
Accurate in high noise development service Floating point support automotive
Low memory required Supported processors: PC control library
Phonetic "front-end" Texas Instruments
Low "horsepower" Intel military alphabet library
processor required NEC machine control library
OKI
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SI = speaker-independent SD = speaker-dependent SA = speaker-adaptive
SV = speaker verification u = under development
CT = computer telephony
GLOSSARY OF TERMS
"Back end" -- The portion of the speech recognition algorithm which determines
the word spoken. It uses the information from the "front end" to arrive at its
decision.
"Celldial" -- A VCS parametric-based programming interface to simplify voice
dialing application software.
"Close talk" -- Speaking into a microphone close to the mouth, such as a
telephone handset microphone.
"Far talk" -- Speaking into a microphone at a distance from the speaker, such as
a telephone speakerphone microphone.
"Front end" -- The feature extraction portion of a speech recognizer. The
"features" or speech characteristics desired are computed by this part of the
speech algorithm and passed to the "back end."
"HMM" -- Hidden Markov Modeling. A mathematical database search model which is
commonly used for complex computer database modeling problems, such as speech
recognition.
"OLE" -- Object linking and embedding. A programming environment that simplifies
application software development through the use of software "libraries" that
contain code to implement special program features.
"Phonetic" -- Relating to phonemes, the basic sounds or units of spoken
language.
"SAPI" -- Speech application program interface. This is a standard established
by Microsoft for programmers of speech applications to enable integration of
third party software products with other applications running in a Microsoft
environment.
"Software-based" -- Technology which is embodied in software only and is thereby
capable of operating in any hardware environment.
"Vocabulary masking" -- A technique by which a speech recognizer vocabulary is
divided into smaller sub-vocabularies in "real time" to improve recognition
accuracy.
22
<PAGE> 25
Enhanced Technologies
As end users become more accustomed to interacting with products incorporating
speech recognition technologies, firms utilizing speech recognition in their
systems request advanced features, such as continuous digit input, the ability
to override outgoing system prompts with voice commands, natural language
capabilities and conversational speech. The Company currently has several
projects under development or in beta test which are aimed at providing these
enhanced speech recognition solutions.
Natural language refers to the capability of speaking digits combined with other
key numeric words, such as "hundred" or "thousand," in a continuous manner.
Speech recognition technology available today requires that the user speak
digits in a more structured manner. For example, a number such as 2400 must be
spoken either discretely or continuously as "two-four-oh-oh." Natural language
technology will permit the user to say "twenty-four hundred" or "two thousand
four hundred" as well. The Company is currently developing vocabularies to
enable natural language input and expects to have beta versions in U.S. English
available in 1996.
Phonetic dictionary technology is another advanced feature being requested by
experienced systems integrators. Using a "phonetic dictionary," a word can be
entered into a speaker-independent system by selecting and linking "phonemes"
(i.e., individual units of sound) from a "dictionary" rather than sampling
hundreds of people speaking the word. In order to develop its phonetic
dictionary technology, the Company must collect thousands of samples of
phonetically rich speech in each language. These samples are processed into a
phonetic dictionary of all the sounds (phonemes) in a language. To develop its
phonetic dictionary technology, the Company must collect many samples of
phonetic representations of speech that then are assembled in VCS's laboratory.
This technology will enable a wider distribution of speech recognition in new
applications that require larger vocabularies of custom or semi-custom words,
such as product names or proper names. This technology will be particularly
useful in applications where the list of vocabulary words changes regularly,
such as employee names in a voice mail/auto attendant system. Phonetic
dictionary technology is currently available in beta form from the Company with
commercial availability of the technology and vocabulary creation tools expected
in 1996.
Large speech recognition vocabularies, in excess of 2,000 words, are becoming
increasingly feasible due to technology advancements, such as phonetic
dictionary. The Company has demonstrated a speaker-independent speech
recognition capability for 500 words and its objective is to complete
development of a 2,500 word speaker-independent product during 1996.
Conversational speech recognition is more complicated than the speech
recognition products described above. Context and grammar rules, which take
advantage of knowledge of a specific application, are implemented in a software
layer above the core recognizer, which aids and guides the recognition process.
Conversational speech systems require extremely expensive hardware to operate
and are inherently inflexible and difficult to maintain in changing application
environments. However, the Company believes conversational speech recognition
has great potential for being the most accepted technology for automated
information systems. VCS plans to develop its initial capabilities in a
conversational speech recognizer during 1996.
Telecommunications Products
VCS licenses software and sells several speech recognizer hardware products for
use in telecommunications environments. VCS speech recognition boards provide
the hardware and software necessary to permit speech recognition and speaker
verification in telecommunications systems. These boards will operate the
Company's speaker-independent and speaker-dependent speech recognition
technologies to provide reliable speech recognition over local and long distance
telephone lines. The boards may be used in analog or digital environments and in
a variety of applications, including customer service, voice mail, home banking,
audiotext, order processing, telemarketing and telephone company operator
services. They are designed for easy incorporation into most interactive voice
processing systems to permit use of these systems from any touch-tone or rotary
dial telephone. This is particularly important internationally where the
touch-tone penetration rate is significantly lower than in the United States,
making speech recognition an enabling factor for many international voice
processing applications. In addition, the Company's latest technologies,
including alphanu-
23
<PAGE> 26
meric recognition and SpeechPrint ID speaker verification, expand the range of
opportunities for automation with voice processing systems.
The same VCS speech recognition software available on its hardware products is
also available under license agreements to persons who wish to integrate the
technology into their own hardware platforms. The available software technology
includes speaker verification as well as discrete, continuous and alphanumeric
vocabularies in a variety of languages. VCS also licenses its enhanced
technologies directly to persons who may have acquired the Company's basic
speech recognition technology from one of the Company's distributors/customers.
The Company also offers its Voice Cut-Thru technology for use with its discrete,
continuous and phonetic technologies. Voice Cut-Thru allows callers to override
outgoing system prompts with voice commands. Recognition actually takes place
during the prompting sequence. This is an advance from the previous VCS
"voice-stop" technology in which the caller must stop the prompt by saying
"stop" and then is required to speak the desired number or command.
In the fourth quarter of 1994, the Company introduced a new speech recognition
software product for Dialogic's AEB architecture called VRSoftTM. The product
has been in beta test for several months, and commercial shipments of VRSoft by
Dialogic are expected to begin during the first quarter of 1996. VRSoft will be
distributed by Dialogic Corporation and is targeted at inexpensive voice mail
and voice response systems that incorporate Dialogic hardware. Many such systems
are in use but have not previously had a cost effective speech recognition
solution due to the requirement for separate speech recognition hardware. VRSoft
will make speech recognition technology available for these systems without the
requirement that additional hardware be purchased. The Company believes this
will attract interest in speech recognition from systems integrators in a
different segment of the market.
Dialogic's latest product architecture, Signal Computing System Architecture or
"SCSA," is designed with an open DSP platform for speech recognition called
Antares. Dialogic has licensed VCS speech recognition to sell with its Antares
product. VCS developed a new line of software products, VCS Antares Software,
for Dialogic to market under this license agreement. VCS customized its
continuous and discrete speech recognition technology with Cut-Thru technology
capabilities for this program. VCS has released this software to Dialogic for
use in DOS, UNIX and OS/2 environments. VCS Antares Software is currently in
beta test, and the Company expects it to be fully available in the first part of
1996. As a result of adopting an open architecture platform, the technology of
the Company's competitors will be available as an alternative to VCS's
technology in products incorporating the Antares product. However, with VRSoft
and VCS Antares Software, VCS technology will be the only speech recognition
technology available across Dialogic's entire product line. VCS believes this is
a competitive advantage since it provides systems integrators a seamless product
and programming interface across all Dialogic speech recognition products.
Computer/Desktop Products
QuikVoiceTM 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 WindowsTM 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-MeTM.
VCS supports Microsoft's Speech Application Programming Interface ("SAPI")
standard for speech applications which will be implemented in Microsoft
operating systems. The Company plans to release a speech engine (i.e., a speech
recognizer) conforming to SAPI during 1996. This speech engine will be marketed
to software developers whose applications use speech recognition in Microsoft's
Windows 95TM and Windows NTTM 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
24
<PAGE> 27
and menu operation and voice driven access to communications software, such as
that used to access the Internet.
The Company also sells a software recognizer capability based upon a proprietary
application programming interface for software developers whose products do not
conform to SAPI. This capability uses a custom made core recognizer
incorporating a VCS-specified API. Because each project is custom developed,
this offering provides software developers with the most flexibility in choosing
any functionality from VCS's broad range of capabilities in speech technology.
Cellular/Automotive and Consumer Electronics Products
The Company markets speech recognition for cellular telephones, consumer
electronics and automotive applications. VCS has targeted wireless/cellular
telephones, answering machines, VCRs, televisions, personal organizers, cordless
telephones and video games as potential high volume applications of VCS's speech
recognition. Manufacturers can obtain VCS's speech recognition for these
applications either by licensing software or buying chip sets that embody the
recognition software from VCS. Each customer typically also purchases support
and design consulting from VCS in order to develop a product using the
technology.
The Company has developed a state-of-the-art speech recognizer incorporating
VCS's speaker-independent and speaker-dependent speech recognition technologies
for low cost applications. The Company currently markets this recognizer for
both automotive and consumer electronics applications. The recognizer is used
today in cellular telephone voice dialers sold as part of built-in car phones.
Both the 1996 Cadillac and Mercedes-Benz line of automobiles are sold with these
telephones as either standard or optional accessories. VCS also provides
recognizers that enable voice control of non-critical automobile functions, such
as seats, windshield wipers, windows, radios and mirrors. Using the Company's
voice activation vocabulary provides for total "hands-free" operation of the
target accessory thus increasing safety and convenience. To date, these
recognizers have been implemented only in concept cars.
Historically, manufacturers have been required to use a chip set consisting of
several single purpose chips in order to implement all of the necessary
functions for speech recognition. In 1994, OKI Semiconductor introduced a new
single chip speaker-independent speech recognition microcontroller, the MSM6679
Voice Recognition Processor ("VRP"), which incorporates VCS technology. This
offers an integrated "one-chip" implementation for OEMs desiring to add speech
recognition to their products. With the OKI Semiconductor VRP, the necessary
functions for speech recognition are combined on a single chip, which should
reduce cost. OKI Semiconductor is using its international distribution
capabilities to market the VRP to systems developers and OEMs for development of
applications using the VRP in the automotive, personal computer,
telecommunications and consumer electronics industries.
During 1995, the Company developed its Personal Voice Dialer product, which is
targeted at small business and home-office applications. This product is a
speech recognition device that permits callers from home telephones to voice
dial calls to telephone numbers stored in the unit's memory. The Personal Voice
Dialer is available with memories for 20 or 50 telephone numbers. It may be
connected by the purchaser to operate from a single telephone or, with
professional installation of an RJ-31 jack, from any phone in the house. VCS is
selling this product through catalogues and through direct marketing. The
Company began test marketing the units in the fourth quarter of 1995 to
determine the best distribution channels and price points for the Personal Voice
Dialer.
25
<PAGE> 28
VCS PRODUCT SUMMARY
The following table sets forth certain summary information for certain of
the Company's products.
<TABLE>
<CAPTION>
OPTIONS AND
PRODUCT NAME/DESCRIPTION FEATURES ENHANCED TECHNOLOGIES ARCHITECTURE VOCABULARIES
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
VR/40D Speaker-independent Alphabet recognition DOS, UNIX, OS/2 45 languages --
Speech recognition Discrete speech input Custom vocabulary AEB interface discrete digits
daughtercard for 4-recognizer package development service No PC slot required 18 languages -- alphabet
Dialogic Phonetic approach Speaker-dependent Analog or digital 8 languages -- cellular
AEB D/41 low density Speaker-adaptive telephone input
products Speaker verification
- ------------------------------------------------------------------------------------------------------------------------------------
VR/160pD Speaker-independent Speaker-dependent DOS, UNIX, OS/2 45 languages --
Speech recognition Discrete input Speaker-adaptive PEB interface discrete digits
platform Continuous input Speaker verification Single PC slot 18 languages -- alphabet
for Dialogic PEB Phonetic approach Word spotting TI 320C25 or 8 languages -- cellular
products 2 to 16 recognizers Hi-rejection TI 320C31 12 languages --
Shared resource Phonetic Dictionary daughtercard continuous
switching Voice activation
HMM decision strategy Cut-thru
Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
VCS Antares Speaker-independent Speaker-dependent DOS, UNIX, OS/2 45 languages --
SoftwareD 2 to 32 recognizers Speaker-adaptive SCSA interface discrete digits
Speech recognition for 2 recognizers/DSP Speaker verification TI 320C31 18
Dialogic Antares SCSA continuous Word spotting firmware languages -- alphabetu
products 4 recognizers/DSP Hi-rejection 8 languages -- cellular
discrete Phonetic Dictionary 12 languages --
8 recognizers/DSP Voice activation continuous
discrete w/cut-thru Cut-thru
2 recognizers/DSP Alphabet recognition
phoneticu
- ------------------------------------------------------------------------------------------------------------------------------------
VRSoftD Speaker-independent Speaker-dependentu DOS, OS/2u 45 languages --
Discrete input Speaker-adaptiveu Intel or equivalent PC discrete digits
PC host processor-based No additional Alphabet recognitionu AEB interface 18
low density Dialogic hardware required languages -- alphabetu
AEB speech recognizer 2 or 4 recognizers 8
per PC system languages -- cellularu
- ------------------------------------------------------------------------------------------------------------------------------------
DVM2c and DVM4s Speaker-independent Speaker-dependent 1/4 PC board 45 languages --
Speech recognition 2 recognizers/PCB Speaker-adaptive form-factor discrete digits
hardware for continuous Speaker verification Flexible VCS API 18 languages -- alphabet
proprietary 8 recognizers/PCB Word spotting Operating system 8 languages -- cellular
architecture voice discrete Hi-rejection independent 12 languages --
processing systems 4 recognizers/PCB Phonetic Dictionary continuous
discrete w/cut-thru Voice activation
2 recognizers/PCB Cut-thru
phoneticu Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
OKI MSM 6679 VRP Speaker-independent VCS "phonetic" front- Stand-alone speech 45 languages --CT
Speaker-dependent end recognition processor discrete digitsu
Single chip integrated Speaker-adaptive High noise accuracy Meets SAE specifications 18 languages -- CT
speech recognition Single chip operationu Single chip package Parallel or serial alphabetu
processor Discrete input Low cost "on-board" 25 interface Machine control
word vocabulary libraryu
Modular 20 word PC control library
vocabulary expansion 7 languages --
Built-in OKI synthesizer automotive
control
Voice activationu
Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
QuikVoice Speaker-independent Out of vocabulary DOS, Windows PC command and control
Speaker-dependent rejection VCS API Discrete digits
Speech recognizer for PC Speaker-adaptive Voice activation
"voice mouse" Discrete input
operation
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
D = Sold exclusively by Dialogic PCB = Printed Circuit
Board u = under development
CT = computer telephony
26
<PAGE> 29
TECHNOLOGY DEVELOPMENT
The Company believes that enhancements of and improvements to its existing
technologies are critical to its future success. The Company has made
substantial investments in research and development in each of the last three
years. During the first nine months of 1995, the Company spent $1,879,000 (24%
of revenues) on Company sponsored research and development. The Company spent
$1,962,000 and $1,190,000 (31% and 17% of revenues, respectively) on Company
sponsored research and development activities during 1994 and 1993,
respectively. Currently, the Company employs 17 people in research and
development. Many of the research and development projects on which the Company
works span more than one year.
The Company's technology development activities are directed at continued
improvements to its existing core technologies, enhancements to these
technologies and improved implementations of the technologies to reduce the cost
of the hardware required for speech recognition. The Company continues to
develop and adapt its technology to operate in OKI Semiconductor's VRP. VCS is
currently developing new products, including a phonetic dictionary development
system, a large vocabulary phonetic recognizer, improved word spotting
technology, improved voice activation, natural language understanding and a
SAPI-compliant speech engine. The Company believes that the timely development
and enhancement of its technologies is necessary to remain competitive in the
industry. Delays or inabilities to develop new technology features, enhancements
or products could have a material adverse effect on the Company's business,
operating results and financial condition.
SALES AND MARKETING
The Company markets its core speech recognition technologies to systems
integrators and OEMs for incorporation into their products as well as to the
buyers of their products. VCS sells to systems integrators and OEMs through its
own sales force. When marketing to the buyers of their products, the Company
frequently coordinates its selling efforts with the sales force of a systems
integrator or OEM.
The Company's principal marketing activities include participation in industry
trade shows and seminars, advertising in selected trade publications, public
relations activities with the trade and business press, publication of technical
articles and distribution of sales literature.
The manner in which the Company sells technology and products for use in various
markets is summarized below:
Telecommunications Market
VCS provides hardware and software speech recognition products to address the
telecommunications market. For software products, the Company receives license
fees or royalty payments based on the number of recognizers incorporated in the
end user product. All of VCS's hardware products sold include a license for the
software to enable speech recognition on the hardware purchased. VCS distributes
its technology products for the telecommunications market either through OEM
arrangements or through licensing arrangements with systems integrators. The
Company sells telecommunications hardware and software products to Dialogic,
which in turn sells them to systems integrators who design and sell systems.
These sales typically have a significant lead time between the initial sale and
volume purchases by systems integrators due to the product development cycle
required to develop applications that incorporate the Company's speech
recognition technology products.
Computer/Desktop Markets
In computer and desktop applications, the Company generally licenses its
technology to hardware manufacturers, such as Micronics (Orchid Technology). The
Company receives a royalty for each copy of the technology shipped with the
integrated product.
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<PAGE> 30
Cellular and Consumer Electronics Markets
The Company sells its technology products directly to cellular telephone
manufacturers, such as OKI Telecom and Hughes Network Systems, for integration
into end user products. The cellular telephone manufacturer typically either
purchases an enabling computer chip or licenses technologies directly from the
Company. When the Company sells a computer chip, a software license for the
single copy of the Company's technology is included with the chip. Under
licensing agreements, customers of the Company pay a royalty for each product
sold that incorporates the Company's technology. The Personal Voice Dialer is
distributed through specialty catalogs and direct consumer advertising.
Other Emerging Markets
The Company and OKI Semiconductor jointly integrated the Company's speech
recognition technology into the VRP, a low-cost chip being manufactured and sold
by OKI Semiconductor. OKI Semiconductor has indicated to the Company that it is
targeting customers for cellular, automotive and personal computer applications
for which the prior implementation of speech recognition was too expensive or
unworkable.
Significant Customers
The Company's largest customers have historically been Dialogic, Periphonics,
Brite and InterVoice. Sales of hardware to Periphonics are made pursuant to
purchase orders, the form of which are updated from time to time. Sales of
technology or products to Dialogic, Brite and InterVoice are generally made
under agreements that do not obligate such customers to make purchases but set
forth the terms under which purchases will be made.
Sales of hardware products incorporating licensed technologies pursuant to
various agreements between the Company and Dialogic have historically accounted
for most sales to Dialogic. While the Company historically has sold hardware
products incorporating licensed technologies to Dialogic, Dialogic has the right
to manufacture such hardware products. If Dialogic chooses to manufacture
hardware products incorporating licensed technologies, Dialogic will pay
royalties to the Company for each port of recognition incorporated and sold by
Dialogic. It is anticipated that future Dialogic products incorporating licensed
technologies will be manufactured by Dialogic and the Company will receive
royalties for VCS speech recognition technologies incorporated and sold by
Dialogic. While gross sales to Dialogic will decrease with the transition from
hardware sales to royalty revenue, cost of sales will also decrease as the
hardware cost component will be eliminated.
Sales to InterVoice are generated from sales and support of software products
sold pursuant to a License Agreement between the Company and InterVoice.
InterVoice pays the Company a royalty for each port of licensed technologies
integrated and sold in InterVoice systems.
Sales to Brite have historically been made pursuant to a Software Agreement
between VCS and Brite dated August 31, 1992 (the "Agreement"). The Agreement
grants Brite a license to use certain VCS technology, sets forth business
generation fees to be paid to VCS with respect to such uses and sets forth fees
to be paid to VCS for enhanced technologies sold in Brite systems. While Brite
is under no obligation to utilize its license, the Agreement specifies the fees
and royalties to be paid if such use occurs. Although the Agreement expired by
its terms on August 31, 1995, Brite continues to use the licensed technology and
pay royalties to the Company. The Company believes the Agreement will be renewed
as Brite continues to market systems incorporating the technology licensed
pursuant to the Agreement.
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<PAGE> 31
The Company's technology is used by many customers in telecommunications,
desktop and consumer electronics markets. A partial list of the Company's major
customers/integrators is as follows:
TELECOMMUNICATIONS
<TABLE>
<S> <C> <C>
AccessLine Technologies, Inc. Group 2000 Pro-Dentec
AG Communication Systems Hewlett Packard Company Siemens, AG
Apex Voice Communication, Inc. IBM Corporation Stylus Innovation, Inc.
Applied Voice Technology Intellicall Syntellect, Inc.
Brite Voice Systems, Inc. Intellivoice TALX Corporation
Comverse Technology, Inc. InterVoice, Inc. Telecorp Systems, Inc.
Cyberlog, Inc. MicroLog Corporation Vicorp Interactive Systems,
Dialogic Corporation Nortel Inc.
Digital Equipment Corporation Parity Software Development Corp. Voicetek Corporation
Deutsche Telekom AG Periphonics Corporation West Interactive Corporation
Global Communications, Ltd. Precision Systems, Inc.
CELLULAR AND CONSUMER ELECTRONICS
HighwayMaster Communications, Inc. NEC (U.K.) OKI Telecom
Hughes Network Systems OKI Semiconductor Pacific Communication Sciences,
Inc. (PCSI)
COMPUTER/DESKTOP
Auralog Health Tech Services Corp. Micronics Computers, Inc.
Cirrus Logic, Inc. (Orchid Technology)
</TABLE>
MANUFACTURING
VCS does not engage in any manufacturing operations and does not plan to do so
in the foreseeable future. The Company contracts out the manufacture and
assembly of hardware. VCS's current suppliers include The Gammon Group,
Hamilton/Hallmark Electronics and NEC America.
COMPETITION
The speech recognition industry is highly competitive and characterized by
rapidly advancing technology. In order to maintain or improve its position in
the industry, the Company must continually enhance its current products and
develop and introduce new products which address the rapidly changing needs of
the marketplace.
Speech recognition is a developing field, and competition is largely based on
technological superiority. Examples of the differentiation in technology include
the ability to operate over telephone lines, size of vocabulary, ability of the
user to create speaker-independent vocabularies, noise suppression and
computational efficiency. The cost of speech recognition technology can also be
an important competitive factor.
While certain of the Company's competitors have developed speech recognition
technology comparable to the Company's technology, the Company believes that,
with respect to markets targeted by the Company, it has a competitive advantage
in implementing its technology based on the technical knowledge and practical
experience it has gained in commercializing technology solutions used in the
telecommunications market.
Competitors include entities engaged in a variety of businesses, including:
computer and semiconductor manufacturers, such as Apple Computer, IBM and
Toshiba; telecommunications and cellular equipment suppliers, such as AT&T,
Motorola and Nortel; affiliates of foreign telephone companies, such as British
Telecom, CNET, CSELT, Telefonica de Espana SA and Vocalis; system suppliers,
such as BBN Hark, Dragon Systems, Marconi Speech and Information Systems,
Microsoft and Texas Instruments; and pure speech recognition companies, such as
Nuance Communications, Lernout & Hauspie Speech Products, Pure Speech, Inc.,
Speech Systems, Inc., Verbex, Inc. and Voice Processing Corporation. Many of the
Company's competitors are substantially larger than the Company, are well
established and have greater financial,
29
<PAGE> 32
technical, marketing, service and operating resources than the Company. These
competitors can be expected to continue to make substantial commitments to
research and product development.
PATENTS
The Company does not apply for patents on its speech recognition techniques that
it maintains as trade secrets because of the disclosure requirements in doing
so. The Company holds seven patents relating to certain methods or systems by or
in which speech recognition or speaker verification may be implemented. The
issuance of a patent is not conclusive as to its validity or enforceability, nor
does it prevent another party from designing around the claimed invention. Much
of the Company's proprietary technology is implemented in software that is
protected under copyright and trade secret law and subject to licensing
agreements.
The Company has recently commenced litigation against a company it believes is
infringing on a patent owned by the Company. See "Legal Proceedings."
EMPLOYEES
As of September 30, 1995, the Company had 59 employees, of which 17 are engaged
in research and development, 16 in product development and application
engineering, 16 in sales and marketing and 10 in finance and administration. In
addition, the Company employs three people on a part-time basis to assist with
speech data processing and one person on a contract basis to assist with
marketing of the Company's Personal Voice Dialer. All of the Company's employees
sign agreements containing standard non-disclosure and invention assignment
provisions. The Company's future success will depend on its ability to attract,
train, retain and motivate highly qualified employees, who are in great demand.
The Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its employee relations are good.
FACILITIES
The Company leases 20,581 square feet for its headquarters facility, pursuant to
a lease that expires September 30, 2000, at 14140 Midway Road, Dallas, Texas
75244. The Company also leases offices in Dublin, Ireland and Ridgefield,
Connecticut for use by sales and marketing personnel.
LEGAL PROCEEDINGS
On November 6, 1995, the Company filed a complaint in the U. S. District Court
for the North District of Texas. VoiceTech Communications, Inc. of Elmhurst,
Illinois was named as the defendant and is alleged to have infringed, directly,
by inducement or by contribution, a Company patent titled "Speech Recognition
System for Electronic Switches in a Cellular Telephone or Personal
Communications Network." The Company is seeking an injunction to prohibit
further infringement, damages and costs. The defendant has not yet answered or
otherwise responded.
30
<PAGE> 33
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE CAPACITIES IN WHICH SERVED
- ----------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Peter J. Foster.......................... 44 President, CEO and Director
Thomas B. Schalk......................... 44 Chief Technical Officer
Kim S. Terry............................. 37 Vice President/Controller and Corp. Secretary
Lawrence Carter.......................... 56 Vice President of Sales
Everett A. Bruce......................... 53 Vice President of Software Development
Marietta Benignus........................ 37 Vice President of Administration
John B. Torkelsen(1,3)................... 50 Chairman and Director
Melvyn J. Goodman(2)..................... 53 Director
John Lucas-Tooth(2)...................... 63 Director
Neal J. Robinson(1,3).................... 51 Director
</TABLE>
- ---------
(1) Member of Audit Committee.
(2) Member of Stock Option Committee.
(3) Member of Compensation Committee.
MR. FOSTER has served as President, CEO and a director of the Company since
August 11, 1994, the date of the Merger. Mr. Foster joined Industries in 1985,
and served as President and a director from 1986 through the date of the Merger,
CEO from 1989 through the date of the Merger and Chairman from 1990 through the
date of the Merger. Mr. Foster received his B.E. in Electrical Engineering from
Stevens Institute of Technology.
DR. SCHALK joined Industries in 1983. From 1990 through the date of the Merger,
he served as Chief Technical Officer of Industries and became Chief Technical
Officer of the Company effective upon the Merger. Prior to joining Industries,
Dr. Schalk was employed by Texas Instruments Incorporated, where he conducted
speech research. Dr. Schalk received a Bachelor of Science with high honors in
Electrical Engineering from the George Washington University and a Ph.D. in
Biomedical Engineering from the Johns Hopkins University.
MS. TERRY joined Industries in 1983. From 1986 through the date of the Merger,
she served as Controller and Corporate Secretary of Industries and became Vice
President/Controller and Corporate Secretary of the Company effective upon the
Merger. Prior to joining Industries, Ms. Terry worked in public accounting in
Texas and California. Ms. Terry received a Bachelor of Business Administration
degree from the University of Texas at Austin.
MR. CARTER joined Industries in 1994 and became Vice President of Sales and
Marketing of the Company effective upon the Merger. Prior to joining Industries,
Mr. Carter served as president of Neodata Services, Inc., a direct response
marketing service company, from 1989 to 1993. Between leaving Neodata and
joining the Company, Mr. Carter was self-employed as a business consultant in
direct marketing and business communications. Mr. Carter received a Bachelor of
Commerce from Concordia University.
MR. BRUCE joined the Company as Vice President of Software Development in June
1995. From 1994 until he joined the Company, Mr. Bruce served as vice president
of development for Data Parallel Systems, a developer of high-performance
database management systems. From 1991 to 1994, he served as director of
software for Truevision, a developer of multimedia and digital video products.
Mr. Bruce received a Bachelor of Arts degree in Chemistry from Wesleyan
University and a Master of Science degree in Chemistry from the University of
Wisconsin.
MS. BENIGNUS joined the Company in October 1995 as Vice President of
Administration. From August 1993 until she joined the Company, Ms. Benignus was
employed by ColorTyme, Inc. where she first served as corporate field training
manager and later as controller. Prior to her association with ColorTyme, Ms.
Benignus served as vice president of human resources for Lehndorff USA Group, a
national real estate
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<PAGE> 34
investment firm, since 1988. Ms. Benignus earned a Bachelor of Business in
Finance from Texas Tech University and a Master of Education in Counselor
Education from the University of North Texas.
MR. TORKELSEN, who has been a director of the Company since 1986, is the
founder, and has been the president, of Princeton Venture Research, Inc.
("PVR"), an investment banking and consulting firm in Princeton, New Jersey,
since November 1984. Since 1985, Mr. Torkelsen has been a director of Mikros
Systems Corporation of Princeton, New Jersey, a company which develops and
manufactures specialty military microprocessors. Mr. Torkelsen has been
president of PVR Securities, Inc., a private investment banking firm located in
Princeton, New Jersey, since 1987. Mr. Torkelsen received a B.S. degree in
Chemical Engineering from Princeton University and an M.B.A. from Harvard
University.
MR. GOODMAN, who has been a director of the Company since the Merger and was a
director of Industries from 1986 until the Merger, is president of Melgood
Investments, Inc. Mr. Goodman was president of Islander Sportswear, Inc. from
March 1989 until January 2, 1996; Islander Sportswear filed for a voluntary
petition under Chapter 11 of the United States Bankruptcy Code on January 2,
1996. Formerly, Mr. Goodman was chairman of ALC Communications Corporation, the
parent company of Allnet Communications Services, a national long distance
telephone company. He is licensed to practice law in the State of Illinois but
is not actively practicing. Mr. Goodman received his J.D. from DePaul University
(Chicago).
SIR JOHN LUCAS-TOOTH has been a director of the Company since 1990. Since
September 1993, he has served as a director of Rupert Loewenstein Limited, a
private investment company. For over five years he has been chairman and chief
executive officer of Sixera Asia Ventures Ltd. and a supervisor of Japan
Ventures Fund and Japan Asia Ventures Fund. These three entities concentrate in
Southeast Asia investments. Since July 1993, he has been chairman of two mutual
insurance companies, MAPIC Limited and SEPIA Limited, which specialize in
indemnity insurance. Sir John Lucas-Tooth graduated from Oxford University with
a degree in Physics and a post-graduate degree in Spectroscopy.
MR. ROBINSON, who has been a director of the Company since the Merger and was a
director of Industries from 1986 until the Merger, has been president of Neal
Robinson Investments, Inc., a private investment company, since 1984. Mr.
Robinson was Chief Executive Officer of Industries from 1986 through 1989, and
was Chairman of Industries from 1986 through 1990. Mr. Robinson is a partner in
the Williamsburg, Virginia law firm of Spirn, Tarley, Robinson and Tarley. Mr.
Robinson received a B.B.A. in Accounting from Spencerian College, an M.B.A. from
the University of Dallas and a J.D. from the Marshall-Wythe School of Law of the
College of William & Mary in 1992. Mr. Robinson is an attorney-at-law (Virginia)
and a Certified Public Accountant (Texas).
All directors are elected at each annual meeting. The current Board of Directors
was formed upon the Merger and consists of three designees of Industries and two
designees of Scott Instruments Corporation (the "Industries Designees" and the
"Scott Designees," respectively). In connection with the Merger, the Company and
twelve stockholders (the "Affiliated Stockholders"), including Messrs.
Torkelsen, Robinson and Foster and Sir John Lucas-Tooth, entered into the
Stockholders Agreement. It provides that, until January 1, 1997, (i) the Company
will nominate the Industries Designees and the Scott Designees (or a successor
appointed by the remaining Industries Designees or Scott Designees, as the case
may be) for re-election and (ii) unless the Affiliated Stockholders own, in the
aggregate, less than 10% of the outstanding Common Stock, they will vote for
re-election of such persons. After the completion of this offering, the
Affiliated Stockholders will beneficially own approximately 25.2% of the
outstanding shares of Common Stock (assuming the exercise of all options and
warrants held by them).
Executive officers are elected by the Board at its annual meeting and serve at
the discretion of the Board. Except as provided below, executive officers hold
office until the next annual meeting or until their successors are elected.
During the first three quarters of 1994, the Company reimbursed travel expenses
submitted by the directors who attended its meetings. Beginning in the fourth
quarter of 1994, the Board changed its policy and elected to pay a flat fee of
$1,750 (or $2,750 for international travelers) in lieu of actual expense
reimbursement for meetings attended in person. The Board currently has three
standing committees, the Compensation Committee, whose function is to establish
salaries and incentives for directors and executive officers of the
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<PAGE> 35
Company, 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 auditors of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for the
Company's Chief Executive Officer and other executive officers earning in excess
of $100,000 ("Named Executives") during 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- -------------
OTHER ANNUAL AWARDS
SALARY BONUS COMPENSATION OPTIONS ALL OTHER
NAME/PRINCIPAL POSITION YEAR ($) ($) ($) (# OF SHARES) COMPENSATION
- ---------------------------- ---- ------- ------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Foster............. 1993(1) 146,942 16,667 -- 104,484 --
President and CEO 1994(2) 149,174 44,042 -- 39,181 --
1995 158,223 27,500 -- 50,000 --
Lawrence Carter............. 1993 -- -- -- -- --
Vice President -- Sales and 1994(3) 24,057 -- -- 65,302 --
Marketing 1995 100,602 60,000 -- -- --
Thomas B. Schalk............ 1993(4) 96,343 15,000 -- 22,856 --
Chief Technical Officer 1994(5) 100,805 14,375 -- 39,181 --
1995 128,094 15,750 -- -- --
</TABLE>
- ---------------
(1) Mr. Foster was employed by Industries prior to the Merger. The figures
listed for 1993 were paid by Industries.
(2) Mr. Foster served as President and CEO of the Company from August 11, 1994,
the date of the Merger, through the end of the year. 1994 figures include
amounts paid by Industries prior to the Merger and paid by the Company
after the Merger.
(3) Mr. Carter joined Industries in July 1994. The amounts listed for 1994
include amounts paid by Industries prior to the Merger and paid by the
Company after the Merger.
(4) Dr. Schalk was employed by Industries prior to the Merger. The figures
listed for 1993 were paid by Industries.
(5) Dr. Schalk served as Chief Technical Officer of the Company from August 11,
1994, the date of the Merger, through the end of the year. 1994 figures
include amounts paid by Industries prior to the Merger and paid by the
Company after the Merger.
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<PAGE> 36
The following table sets forth certain information concerning options granted
during 1995 to Named Executives:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------
% OF TOTAL
OPTIONS
GRANTED EXERCISE OR
OPTIONS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME (# OF SHARES) IN FISCAL YEAR ($/SHARE) DATE
- --------------------------------------- --------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Peter J. Foster........................ 50,000(1) 29% $ 5.375 10/1/2005
President and CEO
Lawrence Carter........................ -- -- -- --
Vice President -- Sales and Marketing
Thomas B. Schalk....................... -- -- -- --
Chief Technical Officer
</TABLE>
- ---------
(1) Options vest at a rate of 25% per annum beginning 10/1/96.
The following table summarizes options and warrants exercised during 1995 and
presents the value of unexercised options held by Named Executives at fiscal
year end:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
SHARES VALUE (# OF SHARES) ($)
ACQUIRED ON REALIZED EXERCISABLE(E)/ EXERCISABLE(E)/
NAME EXERCISE(#) ($) UNEXERCISABLE(U) UNEXERCISABLE(U)
- ----------------------------------------------------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Peter J. Foster........................... -- -- 361,056(E) $2,036,541(E)
90,814(U) $ 250,271(U)
Lawrence Carter........................... -- -- 16,325(E) $ 59,178(E)
48,977(U) $ 177,542(U)
Thomas B. Schalk.......................... -- -- 100,924(E) $ 548,750(E)
40,814(U) $ 169,021(U)
</TABLE>
- ---------
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Peter J. Foster
providing that Mr. Foster will serve as President and Chief Executive Officer
until June 18, 1997, which agreement shall be extended for one additional
one-year period unless either the Company or Mr. Foster notifies the other party
of an intention to terminate the agreement 30 days prior to the end of the
present term. Mr. Foster receives an annual salary of $175,500, plus an annual
bonus of $27,500 and an unaccountable discretionary expense allowance of $27,600
annually. The agreement contains confidentiality and invention assignment
provisions. The agreement also contains non-solicitation and non-competition
provisions that extend for twenty-four months following the termination of Mr.
Foster's employment; there can be no assurance regarding the enforceability of
such provisions under Texas law. In the event that (i) Mr. Foster's employment
is terminated without cause or he resigns as a result of a breach of the
agreement by the Company, or (ii) Mr. Foster resigns under certain circumstances
following a Change in Control (as defined) of the Company, Mr. Foster will be
entitled to a lump-sum cash payment equal to 100% or 150%, respectively, of his
annual aggregate compensation and any
34
<PAGE> 37
unused vacation time, and the period in which he can exercise stock options will
be extended for one year. The Company agreed to indemnify Mr. Foster for losses
sustained and expenses incurred as a result of the discharge of his duties, to
the full extent permitted by law.
The Company has entered into an employment agreement with Dr. Thomas B. Schalk
providing that Dr. Schalk will serve as Chief Technical Officer until June 18,
1997, which agreement shall be extended for one additional one-year period
unless either the Company or Dr. Schalk notifies the other party of an intention
to terminate the agreement 30 days prior to the end of the present term. Dr.
Schalk receives an annual salary of $145,000, plus a performance bonus of up to
$5,000 per calendar quarter based upon Dr. Schalk's exceptional achievements
during the quarter as determined by the Compensation Committee of the Board of
Directors. The agreement contains confidentiality and invention assignment
provisions. The agreement also contains solicitation and non-competition
provisions that extend for twenty-four months following the termination of Dr.
Schalk's employment; there can be no assurance regarding the enforceability of
such provisions under Texas law. In the event that (i) Dr. Schalk's employment
is terminated without cause or he resigns as a result of a breach of the
agreement by the Company, or (ii) Dr. Schalk resigns under certain circumstances
following a Change in Control (as defined) of the Company, Dr. Schalk will be
entitled to a lump-sum cash payment equal to 150% of his annual aggregate
compensation and any unused vacation time, and the period in which he can
exercise stock options will be extended for one year. The Company agreed to
indemnify Dr. Schalk for losses sustained and expenses incurred as a result of
the discharge of his duties, to the full extent permitted by law.
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<PAGE> 38
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of December 31, 1995, with respect
to: (i) each person known by the Company to be the beneficial owner of more than
5% of outstanding Common Stock, (ii) shares of Common Stock beneficially owned
by Named Executives and (iii) each current director and by all current directors
and executive officers of the Company as a group (10 persons at such date).
In addition to the 1,251,533 shares of Common Stock being offered hereby for the
account of the Company, the following shares of Common Stock are being offered
hereby for the account of the security holders named in the table below and
indicated as offering shares hereby (all security holders named in such table
and indicated as offering shares are referred to as the "Selling Stockholders"):
(i) 98,804 currently outstanding shares held by certain of the Selling
Stockholders and (ii) 101,313 shares that will be issued to certain Selling
Stockholders prior to completion of the offering upon the exercise of options or
warrants (as described under "--Exercise of Options and Warrants"). In addition,
there are being offered hereby 1,018,350 shares (the "Option Shares") that will
be issued to the Underwriters prior to completion of this offering upon exercise
by them of the Options that will be sold by certain Selling Stockholders to them
prior to completion of the offering (as described below under "-- Sale of
Options").
Based upon information currently available to the Company, the table below also
sets forth with respect to each Selling Stockholder as of December 31, 1995: (i)
the number of shares of Common Stock currently beneficially owned by such
Selling Stockholder (including (a) options or warrants beneficially owned by
such Selling Stockholder, some or all of which may be exercised by such Selling
Stockholder prior to completion of this offering, or (b) Options to be sold by
such Selling Stockholder to the Underwriters), (ii) the number of shares of
Common Stock to be sold in the offering for the account of such Selling
Stockholder, or the number of Option Shares to be sold in the offering that will
be issued to the Underwriters upon exercise by them of Options being sold to
them by such Selling Stockholder and (iii) the shares of Common Stock that will
be beneficially owned by such Selling Stockholder immediately upon completion of
the offering. The table below also indicates by footnote reference or otherwise
any material relationship which a Selling Stockholder has had with the Company
during the preceding three years.
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIAL OWNERSHIP SHARES OFFERED BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING ----------------------- AFTER THE OFFERING
---------------------- SHARES OPTIONS ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OWNED(1) SHARES(2) NUMBER PERCENT
- ------------------------------------- --------- ------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
(i) Certain Beneficial Owners
Dialogic Corporation
1515 Route 10
Parsippany, NJ 07054(3).............. 2,419,482 36.8% 85,769 914,231 1,419,482 17.7%
(ii) Directors and Named
Executive Officers:
John B. Torkelsen(4)................. 290,631 6.6% -- -- 290,631 4.3%
John Lucas-Tooth(5).................. 63,660 1.4% 13,035 -- 50,625 *
Peter J. Foster(6)................... 540,432 11.5% 104,119 436,313 6.3%
Neal J. Robinson(7).................. 450,304 9.8% -- -- 450,304 6.5%
Melvyn J. Goodman(8)................. 244,920 5.6% -- -- 244,920 3.6%
Lawrence F. Carter................... 16,325 * -- -- 16,325 *
Thomas B. Schalk(9).................. 111,807 2.5% 22,361 -- 89,446 1.3%
(iii) All Current Directors and
Executive Officers as a group (10
persons)(12)....................... 1,760,342 33.5% 43,848 104,119 1,612,375 21.5%
(iv) Selling Stockholders Not
Included Above:
E. Ray Cotten(10)(13)................ 58,678 1.3% 9,250 -- 49,428 *
Marvin Preston IV(11)(13)............ 43,075 1.0% 5,000 -- 38,075 *
Melanie Watson(13)................... 12,500 * 12,500 0 --
Brian Scott(13)...................... 43,750 1.0% 43,750 0 --
Kim S. Terry(14)..................... 42,263 1.0% 8,452 -- 33,811 *
</TABLE>
- ---------
* Less than one percent
36
<PAGE> 39
(1) Represents with respect to a Selling Stockholder the shares that will be
held by such Selling Stockholder prior to completion of this offering and
sold for the account of the Selling Stockholder in the Offering.
(2) Represents with respect to certain Selling Stockholders the number of
Option Shares to be sold in this offering that will be issued to the
Underwriters upon exercise by them of Options to be sold to them by such
Selling Stockholders. See "--Sale of Options."
(3) Beneficial ownership includes (i) prior to the offering, 914,231 shares of
Common Stock issuable upon exercise of options and 1,302,365 shares of
Common Stock issuable upon the conversion of debt and accrued interest
through December 31, 1995 and (ii) after the offering, 1,302,365 shares
issuable upon the conversion of debt and accrued but unpaid interest.
Dialogic Corporation, which is the Company's largest customer and
stockholder, owns these shares indirectly through a wholly-owned
subsidiary, Dialogic Investment Corporation. See "Certain Relationships and
Related Transactions -- Dialogic Relationship."
(4) Beneficial ownership includes 41,000 shares held by Mr. Torkelsen's wife,
as to which Mr. Torkelsen disclaims beneficial ownership. Includes warrants
for 38,125 shares issued to Mr. Torkelsen or PVR, of which Mr. Torkelsen is
the president and sole stockholder.
(5) Beneficial ownership includes warrants for 50,625 shares of Common Stock.
(6) Beneficial ownership includes 23,307 shares held by Mr. Foster's wife, as
to which Mr. Foster disclaims beneficial ownership and 19,590 shares held
in trust for Mr. Foster's minor children. Includes, prior to and after the
offering, 361,056 and 256,937 shares, respectively, issuable upon exercise
of vested options.
(7) Beneficial ownership includes 211,060 shares which may be issued upon
exercise of options and 30,000 shares issuable upon exercise of warrants.
(8) Beneficial ownership includes 26,121 shares which may be issued upon
exercise of options and 30,000 shares issuable upon exercise of warrants.
(9) Beneficial ownership includes 100,924 shares issuable upon exercise of
vested options.
(10) Beneficial ownership includes warrants for 57,500 shares of Common Stock.
(11) Beneficial ownership includes 500 shares held by Mr. Preston's wife, as to
which Mr. Preston disclaims beneficial ownership, and warrants for 28,750
shares of Common Stock.
(12) Beneficial ownership includes, prior to and after the offering, 520,568
shares and 385,636 shares, respectively, issuable to executive officers
upon exercise of vested options, and the options and warrants described in
footnotes (4), (5), (7) and (8) above.
(13) Prior to the Merger, which occurred on August 11, 1994, Ms. Watson served
as the Company's Secretary and Controller and Dr. Scott served as the
Company's Vice Chairman and Executive Vice President. Mr. Preston served as
the Company's CEO from May 1987 to June 1, 1994. Mr. Cotten served as the
Company's President from December 1993 to August 1994 and CEO from June 1,
1994 to August 11, 1994.
(14) Ms. Terry is Vice President, Controller and Corporate Secretary for the
Company.
EXERCISE OF OPTIONS AND WARRANTS
Prior to completion of the offering, certain Selling Stockholders will exercise
options and warrants for an aggregate of 101,313 shares of Common Stock and will
sell such shares in the offering. The Company will receive an aggregate of
$388,795 in connection with the exercise of such options and warrants.
SALE OF OPTIONS
The Selling Stockholders who, in the table above, are indicated as offering
Option Shares will sell to the Underwriters prior to completion of the offering,
and the Underwriters will purchase from such Selling Stockholders, the options
relating to the Options Shares indicated with respect to such Selling
Stockholders (all such options being referred to as the "Options"). The purchase
price to be paid by the Underwriters for each Option will equal the per share
price to the public listed on the cover of this prospectus less the per share
underwriting discount listed on the cover and less the per share exercise price
required to be paid pursuant to the terms of such Option. The Underwriters will,
prior to completion of the offering, exercise all Options purchased and sell the
Option Shares acquired upon such exercise in the offering.
37
<PAGE> 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DIALOGIC RELATIONSHIP
Through Dialogic Investment Corporation, a wholly owned subsidiary, Dialogic
holds (i) 202,887 shares of Common Stock, (ii) a convertible note issued by the
Company in the principal face amount of $1,161,798.90, bearing interest at a
rate of prime plus 2% (the "Note") and (iii) options to purchase, at any time
prior to December 31, 1998, 914,231 shares of Common Stock at a per share
exercise price of approximately $.62 (the "Options"). Pursuant to an agreement
with the Company, the Options were earned by Dialogic during 1991, 1992 and 1993
when its purchases of Industries' products exceeded certain predetermined
targets. Because the exercise price of the Options when earned exceeded the fair
market value of Industries' stock (which at the time was not publicly traded),
no part of the value of these Options was recorded as a cost of sales in the
year in which they were earned. In connection with this offering, Dialogic will
(i) sell 85,769 shares of Common Stock and (ii) sell the Options to the
Underwriters who will exercise such Options and sell the shares of Common Stock
issued thereby. Upon completion of this offering, Dialogic will beneficially own
approximately 18% of the outstanding shares of the Company. The Company has
granted Dialogic "piggyback" registration rights until December 31, 1998 with
respect to all shares of capital stock it acquires from the Company. Dialogic
has agreed that, other than in connection with the offering, it will not sell or
otherwise dispose of any shares of Common Stock for 180 days following the
offering. See "Principal and Selling Shareholders" and "Underwriting."
The outstanding principal and all accrued but unpaid interest under the Note is
convertible into Common Stock by Dialogic, at any time prior to January 1, 1997,
at a price of approximately $.92 per share. Interest is payable annually; the
principal is not prepayable. The Note is secured by a security interest in the
use of the Company's non-exclusive technology and products (i.e., technology
that was not developed by the Company for a specific customer under a contract
giving such customer a proprietary interest in such technology) pursuant to a
Loan and Security Agreement, which also requires VCS to use its best efforts to
cause one designee of Dialogic to be elected to the Company's Board of
Directors. In the event Dialogic notifies VCS that it does not wish its designee
to serve on the VCS Board, then, until the Note is fully paid, VCS shall invite
a Dialogic designee to each meeting of the VCS Board and of each committee
thereof, and to each meeting of VCS's shareholders. VCS is required to provide
Dialogic the same information as the information which any director of VCS
receives or is entitled to receive. Dialogic has elected to have a designee
attend Board and committee meetings but not serve as a director. The Company has
also agreed in the Loan and Security Agreement that Dialogic will have unlimited
access to all of its non-exclusive technology and products on a "most favored
customer" basis until December 31, 2003, subject to extension through December
31, 2008. This obligation is also secured by the security interest in the use of
the Company's non-exclusive technology and products. The Company has agreed to
escrow its source code in order to assure access to such technology.
During 1994, Dialogic purchased products from Industries and the Company at a
cost of $2,796,974. During 1995, Dialogic purchased products from the Company at
a cost of $6,412,280.
ISSUANCE OF OPTIONS AND WARRANTS
On February 1, 1994, ten year warrants to purchase Common Stock at a price of
$5.00 per share (the closing sale price of Common Stock on such date) were
granted to the following individuals: Ralph Hulbert (a former director), 12,500;
Sir John Lucas-Tooth, 12,500; Marvin Preston IV, 3,750; E. Ray Cotten (a former
officer), 46,250; Brian L. Scott (a former officer and director), 43,750;
Melanie Watson (a former officer), 12,500; and Henry M. Carr (a former officer),
3,750. The warrants provide the holder of the shares issued thereunder with
certain "piggyback" registration rights. In connection with the issuance of
these warrants, options (at exercise prices ranging from $7.76 to $8.00 per
share) to purchase Common Stock for E. Ray Cotten (32,500), Brian L. Scott
(39,285) and Melanie Watson (6,496) were canceled.
On May 31, 1994, simultaneously with Marvin Preston IV's resignation as Chief
Executive Officer and in recognition of his service to the Company, the Board
agreed to adjust the exercise price of warrants held by
38
<PAGE> 41
him to purchase 35,714 shares of Common Stock from a weighted average price of
$11.32 per share to $4.00 per share. Expiration dates of these warrants range
from June 1995 to July 1998 and were not changed. The warrants provide that the
holder of the shares issued thereunder has "piggyback" registration rights.
On October 7, 1994, the Company granted options to purchase Common Stock of the
Company at a price of $3.375 per share to the following officers: Larry Carter,
65,302 options, Peter Foster and Thomas B. Schalk, 39,181 options each, and Kim
Terry, 20,897 options. All options vest at a rate of 25% per annum beginning
October 7, 1995. In addition, the Company granted Melvyn J. Goodman, Sir John
Lucas-Tooth, Neal J. Robinson and John B. Torkelsen each the right to purchase
for one cent ($.01) warrants to purchase up to 30,000 shares of the Company's
Common Stock at a price of $3.375 per share. Mr. Torkelsen purchased his
warrants from the Company on February 27, 1995. Melvyn Goodman purchased his
warrants from the Company on April 10, 1995 and Neal Robinson purchased his
warrants from the Company on November 30, 1995.
On July 10, 1995, the Company granted Everett Bruce options to purchase 40,000
shares of Common Stock at a price of $3.00 per share. This option vests ratably
over four years of continuous employment.
On October 4, 1995, the Company granted Peter Foster options to purchase 50,000
shares of Common Stock and Marietta Benignus options to purchase 12,000 shares
of Common Stock at a price of $5.375 per share. These options vest ratably over
four years of continuous employment.
Certain of the holders of options and warrants described above are Selling
Stockholders in the offering. See "Principal and Selling Stockholders" and
"Underwriting."
OTHER TRANSACTIONS
In 1992, Brian Scott exercised options to purchase 35,715 shares of Common Stock
at an exercise price of $7.00 per share, for cash and a note in the amount of
$193,302. Interest on the note was at the rate of 6% per annum. The note was
collateralized by shares of the Company's Common Stock purchased and originally
matured June 10, 1993. On February 1, 1994, the maturity date of the note was
retroactively extended until June 10, 1994. The outstanding balance at March 31,
1994 was $170,100. In April 1994, the Company agreed to cancel the note in
exchange for the collateral on the note of 24,300 shares of Common Stock. The
Company also agreed to forgive the unpaid interest on the note in the amount of
$12,308.
In 1993, John Torkelsen and Sir John Lucas-Tooth exercised warrants to purchase
a total of 11,385 shares of Common Stock at an exercise price of $7.00 per
share. At March 31, 1994, non interest bearing receivables of $79,695 were
recorded related to the exercise of these warrants. On June 1, 1994, these non
interest bearing receivables were converted into promissory notes with interest
rates of 6% per annum and with principal and interest due on June 30, 1996.
In January 1994, the Company agreed to pay PVR, of which Mr. Torkelsen is the
President, the sum of $376,500 and $111,000 for investment banking service fees
and expenses, respectively, incurred and accrued prior to December 31, 1993.
These amounts were paid to PVR by the Company on June 2, 1994.
In March 1994, the Company sold in a private placement 225,000 shares of its
Common Stock for $5.00 per share, which resulted in cash proceeds to the Company
of $1,125,000 (of which $375,000 was paid as of March 31, 1994, $712,500 was
paid on June 2, 1994 and the balance of $37,500 was paid in June 1994). John
Torkelsen purchased 142,500 shares for $712,500, Marvin Preston purchased 12,000
shares for $60,000 and Sir John Lucas-Tooth purchased 7,500 shares for $37,500.
The Company agreed to file a registration statement under the Securities Act
covering the resale of shares of Common Stock issued in the private placement.
In June 1994, the Company sold in a private placement 30,461 shares of its
Common Stock for $4.00 per share, which resulted in cash proceeds to the Company
of $121,845. Ralph Hulbert purchased 2,500 shares in the private placement. The
Company agreed to file a registration statement under the Securities Act
covering the resale of shares of Common Stock issued in the private placement.
39
<PAGE> 42
On June 2, 1994, the Company paid PVR $230,000 in legal and other expenses
incurred in the fourth quarter of 1993 and the first quarter of 1994 previously
paid by PVR on behalf of the Company. On January 19, 1995, the Company paid PVR
$50,966 for legal fees incurred in the second and third quarter of 1994
previously paid by PVR on behalf of the Company. Mr. Torkelsen, the Company's
Chairman, is the president of PVR.
On July 12, 1994, the Company entered into a Separation Agreement with E. Ray
Cotten whereby Mr. Cotten's full-time service to the Company terminated on
August 15, 1994. During the twelve months beginning August 16, 1994, Mr. Cotten
received compensation in the amount of $134,800. He was available to provide
consulting services to the Company for up to twenty hours per month and agreed
not to engage in any business that is in direct competition with the business of
the Company during that period. Mr. Cotten also received medical, life and
disability insurance benefits for a one year period, and medical insurance
benefits will be provided for an additional two year period.
On September 20, 1994, Dialogic converted accrued but unpaid interest due on its
convertible Note in the amount of $99,286 into 108,060 shares of the Company's
Common Stock. On September 20, 1995, Dialogic converted accrued but unpaid
interest due on its convertible Note in the amount of $123,787 into 134,727
shares of the Company's Common Stock.
On October 7, 1994, the Company renewed and extended the convertible note
originally issued by Industries to Peter J. Foster on the same terms and
conditions, except that the maturity date was changed to August 1, 1995. On
August 1, 1995, Peter J. Foster converted his convertible note into 50,633
shares of Common Stock.
In July 1995 and November 1995, the Company extended the terms of Dr. Schalk's
and Mr. Foster's employment agreements, respectively, through June 18, 1997.
In October 1995, Neal J. Robinson exercised 63,307 options of the Company for
$170,929 and Melvyn J. Goodman exercised 63,306 options of the Company for
$170,926.
John Torkelsen exercised 1,116 warrants of the Company for $7,812, and John
Lucas-Tooth exercised 446 warrants of the Company for $3,122, on December 6,
1995, the date such warrants would have expired.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, the Company's authorized capital stock will
consist of 20,000,000 shares of Common Stock, par value $.01 per share, and
300,000 shares of preferred stock, par value $1.00 per share (the "Preferred
Stock"), of which 6,734,086 shares of Common Stock and no shares of Preferred
Stock will be issued and outstanding. All of the issued and outstanding shares
of Common Stock will be fully paid and nonassessable. In addition, upon
consummation of the offering there will be reserved for issuance 2,686,512
shares of Common Stock issuable upon the exercise of outstanding options or
warrants or the conversion of a convertible note.
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by this reference to the
Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and By-laws, as amended (the "By-laws"), copies of which have
been filed or incorporated as exhibits to the Registration Statement of which
this Prospectus forms a part.
COMMON STOCK
Each issued and outstanding share of Common Stock entitles the holder thereof to
one vote on all matters submitted to a vote of stockholders. The Company's
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 the Company. The
Certificate of Incorporation makes no provision for subscription or conversion
rights, redemption privileges or sinking funds with respect to shares of Common
Stock. Upon any liquidation, dissolution or winding up of the affairs of the
Company, holders of 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 preferred stock outstanding at the time. Subject
to rights of holders of preferred stock, dividends on Common Stock may be paid
if, as and when declared by the Company's Board of
40
<PAGE> 43
Directors out of funds legally available therefor. The Company has never paid
cash or other dividends on shares of 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 preferred stock in
series by adoption of a resolution or resolutions providing for the issue of
series of preferred stock. Each series of preferred stock will have such
distinctive designation or title as may be fixed by the Board of Directors of
the Company 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 preferred stock. No preferred stock is currently outstanding.
OUTSTANDING OPTIONS AND WARRANTS
Following the offering, there will be outstanding options to purchase 1,132,147
shares of Common Stock at prices ranging from $1.15 to $8.52 per share, with a
weighted average exercise price of $2.35 per share. In addition, there will be
outstanding warrants to purchase 252,000 shares of Common Stock at prices
ranging from $4.00 to $8.00 per share, with a weighted average exercise price of
$4.59 per share. There will also be a convertible note, in the principal amount
of $1,161,798, convertible into shares of Common Stock at a price of
approximately $.92 per share.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company'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.
The Company's By-laws, as amended, provide that directors, trustees, officers,
employees and agents of the Company 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 the Company.
The Company maintains a policy of insurance under which the directors and
officers of the Company 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 the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
ANTI-TAKEOVER PROVISIONS
Pursuant to a Stockholders Agreement, certain individuals and institutions that
will beneficially own, in the aggregate, approximately 25.2% of the outstanding
Common Stock after the consummation of the offering (assuming that the
Underwriters over-allotment option is not exercised) have agreed to vote their
shares of Common Stock for the election of the current directors (or replacement
nominees) until January 1, 1997. See "Management." This agreement could make a
merger, tender offer or proxy contest involving the Company more difficult, even
if such events would be beneficial to the interests of stockholders.
41
<PAGE> 44
The Company, a Delaware corporation, is subject to the provisions of the General
Corporation Law of the State of Delaware, 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, the Company
to date has not made this election.
As described above, the Company's Certificate of Incorporation, as amended,
permits shares of preferred stock to be issued in the future without further
stockholder approval and upon such terms as the Board of Directors of the
Company may determine. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any 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 acquire, or of discouraging a third party from attempting
to acquire, a majority of the outstanding capital stock. The Company has no
present plan to issue any shares of preferred stock.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Chemical Mellon
Shareholder Services, Dallas, Texas.
42
<PAGE> 45
UNDERWRITING
The underwriters of this offering of Common Stock (the "Underwriters"), for whom
First Albany Corporation ("First Albany") and First Analysis Securities
Corporation are serving as representatives, have agreed, subject to the terms
and conditions of the Underwriting Agreement (the form of which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part): (i)
to purchase certain Options from certain Selling Stockholders (as described
under "Principal and Selling Stockholders--Sale of Options") and (ii) to
purchase from the Company, the Selling Stockholders and by exercise of such
Options the number of shares of Common Stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
------------------------------------------------------------------------ ------------
<S> <C>
First Albany Corporation................................................
First Analysis Securities Corporation...................................
------------
Total......................................................... 2,470,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters to
purchase shares of Common Stock are subject to certain conditions, and that if
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all shares of Common Stock agreed to be purchased by
the Underwriters pursuant to the Underwriting Agreement must be so purchased.
The Company has been advised that the Underwriters propose to offer the shares
of Common Stock (including the Option Shares acquired upon exercise of the
Options) directly to the public initially at the public offering price set forth
on the cover page of this Prospectus, and to certain selected dealers (who may
include the Underwriters) at such public offering price less a concession not in
excess of $ per share. The Underwriters may allow, and the selected
dealers may reallow, a concession not in excess of $ per share to
certain other brokers and dealers. After the public offering, the public
offering price, the concession to selected dealers and the reallowance to other
dealers may be changed by the Underwriters.
Purchasers of the shares offered pursuant to this offering may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
The Company and Dialogic Investment Corporation, a wholly owned subsidiary of
Dialogic and a Selling Stockholder, have granted to the Underwriters an option
to purchase up to an additional 220,500 shares and 150,000 shares of Common
Stock, respectively, at the public offering price, less the underwriting
discounts and commissions shown on the cover page of this Prospectus, solely to
cover over-allotments, if any. The options may be exercised at any time up to 30
days after the date of this Prospectus. To the extent that the Underwriters
exercise such option, each of the Underwriters will be committed, subject to
certain conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments that the
43
<PAGE> 46
Underwriters may be required to make in respect thereof other than from
liabilities created by information provided by the Underwriters.
All of the executive officers and directors of the Company and the Selling
Stockholders have agreed not to offer, sell, contract to sell or grant any
option to purchase or otherwise dispose of any shares of Common Stock during the
period of 180 days after the date of this Prospectus without the prior written
consent of First Albany. The Company has also agreed not to offer, sell,
contract to sell or otherwise dispose of any share of Common Stock or any
securities convertible into or exchangeable for Common Stock or any rights to
acquire Common Stock (except pursuant to the exercise of outstanding options or
other rights to acquire Common Stock or with respect to options granted under
the Company's employee stock option plans) for a period of 180 days after the
date of this Prospectus without the prior written consent of First Albany.
EXPERTS
The financial statements included in this 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.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
Ernst & Young served as independent accountant for Scott Instruments Corporation
for the years ended December 31, 1992 and 1993. On August 15, 1994, the
Company's Board of Directors, in connection with the change in control of the
Registrant following the Merger, selected BDO Seidman, LLP, to serve as its
independent accountant with respect to the year ended December 31, 1994. The
Board of Directors failure to select Ernst & Young as the Company's independent
accountants constitutes their being "dismissed" as such term is used in Item 304
of Regulation S-B, under the Securities Act of 1933, as amended.
Ernst & Young's reports on the Company's financial statements for the years
ended December 31, 1992 and 1993, 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 1992 and 1993, however, did disclose the
uncertainty surrounding the Company's continuation as a going concern. The
Company did not have 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.
LEGAL MATTERS
Certain legal matters in connection with the legality of the shares of Common
Stock offered hereby will be passed upon for the Company by Dickinson, Wright,
Moon, Van Dusen & Freeman, Chicago, IL. Certain legal matters will be passed
upon for the Underwriters by Goodwin, Procter & Hoar, Boston, MA.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 as amended (the "1934 Act") and in accordance therewith
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed with the Commission are
available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at certain of the Commission's regional
offices located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; 75 Park Place, New York, New York 10007; and
Suite 500 East, 5757 Wilshire Boulevard, Los Angeles, California 90036. Copies
of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549,
at prescribed rates.
44
<PAGE> 47
The Company's Common Stock is listed on the American Stock Exchange/Emerging
Company Marketplace under the symbol VPS.EC. Reports and other information
concerning the Company can be inspected at the offices of the American Stock
Exchange, 86 Trinity Place, New York, New York 10006. The Common Stock has been
approved for listing on The Nasdaq National Market, subject to official notice
of issuance. Filings with The Nasdaq National Market can be inspected at the
offices of The National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
INFORMATION INCORPORATED BY REFERENCE
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the 1934 Act prior to the termination of the offering of
the shares of Common Stock offered hereby, shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents.
The Company will provide copies of the above listed documents including
financial statements and schedules but not including exhibits, at no charge to
each person to whom a Prospectus is delivered, upon receipt of a written request
of such person addressed to the attention of Investor Relations, at Voice
Control Systems, Inc., 14140 Midway Road, Suite 100, Dallas, Texas 75244. Copies
of any exhibit to the above documents will be furnished upon the payment of a
reasonable fee.
45
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors Report............................................................ F-2
Balance Sheets at December 31, 1994 and 1993........................................... F-3
Statements of Operations for Each of the Three Years in the Period Ended December 31,
1994................................................................................. F-4
Statements of Stockholders' Equity for Each of the Three Years in the Period Ended
December 31, 1994.................................................................... F-5
Statements of Cash Flow for Each of the Three Years in the Period Ended December 31,
1994................................................................................. F-6
Notes to Financial Statements.......................................................... F-7
Balance Sheet at September 30, 1995.................................................... F-15
Statements of Operations for the Nine Months Ended September 30, 1995 and 1994......... F-16
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994......... F-17
Notes to Financial Statements.......................................................... F-18
</TABLE>
F-1
<PAGE> 49
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, 1994 and 1993, and the related statements of operations,
capital deficit, and cash flows for each of the three years in the period ended
December 31, 1994. 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, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
February 2, 1995
F-2
<PAGE> 50
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,075,527 $ 996,772
Accounts receivable (net of $35,000 allowance for doubtful
accounts
in 1994)...................................................... 920,820 1,394,254
Assets held for sale (Notes 2 and 12)............................ 150,000 --
Inventory (Note 4)............................................... 286,273 219,317
Prepaid expenses................................................. 87,075 59,571
----------- -----------
Total current assets..................................... 2,519,695 2,669,914
Net property and equipment (Note 5)................................ 484,097 240,779
Other assets....................................................... 25,770 16,055
----------- -----------
$ 3,029,562 $ 2,926,748
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Convertible debentures-related party (Note 6).................... $ 200,000 $ 380,000
Accounts payable and accrued expenses (Note 7)................... 481,800 363,865
Deferred revenue................................................. 56,250 12,500
Current portion of long-term debt (Note 6 and 12)................ 108,857 --
----------- -----------
Total current liabilities................................ 846,907 756,365
Long term debt (Notes 3 and 6)..................................... 1,174,607 1,161,799
----------- -----------
Total liabilities........................................ 2,021,514 1,918,164
----------- -----------
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:
Authorized shares -- 20,000,000 in 1994 and 35,000,000 in
1993; Issued and outstanding shares -- 3,877,979 in 1994 and
2,196,391 in 1993............................................. 38,780 21,964
Paid-in capital.................................................. 9,853,401 3,192,237
Receivable from stockholders..................................... (79,695) --
Deficit.......................................................... (8,804,438) (2,205,617)
----------- -----------
Total stockholders' equity............................... 1,008,048 1,008,584
----------- -----------
$ 3,029,562 $ 2,926,748
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 51
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Sales (Note 11)........................................ $ 6,333,829 $7,052,239 $3,557,793
Cost of sales.......................................... 1,643,519 2,051,490 1,210,040
----------- ---------- ----------
Gross profit......................................... 4,690,310 5,000,749 2,347,753
Costs and expenses:
Research and development............................. 1,962,009 1,190,323 927,276
Selling, general and administrative.................. 2,933,801 1,673,017 936,950
Acquired R&D/Goodwill (Note 2)....................... 6,251,761 -- --
Interest, to affiliates (Note 6)..................... 141,560 159,517 207,047
----------- ---------- ----------
Total costs and expenses..................... 11,289,131 3,022,857 2,071,273
----------- ---------- ----------
Net income (loss) before taxes......................... (6,598,821) 1,977,892 276,480
----------- ---------- ----------
Income taxes (Note 9).................................. -- 98,000 --
----------- ---------- ----------
Net income (loss)...................................... $(6,598,821) $1,879,892 $ 276,480
=========== ========== ==========
Net income (loss) per share:
Primary.............................................. $ (2.29) $ .82 $ .15
=========== ========== ==========
Fully diluted........................................ $ (2.29) $ .52 $ .15
=========== ========== ==========
Weighted average outstanding shares:
Primary.............................................. 2,881,195 2,291,558 1,880,017
=========== ========== ==========
Fully diluted........................................ 2,881,195 3,750,075 1,880,017
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 52
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK PAID-IN RECEIVABLE
STOCK DOLLARS CAPITAL FROM S/HS DEFICIT TOTAL
--------- ------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992
(Note 2)............... 1,880,017 $18,800 $2,904,510 $ -- $(4,361,989) $(1,438,679)
Net Income............... -- -- -- -- 276,480 276,480
--------- ------- ---------- -------- ----------- -----------
Balance, December 31,
1992................... 1,880,017 18,800 2,904,510 -- (4,085,509) (1,162,199)
Issuance of 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
========= ======= ========== ======== =========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 53
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(6,598,821) $1,879,892 $ 276,480
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....................... 284,147 101,624 84,160
Provision for bad debts............................. 35,000 -- --
Changes in operating assets and liabilities:
Accounts receivable............................... 678,300 (1,089,548) (60,884)
Other assets...................................... (9,715) -- (19,266)
Prepaid expenses.................................. 1,720 (42,612) 5,749
Inventory......................................... (5,528) (62,517) (24,879)
Accounts payable and accrued expenses............. (155,484) 237,841 (162,463)
Deferred revenue.................................. 32,350 (59,000) 71,500
---------- ---------- ---------
Net cash provided by operating activities................ 264,783 965,680 170,397
---------- ---------- ---------
Net cash used in investing activities:
Capital expenditures................................... (240,376) (137,804) (99,228)
---------- ---------- ---------
Cash flows from financing activities:
Principal payments under capital lease obligations and
notes payable....................................... (12,925) (195,795) (30,718)
Proceeds from exercise of employee stock options....... 67,273 500 --
---------- ---------- ---------
Net cash provided by (used in) financing activities...... 54,348 (195,295) (30,718)
---------- ---------- ---------
Net increase in cash and cash equivalents................ 78,755 632,581 40,451
Cash and cash equivalents at beginning of year........... 996,772 364,191 323,740
---------- ---------- ---------
Cash and cash equivalents at end of year................. $1,075,527 $ 996,772 $ 364,191
========== ========== =========
Supplemental cash flows information
Interest paid.......................................... $ 41,788 $ 163,215 $ 212,912
Income taxes paid...................................... 65,000 28,000
Non Cash Investing and Financing Activities:
Conversion of debt and accrued interest to 154,057
and 316,048 shares of stock -- all issued to
affiliates
(Notes 3 and 6)................................... 281,012 290,391 --
Acquisition of Scott in exchange for 1,481,194
shares
of stock.......................................... $6,250,000 -- --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 54
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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 voice control 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.
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.
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.
Inventory
Inventory consists of speech recognition products and raw materials used in the
construction of speech recognition products. Inventory is stated at the lower of
cost or market value. Cost is determined on a first-in, first-out basis.
F-7
<PAGE> 55
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 1993 and 1992 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 three 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.
All of the Company's cash and cash equivalents are in one bank. Thus, the
balance over $100,000 exceeds the federally insured deposit limit.
2. BUSINESS ACQUISITION
Effective August 11, 1994, the Company acquired all of the stock of Industries
in a reverse acquisition accounted for using the purchase method of accounting
(see Note 1). Each outstanding share of Industries common stock was converted
into and exchanged for 2.61209 (.65302 after giving effect to the one-for-four
reverse stock split) shares of Scott's common stock. Concurrently, all
outstanding shares of common stock were subject to a one-for-four reverse stock
split. Each of the stock splits referred to above have been retroactively
reflected in the financial statements for all periods presented. In connection
with the transaction, the Company changed its number of authorized shares to
20,000,000.
For financial reporting purposes, the results of operations of Scott have been
included in the Company's financial statements since the effective date of
acquisition.
F-8
<PAGE> 56
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Scott's assets were revalued to approximate fair market value based on Scott's
average market capitalization from the date of the negotiated transaction,
January 28, 1994, to the effective date of acquisition, August 11, 1994, which
approximates $6.25 million. The revaluation of the assets consist of the
following:
<TABLE>
<S> <C>
Goodwill......................................................... $2,780,309
Research and development......................................... 3,060,000
Land and building................................................ 150,000
Remaining net assets............................................. 259,691
----------
$6,250,000
==========
</TABLE>
Goodwill was amortized using the straight-line method over a period of seven
years. Goodwill amortization during 1994 totaled $66,198. In December 1994, the
Company reappraised the factors contributing to the value of the goodwill
acquired and wrote-off goodwill totaling $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 following summarized unaudited proforma results of operations for the twelve
months ended December 31, 1994 and December 31, 1993 assume the acquisition
occurred as of the beginning of the respective periods. 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 1993
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Revenue................................................... $ 7,104,000 $ 9,509,000
Net income(loss) before write-off of acquired
R&D and goodwill........................................ (1,388,000) 695,000
Write-off of acquired R&D and goodwill.................... (6,252,000) (6,252,000)
----------- -----------
Net loss.................................................. $(7,640,000) $(5,557,000)
=========== ===========
Net loss per share........................................ $ (2.04) $ (1.66)
=========== ===========
Weighted average shares outstanding....................... 3,741,967 3,338,371
=========== ===========
</TABLE>
3. ISSUANCE OF CONVERTIBLE DEBT
In September 1991, the Company issued a three year promissory note to a major
customer (the "Lender") in the principal amount of $1,161,799 in exchange for
certain demand notes previously issued by the Company. The note bears interest
at a floating rate with a New Jersey bank plus 2%; interest is payable annually
and principal was due on September 20, 1994. On March 14, 1994, the due date of
the note was extended to January 1997. The promissory note is convertible at any
time into common stock of the Company with one share of common stock issued for
every $.9188 of principal and unpaid interest converted, subject to adjustment
in the event of certain dilutive actions of the Company.
The Company granted the Lender a security interest in the use of its
non-exclusive technology and products. As a part of the Security Agreement, the
Company granted Lender an option (the "Majority Option") to purchase from the
Company a sufficient number of shares which, together with other shares the
Lender then owns or has the ability to acquire by conversion of the note or a
purchase from Lone Star Ventures, would amount to 51% of the common stock of the
Company on a fully diluted basis. For financial reporting purposes,
F-9
<PAGE> 57
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
4. INVENTORY
Inventory consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Raw material................................................... $ 9,670 $ 71,740
Finished goods................................................. 276,603 147,577
-------- --------
$286,273 $219,317
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ---------
<S> <C> <C>
Research and development equipment.......................... $1,145,848 $ 819,856
Furniture and fixtures...................................... 193,327 106,120
---------- ---------
1,339,175 925,976
Less accumulated depreciation............................... (855,078) (685,197)
---------- ---------
$ 484,097 $ 240,779
========== =========
</TABLE>
F-10
<PAGE> 58
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE AND CONVERTIBLE DEBT
Notes payable and convertible debt consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Prime plus 2% (10.5% at December 31, 1994) 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 1,161,799
Less current maturities...................................... 108,857 --
---------- ----------
Long term debt............................................... $1,174,607 $1,161,799
========== ==========
</TABLE>
On April 1, 1993, the Company issued 206,386 shares of common stock to
affiliates in exchange for convertible debt and accrued interest totaling
$290,391. In addition, the Company paid off $195,795 in notes payable to
officers and stockholders.
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 bear interest at prime
plus 4 percent. The debentures are 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.
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 its convertible note totaling $99,286 was exchanged for
108,060 shares of common stock.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Trade accounts payable.......................................... $205,839 $309,739
Accrued payroll................................................. 215,228 4,359
Accrued interest payable........................................ 32,777 28,808
Accrued property tax............................................ 27,956 --
Customer deposits............................................... -- 15,959
Federal income tax payable...................................... -- 5,000
-------- --------
$481,800 $363,865
======== ========
</TABLE>
F-11
<PAGE> 59
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance, January 1, 1992.................................... -- --
Options granted........................................... 145,547 $1.75 -- $2.00
Options canceled or forfeited............................. -- --
Options exercised......................................... -- --
---------
Balance, December 31, 1992.................................. 145,547 $1.75 -- $2.00
Options granted........................................... 507,855 $1.94 -- $2.13
Options canceled 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 canceled 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 canceled or forfeited............................. (15,160) $7.00 -- $8.00
Options exercised......................................... -- --
---------
Balance, December 31, 1994.................................. 397,613 $3.00 -- $8.00
=========
Options exercisable.................................... 13,276 $7.00 -- $8.00
=========
</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. At December 31, 1993, Industries had
478,992 employee options outstanding and 270,842 options exercisable at an
average exercise price of $1.44 per share and $1.36 per share, respectively. As
of August 11, 1994, the Company assumed as a result of the merger described in
Note 2, stock options totaling 471,808 at an exercise price ranging from $1.15
to $1.53 per share. At December 31, 1994, there were 446,634 employee options
outstanding of which 327,206 were exercisable, at an exercise price ranging from
$1.15 to $1.53 per share.
Industries had also granted to directors and officers options to purchase shares
of stock at an exercise price not less than fair market value of the shares on
the date of grant. At December 31, 1993, Industries had 694,682 stock options
outstanding and exercisable at an average exercise price of $1.79 per share. On
August 11, 1994, as a result of the merger described in Note 2, the Company
assumed the 694,682 outstanding options. At
F-12
<PAGE> 60
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994, in addition to the options described in Note 3, there were
668,459 officers and directors options outstanding and exercisable at an
exercise price of $1.79.
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, 1994, warrants to purchase 351,404 shares of the Company's common
stock were outstanding at prices ranging from $3.375 to $8.00.
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.
9. INCOME TAXES
Federal and state income taxes consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- -----------
<S> <C> <C> <C>
Current
Federal....................................... $ -- $ 33,000 $ --
State......................................... -- 65,000 --
----------- --------- -----------
$ -- $ 98,000 $ --
=========== ========= ===========
</TABLE>
The following reconciles income tax expense at the federal statutory rate to the
actual tax expense.
<TABLE>
<CAPTION>
1993 1992 1994
----------- --------- -----------
<S> <C> <C> <C>
Income taxes at the statutory rate............ $ -- $ 672,000 $ 94,000
Effect on taxes resulting from:
Utilization of NOL carryforwards............ -- (672,000) (94,000)
Federal alternative minimum taxes........... -- 33,000 --
State taxes................................. -- 65,000 --
----------- --------- -----------
$ -- $ 98,000 $ --
=========== ========= ===========
</TABLE>
Significant components of the Company's net deferred tax assets for federal and
state income taxes are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- -----------
<S> <C> <C> <C>
Net operating losses.......................... $ 5,449,000 $ 935,000 $ 1,607,000
Valuation allowance........................... (5,449,000) (935,000) (1,607,000)
----------- --------- -----------
$ -- $ -- $ --
=========== ========= ===========
</TABLE>
Net operating loss (NOL) carryforwards, expiring from 1996 to 2010, totaling
approximately $16,025,000 are available at December 31, 1994 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 will be to limit the use of the Company's NOL in
future years to approximately $1,355,000 annually.
F-13
<PAGE> 61
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.
10. COMMITMENTS AND CONTINGENCIES
The Company rents offices and equipment under non cancelable and cancelable
operating agreements. Minimum future rental obligations under non cancelable
agreements as of December 31, 1994 are $176,093 in 1995, and $131,750 in 1996.
Related rental expense was $173,994, $166,959, and $155,035 in 1994, 1993, and
1992 respectively.
11. MAJOR CUSTOMERS
In 1994, three customers accounted for 44%, 13%, and 10% of total sales revenue.
Two customers accounted for 55% and 13%, and 49% and 13% of total sales revenue
for the years ended December 31, 1993 and 1992, respectively. 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 2%, 62%,
and 4% of the total receivable balance at December 31, 1994, 1993, and 1992,
respectively.
12. SUBSEQUENT EVENTS
In February 1995, the Company sold certain land and a building held for sale
with a book value of $150,000 for $150,200 in cash, after expenses of sale. No
significant gain or loss was recognized. Net proceeds from the sale were applied
to the mortgage note payable to a bank totaling approximately $107,000. As a
result, the Company has prepaid the entire amount due under the term loan and
ratably reduced future year payments.
F-14
<PAGE> 62
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
<S> <C>
ASSETS
Current:
Cash and cash equivalents..................................................... $ 1,478,024
Accounts receivable (net of $33,800 allowance for doubtful accounts) (Note
6)......................................................................... 1,475,775
Inventory..................................................................... 644,576
Prepaid expenses.............................................................. 207,618
-------------
Total current assets.................................................. 3,805,993
Net property and equipment...................................................... 465,100
Other assets.................................................................... 19,198
-------------
$ 4,290,291
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable and accrued expenses (Note 4)................................ $ 399,229
Deferred revenue.............................................................. 309,938
Current portion of capital lease obligation................................... 6,971
-------------
Total current liabilities............................................. 716,138
Long term debt.................................................................. 1,161,799
-------------
Total liabilities..................................................... 1,877,937
Commitments
Stockholders' equity
Preferred stock, $1.00 par value; 300,000 shares authorized -- none issued and
outstanding................................................................ --
Common stock, $.01 par value; 20,000,000 authorized shares; 4,226,319 issued
and outstanding............................................................ 42,263
Paid-in capital............................................................... 10,573,689
Receivable from stockholders.................................................. (79,695)
Deficit....................................................................... (8,123,903)
-------------
Total stockholders' equity............................................ 2,412,354
-------------
$ 4,290,291
==========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 63
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1995 1994 1995 1994
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales (Note 6).......................... $2,903,105 $ 1,335,605 $7,839,898 $ 4,181,601
Cost of Sales........................... 1,016,678 370,480 2,626,238 1,012,891
---------- ----------- ---------- -----------
Gross Profit............................ 1,886,427 965,125 5,213,660 3,168,710
Costs and Expenses:
Research and development.............. 644,735 489,889 1,878,759 1,279,545
Selling, general and administrative... 890,911 1,006,870 2,534,636 2,261,362
Acquired R&D (Note 3)................. -- 3,507,607 -- 3,507,607
Interest, to affiliates............... 33,730 39,815 109,730 108,289
---------- ----------- ---------- -----------
Total Costs and Expenses...... 1,569,376 5,044,181 4,523,125 7,156,803
---------- ----------- ---------- -----------
Income Before Income Taxes.............. 317,051 (4,079,056) 690,535 (3,988,093)
Income Taxes (Note 5)................... 10,000 -- 10,000 --
---------- ----------- ---------- -----------
Net Income.............................. $ 307,051 $(4,079,056) $ 680,535 $(3,988,093)
========= ========== ========= ==========
Net income (loss) per share:
Primary............................... $ 0.05 $ (1.26) $ 0.11 $ (1.57)
========= ========== ========= ==========
Fully diluted......................... $ 0.05 $ (1.26) $ 0.10 $ (1.57)
========= ========== ========= ==========
Weighted average outstanding shares:
Primary............................... 6,693,083 3,231,735 6,492,906 2,545,299
========= ========== ========= ==========
Fully diluted......................... 6,803,800 3,231,735 6,754,263 2,545,299
========= ========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 64
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1995 1994
---------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income....................................................... $ 680,535 $(3,988,093)
Adjustments to reconcile net income to net cash provided by
operating activities:
Acquired R&D.................................................. -- 3,507,607
Depreciation and amortization................................. 156,205 225,542
Change in operating assets and liabilities:
Accounts receivable......................................... (554,955) 369,595
Inventory................................................... (358,304) (400,121)
Prepaids.................................................... (116,379) (39,064)
Other assets................................................ 2,408 (111,542)
Accounts payable and accrued expenses....................... 41,216 12,749
Deferred revenue............................................ 253,688 10,079
---------- -----------
Net cash provided by (used in) operating activities................ 104,414 (413,248)
---------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of assets..................................... 150,200 --
Capital expenditures............................................. (137,206) (233,905)
---------- -----------
Net cash provided by (used in) investing activities................ 12,994 (157,272)
---------- -----------
Cash Flows from Financing Activities:
Repayment of principal on notes payable and long-term debt....... (114,694) (5,111)
Proceeds from exercise of stock options.......................... 399,983 66,274
---------- -----------
Net cash provided by financing activities.......................... 285,289 61,163
---------- -----------
Net increase (decrease) in cash and cash equivalents............... 402,497 (585,990)
Cash and cash equivalents at beginning of year..................... 1,075,527 996,772
---------- -----------
Cash and cash equivalents at end of quarter........................ $1,478,024 $ 410,782
========== ===========
Supplemental disclosures of cash flow information -- Cash paid
for interest..................................................... $ 19,092 $ 35,932
========== ===========
Non cash financing activities:
Conversion of debt and accrued interest to common stock.......... $ 323,787 $ 281,012
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE> 65
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Voice Control Systems, Inc. (the "Company" or "VCS") engages in the design of
speech recognition systems which allow for the voice control of electronic
machines and/or devices. Operating results for the nine months ending September
30, 1995 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. BUSINESS ACQUISITION
Effective August 11, 1994, the Company acquired all of the stock of VCS
Industries, Inc. in a reverse acquisition (the "Merger") accounted for using the
purchase method of accounting. 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 the Company's common stock.
Concurrently, all outstanding shares of common stock were subject to a
one-for-four reverse stock split. As a result of the Merger, the Company
expensed $3,507,607 for acquired research and development, acquired capitalized
software costs, and costs associated with the termination of an officer in the
quarter ended September 30, 1994.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at September 30,
1995:
<TABLE>
<S> <C>
Accounts payable............................................... $ 262,882
Accrued expenses............................................... 136,347
--------
$ 399,229
========
</TABLE>
5. INCOME TAXES
Net operating loss ("NOL") carryforwards expiring from 1996 to 2010 totaling
approximately $15,258,000 are available at September 30, 1995 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. The effect of such
change will be to limit the use of the Company's NOL in future years to
approximately $1,355,000 annually.
The following reconciles income tax expense at the federal statutory rate to the
actual tax expense at September 30:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Federal Income taxes at the statutory rate...................... $ 252,000 $ --
State taxes based on income..................................... 35,000 --
Effect on taxes resulting from:
Utilization of NOL carryforwards.............................. (287,000) --
Federal Alternative Minimum Taxes............................. 10,000 --
--------- --------
$ 10,000 $
========= ========
</TABLE>
F-18
<PAGE> 66
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Company has provided an allowance for its entire deferred tax asset,
relating primarily to NOL carryforwards, of approximately $5,188,000 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.
6. MAJOR CUSTOMERS
Two customers accounted for 60% and 10% of total sales revenue for the nine
months ended September 30, 1995. Three customers accounted for 44%, 14%, and 12%
respectively of total sales revenue for the nine months ended September 30,
1994.
The Company's largest customer is also the holder of its long term convertible
debt. Accounts receivable from the largest customer was 14% of the total
receivable balance at September 30, 1995.
F-19
<PAGE> 67
(VCS logo) provides speech solutions using a wide variety of technologies
including:
Eight animated illustrations depicting the meaning of:
Speaker-independent voice recognition
Speaker-dependent voice recognition
Phonetic dictionary
Natural language
Speech input format
Speaker verification
Cut-thru
Alphanumeric recognition
<PAGE> 68
---------------------------------------------------------
---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 10
Price Range of Common Stock and
Dividend Policy......................... 10
Capitalization............................ 11
Selected Financial Data................... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 13
Business.................................. 16
Management................................ 31
Principal and Selling Stockholders........ 36
Certain Relationships and Related
Transactions............................ 38
Description of Capital Stock.............. 40
Underwriting.............................. 43
Experts................................... 44
Change in Registrant's Certifying
Accountant.............................. 44
Legal Matters............................. 44
Available Information..................... 44
Information Incorporated by Reference..... 45
Index to Financial Statements............. F-1
</TABLE>
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
2,470,000 SHARES
LOGO
VOICE CONTROL SYSTEMS, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
FIRST ALBANY CORPORATION
FIRST ANALYSIS SECURITIES CORPORATION
, 1996
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 -- INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI of the Company's Bylaws expressly directs the Company to indemnify
any director, officer, employee, or agent of the Company or any person serving
at the request of the Company 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 Company) 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 Company 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 Company 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 Company 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 Company to procure a judgment
in the Company's favor by reason of the fact that such person is or was a
director, trustee, officer, employee or agent of the Company, or is or was
serving at the request of the Company 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 Company; 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 Company 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
Company.
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 Company, 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 Corporation as authorized 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> 70
An Amendment to the Certificate of Incorporation of the Company eliminating
personal liability of directors to the fullest extent permitted by Delaware law
was approved by the Company's stockholders at the Company's Annual Meeting of
Stockholders held on December 10, 1987.
ITEM 25 -- OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses incurred or expected to be
incurred by the Company in connection with the issuance and distribution of the
securities being offered hereby (items marked with an asterisk (*) represent
estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 8,807
Legal Fees and Expenses................................................... 70,000*
Blue Sky Fees (including counsel fees).................................... 20,000*
NASD Filing Fees.......................................................... 3,000*
Nasdaq National Market Fee................................................ 10,000*
Accounting Fees and Expenses.............................................. 50,000*
Transfer Agent and Registrar Fees......................................... 5,000*
Printing Expenses......................................................... 80,000*
Miscellaneous............................................................. 28,193*
---------
Total........................................................... $275,000
=========
</TABLE>
ITEM 26 -- RECENT SALES OF UNREGISTERED SECURITIES
Except for the following (after giving effect to a one-to-four reverse stock
split in August 1994), the Company has not had any sales of unregistered
securities within the past three years:
(1) Since January 1993, the Company has issued an aggregate of 291,250 warrants
to 11 officers and directors of the Company in recognition of their
services. Such issuances were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended (the "Securities Act").
(2) In 1993, six current and former directors of the Company exercised warrants
to purchase a total of 17,947 shares of Common Stock for an aggregate price
of $125,640. Such issuance was exempt from registration pursuant to Section
4(2) under the Securities Act.
(3) In 1993, four persons exercised warrants acquired in a private placement
and purchased 7,946 shares of Common Stock for a purchase price of $55,629
in a transaction exempt from registration pursuant to Section 4(2) of the
Securities Act.
(4) In March 1994, the Company sold in a private placement pursuant to Section
4(2) of the Securities Act 225,000 shares of its Common Stock for $5.00 per
share, which resulted in cash proceeds to the Company of $1,125,000. Each
purchaser affirmed to the Company that he or she was an accredited investor
as defined in Regulation D under the Securities Act.
(5) In June 1994, the Company sold in a private placement pursuant to Section
4(2) of the Securities Act 30,461 shares of its Common Stock for $4.00 per
share, which resulted in cash proceeds to the Company of $121,845. Each
purchaser affirmed to the Company that he or she was an accredited investor
as defined in Regulation D under the Securities Act.
(6) In December 1994, the Company issued non-transferable options to purchase
10,000 shares of Common Stock to an outside consultant, who is an
accredited investor. These were issued as partial consideration of services
rendered. This issuance was exempt from registration pursuant to Section
4(2) under the Securities Act.
(7) In July 1995, the Company issued non-assignable options to purchase 5,000
shares of Common Stock to a former officer in recognition of his services
to the Company. This issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act.
II-2
<PAGE> 71
(8) In August 1995, Peter J. Foster, the CEO and an accredited investor,
converted his convertible note in the principal amount of $200,000 into
50,633 shares of Common Stock in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act.
(9) In August 1995, a former consultant who is an accredited investor exercised
a non-assignable option to purchase 11,325 shares of Common Stock for an
aggregate purchase price of $23,239 in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act.
(10) In September and October 1995, four investors, each of whom is an
accredited investor, exercised non-assignable options to purchase an
aggregate of 253,226 shares of Common Stock for an aggregate purchase price
of $683,710 in a transaction exempt from registration pursuant to Section
4(2) of the Securities Act.
(11) In September 1995, the Company issued 4,243 shares of Common Stock to a
former employee for an aggregate price of $6,497 pursuant to the exercise
of options granted under the 1986 Incentive Stock Plan of VCS Industries,
Inc. ("Industries"), which merged into the Company in August 1994. Such
issuance was exempt from registration pursuant to Rule 701 under the
Securities Act.
(12) In December 1995, four investors, who are directors or former directors of
the Company, exercised non-assignable warrants issued to them as directors
to purchase a total of 2,678 shares of Common Stock at an aggregate price
of $18,745. This issuance was exempt from registration pursuant to Section
4(2) of the Securities Act.
ITEM 27 -- EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
1.1* -- Form of Underwriting Agreement
2.1 -- Agreement and Plan of Reorganization between Scott Instruments
Corporation and VCS Industries, Inc. dated April 11, 1994, as amended
(filed with the Securities and Exchange Commission on April 11, 1994
as Exhibit 2.1 to the Company's Registration Statement on Form S-4
dated April 11, 1994, Registration No. 33-77658, and amendment
thereto filed on June 1, 1994, as Exhibit 2.1a to the Company's
Amendment No. 1 to the Registration Statement on Form S-4 dated June
1, 1994, Registration No. 33-77658, and amendment thereto filed on
July 12, 1994, as Exhibit 2.1b to the Company's Amendment No. 2 to
the Registration Statement on Form S-4 dated July 12, 1994,
Registration No. 33-77658, and incorporated by reference herein).
3.1 -- Certificate of Incorporation of the Company, as amended (filed with
the Securities and Exchange Commission on March 11, 1986, as Exhibit
3.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1985, and amendment thereto filed on March 30,
1987, as Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986, and amendments thereto filed
July 8, 1993 as Exhibit 4.3 to Form S-8 Registration Statement of
Scott, as further amended by the Certificate of Merger between Scott
Instruments and VCS Industries, Inc., dated August 9, 1994 filed on
March 23, 1995, as Exhibit 3.1 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994 and incorporated
by reference herein).
3.2 -- By-Laws of the Company (filed with the Securities and Exchange
Commission on March 11, 1986, as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1985, and
amendment thereto filed on March 30, 1987, as Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, and amendment thereto filed on March 23, 1995, as
Exhibit 3.2 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated by reference
herein).
4.1** -- Specimen certificate representing shares of the Company's Common
Stock, $0.01 par value.
</TABLE>
II-3
<PAGE> 72
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
4.2 -- Promissory Note dated September 20, 1991 in the principal amount of
$1,161,798.90 executed by the Company and payable to Dialogic
Corporation (filed with the Securities and Exchange Commission on
April 11, 1994 as Exhibit 10.27 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and incorporated by reference herein).
4.3 -- Loan and Security Agreement dated September 20, 1991 by and between
the Company and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.28 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
4.4 -- Omnibus Amendment Agreement dated March 14, 1994 between the Company
and Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.35 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
5.1* -- Opinion of Counsel.
10.1 -- 1992 Stock Option Plan of the Company (filed with the Securities and
Exchange Commission on March 30, 1993 as Exhibit 10.25 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992 and incorporated by reference herein).
10.2 -- 1992 Stock Option Agreement of the Company (filed with the Securities
and Exchange Commission on March 30, 1993 as Exhibit 10.26 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992 and incorporated by reference herein).
10.3 -- Industries 1986 Incentive Stock Plan (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.37 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.4 -- Form of 1986 Incentive Stock Option Agreement of Industries, (filed
with the Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.38 to the Company's Registration Statement on Form S-4
dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.5 -- Form of Stock Option Agreement between Industries and various
non-employee option holders (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.39 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
10.6 -- Form of Warrant Agreement between the Company and various directors,
officers and affiliates (filed with the Securities and Exchange
Commission on March 31, 1994 as Exhibit 10.18 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
10.7 -- Stock Option Agreement dated September 20, 1991 executed by the
Company in favor of Dialogic Corporation (filed with the Securities
and Exchange Commission on April 11, 1994 as Exhibit 10.29 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.8 -- Form of Convertible Note between the Company and an officer (filed
with the Securities and Exchange Commission on March 23, 1995, as
Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated by reference
herein).
</TABLE>
II-4
<PAGE> 73
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.9 -- Form of subscription agreement for the private offering of the
Company's Common Stock in March and June 1994 (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.43
to the Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.10 -- Employment agreement dated June 18, 1993 between the Company and
Peter J. Foster (filed with the Securities and Exchange Commission on
April 11, 1994 as Exhibit 10.15 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and incorporated by reference herein).
10.11** -- Amendment to employment agreement dated November 14, 1995 between the
Company and Peter J. Foster.
10.12 -- Employment agreement dated June 18, 1993 between the Company and
Thomas B. Schalk (filed with the Securities and Exchange Commission
on April 11, 1994 as Exhibit 10.16 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and incorporated by reference herein).
10.13 -- Amendment to employment agreement dated July 20, 1995 between the
Company and Thomas B. Schalk (filed with the Securities and Exchange
Commission on November 15, 1995 as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB, and incorporated by reference
herein).
10.14# -- License Agreement dated June 8, 1990 by and between the Company and
Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.30 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
10.15# -- Amendment to License Agreement dated September 20, 1991 between the
Company and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.31 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.16# -- Amendment No. 2 to the Licensee Agreement dated September 20, 1991
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.32
to the Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.17**# -- Amendment No. 4 to the License Agreement dated October 1, 1995
between the Company and Dialogic Corporation.
10.18**# -- License Agreement dated October 7, 1994 between the Company and
Dialogic Corporation.
10.19# -- Support Agreement dated September 20, 1991 between the Company and
Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.33 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
10.20# -- Addendum No. 1 to the Support Agreement dated January 31, 1993
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.34
to the Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.21**# -- Addendum No. 3 to the Support Agreement dated October 1, 1995 between
the Company and Dialogic Corporation.
</TABLE>
II-5
<PAGE> 74
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- -------------------- ------------------------------------------------------------------------
<C> <S>
10.22# -- Omnibus Amendment Agreement dated March 14, 1994 between the Company
and Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.35 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
10.23# -- VR/xx-PEB letter agreement dated January 31, 1992 between the Company
and Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.36 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and incorporated by reference herein).
10.24# -- Software Agreement between the Company and Brite Voice Systems (filed
with the Securities and Exchange Commission on June 29, 1995 as
Exhibit 10.29 to Amendment No. 1 to the Company's Annual Report on
Form 10-KSB/A for the fiscal year ended December 31, 1994, and
incorporated by reference herein).
10.25 -- Office Lease Agreement between the Company and Laborers National
Pension Fund dated July 17, 1986 (filed with the Securities and
Exchange Commission on March 23, 1995, as Exhibit 10.30 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated by reference herein).
10.26 -- Amendment to Office Lease Agreement between the Company and Laborers
National Pension Fund dated March 25, 1994 (filed with the Securities
and Exchange Commission on March 23, 1995, as Exhibit 10.31 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated by reference herein).
10.27 -- Addendum to Office Lease Agreement between the Company and Laborers
National Pension Fund dated September 8, 1995 (filed with the
Securities and Exchange Commission on November 15, 1995, as Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB, and
incorporated by reference herein).
10.28 -- Separation agreement dated July 12, 1994 between the Company and E.
Ray Cotten (filed with the Securities and Exchange Commission on July
12, 1994 as Exhibit 10.17 to the Company's Amendment No. 2 to the
Registration Statement on Form S-4 dated July 12, 1994, Registration
No. 33-77658, and incorporated by reference herein).
10.29 -- License Agreement between the Company and InterVoice, Inc. dated
August 31, 1994 (filed with the Securities and Exchange Commission on
November 10, 1994 as Exhibit 10.2 to Form 10-QSB for the quarter
ended September 30, 1994, and incorporated by reference herein).
16.1 -- Letter regarding Change in Certifying Independent Accountant (filed
with the Securities and Exchange Commission on September 13, 1994 as
Exhibit 16.1 to Form 8-K/A, and incorporated by reference herein).
23.1* -- Consent of BDO Seidman, LLP, Independent Auditors.
23.2 -- Consent of Counsel, included in Exhibit 5.1.
24.1* -- Power of Attorney of Sir John Lucas-Tooth. Other powers of attorney
included in the signature page to this Registration Statement
previously filed.
</TABLE>
- ---------------
# Confidential treatment has been requested for a portion of this exhibit.
* Filed herewith.
** Filed previously.
II-6
<PAGE> 75
ITEM 28 -- UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(1) File, during any period in which offers or sells securities, a
post-effective amendment to this registration statement to include any
additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") 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.
II-7
<PAGE> 76
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
to this Registration Statement to be signed on its behalf by the undersigned, in
the City of Dallas, State of Texas, on January 16, 1996.
VOICE CONTROL SYSTEMS, INC.
By: /s/ PETER J.
FOSTER
Peter J. Foster,
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to this Registration Statement has been signed by the following persons in the
capacities indicated on January 16, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<C> <S> <C>
* Chairman and Director January 16, 1996
John B. Torkelsen
/s/ PETER J. FOSTER President, Chief Executive January 16, 1996
Peter J. Foster Officer and Director
/s/ KIM S. TERRY Vice President, Controller January 16, 1996
Kim S. Terry and Corporate Secretary
(Principal Financial and
Accounting Officer)
* Director January 16, 1996
Melvyn J. Goodman
* Director January 16, 1996
John Lucas-Tooth
* Director January 16, 1996
Neal J. Robinson
*BY: /s/ KIM S. TERRY
Kim S. Terry,
as Attorney in Fact
</TABLE>
II-8
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ---------- ------------------------------------------------------------------- ------------
<C> <S> <C>
1.1* -- Form of Underwriting Agreement
2.1 -- Agreement and Plan of Reorganization between Scott Instruments
Corporation and VCS Industries, Inc. dated April 11, 1994, as
amended (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 2.1 to the Company's Registration Statement on
Form S-4 dated April 11, 1994, Registration No. 33-77658, and
amendment thereto filed on June 1, 1994, as Exhibit 2.1a to the
Company's Amendment No. 1 to the Registration Statement on Form S-4
dated June 1, 1994, Registration No. 33-77658, and amendment
thereto filed on July 12, 1994, as Exhibit 2.1b to the Company's
Amendment No. 2 to the Registration Statement on Form S-4 dated
July 12, 1994, Registration No. 33-77658, and incorporated by
reference herein).
3.1 -- Certificate of Incorporation of the Company, as amended (filed with
the Securities and Exchange Commission on March 11, 1986, as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1985, and amendment thereto filed on
March 30, 1987, as Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1986, and
amendments thereto filed July 8, 1993 as Exhibit 4.3 to Form S-8
Registration Statement of Scott, as further amended by the
Certificate of Merger between Scott Instruments and VCS Industries,
Inc., dated August 9, 1994 filed on March 23, 1995, as Exhibit 3.1
to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1994 and incorporated by reference herein).
3.2 -- By-Laws of the Company (filed with the Securities and Exchange
Commission on March 11, 1986, as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1985, and amendment thereto filed on March 30, 1987, as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1986, and amendment thereto filed on March 23,
1995, as Exhibit 3.2 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1994, and incorporated by
reference herein).
4.1** -- Specimen certificate representing shares of the Company's Common
Stock, $0.01 par value.
4.2 -- Promissory Note dated September 20, 1991 in the principal amount of
$1,161,798.90 executed by the Company and payable to Dialogic
Corporation (filed with the Securities and Exchange Commission on
April 11, 1994 as Exhibit 10.27 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and incorporated by reference herein).
4.3 -- Loan and Security Agreement dated September 20, 1991 by and between
the Company and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.28 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
4.4 -- Omnibus Amendment Agreement dated March 14, 1994 between the
Company and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.35 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
5.1* -- Opinion of Counsel.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------------------
<C> <S> <C>
10.1 -- 1992 Stock Option Plan of the Company (filed with the Securities
and Exchange Commission on March 30, 1993 as Exhibit 10.25 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992 and incorporated by reference herein).
10.2 -- 1992 Stock Option Agreement of the Company (filed with the
Securities and Exchange Commission on March 30, 1993 as Exhibit
10.26 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992 and incorporated by reference herein).
10.3 -- Industries 1986 Incentive Stock Plan (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.37 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.4 -- Form of 1986 Incentive Stock Option Agreement of Industries, (filed
with the Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.38 to the Company's Registration Statement on Form S-4
dated April 11, 1994, Registration No. 33-77658, and incorporated
by reference herein).
10.5 -- Form of Stock Option Agreement between Industries and various
non-employee option holders (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.39 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.6 -- Form of Warrant Agreement between the Company and various
directors, officers and affiliates (filed with the Securities and
Exchange Commission on March 31, 1994 as Exhibit 10.18 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.7 -- Stock Option Agreement dated September 20, 1991 executed by the
Company in favor of Dialogic Corporation (filed with the Securities
and Exchange Commission on April 11, 1994 as Exhibit 10.29 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.8 -- Form of Convertible Note between the Company and an officer (filed
with the Securities and Exchange Commission on March 23, 1995, as
Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated by reference
herein).
10.9 -- Form of subscription agreement for the private offering of the
Company's Common Stock in March and June 1994 (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit
10.43 to the Company's Registration Statement on Form S-4 dated
April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.10 -- Employment agreement dated June 18, 1993 between the Company and
Peter J. Foster (filed with the Securities and Exchange Commission
on April 11, 1994 as Exhibit 10.15 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and incorporated by reference herein).
10.11** -- Amendment to employment agreement dated November 14, 1995 between
the Company and Peter J. Foster.
</TABLE>
<PAGE> 79
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------------------
<C> <S> <C>
10.12 -- Employment agreement dated June 18, 1993 between the Company and
Thomas B. Schalk (filed with the Securities and Exchange Commission
on April 11, 1994 as Exhibit 10.16 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No.
33-77658, and incorporated by reference herein).
10.13 -- Amendment to employment agreement dated July 20, 1995 between the
Company and Thomas B. Schalk (filed with the Securities and
Exchange Commission on November 15, 1995 as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-QSB, and incorporated by
reference herein).
10.14# -- License Agreement dated June 8, 1990 by and between the Company and
Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.30 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.15# -- Amendment to License Agreement dated September 20, 1991 between the
Company and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.31 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.16# -- Amendment No. 2 to the Licensee Agreement dated September 20, 1991
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit
10.32 to the Company's Registration Statement on Form S-4 dated
April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.17**# -- Amendment No. 4 to the License Agreement dated October 1, 1995
between the Company and Dialogic Corporation.
10.18**# -- License Agreement dated October 7, 1994 between the Company and
Dialogic Corporation.
10.19# -- Support Agreement dated September 20, 1991 between the Company and
Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.33 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.20# -- Addendum No. 1 to the Support Agreement dated January 31, 1993
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit
10.34 to the Company's Registration Statement on Form S-4 dated
April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.21**# -- Addendum No. 3 to the Support Agreement dated October 1, 1995
between the Company and Dialogic Corporation.
10.22# -- Omnibus Amendment Agreement dated March 14, 1994 between the
Company and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.35 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.23# -- VR/xx-PEB letter agreement dated January 31, 1992 between the
Company and Dialogic Corporation (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.36 to the
Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ---------- ---------------------------------------------------------------------------------
<C> <S> <C>
10.24# -- Software Agreement between the Company and Brite Voice Systems
(filed with the Securities and Exchange Commission on June 29, 1995
as Exhibit 10.29 to Amendment No. 1 to the Company's Annual Report
on Form 10-KSB/A for the fiscal year ended December 31, 1994, and
incorporated by reference herein).
10.25 -- Office Lease Agreement between the Company and Laborers National
Pension Fund dated July 17, 1986 (filed with the Securities and
Exchange Commission on March 23, 1995, as Exhibit 10.30 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994, and incorporated by reference herein).
10.26 -- Amendment to Office Lease Agreement between the Company and
Laborers National Pension Fund dated March 25, 1994 (filed with the
Securities and Exchange Commission on March 23, 1995, as Exhibit
10.31 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994, and incorporated by reference
herein).
10.27 -- Addendum to Office Lease Agreement between the Company and Laborers
National Pension Fund dated September 8, 1995 (filed with the
Securities and Exchange Commission on November 15, 1995, as Exhibit
10.1 to the Company's Quarterly Report on Form 10-QSB, and
incorporated by reference herein).
10.28 -- Separation agreement dated July 12, 1994 between the Company and E.
Ray Cotten (filed with the Securities and Exchange Commission on
July 12, 1994 as Exhibit 10.17 to the Company's Amendment No. 2 to
the Registration Statement on Form S-4 dated July 12, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.29 -- License Agreement between the Company and InterVoice, Inc. dated
August 31, 1994 (filed with the Securities and Exchange Commission
on November 10, 1994 as Exhibit 10.2 to Form 10-QSB for the quarter
ended September 30, 1994, and incorporated by reference herein).
16.1 -- Letter regarding Change in Certifying Independent Accountant (filed
with the Securities and Exchange Commission on September 13, 1994
as Exhibit 16.1 to Form 8-K/A, and incorporated by reference
herein).
23.1* -- Consent of BDO Seidman, LLP, Independent Auditors.
23.2 -- Consent of Counsel, included in Exhibit 5.1.
24.1* -- Power of Attorney of Sir John Lucas-Tooth. Other powers of attorney
included in the signature page to this Registration Statement
previously filed.
</TABLE>
- ---------------
# Confidential treatment has been requested for a portion of this exhibit.
* Filed herewith.
** Filed previously.
<PAGE> 1
2,470,000 SHARES(1)
VOICE CONTROL SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
________ __, 1996
FIRST ALBANY CORPORATION
FIRST ANALYSIS SECURITIES CORPORATION
As Representatives of the several
Underwriters named in Schedule II hereto
c/o First Albany Corporation
41 State Street
Albany, New York 12207
Gentlemen:
Voice Control Systems, Inc., a Delaware corporation (the "Company"),
and the stockholders of the Company listed in Schedule I hereto (the "Selling
Stockholders") severally propose to sell to the several Underwriters named in
Schedule II hereto (the "Underwriters"), an aggregate of 1,451,650 shares (the
"Firm Shares") of Common Stock, $0.01 par value (the "Common Stock"), of the
Company and options exercisable for 914,231 shares of Common Stock at an
exercise price of $.6125 per share, and options exercisable for 104,119 shares
of Common Stock at an exercise price of $______ per share (such options, the
"Options", and such shares, the "Option Shares"), in the respective amounts set
forth opposite their respective names in Schedule I . The Firm Shares consist
of 1,251,533 authorized but unissued shares of Common Stock to be issued and
sold by the Company and 200,117 outstanding shares of Common Stock to be sold
by the Selling Stockholders. The Options are being sold by two Selling
Stockholders. In addition, the Company has granted to the several Underwriters
an option to purchase up to 220,500 additional shares of Common Stock, and
Dialogic Investment Corporation, a Selling Stockholder, has granted to the
several Underwriters an option to purchase up to 150,000 additional shares of
Common Stock, on the terms and for the purposes set forth in Section 3 hereof
(such 370,500 shares being referred to hereinafter as the "Over-allotment
Shares"). The Firm Shares, the Option Shares and the Over-allotment Shares
are herein collectively called the "Shares." References to the "Company"
herein, unless the context requires otherwise, refer to the Company and its
subsidiaries, if any, as a consolidated operation. Each of the Company (with
respect to all of the Selling Stockholders) and each of the Selling
Stockholders, severally and not jointly with respect to itself only,
acknowledge and agree that the respective number of Firm and Over-allotment
Shares and the respective number of Option Shares that are represented by
Options set forth opposite the Selling Stockholder's name in Schedule I hereto
give the appropriate and correct effect to any adjustments required by any
agreement, contract, document or instrument pursuant to which such Shares and
Options were issued or otherwise granted.
The Company and the Selling Stockholders hereby confirm their
agreement with respect to the sale of the Shares and the Options, as the case
may be, to the several Underwriters, for whom you are acting as Representatives
(the "Representatives").
____________________
(1) Plus an option to purchase up to 370,500 additional shares to cover
over-allotments.
<PAGE> 2
1. Registration Statement. A registration statement on Form SB-2
(File No. 33-64835) with respect to the Shares, including a prospectus subject
to completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations ("Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company agrees to file such additional amendments to the
registration statement, such amended prospectuses subject to completion and
such abbreviated registration statements as may hereafter be required. Copies
of such registration statement and amendments, of each related prospectus
subject to completion sent or given to any person prior to the effective date
of such registration statement, including all documents incorporated by
reference therein, and of any abbreviated registration statement filed pursuant
to Rule 462(b) have been delivered to you. The Company represents and warrants
that the Company and the transactions contemplated by this Agreement meet the
requirements for using Form SB-2 under the Act.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company agrees that it
will, pursuant to Rule 424(b) of the Rules and Regulations or by means of a
post-effective amendment to the registration statement that includes a final
form of prospectus, prepare and promptly file with the Commission the
information omitted from the registration statement pursuant to Rule 430A(a) of
the Rules and Regulations or, if the Representatives, on behalf of the several
Underwriters, shall have agreed to the utilization of a term sheet pursuant to
and satisfying the requirements of Rule 434 of the Rules and Regulations ("Term
Sheet"), the information required to be included in such Term Sheet. If the
registration statement relating to the Shares has not been declared effective
under the Act by the Commission, the Company agrees that it will prepare and
promptly file an amendment to the registration statement, including a final
form of prospectus, or, if the Representatives, on behalf of the several
Underwriters, shall have agreed to the utilization of a Term Sheet, including
the information required to be included in such Term Sheet. The Company will
file any such Term Sheet with the Commission in a timely manner pursuant to
Rule 424(b). The term "Registration Statement" as used herein shall mean such
registration statement, including financial statements, schedules and exhibits,
in the form in which it became or becomes, as the case may be, effective
(including, if the Company omitted information from the registration statement
pursuant to Rule 430A(a) or if the Company utilizes a Term Sheet, the
information deemed to be a part of the registration statement at the time it
became effective pursuant to Rule 430A(b) or Rule 434(d)) and, in the event of
any amendment thereto or the filing of any abbreviated registration statement
pursuant to Rule 462(b) relating thereto after the effective date of such
registration statement, shall also mean (from and after the effectiveness of
such amendment or the filing of such abbreviated registration statement) such
registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used herein shall mean the
prospectus relating to the Shares included in the Registration Statement at the
time it became or becomes, as the case may be, effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a), the information deemed to be a part of the Registration Statement at
the time it became effective pursuant to Rule 430A(b)); provided, however, that
if in reliance on Rule 434 and with the consent of First Albany Corporation, on
behalf of the several Underwriters, the Company shall have provided to the
Underwriters for use in connection with the offering of the Shares a Term
Sheet, the term "Prospectus" shall mean the "prospectus subject to completion"
(as defined in Rule 434(g)) last provided to the Underwriters by the Company
and circulated by the Underwriters to all prospective purchasers of the Shares,
together with such Term Sheet (including the information deemed to be a part of
the Registration Statement at the time it became effective pursuant to Rule
434(d)). Notwithstanding the foregoing, if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b)), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the
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<PAGE> 3
Underwriters for such use. If in reliance on Rule 434 and with the consent of
First Albany Corporation, on behalf of the several Underwriters, the Company
shall have provided to the Underwriters for use in connection with the offering
of the Shares a Term Sheet, the Company agrees that the Prospectus and the Term
Sheet, taken together, will not be materially different from the prospectus in
the Registration Statement. The term "Preliminary Prospectus" as used herein
means (i) any prospectus subject to completion included in the Registration
Statement prior to the time it became or becomes, as the case may be, effective
under the Act, except that if any prospectus subject to completion filed by the
Company with the Commission pursuant to Rule 424(a) or any other prospectus
subject to completion provided to the Underwriters by the Company for use in
connection with the offering of the Shares (whether or not required to be filed
by the Company with the Commission pursuant to Rule 424(a)) differs from the
prospectus subject to completion included in the Registration Statement prior
to the time it became or becomes, as the case may be, effective under the Act,
the term "Preliminary Prospectus" shall refer to such differing prospectus
subject to completion from and after the time such prospectus subject to
completion is filed with the Commission or transmitted to the Commission for
filing pursuant to Rule 424(a) or from and after the time it is first provided
to the Underwriters by the Company for such use, and (ii) any prospectus
subject to completion as described in Rule 430A or Rule 434(g). Any reference
to the Registration Statement, the Prospectus or the Preliminary Prospectus
shall be deemed to refer to and include any documents incorporated by reference
therein, as of the date of the Registration Statement, the Prospectus or any
Preliminary Prospectus, as the case may be, and any reference to any amendment
or supplement to the Registration Statement, the Prospectus or any Preliminary
Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), which, upon filing, are incorporated by reference therein. As
used herein, the term "Incorporated Documents" means the documents which at the
time are incorporated by reference in the Registration Statement, the
Prospectus or any Preliminary Prospectus or any amendment or supplement
thereto.
2. Representations and Warranties of the Company and the Selling
Stockholders.
(a) The Company represents and warrants to, and agrees
with, the several Underwriters as follows:
(i) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each Preliminary
Prospectus, at the time of filing thereof (or, if not filed, at the time it is
first provided to the Underwriters by the Company for use in connection with
the offering of the Shares), did not contain an 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 the light of the circumstances
under which they were made, not misleading; except that the foregoing shall not
apply to statements in or omissions from any Preliminary Prospectus in reliance
upon, and in conformity with, written information furnished to the Company by
you, or by any Underwriter through you, specifically for use in the preparation
thereof.
(ii) As of the time the Registration Statement (and
any post-effective amendment thereto) is or was declared effective by the
Commission, upon the filing or first delivery to the Underwriters of the
Prospectus (or any supplement to the Prospectus) and at the First Closing Date
and Second Closing Date (as hereinafter defined), (A) the Registration
Statement and Prospectus (in each case, as amended and/or supplemented, if
applicable) will conform or conformed in all material respects to the
requirements of the Act and the Rules and Regulations, (B) the Registration
Statement (as so amended) will not or did not include an 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 not misleading, and (C) the Prospectus
(as so supplemented) will not or did not include an 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 in
which they are or were made, not misleading; except that the foregoing shall
not apply to statements in or omissions from any such document in reliance
upon, and in conformity with, written information furnished to the Company by
you, or by any Underwriter through you,
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<PAGE> 4
specifically for use in the preparation thereof. If the Registration Statement
has been declared effective by the Commission, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no proceeding
for that purpose has been initiated or, to the Company's knowledge, threatened
by the Commission. The Incorporated Documents heretofore filed, when they were
filed (or, if any amendment with respect to any such document was filed, when
such amendment was filed), conformed in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission thereunder; any further Incorporated Documents so filed will, when
they are filed, conform in all material respects with the Exchange Act and the
rules and regulations thereunder; no such document when it was filed (or, if an
amendment with respect to any such document was filed, when such amendment was
filed), contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and no such further amendment will 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 not misleading.
(iii) The consolidated financial statements of the
Company, together with the notes thereto, set forth in the Registration
Statement and Prospectus comply in all material respects with the requirements
of the Act and fairly present the financial condition of the Company as of the
dates indicated and the results of operations and changes in stockholders'
equity and cash flows for the periods therein specified in conformity with
generally accepted accounting principles as in effect in the United States
consistently applied throughout the periods involved (except as otherwise
stated therein); and the supporting schedules, if any, included in the
Registration Statement present fairly the information required to be stated
therein. No other financial statements or schedules are required to be
included in the Registration Statement or Prospectus. BDO Seidman, LLP, who
have expressed their opinion with respect to the financial statements and
schedules filed as a part of the Registration Statement and included in the
Registration Statement and Prospectus, are independent public accountants as
required by the Act and the Rules and Regulations. The summary financial and
statistical data included in the Registration Statement fairly present the
information shown therein and have been compiled on a basis consistent with the
financial statements presented in the Registration Statement.
(iv) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company has full corporate power and
authority to own, lease and operate its properties and conduct its business as
currently being carried on and as described in the Registration Statement and
Prospectus, and is duly qualified to do business as a foreign corporation in
good standing in each domestic and foreign jurisdiction in which (i) it owns or
leases real property or in which the conduct of its business otherwise makes
such qualification necessary and (ii) in which the failure to so qualify could
have a material adverse effect upon the business, condition (financial or
otherwise), operations or properties of the Company taken as a whole.
(v) Except as expressly contemplated in the
Prospectus, subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, the Company has not incurred
any material liabilities or obligations, direct or contingent, or entered into
any material transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and there has not
been any change in the capital stock (other than a change in the number of
outstanding shares of Common Stock due to the issuance of shares upon the
exercise of options or warrants or the conversion of convertible promissory
notes outstanding as of the date the Registration Statement was filed), or any
material change in the short-term or long-term debt, or any issuance of (or
amendment to or change in the terms of) options, warrants, convertible
securities or other rights to purchase the capital stock, of the Company, or
any material adverse change, or any development likely to involve a prospective
material adverse change, in the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth or results
of operations of the Company.
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<PAGE> 5
(vi) Except as set forth in the Prospectus, there is
not pending or, to the knowledge of the Company, threatened or contemplated,
any action, suit or proceeding to which the Company or, to the best knowledge
of the Company after due inquiry, any of its or their officers or directors, is
a party before or by any domestic or foreign court or governmental agency,
authority or body, or any arbitrator, which might result in any material
adverse change in the condition (financial or otherwise), business, property,
prospects, net worth, or results of operations of the Company, or which might
prevent the consummation of the transactions contemplated hereby.
(vii) There are no contracts or documents of the
Company that are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Act or by the Rules and
Regulations that have not been accurately described in all material respects or
so filed.
(viii) This Agreement has been duly authorized,
executed and delivered by the Company, and constitutes a valid, legal and
binding obligation of the Company, and is enforceable against the Company in
accordance with its terms except as rights to indemnification and contribution
hereunder may be limited by applicable law and except as the enforcement hereto
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally.
The execution, delivery and performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the material terms and provisions of, or constitute a
default under, any statute, any material agreement or instrument to which the
Company is a party or by which it is bound or to which any of its property is
subject, the Company's Certificate of Incorporation or by-laws, or any order,
rule, regulation or decree of any court or governmental agency or body having
jurisdiction over the Company or any of its properties; no consent, approval,
authorization or order of, or filing with, any court or governmental agency or
body is required for the execution, delivery and performance of this Agreement
or for the consummation of the transactions contemplated hereby, including the
issuance or sale of the Shares by the Company, except such as may be required
under any blue sky or state securities laws or regulations applicable to the
public offering of Common Stock by the several Underwriters contemplated hereby
("Blue Sky Laws"), or the by-laws or rules of the National Association of
Securities Dealers, Inc. ("NASD") relating to the corporate financing
arrangements applicable to the transactions contemplated hereby; and the
Company has full power and authority to enter into this Agreement and to
authorize, issue and sell the Shares as contemplated by this Agreement.
(ix) All of the issued and outstanding shares of
capital stock of the Company, including the outstanding shares of Common Stock,
are duly authorized and validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws and were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; the Shares which may be sold hereunder by
the Company and the Selling Stockholders and the Option Shares have been duly
authorized and, when issued, delivered and paid for in accordance with the
terms hereof, will have been duly and validly issued and will be fully paid and
nonassessable; and the capital stock of the Company, including the Common
Stock, conforms to the description thereof in the Registration Statement and
Prospectus. Except as described in the Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the Company's
Certificate of Incorporation, by-laws or any material agreement or other
instrument to which the Company is a party or by which the Company is bound.
Neither the filing of the Registration Statement nor the offering or sale of
the Shares as contemplated by this Agreement gives rise to any rights for or
relating to the registration of any shares of Common Stock or other securities
of the Company except such as have been fulfilled by filing of the Registration
Statement or as are described in the Registration Statement. Except as
described in the Registration Statement and the Prospectus, there are no
options, warrants, agreements, contracts or other rights in existence to
purchase or acquire from the Company any shares of the capital stock of the
Company. The
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<PAGE> 6
Company has an authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus, including as set forth in the
Prospectus under the caption "Capitalization."
(x) The Company holds, and is operating in
compliance with, all franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business and all such
franchises, grants, authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and effect; the Company
is in compliance with all applicable federal, state, local and foreign laws,
regulations, orders and decrees, except where the failure to be so in
compliance would not have a material adverse effect on the business, condition
(financial or otherwise), property, prospects, net worth or results of
operations of the Company.
(xi) The Company has good and marketable title to
all property and assets described in the Registration Statement and Prospectus
as being owned by it, in each case free and clear of all liens, claims,
security interests or other encumbrances except such as (i) are described in
the Registration Statement and the Prospectus or (ii) are not material in
amount and do not materially adversely affect the business, condition
(financial or otherwise), property, prospects, net worth or results of
operations of the Company; the property held under lease by the Company is held
by it under valid, subsisting and enforceable leases with only such exceptions
with respect to any particular lease as do not interfere in any material
respect with the conduct of the business of the Company. The accounts
receivable of the Company at September 30, 1995 arose in the ordinary course of
business and represented bona fide claims against debtors for goods or services
sold or provided to such debtors in accordance with valid purchase orders or
instructions.
(xii) The Company owns or possesses adequate rights
to use all patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights,
licenses, inventions, know-how, trade secrets and rights ("Intellectual
Property") necessary for the conduct of the business of the Company and its
subsidiaries as currently carried on and as proposed to be carried on and as
described in the Registration Statement and Prospectus, including the
Intellectual Property described or referred to in the Prospectus as being owned
or used by the Company. Except as stated in the Registration Statement and
Prospectus, no activity engaged in by, and no aspect of the business of, the
Company uses or involves or gives rise to any infringement of or conflict with,
or license or similar fees for, any Intellectual Property or other similar
rights of others, which infringements, conflicts, licenses or fees, either
individually or in the aggregate, could have a material adverse effect on the
business, condition (financial or otherwise), property, prospects, net worth or
results of operations of the Company, and the Company has not received any
notice alleging any such infringement or conflict or that any such fee is due.
To the knowledge of the Company, no officer or employee of the Company is
obligated under any contract or subject to any judgment, decree or order of any
court or administrative agency that would interfere in any material respect
with the use of such person's best efforts to promote the interests of the
Company or which would conflict in any material respect with the business of
the Company as described in the Registration Statement. To the knowledge of
the Company, no prior or subsequent employer of any employee of the Company has
any right to or interest in any inventions, improvements, discoveries or other
information assigned to or owned by the Company.
(xiii) The Company (i) is not in violation of its
charter or by-laws or (ii) in breach of or otherwise in default in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note, indenture, loan agreement or any other material contract,
lease or other instrument to which it is subject or bound, or to which any of
the property or assets of the Company is subject, which breach or default is
material or could have a material adverse effect on the business, condition
(financial or otherwise), prospects, net worth or results of operations of the
Company.
(xiv) The Company has filed on a timely basis all
federal, state, local and foreign income, franchise and other tax returns
required to be filed (or timely filed for extensions thereof) and are not in
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<PAGE> 7
default in the payment of any taxes which were payable pursuant to said returns
or any assessments with respect thereto, other than any which the Company is
contesting in good faith, or where the failure to timely file such return or
pay such taxes would not have a material adverse effect on the business,
condition (financial or otherwise), prospects, net worth or results of
operations of the Company.
(xv) The Company has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act.
(xvi) The Company's Common Stock is registered under
Section 12(b) of the Exchange Act; and the outstanding shares of Common Stock
and the Shares have been approved for listing on the Nasdaq National Market,
subject to notice of issuance of the Shares.
(xvii) The Company owns no capital stock or other
equity or ownership or proprietary interest in any corporation, partnership,
association, trust or other entity.
(xviii) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles applied on a consistent basis and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is promptly taken with respect to
any differences.
(xix) Other than as expressly contemplated by this
Agreement, the Company has not incurred and will not incur any liability for
any finder's or broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
(xx) The Company has not been advised, and has no
reason to believe, that it is not conducting business in compliance with all of
the laws, rules and regulations of the jurisdictions in which it is conducting
business except where failure to be so in compliance would not have a material
adverse effect on the business, condition (financial or otherwise), property,
prospects, net worth or results of operations of the Company.
(xxi) The Company maintains property, liability and
other insurance of the types and in the amounts reasonably deemed by the
Company to be adequate for its business, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect. The Company reasonably believes that any outstanding claims against
the Company are adequately covered by insurance policies in full force and
effect or by indemnities by third parties.
(xxii) The Company is not involved in any labor
dispute or disturbance nor, to the knowledge of the Company, is any such
dispute or disturbance threatened.
(xxiii) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to conduct, its affairs in such a manner as to ensure that it will not
become an "investment company" within the meaning of the 1940 Act and such
rules and regulations.
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<PAGE> 8
(xxiv) The Company has not at any time, (i) made any
unlawful contribution to any candidate for foreign office, or failed to
disclose fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer of official, or other person
charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(xxv) The Registration Statement and Prospectus
accurately described in all material respects the Company's agreements with
Dialogic Corporation (and its subsidiaries) and the three next largest
customers of the Company (and their subsidiaries) (collectively, the "Principal
Agreements"), and such descriptions do not omit to state any material fact
relating to the Principal Agreements necessary in order to make such
descriptions not misleading. The entry by the Company into each Principal
Agreement and the Company's performance thereunder has not and will not,
through the giving of notice or the passage of time or both, cause a default
under any other Principal Agreement or any other agreement of the Company which
could reasonably be expected to have a material adverse effect on the business,
condition (financial or otherwise), prospects, net worth or results of
operations of the Company taken as a whole.
(xxvi) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the benefit of
any of the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
(xxvii) All documents delivered or to be delivered
by the Company or any of its directors, officers or controlling persons with
respect to the offering contemplated by the Registration Statement to the
Representatives, the Commission, the NASD or any state securities law
administrator in connection with the issuance and sale of the Shares were on
the dates on which they were delivered or will be on the dates on which they
are delivered, true, complete and correct in all material respects (except to
the extent that incorrect information was subsequently corrected prior to the
date hereof).
(xxix) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Stock, to facilitate the sale or resale of the Shares.
(b) Each of the Selling Stockholders, severally and not
jointly, represents and warrants to, and agrees with, the several Underwriters
and the Company as follows:
(i) Such Selling Stockholder is the record and
beneficial owner of, and has, and on the First Closing Date and/or the Second
Closing Date, as the case may be, will have, good, valid and marketable title
to the Shares and Options to be sold by such Selling Stockholder, free and
clear of all security interests, claims, liens, restrictions on
transferability, legends, proxies, equities or other encumbrances (except that,
(x) with respect to the date hereof, such Selling Stockholder may have record
ownership of warrants, convertible promissory notes or options which give such
Selling Stockholder beneficial ownership of all or some of such Shares as of
the date hereof ("Share Rights") and (y) such representation does not extend to
restrictions on transferability imposed pursuant to the Act and legends that
would apply if such Options or Share Rights were not transferred in a
transaction registered under the Act and all applicable State securities laws
("Securities Law Encumbrances"), and such Selling Stockholder has good, valid
and marketable title to such Share Rights free and clear of all such
encumbrances (except for Securities Law Encumbrances). Upon delivery of and
payment for such Shares and Options hereunder, the several Underwriters will
acquire valid and marketable title thereto, free and clear of any security
interests, claims, liens, restrictions on transferability, legends, proxies,
equities or other encumbrances. Such Selling Stockholder is selling the Shares
and Options to be sold by such Selling Stockholder for such Selling
Stockholder's own account and is not selling such Shares and Options , directly
or indirectly, for
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<PAGE> 9
the benefit of the Company, and no part of the proceeds of such sale received
by such Selling Stockholder will inure, either directly or indirectly, to the
benefit of the Company.
(ii) Such Selling Stockholder or its duly appointed
attorney-in-fact has duly executed and delivered a Custody and Escrow Agreement
("Custody Agreement"), substantially in the form of Exhibit A hereto, which
Custody Agreement is a valid and binding obligation of such Selling
Stockholder, to Peter J. Foster and Robert E. Neiman, as custodian and escrow
agent (the "Custodian"). Pursuant to the Custody Agreement such Selling
Stockholder has placed in custody with the Custodian, for delivery under this
Agreement, (a) the stock certificates in negotiable form representing the
Shares to be sold by such Selling Stockholder and/or Share Rights under which
such Selling Stockholder has all necessary rights to acquire any Shares to be
sold by such Selling Stockholder (together with instruments sufficient to
exercise such Share Rights and funds sufficient to pay at least the par value
per share to be issued upon such exercise) and (b) if applicable, instruments
representing the Options to be sold by such Selling Stockholder. In the case
of the preceding clause (a), such stock certificates were or (with respect to
stock certificates to be issued upon exercise or conversion of Share Rights)
will be, as the case may be, duly and properly endorsed in blank for transfer,
or were or will be, as the case may be, accompanied by all documents duly and
properly executed that are necessary to effect and validate the transfer to the
Underwriters hereunder of title thereto, free of any legend, restriction on
transferability, proxy, lien or claim, whatsoever. In the case of the
preceding clause (b), such Options will be accompanied by all documents duly
and properly executed that are necessary to effect and validate the transfer to
the Underwriters hereunder of title thereto and to enable the Underwriters to
exercise such Options and receive upon such exercise Option Shares that are
free of any legend, restriction on transferability, proxy, lien or claim
whatsoever (except, in the case of both clause (a) and (b), for Securities Law
Encumbrances).
(iii) Such Selling Stockholder has the power and
authority to enter into this Agreement and to sell, transfer and deliver the
Shares or Options to be sold by such Selling Stockholder; and such Selling
Stockholder has duly executed and delivered to Peter J. Foster and Robert E.
Neiman, as attorneys-in-fact (the "Attorneys-in-Fact"), an irrevocable power of
attorney (a "Power of Attorney"), substantially in the form of Exhibit B
hereto, authorizing and directing the Attorneys-in-Fact, or any of them, to
effect the sale and delivery of the Shares and/or Options being sold by such
Selling Stockholder, to enter into this Agreement and to take all such other
action as may be necessary, desirable or appropriate hereunder.
(iv) This Agreement, the Custody Agreement and the
Power of Attorney have each been duly executed and delivered by or on behalf of
such Selling Stockholder and each constitutes a valid and binding agreement of
such Selling Stockholder, enforceable against such Selling Stockholder in
accordance with its terms. The execution and delivery of this Agreement, the
Custody Agreement and the Power of Attorney and the performance of the terms
hereof and thereof and the consummation of the transactions herein and therein
contemplated will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any trust, agreement or
instrument to which such Selling Stockholder is a party or by which such
Selling Stockholder is bound or to which any of such Selling Stockholder's
property is subject, or any law, regulation, order or decree of any court or of
any regulatory body or agency applicable to such Selling Stockholder other than
any Blue Sky Law or the by-laws and rules of the NASD relating to corporate
financing arrangements; no consent, approval, authorization or order of, or
filing with, any court or governmental agency or body is required with respect
to such Selling Stockholder for the execution, delivery and performance of this
Agreement, the Custody Agreement and the Power of Attorney or for the
consummation of the transactions contemplated hereby and thereby, including the
sale of the Shares and Options being sold by such Selling Stockholder and the
sale of the Option Shares by the Underwriters, except such as may be required
under the Act and other than any Blue Sky Law or the by-laws and rules of the
NASD relating to corporate financing arrangements.
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<PAGE> 10
(v) Such Selling Stockholder has not distributed and
will not distribute any prospectus or other offering material in connection
with the offering and sale of the Shares other than any Preliminary Prospectus
or the Prospectus or other materials permitted by the Act to be distributed by
such Selling Stockholder.
(vi) Such Selling Stockholder has reviewed the
Prospectus and such Selling Stockholder has no actual knowledge which causes it
to believe that the Prospectus contains any untrue statement of a material fact
or omits to state any material fact necessary to make the statements therein
not misleading regarding such Selling Stockholder, the Company or otherwise. A
reference in this agreement to the actual knowledge of Dialogic Investment
Corporation refers to the actual knowledge of Kenneth J. Burkhardt, Jr., Howard
G. Bubb or Edward B. Jordan. A reference in this agreement to the "actual
knowledge" of a Selling Stockholder does not imply any obligation that the
Selling Stockholder (or, in the case of Dialogic Investment Corporation,
Messrs. Burkhardt, Bubb or Jordan) undertake any inquiry with respect to any
matter and expressly excludes constructive knowledge.
(vii) Such Selling Stockholder has not since the
filing of the Registration Statement (1) sold, bid for, purchased, attempted to
induce any person to purchase, or paid anyone any compensation for soliciting
purchases of, Common Stock or (2) paid or agreed to pay to any person any
compensation for soliciting another to purchase any Shares of the Company
(except for the sale of Shares and except for any exercise of options and
warrants or conversion of convertible notes in connection with the sale of
Shares by the Selling Stockholders under this Agreement).
(viii) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the Company's Common Stock, to facilitate the sale or resale of
the Shares.
(ix) Such Selling Stockholder (if it is not an
individual) has been duly organized and is validly existing in good standing
under the laws of the jurisdiction of its organization, has full corporate
power and authority to enter into and perform its obligations under this
Agreement and to sell, assign, transfer and deliver the securities to be sold
by it under this Agreement.
(x) Such Selling Stockholder does not have, or has
waived prior to the date hereof, any preemptive right, co-sale right or right
of first refusal or other similar right to purchase any of the securities that
are to be sold by the Company and the other Selling Stockholders to the
Underwriters pursuant to this Agreement; such Selling Stockholder does not
have, or has waived prior to the date hereof, any registration right or other
similar right to participate in the offering made by the Prospectus, other than
such rights of participation as have been satisfied by its participation in the
transactions to which this Agreement relates in accordance with the terms of
this Agreement; and such Selling Stockholder does not own any warrants, options
or similar rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other securities from
the Company, other than those described in the Registration Statement and the
Prospectus.
(c) Any certificate signed by any officer of the Company
and delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby; any certificate signed by or on behalf of any Selling
Stockholder as such and delivered to you or to counsel for the Underwriters
shall be deemed a representation and warranty by such Selling Stockholder to
each Underwriter as to the matters covered thereby; and any certificate
delivered by the Company or a Selling Stockholder to its counsel for purposes
of enabling such counsel to render the opinions referred to in Section 5 will
also be furnished to you and counsel for the Underwriters and, to the extent
such certificate contains representations or certifications not contained in
this Agreement, such representations and certifications shall be deemed to be
additional representations and warranties of the Company or such Selling
Stockholder, as the case may be, to the Underwriters as to the matters covered
thereby.
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3. Purchase, Sale and Delivery of Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell 1,251,533 Firm Shares, and each
Selling Stockholder, severally and not jointly, agrees to sell the number of
Firm Shares or Options set forth opposite the name of such Selling Stockholder
in Schedule I hereto, to the several Underwriters, and each Underwriter agrees,
severally and not jointly, to purchase from the Company and the Selling
Stockholders the number of Firm Shares or Options set forth opposite the name
of such Underwriter in Schedule II hereto. The purchase price for each Firm
Share shall be $_____ per share (the "Firm Price") and the purchase price for
each Option shall be the Firm Price less the exercise price of each Option.
The obligation of each Underwriter to each of the Company and the Selling
Stockholders shall be to purchase from each of the Company and the Selling
Stockholders that number of Firm Shares and Options (to be adjusted by the
Representatives to avoid fractional shares) which represents the same
proportion of the number of Firm Shares and Options to be sold by each of the
Company and the Selling Stockholders pursuant to this Agreement as the number
of Firm Shares and Options set forth opposite the name of such Underwriter in
Schedule II hereto represents to the total number of Firm Shares and Options to
be purchased by all Underwriters pursuant to this Agreement. In making this
Agreement, each Underwriter and each Selling Stockholder is contracting,
severally and not jointly; except as provided in paragraph (c) of this Section
3 and in Section 8 hereof, the agreement of each Underwriter is to purchase
only the respective number of Firm Shares and Options specified in Schedule II.
Each Selling Stockholder solely with respect to itself or
himself or herself agrees and acknowledges that certificates in negotiable form
representing Shares, and, in the case of Options, instruments representing such
Options, if applicable, and/or with duly executed instruments of assignment
(together, "Option Instruments") for the total number of the Shares and Options
to be sold hereunder by such Selling Stockholder (including certificates
representing Shares issued or issuable upon the exercise of Share Rights as
defined in Section 2(b) hereof) have been placed in custody with the Custodian
pursuant to the Custody Agreement executed by or on behalf of such Selling
Stockholder for delivery of all Firm Shares, Options and Over-allotment Shares
to be sold hereunder by such Selling Stockholder. Such Selling Stockholder
specifically agrees that the Firm Shares and Over-allotment Shares represented
by the certificates and the Option Instruments held in custody for such Selling
Stockholder at any time under the Custody Agreement, together with the Share
Rights and funds held in custody for such Selling Stockholder as described in
Section 2(b) hereof, are subject to the interests of the Underwriters
hereunder, that the arrangements made by such Selling Stockholder for such
custody are to that extent irrevocable, and that the obligations of such
Selling Stockholder hereunder shall not be terminable by any act or deed of
such Selling Stockholder (or by any other person, firm or corporation including
the Company, the Custodian or the Underwriters) or by operation of law
(including, without limitation, the death of an individual Selling Stockholder
or the dissolution of a corporate, trust or partnership Selling Stockholder) or
by the occurrence of any other event or events, except as set forth in the
Custody Agreement. If any such event should occur prior to the delivery to the
Underwriters of the Firm Shares, the Options or Over-allotment Shares
hereunder, as the case may be, certificates for the Firm Shares or instruments
representing the Options, as the case may be, shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such event has not occurred. The Custodian is authorized to receive and
acknowledge receipt of the proceeds of sale of the Firm Shares, Options or
Over-allotment Shares, as the case may be, held by it against delivery of such
Shares.
The Firm Shares and Options will be delivered by the Company
and the Custodian to you for the accounts of the several Underwriters against
payment of the purchase price therefor by certified or official bank check or
other next day funds payable to the order of the Company (in the case of the
Shares to be sold by the Company) or to the order of the Custodian and the
Selling Stockholder (in the case of the Shares and Options to be sold by the
Selling Stockholders), as appropriate, at the offices of First Albany
Corporation, 41 State Street, Albany, New York 12207 or such other location as
may be mutually acceptable, at 9:00 a.m., New York time,
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<PAGE> 12
(a) if this Agreement is executed and delivered after 4:30 p.m., New York time,
on the fourth (4th) full business day following the day that this Agreement is
executed and delivered, (b) if clause (a) of this sentence is inapplicable,
then on the third (3rd) full business day following the first day on which the
Shares are traded, or (c) if clauses (a) and (b) of this sentence are
inapplicable, then at such other time and date not later than seven (7) full
business days following the first day that the Shares are traded as the
Representatives and the Company may determine (or at such time and date to
which payment and delivery shall have been postponed pursuant to Section 8
hereof), such time and date of delivery being herein referred to as the "First
Closing Date"; provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in
Section 4(a)(v) hereof, the Representatives may, in their sole discretion,
postpone the First Closing Date until no later than two (2) full business days
following delivery of copies of the Prospectus to the Representatives. Each of
the Underwriters, severally and not jointly, agrees to exercise the Options
purchased by such Underwriter immediately upon their receipt and to pay the
exercise price therefor, and the Company agrees to permit such exercise and
immediately issue certificates for the Option Shares represented thereby. The
certificates for the Firm Shares and the Option Shares, in definitive form and
in such denominations and registered in such names as you may request upon at
least two (2) business days prior notice to the Company and the Custodian, will
be made available for checking and packaging at the offices of First Albany
Corporation, 41 State Street, Albany, New York 12207 or such other location as
may be mutually acceptable, at least one (1) business day prior to the First
Closing Date. If the Representatives so elect, delivery of the Firm Shares and
the Option Shares may be made by credit through full fast transfer to the
accounts at the Depository Trust Company designated by the Representatives.
(b) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company, with respect to 220,500 of the Over-allotment Shares, and
Dialogic Investment Corporation, a Selling Stockholder, with respect to 150,000
Over-allotment Shares, hereby grant to the several Underwriters an option to
purchase all or any portion of the Over-allotment Shares at the Firm Price
(i.e., the same purchase price as the Firm Shares) for use solely in covering
any over-allotments made by the Underwriters in the sale and distribution of
the Firm Shares and the Option Shares. The option granted hereunder may be
exercised at any time (but not more than once) within 30 days after the
effective date of this Agreement upon written notice by the Representatives to
the Company and to the Attorneys-in-Fact setting forth the aggregate number of
Over-allotment Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the certificates for the
Over-allotment Shares are to be registered and the date and time, as determined
by you, when the Over-allotment Shares are to be delivered, such time and date
being herein referred to as the "Second Closing" and "Second Closing Date,"
respectively; provided, however, that the Second Closing Date shall not be
earlier than the First Closing Date nor earlier than the second (2nd) business
day after the date on which the option shall have been exercised. If the
option granted hereunder is exercised, the number of Over-allotment Shares to
be purchased by each Underwriter shall be the same percentage of the total
number of Over-allotment Shares to be purchased by the several Underwriters as
the number of Firm Shares and Options to be purchased by such Underwriter is of
the total number of Firm Shares and Options to be purchased by the several
Underwriters, as adjusted by the Representatives in such manner as the
Representatives deem advisable to avoid fractional shares. If the option
granted hereby is exercised in part, the respective number of Over-allotment
Shares which may be sold by the Company and Dialogic Investment Corporation
hereto shall be determined on a pro rata basis in accordance with the number of
Over-allotment Shares to be sold by the Company and Dialogic Investment
Corporation pursuant to this Section 3(b), adjusted by you in such manner as to
avoid fractional shares. You, as Representatives of the several Underwriters,
may cancel such option at any time prior to its exercise or expiration by
giving written notice of such cancellation to the Company. No Over-allotment
Shares shall be sold and delivered unless the Firm Shares and Options
previously have been, or simultaneously are, sold, delivered and paid for in
accordance with Section 3(a).
The Over-allotment Shares will be delivered by the Company and
the Custodian to you for the accounts of the several Underwriters against
payment of the purchase price therefor by certified or official bank
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<PAGE> 13
check or other next day funds payable to the order of the Company (in the case
of Over-allotment Shares to be sold by the Company) or to the order of the
Custodian and Dialogic Investment Corporation (in the case of Over-allotment
Shares to be sold by Dialogic Investment Corporation) Custodian at the offices
of First Albany Corporation, 41 State Street, Albany, New York 12207 or such
other location as may be mutually acceptable at 9:00 a.m. on the Second Closing
Date. Certificates representing the Over-allotment Shares in definitive form
and in such denominations and registered in such names as you have set forth in
your notice of option exercise, will be made available for checking and
packaging at the office of First Albany Corporation, 41 State Street, Albany,
New York 12207 or such other location as may be mutually acceptable, at least
one (1) business day prior to the Second Closing Date. If the Representatives
so elect, delivery of such certificates may be made by credit through full fast
transfer to the accounts of The Depositary Trust Company designated by the
Representatives.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment to the Company or the Selling Stockholders, on behalf of any
Underwriter for the Shares to be purchased by such Underwriter. Any such
payment by you shall not relieve any such Underwriter of any of its obligations
hereunder. Nothing herein contained shall constitute any of the Underwriters
an unincorporated association or partner with the Company or the Selling
Stockholders.
(d) An Underwriter shall have fulfilled its obligation to
pay to a Selling Stockholder the Firm Price of a share if such Underwriter (x)
pays to the Company (or pays to the Custodian who pays to the Company) any
monies due the Company on account of the exercise of an option or warrant that
has been exercised to acquire for delivery to the Underwriter such share and
(y) such Underwriter pays to such Selling Stockholder the Firm Price less the
amount paid to the Company or the Custodian pursuant to the preceding clause
(x).
4. Covenants.
(a) The Company covenants and agrees with the several
Underwriters as follows:
(i) The Company will use its best efforts to cause
the Registration Statement and any amendment thereof, if not effective at the
time and date that this Agreement is executed and delivered by the parties
hereto, to become effective as promptly as possible; the Company will use its
best efforts to cause any abbreviated registration statement filed pursuant to
Rule 462(b) as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible;
the Company will notify you, promptly after it shall receive notice thereof, of
the time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to Rule 424(b) or as part of a
post-effective amendment to such Registration Statement as originally declared
effective which is declared effective by the Commission; if the Company
utilizes a Term Sheet, the Company will provide evidence satisfactory to you
that the Prospectus and Term Sheet meeting the requirements of Rule 434 have
been filed within the time period prescribed, with the Commission pursuant to
Rule 424(b); if for any reason the filing of the final form of Prospectus is
required under Rule 424(b), it will provide evidence satisfactory to you that
that Prospectus contains such information as may be required by Rule 424(b) and
the Rules and Regulations and has been filed with the Commission within the
time period prescribed; it will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information; promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in your reasonable opinion, may be
necessary or advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the
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<PAGE> 14
Commission, and promptly notify you of the filing of, any amendments or
supplements to the Registration Statement or Prospectus which may be necessary
to correct any statements or omissions, if, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
shall have occurred as a result of which the Prospectus or any other prospectus
relating to the Shares as then in effect would include any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading; and it will file no amendment or supplement to the Registration
Statement or Prospectus or the Incorporated Documents, or, prior to the end of
the period of time in which a prospectus relating to the Shares is required to
be filed under the Act, file any document which upon filing becomes an
Incorporated Document, which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however to compliance with the Act and
the Rules and Regulations, and the Exchange Act and the rules and regulations
of the Commission thereunder and the provisions of this Agreement.
(ii) The Company will advise you, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or suspending the use of the Prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceeding for any such purpose; and the
Company will promptly use its best efforts to prevent the issuance of any stop
order or to obtain its withdrawal at the earliest possible moment if such a
stop order should be issued.
(iii) Within the time during which a prospectus
relating to the Shares is required to be delivered under the Act, the Company
will comply with all requirements imposed upon it by the Act, as now and
hereafter amended, and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Shares as contemplated by the provisions hereof and the Prospectus. If
during such period any event occurs as a result of which the Prospectus or any
other prospectus relating to the Shares as then in effect would include an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances then
existing, not misleading, or if during such period it is necessary to amend the
Registration Statement or supplement the Prospectus to comply with the Act, the
Company will promptly notify you and will promptly amend the Registration
Statement or supplement the Prospectus (at the expense of the Company) so as to
correct such statement or omission or effect such compliance.
(iv) The Company will use its best efforts in
cooperation with you to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you reasonably designate and to
continue such qualifications in effect so long as required for the distribution
of the Shares, except that the Company shall not be required in connection
therewith to qualify as a foreign corporation or to execute a general consent
to service of process in any state.
(v) The Company will furnish to the Underwriters, as
soon as available, and, in the case of the Prospectus and any Term Sheet, in no
event later than the first full business day following the first day that the
Shares are traded, copies of the Registration Statement (four of which will be
manually signed and will include all exhibits), each Preliminary Prospectus,
the Prospectus, and all amendments and supplements to such documents, and the
Incorporated Documents (one of which will include all exhibits), in each case
in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if First Albany Corporation, on behalf of the
several Underwriters, shall agree to the utilization of a Term Sheet, the
Company shall provide to you copies of the Preliminary Prospectus updated in
all respects through the date specified by you in such quantities as you may
from time to time reasonably request.
(vi) During a period of five (5) years commencing
with the date hereof, the Company will furnish to the Representatives, and to
each Underwriter who may so request in writing, copies of all periodic
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<PAGE> 15
and special reports furnished to the stockholders of the Company and all
publicly available information, documents and reports filed by the Company with
the Commission, NASD, the Nasdaq National Market, AMEX or any other securities
exchange.
(vii) The Company will make generally available to
its security holders as soon as practicable, but in any event not later than
the 45th day after the end of the fiscal quarter of the Company first occurring
after the first anniversary of the effective date of the Registration Statement
(or not later than the 90th day after the end of such fiscal quarter, if such
quarter is the Company's fourth fiscal quarter), an earnings statement (which
need not be audited) covering a 12-month period beginning after the effective
date of the Registration Statement that shall satisfy the provisions of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been made available.
(viii) The Company, whether or not the transactions
contemplated hereunder are consummated or this Agreement is prevented from
becoming effective under the provisions of Section 9 hereof or is terminated,
will pay or cause to be paid (A) all expenses (including transfer taxes
allocated to the respective transferees) incurred in connection with the
delivery to the Underwriters of the Shares, (B) all expenses and fees
(including, without limitation, fees and expenses of the Company's accountants
and counsel but, except as otherwise provided below, not including fees of the
Underwriters' counsel or accountants, if any) in connection with the
preparation, printing, filing, delivery, and shipping of the Registration
Statement (including the financial statements therein and all amendments,
schedules, and exhibits thereto), the Shares, each Preliminary Prospectus, the
Prospectus, any Term Sheet and the Incorporated Documents and any amendment
thereof or supplement to any of the foregoing, and the printing, delivery, and
shipping of this Agreement, the Agreement Among Underwriters, the Selected
Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments or documents related to any of the foregoing, (C) all filing fees
and reasonable fees and disbursements of the Underwriters' counsel incurred in
connection with the qualification of the Shares for offering and sale by the
Underwriters or by dealers under the securities or blue sky laws of the states
and other jurisdictions which you shall designate in accordance with Section
4(a)(iv) hereof but not including any attorneys fees and costs of Underwriters'
counsel for any other purpose, (D) the fees and expenses of the Custodian and
any transfer agent or registrar, (E) the filing fees incident to any required
review by NASD of the terms of the sale of the Shares, (F) listing fees, if
any, and (G) all other costs and expenses incident to the performance of its
obligations hereunder that are not otherwise specifically provided for herein.
It is agreed that if, prior to distribution of the Preliminary Prospectus, the
outstanding shares of Common Stock and the Shares are approved for listing on
the Nasdaq National Market subject to notice of issuance of the Firm Shares and
the Common Stock and Shares are so listed, then the fees and disbursements
(other than filing fees) of Underwriters' counsel under clause (C) above shall
not exceed $15,000. If the sale of the Shares provided for herein is not
consummated pursuant to a termination under Section 9(b)(i), (ii) or (iii)
hereof, or by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to perform any agreement on its or their
part to be performed, or because any other condition of the Underwriters'
obligations hereunder is not fulfilled, the Company will reimburse the several
Underwriters for all out-of-pocket expenses and other disbursements (including
reasonable fees and disbursements of counsel) incurred by the Underwriters in
connection with their investigation, preparing to market and marketing the
Shares or in contemplation of performing their obligations hereunder. The
Company shall not in any event be liable to any of the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
(ix) The Company will apply the net proceeds from
the sale of the Shares to be sold by it hereunder for the purposes set forth in
the Prospectus under "Use of Proceeds" and will file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required by the Rules and Regulations.
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<PAGE> 16
(x) The Company will not, without the prior written
consent of First Albany Corporation on behalf of itself and the other
Representatives, offer for sale, sell, contract to sell, grant any option for
the sale of or otherwise issue or dispose of any Common Stock or any securities
convertible into or exchangeable for, or any options or rights to purchase or
acquire, Common Stock, except (i) to the Underwriters pursuant to this
Agreement or (ii) to the holders of options granted or to be granted under the
Company's 1986 or 1992 Stock Option Plans (the "Plans") or (iii) to the holders
of any other options or warrants or convertible securities currently
outstanding upon the exercise or conversion thereof, for a period of 180 days
after the commencement of the public offering of the Shares by the
Underwriters. The Company will not, without the prior written consent of First
Albany Corporation on behalf of itself and the other Representatives and
subject to the Lock-Up Agreements (as more fully described in Section (xi)
below), grant any new option under any Plan which becomes exercisable during
such 180 day period.
(xi) The Company either has caused to be delivered
to you or will cause to be delivered to you prior to the effective date of the
Registration Statement a Lock-Up Agreement, in the form of Exhibit C hereto,
from each of the Selling Stockholders, each director and executive officer of
the Company, and each person who, to the knowledge of the Company, is the
beneficial owner of more than 100,000 of the outstanding shares of Common
Stock, stating that such person agrees that he or she will not, without the
prior written consent of First Albany Corporation on behalf of itself and the
other Representatives, directly or indirectly offer for sale, sell, contract to
sell or otherwise dispose of any shares of Common Stock or rights to purchase
Common Stock, except to the Underwriters pursuant to this Agreement, for a
period of 180 days after commencement of the public offering of the Shares by
the Underwriters.
(xii) The Company has not taken and will not take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security of the Company, to facilitate the
sale or resale of the Shares.
(xiii) The Company will not incur any liability for
any finder's or broker's fee or agent's commission in connection with the
execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby.
(xiv) If at any time during the 90-day period after
the Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event so long
as such press release or other public statement does not, in the opinion of the
Company's counsel, violate the law.
(xv) The Company will maintain a transfer agent and,
if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for its Common
Stock.
(xvi) The Company is familiar with the Investment
Company Act of 1940, as amended, and the rules and regulations thereunder, and
has in the past conducted its affairs and will conduct its affairs, during any
applicable statute of limitations relating to the offer and sale of the Shares,
in such a manner so as to insure that the Company was not and will not be an
"Investment Company" within the meaning of the Investment Company Act of 1940
and the rules and regulations thereunder.
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<PAGE> 17
(xvii) During a period of 180 days from the
effective date of the Registration Statement, the Company will not file a
registration statement under the Act, including any registration statement
registering shares under any of the Plans or any other employee benefit plan;
provided that the Company shall be permitted to maintain the effectiveness of
any currently effective registration statement on Form S-8 or to file a Form
S-8 relating to the Plans.
(xviii) The Company consents to the transfer of the
Options to the Underwriters as contemplated hereby and agrees that upon
exercise of the Options and payment of the exercise price therefor the Company
will issue to or at the direction of the Underwriters validly issued,
outstanding, fully paid, and nonassessable shares of Common Stock in the number
contemplated among the parties hereby.
(b) Each of the Selling Stockholders, severally and not
jointly, covenants and agrees with the several Underwriters and the Company as
follows:
(i) Such Selling Stockholder will pay all taxes, if
any, on the transfer and sale, respectively, of the Shares and Options being
sold by such Selling Stockholder and except as otherwise agreed to by the
Company and such Selling Stockholder, the fees of such Selling Stockholder's
counsel; provided, however, that such Selling Stockholder agrees to reimburse
the Company for any reimbursement made by the Company to the Underwriters
pursuant to Section 4(a)(viii) hereof to the extent such reimbursement resulted
from the failure or refusal on the part of such Selling Stockholder to comply
under the terms or fulfill any of the conditions of this Agreement, which
failure or refusal arises out of or results from (A) the breach by such Selling
Stockholder of any representation or warranty herein or in such Selling
Stockholder's Power of Attorney, or (B) any act taken or attempted to be taken
by such Selling Stockholder in its own right and in derogation of the authority
granted by such Selling Stockholder in such Power of Attorney. Such Selling
Stockholder agrees to pay any expenses relating to the qualification of such
Selling Stockholder's shares for sale if the Company's payment of such is
prohibited by any state Blue Sky or securities regulatory commission in a
jurisdiction in which Shares are being offered.
(ii) The Shares and Options to be sold by such
Selling Stockholder, represented by the certificates and instruments on deposit
with the Custodian at any time pursuant to the Custody Agreement of such
Selling Stockholder (together with instruments representing Share Rights) and
funds held in custody for the Selling Stockholders as described in Section 2(b)
hereof (if applicable), are subject to the interest of the several
Underwriters; the arrangements made for such custody are, except as
specifically provided in the Custody Agreement, irrevocable; and the
obligations of such Selling Stockholder hereunder shall not be terminated,
except as provided in this Agreement or in the Custody Agreement, by any act of
such Selling Stockholder, by operation of law, whether by the liquidation,
dissolution or merger of such Selling Stockholder, by the death of such Selling
Stockholder, or by the occurrence of any other event. If any Selling
Stockholder should die, liquidate, dissolve or be a party to a merger or if any
other such event should occur before the delivery of the Shares and Options
hereunder, the certificates and instruments for the Shares and Options, and, if
applicable, Share Rights shall be delivered by the Custodian in accordance with
the terms and conditions of this Agreement as if such death, liquidation,
dissolution, merger or other event had not occurred, whether or not the
Custodian shall have received notice thereof.
(iii) Such Selling Stockholder will not, without the
prior written consent of First Albany Corporation on behalf of itself and the
other Representatives, directly or indirectly offer for sale, sell, contract to
sell, grant any option for the sale of or otherwise dispose of any Common Stock
or any Shares convertible into or exchangeable for, or any options or rights to
purchase or acquire, Common Stock, except to the Underwriters pursuant to this
Agreement, for the period of 180 days after the commencement of the public
offering of the Shares by the Underwriters. Such agreement is further
memorialized in a Lock-Up Agreement in the form attached hereto as Exhibit C.
Such Selling Stockholder agrees and consents to the entry of stop transfer
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instructions with the Company's transfer agent against the transfer during such
180 day period of shares of Common Stock held by such Selling Stockholder,
except in accordance with the terms hereof or of such Lock-Up Agreement.
(iv) Such Selling Stockholder has not taken and will
not take, directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
the Shares.
(v) For so long as the Underwriters hereunder and
any dealers to whom they may sell the Shares are required to deliver a copy of
the Prospectus or any supplement thereto to an offeree or purchaser of the
Shares from such Underwriters or dealers, such Selling Stockholder shall
immediately notify you if it acquires actual knowledge (as described in Section
2(b)(vi)) of any event, or of any change in information relating to such
Selling Stockholder or the Company or any new information relating to the
Company or relating to any matter stated in the Prospectus or any supplement
thereto, which results in the Prospectus (as supplemented) including an untrue
statement of a material fact or omitting to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(vi) In order to document the Underwriters'
compliance with the reporting and withholding provisions of the federal income
tax laws, including the Tax Equity and Fiscal Responsibility Act of 1982 and
the Interest and Dividend Tax Compliance Act of 1983 with respect to the
transactions herein contemplated, each of the Selling Stockholders agrees to
deliver to you prior to or at the Closing Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu thereof), or
such other information or documentation as may be necessary, in your reasonable
opinion, to evidence such compliance.
5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of, as of the
date hereof and at each of the First Closing Date and the Second Closing Date
(as if made at such Closing Date), as the case may be, and compliance with, all
representations, warranties and agreements of the Company and the Selling
Stockholders contained herein, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder and to the
following additional conditions:
(a) The Registration Statement shall have become
effective not later than 2:00 p.m., New York time, on the date of this
Agreement, or such later time and date as First Albany on its own behalf and on
behalf of the other Representatives of the several Underwriters, shall approve,
and all filings required by Rule 424 and Rule 430A of the Rules and Regulations
shall have been timely made; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereof shall have been issued; no
proceedings for the issuance of such an order shall have been initiated or
threatened; and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to your satisfaction.
(b) No Underwriter shall have advised the Company that
the Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, contains an untrue statement of fact which, in your
opinion, is material, or omits to state a fact which, in your opinion, is
material and is required to be stated therein or necessary to make the
statements therein not misleading.
(c) Except as expressly contemplated in the Prospectus,
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company shall not have incurred
any material liabilities or obligations, direct or contingent, or entered into
any material transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock; and, except
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as contemplated by the Registration Statement and Prospectus, there shall not
have been any change in the capital stock (other than a change in the number of
outstanding shares of Common Stock due to the issuance of shares upon the
exercise of options, convertible promissory notes or warrants outstanding as of
the date the Registration Statement was filed), or any material change in the
short-term or long-term debt of the Company, or any issuance of (or amendment
to or change in the terms of) options, warrants, convertible securities or
other rights to purchase the capital stock of the Company, or any material
adverse change or any development likely to involve a prospective material
adverse change (whether or not arising in the ordinary course of business), in
the general affairs, condition (financial or otherwise), business, key
personnel, property, prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole, that, in your reasonable
judgment, makes it impractical or inadvisable to offer or deliver the Shares on
the terms and in the manner contemplated in the Prospectus.
(d) On each Closing Date, there shall have been furnished
to you, as Representatives of the several Underwriters, the opinion of
Dickinson, Wright, Moon, Van Dusen & Freeman, counsel for the Company, dated
such Closing Date and addressed to you, to the effect that:
(i) The Company is validly existing as a corporation
in good standing under the laws of its jurisdiction of incorporation. The
Company has full corporate power and authority to own its properties and
conduct its business as currently being carried on as described in the
Registration Statement and Prospectus, and the Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
set forth on Schedule III hereto.
(ii) The authorized and outstanding capital stock of
the Company, and, to the best of such counsel's knowledge, all securities
convertible into or exercisable for capital stock of the Company, as of the
date indicated in the Prospectus, is as set forth in the Prospectus under the
caption "Capitalization," including the footnotes to the table included under
such caption; the capital stock of the Company conforms as to legal matters to
the description thereof contained in the Prospectus under the caption
"Description of Capital Stock." All of the issued and outstanding shares of
the capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable (except that such opinion need not extend
to 45,540 shares issued in consideration for promissory notes). The Shares to
be issued and sold by the Company hereunder and the Option Shares have been
duly authorized and, when issued, delivered and paid for in accordance with the
terms of this Agreement (or, in the case of the Option Shares, in accordance
with the terms of the Options), will have been validly issued and will be fully
paid and nonassessable. The certificates for the Shares to be issued and sold
by the Company hereunder and delivered to the Underwriters are in due and
proper form. Except as described in the Prospectus, there are no preemptive
rights or other rights to subscribe for or to purchase, or any restriction upon
the voting or transfer of, any shares of Common Stock pursuant to the Company's
Certificate of Incorporation, by-laws or any agreement or other instrument
known to such counsel to which the Company is a party or by which the Company
is bound. To the best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Shares as contemplated
by this Agreement gives rise to any rights for or relating to the registration
of any shares of Common Stock or other Shares of the Company, except such
rights as are described in the Prospectus or which have been satisfied.
(iii) To the best of such counsel's knowledge, (i)
except as described in the Registration Statement and Prospectus, there are no
options, warrants, agreements, contracts or other rights in existence to
purchase or acquire from the Company any shares of the capital stock of the
Company and (ii) the Company owns no capital stock or other equity or ownership
or proprietary interest in any corporation, partnership, association, trust or
other entities.
(iv) The Registration Statement has become effective
under the Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
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<PAGE> 20
issued and no proceeding for that purpose has been instituted or, to the
knowledge of such counsel, threatened by the Commission; any required filing of
the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules
and Regulations has been made in the manner and within the time period required
by Rule 424(b).
(v) The descriptions in the Registration Statement
and Prospectus of statutes, legal and governmental proceedings and contracts,
insofar as such descriptions purport to summarize matters of law, are accurate
in all material respects and fairly present the information required to be
disclosed with respect thereto; and such counsel does not know of any statutes
or legal or governmental proceedings required to be described in the Prospectus
that are not described as required, or of any contracts or documents of a
character required to be described in the Registration Statement or Prospectus
or included as exhibits to the Registration Statement that are not described or
included as required.
(vi) The Company has full corporate power and
authority to enter into this Agreement and to issue, sell and deliver to the
several Underwriters the Shares to be issued and sold by the Company hereunder.
This Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid, legal and binding obligation of the Company
enforceable against the Company in accordance with its terms (except as rights
to indemnification and contribution hereunder may be limited by federal or
state securities laws or otherwise and except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of equity,
whether considered in a proceeding at law or in equity); the execution,
delivery and performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any statute,
any rule, regulation, license, authorization, approval or permit issued or
promulgated by any governmental agency or body having jurisdiction over the
Company or any material agreement or instrument known to such counsel to which
the Company is a party or by which it is bound or to which any of its property
is subject, the Company's Certificate of Incorporation, or by-laws, or any
material order, judgment, writ or decree known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or any of its
respective properties; and no consent, approval, authorization or order of, or
filing with, any court or governmental agency or body is required under any
statute or regulation of general application or, to such counsel's best
knowledge, specific application to the Company for the execution, delivery and
performance of this Agreement or for the consummation of the transactions
contemplated hereby, including the issuance or sale of the Shares by the
Company, except such as have been obtained (specifying the same) or except such
as may be required under the Act (provided, that no opinion need be expressed
in this paragraph with respect to any Blue Sky Laws or the by-laws or rules of
the NASD applicable to the corporate finance arrangements of the transactions
contemplated hereby).
(vii) Such counsel has participated in conferences
with officers and other representatives of the Company and has examined certain
corporate records and other documents in connection with the preparation of the
Registration Statement and, to the best of such counsel's knowledge based upon
the foregoing, nothing has come to the attention of counsel which would cause
counsel to believe that the Company does not hold, or is not operating in
compliance in all material respects with, all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and orders
of any governmental or self-regulatory body required for the conduct of its
business and all such franchises, grants, authorizations, licenses, permits,
easements, consents, certifications and orders are valid and in full force and
effect, except where the failure to hold or to be so in compliance would not
have a material adverse effect on the business, condition (financial or
otherwise), property, prospects, net worth or results or results of operations
of the Company.
(viii) To the best of such counsel's knowledge, the
Company is not in violation of its certificate of incorporation or by-laws, and
the Company is not in breach of or otherwise in default in the performance of
any material obligation, agreement or condition contained in any bond,
debenture, note, contract, indenture, loan agreement, permit, approval,
registration, judgment, decree, order, statute, rule or regulation or
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<PAGE> 21
any other contract, lease or other instrument to which it is subject or by
which any of them may be bound, or to which any of the material property or
assets of the Company is subject.
(ix) The Registration Statement and the Prospectus,
and any amendment thereof or supplement thereto, comply as to form in all
material respects with the requirements of the Act and the Rules and
Regulations.
(x) Except as set forth in the Prospectus, such
counsel knows of no pending or threatened action, suit, claim, proceeding or
investigation before any court or governmental agency or body that, if
determined adversely to the Company, would have a material adverse effect on
the Company or which would limit, revoke, cancel, suspend, or cause not to be
renewed any existing license, certificate, registration, approval or permit
from any state, federal or regulatory authority that is material to the conduct
of the business of the Company as presently conducted and described in the
Registration Statement.
(xi) To the best of such counsel's knowledge, no
holders of shares of Common Stock or other securities of the Company have
registration rights with respect to securities of the Company, other than as
described in the Prospectus.
(xii) Based on and subject to our analysis of
representations made to us by the Company regarding its historical development,
the activities of its employees, its assets and investment activities, its
sources of revenues and its public statements regarding its business and all
such other matters as we have deemed relevant for purposes of rendering this
opinion, we are of the opinion that the Company is not subject to registration
as an "investment company" under the Investment Company Act of 1940.
(xiii) The statements under the captions "Risk
Factors--Shares Eligible for Future Sale," "Business--Sales and Marketing,"
"Business--Facilities," and "Description of Capital Stock" in the Prospectus,
insofar as such statements constitute a summary of documents referred to
therein or of matters of law, are reasonable summaries that fairly and
correctly present, in all material respects, the information required to be
disclosed in the Prospectus with respect to such documents and matters.
Counsel rendering the foregoing opinion shall also include a
statement to the effect that although they have not independently verified the
accuracy, completeness or fairness of the statements of fact contained in the
Registration Statement or the Prospectus, based upon their participation in the
preparation of the Registration Statement and the Prospectus and their review
and discussion of the contents thereof and their examination of the documents
referred to therein, nothing has come to the attention of such counsel during
the course of their representation of the Company that leads them to believe
that the Registration Statement (except as to the financial statements and
schedules and other financial data contained therein, as to which such counsel
need not express any opinion or belief) as of the date it became effective and
as of such Closing Date contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus as amended
or supplemented (except as to the financial statements and schedules and other
financial data contained therein, as to which such counsel need not express any
opinion or belief) as of its date and as of such Closing Date, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
In rendering such opinion such counsel may rely (a) as to
matters of law other than the general corporation law of the State of Delaware,
federal law and the laws of Illinois and Michigan, upon the opinion or opinions
of local counsel reasonably satisfactory to the Representatives provided that
the extent of such reliance is specified in such opinion and that such counsel
shall state that such opinion or opinions of local counsel are satisfactory to
them and that they believe they are justified in relying thereon, (b) as to
matters of fact, to the
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extent such counsel deems reasonable, upon certificates of officers of the
Company provided that the extent of such reliance is specified in such opinion.
Copies of any opinion or certificate relied upon shall be delivered to you as
Representatives of the Underwriters and (c) as to the opinion in clause (ii)
above with respect to the due authorization, valid issuance, payment for and
nonassessability of shares of the capital stock of the Company issued prior to
August 9, 1994, on the opinion of Smith, Stratton, Wise, Heher & Brennan dated
August 9, 1994, provided such firm states in a currently dated letter that it
consents to such reliance.
(e) On each Closing Date, there shall have been furnished
to you, as Representatives of the several Underwriters, the opinion of
Lowenstein Sandler, counsel for Dialogic Corporation and Dialogic Investment
Corporation, and the opinion of Dickinson, Wright, Moon, Van Dusen & Freeman,
acting as counsel for the other Selling Stockholders for the limited purpose of
providing the opinion provided herein, dated such Closing Date and addressed to
you, to the effect that:
(i) Each Selling Stockholder with respect to which
such opinion is rendered is the sole record and (in the case of the opinion by
counsel to Dialogic Investment Corporation) to such counsel's knowledge the
sole beneficial owner of the Shares and Options to be sold by such Selling
Stockholder; upon delivery of the certificates representing the Shares and
instruments representing the Options to be sold by such Selling Stockholder
pursuant to this Agreement along with the instruments of assignment attached
thereto, against payment therefor by the Underwriters, good and marketable
title to such Shares and valid title or ownership of such Options will pass to
the Underwriters and the Underwriters will acquire all the rights of such
Selling Stockholder in the Shares and Options (assuming the Underwriters
purchased the Shares and Options in good faith and without knowledge of an
adverse claim), free and clear of any security interests, claims, liens,
restrictions on transferability, legends, proxies, equities or other
encumbrances or adverse claims of which such counsel has knowledge. The
certificates or instruments representing the Shares to be sold by the Selling
Stockholders hereunder as delivered to the Underwriters are in due and proper
form.
(ii) Based on such assumptions and qualifications as
are reasonably satisfactory to the Representatives, each Selling Stockholder
with respect to which such opinion is rendered has the power and authority to
enter into the Custody Agreement, the Power of Attorney and this Agreement and
to perform and discharge such Selling Stockholder's obligations thereunder and
hereunder; and this Agreement, the Custody Agreement and the Powers of Attorney
have been duly and validly authorized, executed and delivered by (or by the
Attorneys-in-Fact, or any of them, on behalf of) such Selling Stockholder and
are valid and binding agreements of such Selling Stockholder, enforceable
against such Selling Stockholder in accordance with their respective terms
(except as rights to indemnification and contribution hereunder or thereunder
may be limited by federal or state securities laws or otherwise and except as
such enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally and subject to general
principles of equity, whether considered in a proceeding at law or in equity).
(iii) In the case of each Selling Stockholder with
respect to which such opinion is rendered, the execution and delivery of this
Agreement, the Custody Agreement and the Power of Attorney and the performance
of the terms hereof and thereof and the consummation of the transactions herein
and therein contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any statute, rule or
regulation or any agreement or instrument known to such counsel to which such
Selling Stockholder is a party or by which such Selling Stockholder is bound or
to which any of its property is subject, or any order or decree known to such
counsel of any court or government agency or body having jurisdiction over such
Selling Stockholder or any of its respective properties; and no consent,
approval, authorization or order of, or filing with, any court or governmental
agency or body is required under any statute or regulation of general
application or, to such counsel's best knowledge, specific application to such
Selling Stockholder for the execution, delivery and performance of this
Agreement, the Custody Agreement and the Power of Attorney or for the
consummation of the transactions contemplated hereby and thereby, including the
sale of the Shares and
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<PAGE> 23
Options being sold by such Selling Stockholder, except such as may be required
under the Act (provided, that no opinion need be expressed in this paragraph
with respect to any Blue Sky Laws or the by-laws or rules of the NASD
applicable to the corporate financing arrangements of the transactions
described herein).
(iv) In the case of the opinion by counsel to
Dialogic Corporation and Dialogic Investment Corporation, each of such entities
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation.
In rendering such opinion such counsel may rely, (i) as to
matters of law other than the general corporate law of the State of Delaware,
federal law and (in the case of the opinion by Dickinson, Wright, Moon, Van
Dusen & Freeman) the laws of Illinois and Michigan and (in the case of the
opinion by Lowenstein Sandler, Kohl, Fisher & Boylan) the laws of the State of
New Jersey, upon the opinion or opinions of local counsel reasonably
satisfactory to the Representatives provided that the extent of such reliance
is specified in such opinion and that such counsel shall state that such
opinion or opinions of local counsel are satisfactory to them and that they
believe they are justified in relying thereon and (ii) as to matters of fact,
to the extent such counsel deems reasonable, upon certificates of the Selling
Stockholders and representations and warranties of the Selling Stockholders
contained herein and in the Power of Attorney, without independent
verification, provided that the extent of such reliance is specified in such
opinion. Copies of any opinion or certificate relied upon shall be delivered
to you, as Representatives of the Underwriters. In rendering such opinion with
respect to the Selling Stockholders such counsel may assume that the laws of
any state are similar to the laws of Illinois, Michigan or New Jersey.
(f) On each Closing Date, there shall have been furnished
to you, as Representatives of the several Underwriters, such opinion or
opinions from Goodwin, Procter & Hoar, counsel for the several Underwriters,
dated such Closing Date and addressed to you, with respect to such matters as
you reasonably may request, and such counsel shall have received such papers
and information as they request to enable them to pass upon such matters.
(g) On each Closing Date you, as Representatives of the
several Underwriters, shall have received a letter of BDO Seidman, LLP, dated
such Closing Date and addressed to you, confirming that they are independent
public accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under
Rule 2-01 of Regulation S-X of the Commission, and stating, as of the date of
such letter (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information is given
in the Prospectus, as of a date not more than five (5) days prior to the date
of such letter), the conclusions and findings of said firm with respect to the
financial information and other matters covered by its letter delivered to you
concurrently with the execution of this Agreement, and the effect of the letter
so to be delivered on such Closing Date shall be to confirm the conclusions and
findings set forth in such prior letter. All such letters shall be in a form
reasonably satisfactory to the Representatives and counsel thereto.
(h) On each Closing Date, there shall have been furnished
to you, as Representatives of the Underwriters, a certificate, dated such
Closing Date and addressed to you, signed by the Chairman of the Board or the
President and by the chief financial officer of the Company, to the effect that
(and you shall be satisfied that as of such date):
(i) The representations and warranties of the
Company in this Agreement are true and correct as if made at and as of such
Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date;
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<PAGE> 24
(ii) The Registration Statement has become effective
and no stop order or other order suspending the effectiveness of the
Registration Statement or any amendment thereof or the qualification of the
Shares for offering or sale has been issued, and no proceeding for that purpose
has been instituted or, to the best of their knowledge, is contemplated by the
Commission or any state or regulatory body; and
(iii) The signers of said certificate have carefully
examined the Registration Statement and the Prospectus, and any amendments
thereof or supplements thereto, and (A) such documents contain all statements
and information required to be included therein, the Registration Statement, or
any amendment thereof, does not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, and the Prospectus, as amended
or supplemented, does not include any untrue statement of material fact or omit
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, (B) since the
effective date of the Registration Statement there has occurred no event
required to be set forth in an amended or supplemented prospectus which has not
been so set forth, (C) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company has not incurred any material liabilities or obligations, direct or
contingent, or entered into any material transactions, not in the ordinary
course of business, or declared or paid any dividends or made any distribution
of any kind with respect to its capital stock, and except as contemplated by
the Prospectus, there has not been any change in the capital stock (other than
a change in the number of outstanding shares of Common Stock due to the
issuance of shares upon the exercise of options or warrants outstanding as of
the date the Registration Statement was filed), or any material change in the
short-term or long-term debt, or any issuance of (or amendment to or change in
the terms of) options, warrants, convertible securities or other rights to
purchase the capital stock, of the Company, or any material adverse change or
any development involving a prospective material adverse change (whether or not
arising in the ordinary course of business), in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects, net
worth or results of operations of the Company and its subsidiaries, taken as a
whole, and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the Company
is a party before or by any court or governmental agency, authority or body, or
any arbitrator, which could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), business, prospects or
results of operations of the Company.
(i) On each Closing Date, there shall have been furnished
to you, as Representatives of the several Underwriters, a certificate or
certificates, dated such Closing Date and addressed to you, signed by each of
the Selling Stockholders or any of such Selling Stockholder's Attorneys-in-Fact
to the effect that (and you shall be satisfied that) the representations and
warranties of such Selling Stockholder contained in this Agreement are true and
correct as if made at and as of such Closing Date, and that such Selling
Stockholder has complied with all the agreements and satisfied all the
conditions on such Selling Stockholder's part to be performed or satisfied at
or prior to such Closing Date.
(j) The Company and the Selling Stockholders shall have
furnished to you and counsel for the Underwriters such additional documents,
certificates and evidence as you or they may have reasonably requested.
(k) The outstanding shares of Common Stock and the Shares
shall be approved for listing, subject to notice of issuance of the Firm
Shares, on the Nasdaq National Market of the National Association of Securities
Dealers, Inc.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and counsel for the
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<PAGE> 25
Underwriters. The Company will furnish you with such conformed copies of such
opinions, certificates, letters and other documents as you shall reasonably
request.
If any of the conditions hereinabove provided for in this
Section 5 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be
terminated by the Representatives by notifying the Company and the Selling
Stockholders of such termination in writing or by telegram at or prior to the
Closing Date or the Option Closing Date, as the case may be.
In such event, the Selling Stockholders, the Company and the
Underwriters shall not be under any obligation to each other (except to the
extent provided in Sections 4(a)(viii), 4(b)(i) and 6 hereof).
6. Indemnification and Contribution.
(a) The Company and each Selling Stockholder, severally
and not jointly, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any
breach of any representation, warranty, covenant or agreement of the Company or
such Selling Stockholder, as the case may be (it being understood that, with
respect to a Selling Stockholder, this clause (a)(i) refers only to
representations, warranties, covenants or agreements made herein by such
Selling Stockholder), herein contained, (ii) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, or (iii) the omission or alleged omission to state therein a material
fact necessary to make the statements therein (or, in the case of the
application of this clause (a)(ii) to the Company, required to be stated
therein) not misleading, and will reimburse each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that:
(I) the Company and the Selling Stockholders will not be
liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information furnished to the Company by or
through the Representatives specifically for use in the preparation
thereof,
(II) in the case of a claim under clauses (a)(ii) or (a)(iii)
above, (x) each Selling Stockholder (other than Dialogic Investment
Corporation and any Selling Stockholder who is a director or officer
of the Company) will only be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in the Registration Statement, the
Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Selling
Stockholder specifically for use in the preparation thereof, and (y)
Dialogic Investment Corporation and any Selling Stockholder of the
Company who is a director or officer of the Company will only be
liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement
or omission made in the Registration Statement, the Preliminary
Prospectus dated January 16, 1996 in the form last reviewed by such
Selling Stockholder prior to its filing with the Commission, or the
Prospectus in the form last reviewed by such Selling Stockholder prior
to effectiveness of the Registration Statement (but with no liability
for (A) a statement in the Prospectus that such Selling Stockholder
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<PAGE> 26
requested in writing prior to effectiveness thereof be omitted or
modified or (B) an omission that would have been avoided had a
statement requested in writing prior to effectiveness thereof by such
Selling Stockholder to be added in the Prospectus been so added) and
with respect to which such Selling Stockholder had actual knowledge
(as described in Section 2(b)(vi)) of the facts or circumstances
associated with such untrue statement or omission, and
(III) the indemnity obligation contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased the Shares which are
the subject thereof (or to the benefit of any person controlling such
Underwriter) if at or prior to the written confirmation of the sale of
such Shares a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of
noncompliance by the Company with Section 4(a)(v) hereof.
In addition to their other obligations under this Section 6(a), the Company and
each Selling Stockholder severally and not jointly agree that, as an interim
measure during the pendency of any such claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or omission, or
any alleged statement or omission, described in this Section 6(a), they will
reimburse the Underwriters on a monthly basis for all reasonable legal and
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's and the Selling Stockholders' obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction
(provided that the Underwriters agree to reimburse any such payments to the
extent a court of competent jurisdiction in a binding decision which is
non-appealable or is not being appealed finds such payments to have been
improper). Notwithstanding the foregoing, in the case of a claim under clauses
(a)(ii) or (a)(iii) above, the obligation of the Selling Stockholders pursuant
to the immediately preceding sentence shall be limited to claims, actions,
investigations, inquiries or other proceedings arising out of or based upon any
statement or omission, or any alleged statement or omission, described in
clause (II)(x) or (y) (as applicable) of the proviso to the first sentence of
this Section 6(a). Any such interim reimbursement payments that are not made
to the Underwriters within 30 days of a request for reimbursement shall bear
interest at the prime rate (or reference rate or other commercial lending rate
for borrowers of the highest credit standing) announced from time to time by
Citibank, N.A. (the "Prime Rate") from the date of such request. In no event
shall the liability of any Selling Stockholder for indemnification under this
Section 6(a) exceed the lesser of (i) that proportion of the total of such
losses, claims, damages or liabilities indemnified against that is equal to the
proportion of the total Shares and Options sold hereunder which is being sold
by such Selling Stockholder, or (ii) the proceeds received by such Selling
Stockholder from the Underwriters in the offering. This indemnity agreement
will be in addition to any liability which the Company or the Selling
Stockholders may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement, the Selling Stockholders, and each person, if any, who
controls the Company or any of the Selling Stockholders within the meaning of
the Act, against any losses, claims, damages or liabilities to which the
Company or any such director, officer, Selling Stockholder or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made; and will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, Selling Stockholder or
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<PAGE> 27
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Company by or
through the Representatives specifically for use in the preparation thereof.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 6, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 6(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 6(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was substantially prejudiced by the failure to
give such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 6(a) or (b). In case any such proceeding shall be
brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain
its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred the fees and expenses of the counsel
retained by the indemnified party in the event (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and the indemnified party shall have reasonably concluded that there may
be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party or
that representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them. It is understood
that the indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable fees
and expenses of more than one separate firm for all such indemnified parties.
Such firm shall be designated in writing by you in the case of parties
indemnified pursuant to Section 6(a) and by the Company and the Selling
Stockholders in the case of parties indemnified pursuant to Section 6(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment against the indemnified party for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 6
is unavailable to or insufficient to hold harmless an indemnified party under
Section 6(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof), then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to in Section 6(a) or (b)
above in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under Section 6(c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative
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<PAGE> 28
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the Selling Stockholders on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
Section 6(d) were determined by pro rata allocation (even if the Underwriters
were treated as an entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 6(d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 6(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 6(d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the shares purchased by
such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation, and (iii)
no Selling Stockholder shall be required to contribute any amount in excess of
the lesser of (A) that proportion of the total of such losses, claims, damages
or liabilities indemnified or contributed against equal to the proportion of
the total Shares and Options sold hereunder which is being sold by such Selling
Stockholder, or (B) the proceeds received by such Selling Stockholder from the
Underwriters in the offering. The Underwriters' obligations in this Section
6(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) To the extent permitted by law, in any proceeding
relating to the Registration Statement, any Preliminary Prospectus, the
Prospectus or any supplement or amendment thereto, each party against whom
contribution may be sought under this Section 6 hereby consents to the
jurisdiction of any court having jurisdiction over any other contributing
party, agrees that process issuing from such court may be served upon him or it
by any other contributing party and consents to the service of such process and
agrees that any other contributing party may join him or it as an additional
defendant in any such proceeding in which such other contributing party is a
party.
(f) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof, including without limitation
the provisions of this Section 6, and are fully informed regarding such
provisions. They further acknowledge that the provisions of this Section 6
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is
made in the Registration Statement, any Preliminary Prospectus, the Prospectus
and any Supplement or amendment thereto, as required by the Act. The parties
have been advised that federal or state public policy, as interpreted by the
courts in certain jurisdictions, may be contrary to certain of the provisions
of this Section 6, and the parties hereto hereby expressly waive and relinquish
any right or ability to assert such public policy as a defense to a claim under
this Section 6 and further agree not to attempt to assert any such defense.
(g) No provision in this Section 6 is intended to limit
the effect of any contractual obligation by the Company to indemnify any
Selling Stockholder.
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<PAGE> 29
7. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties, and agreements of the Company and
each Selling Stockholder herein or in certificates delivered pursuant hereto,
and the agreements of the several Underwriters, the Company and such Selling
Stockholder contained in Section 6 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any controlling person thereof, or the Company or any of its
officers, directors, or controlling persons, or such Selling Stockholder or any
controlling person thereof, and shall survive delivery of, and payment for, the
Shares to and by the Underwriters hereunder.
8. Substitution of Underwriters.
(a) If on the First Closing Date or the Second Closing
Date, as the case may be, any Underwriter or Underwriters shall fail to take up
and pay for the amount of the Shares and Options agreed by such Underwriter or
Underwriters to be purchased hereunder upon tender of the Shares and Options in
accordance with the terms hereof (otherwise than by reason of any default on
the part of the Company or a Selling Stockholder), you, as Representatives of
the Underwriters, shall use your best efforts to procure within 24 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company and the Selling Stockholders such amounts as may be agreed
upon and upon the terms set forth herein, the Firm Shares and Options or
Over-allotment Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase.
(b) If during such 24 hours you, as such Representatives,
shall not have procured such other Underwriters, or any others, to purchase the
Firm Shares and Options or the Over-allotment Shares, as the case may be,
agreed to be purchased by the defaulting Underwriter or Underwriters, then (i)
if the aggregate number of shares with respect to which such default shall
occur does not exceed 10% of the Firm Shares and Options or 10% of the Over-
allotment Shares, as the case may be, covered hereby, the other Underwriters
shall be obligated, severally, in proportion to the respective numbers of Firm
Shares and Options or Over-allotment Shares, as the case may be, which they are
obligated to purchase hereunder, to purchase the Firm Shares and Options or
Over-allotment Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (ii) if the aggregate number of shares of
Firm Shares and Options or of Over-allotment Shares, as the case may be, with
respect to which such default shall occur exceeds 10% of the Firm Shares and
Options or of Over-allotment Shares, as the case may be, covered hereby, the
Company and the Selling Stockholders or you as the Representatives of the
Underwriters will have the right, by written notice given within the next
24-hour period to the parties to this Agreement, to terminate this Agreement.
In the event of any such termination neither the Company nor the Selling
Stockholder shall be under any liability to any Underwriter (except to the
extent provided in Section 4(a)(viii), Section 4(b)(i) and Section 6 hereof)
nor shall any Underwriter (other than an Underwriter who shall have failed,
otherwise than for some reason permitted under this Agreement, to purchase the
amount of Firm Shares, Options or Over-allotment Shares, as the case may be,
agreed by such Underwriter to be purchased hereunder, which Underwriter shall
remain liable to the Company, and the Selling Stockholders and the other
Underwriters for damages, if any, resulting from such default) be under any
liability to the Company or the Selling Stockholders (except to the extent
provided in Section 6 hereof).
If the Firm Shares and Options or if the Over-allotment
Shares, as the case may be, to which a default relates are to be purchased by
the non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date or the Second Closing Date, as the case may be, for not more than
seven (7) business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used herein, the term "Underwriter" includes
any person substituted for an Underwriter under this Section 8.
9. Effective Date of this Agreement and Termination.
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<PAGE> 30
(a) This Agreement shall become effective at 10:00 a.m.,
New York time, on the first full business day following the effective date of
the Registration Statement, or at such earlier time after the effective time of
the Registration Statement as you in your discretion shall first release the
Shares for sale to the public; provided, that if the Registration Statement is
effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the Shares
for sale to the public. For the purpose of this Section, the Shares shall be
deemed to have been released for sale to the public upon release by you of the
publication of a newspaper advertisement relating thereto or upon release by
you of telexes offering the Shares for sale to securities dealers, whichever
shall first occur. By giving notice as hereinafter specified before the time
this Agreement becomes effective, you, as Representatives of the several
Underwriters, or the Company may prevent this Agreement from becoming effective
without liability of any party to any other party, except that the provisions
of Section 4(a)(viii), Section 4(b)(i) and Section 6 hereof shall at all times
be effective.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as
hereinafter specified at any time at or prior to the First Closing Date, and
the option referred to in Section 3(b), if exercised, may be canceled at any
time prior to the Second Closing Date, if (i) the Company or any Selling
Stockholder shall have failed, refused or been unable, at or prior to such
Closing Date, to perform any agreement on its part to be performed hereunder,
(ii) any other condition of the Underwriters' obligations hereunder is not
fulfilled, (iii) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have occurred any
material adverse change or any development likely to involve a prospective
material adverse change in or affecting the condition, financial or otherwise,
of the Company, or the earnings, business affairs, management, or business
prospects of the Company, in each case whether or not arising in the ordinary
course of business, (iv) any federal or state statute, regulation, rule or
order of any court or other governmental authority shall have been enacted,
published, decreed or otherwise promulgated which in your reasonable opinion
materially and adversely affects or will materially and adversely affect the
business or operations of the Company, (v) trading on the New York Stock
Exchange, the American Stock Exchange, or the Nasdaq National Market shall have
been wholly suspended, (vi) minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall have been
required, on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market, by such Exchange or Market or by order of the
Commission or any other governmental authority having jurisdiction, (vii) a
banking moratorium shall have been declared by federal or New York or Texas
authorities, or (viii) there has occurred any material adverse change in the
financial markets in the United States or an outbreak of major hostilities (or
an escalation thereof) in which the United States is involved, a declaration of
war by Congress, any other substantial national or international calamity or
any other event or occurrence of a similar character shall have occurred since
the execution of this Agreement that, in your reasonable judgment, makes it
impractical or inadvisable to proceed with the completion of the sale of and
payment for the Shares. Any such termination shall be without liability of any
party to any other party except that the provisions of Section 4(a)(viii),
Section 4(b)(i) and Section 6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section, the
Company and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall
be notified promptly by you by telephone, telecopy or telegram, confirmed by
letter. If the Company elects to prevent this Agreement from becoming
effective, you and an Attorney-in-Fact, on behalf of the Selling Stockholders,
shall be notified by the Company by telephone, telecopy or telegram, confirmed
by letter.
10. Default by the Selling Stockholders or the Company. If a
Selling Stockholder shall fail at the First Closing Date or Second Closing
Date, as the case may be, to sell and deliver the number of Shares and Options
which such Selling Stockholders is obligated to sell hereunder, then the
Underwriters may at your option, by written notice from you to the Company,
either (a) terminate this Agreement without any liability on the part
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<PAGE> 31
of any non-defaulting party or (b) elect to purchase the Shares which the
Company has agreed to sell hereunder and (b) the Shares and Options which the
non-defaulting Selling Stockholders have agreed to sell hereunder.
In the event of a default by a Selling Stockholder as referred
to in this Section, either you or the Company shall have the right to postpone
the First Closing Date or Second Closing Date, as the case may be, for a period
not exceeding seven (7) days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
If the Company shall fail at the First Closing Date to sell
and deliver the number of Shares which it is obligated to sell hereunder, then
this Agreement shall terminate without any liability on the part of any non-
defaulting party. If the Company shall fail at the Second Closing Date to sell
and deliver the number of Over-allotment Shares which the Company is obligated
to sell and deliver at the Second Closing Date, then the Underwriters may at
your option, by written notice from you to the Company, either (a) terminate
this Agreement without any liability on the part of any non-defaulting party or
(b) elect to purchase the Over-allotment Shares which the Selling Stockholders
have agreed to sell hereunder.
No action taken pursuant to this Section shall relieve the
Company or the Selling Stockholders so defaulting from liability, if any, in
respect of such default.
11. Information Furnished by Underwriters. The statements set
forth in the last paragraph of the cover page (to the extent related to the
Underwriters) of any Preliminary Prospectus and the Prospectus; in the
stabilization legend on page 2 of the Preliminary Prospectus and the
Prospectus; and under the caption "Underwriting" in any Preliminary Prospectus
and in the Prospectus constitute the only written information furnished by or
on behalf of the Underwriters referred to in Section 2 and Section 6 hereof.
12. Actions on behalf of Others. In all dealings hereunder, you
as the Representatives of the several Underwriters shall act on behalf of each
of the Underwriters, and the parties hereto shall be entitled to act and rely
upon any statement, request, notice or agreement on behalf of any Underwriter
made or given by you jointly or by any of you on behalf of you as the
Representatives; and in all dealings with the Selling Stockholders hereunder,
you and the Company shall be entitled to act and rely upon any statement,
request, notice or agreement on behalf of such Selling Stockholders made or
given by any or all of the Attorneys-in-Fact for such Selling Stockholders.
13. Notices. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telecopy or telegraph and,
if to the Underwriters, shall be mailed, telecopied or telegraphed or delivered
to the Representatives c/o First Albany Corporation, 41 State Street, Albany,
New York 12207, except that notices given to an Underwriter pursuant to Section
6 hereof shall be sent to such Underwriter at the address stated in the
Underwriters' Questionnaire furnished by such Underwriter in connection with
this offering; if to the Company, shall be mailed, telecopied or telegraphed or
delivered to it at 14140 Midway Road, Dallas, Texas 75244, Attention: Peter J.
Foster, President and Chief Executive Officer; if to the Selling Stockholders,
at the address of the Attorneys-in-Fact as set forth in the Powers of Attorney,
or in each case to such other address as the person to be notified may have
requested in writing. All notices given by telegram shall be promptly
confirmed by letter. Any party to this Agreement may change such address for
notices by sending to the parties to this Agreement written notice of a new
address for such purpose.
14. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns and the controlling persons, officers and
directors referred to in Section 6. Nothing in this Agreement is intended or
shall be construed to give to any other person, firm or corporation any legal
or equitable remedy or claim under or in respect of this Agreement or
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<PAGE> 32
any provision herein contained. The term "successors and assigns" as herein
used shall not include any purchaser, as such purchaser, of any of the Shares
from any of the several Underwriters.
15. Governing Law. This Agreement shall be governed and construed
in accordance with the substantive laws of the State of New York (without
regard to its choice of law rules).
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<PAGE> 33
Please sign and return to the Company the enclosed duplicates
of this letter whereupon this letter will become a binding agreement between
the Company, the Selling Stockholders and the several Underwriters in
accordance with its terms.
Very truly yours,
VOICE CONTROL SYSTEMS, INC.
By:______________________________________
Name: Peter J. Foster
Title: President and Chief Executive
Officer
THE SELLING STOCKHOLDERS LISTED IN
SCHEDULE I
By:______________________________________
Robert E. Neiman, as Attorney-in-Fact
Confirmed as of the date first above mentioned, on
behalf of themselves and the other several
Underwriters named in Schedule II hereto.
FIRST ALBANY CORPORATION
By:____________________________
Name:
Title:
FIRST ANALYSIS SECURITIES CORPORATION
By:____________________________
Name:
Title:
JOINDER
Dialogic Corporation, which owns 100% of the capital stock of Dialogic
Investment Corporation ("DIC") and which desires DIC to enter into and perform
under this Agreement, agrees that (a) it shall cause DIC to perform its
covenants hereunder, (b) it shall be liable, to the same extent as DIC, for any
liability of DIC arising under this Agreement and (c) the representations made
by DIC in Section 2(b)(iii) and (iv) (each with respect to Dialogic
Corporation's entry into this joinder), (v), (vi), (vii), (viii), (ix) and (x)
hereof shall be deemed, mutatis
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<PAGE> 34
mutandi, to have also been made by Dialogic Corporation with respect to it and
Dialogic Corporation shall be liable to the Underwriters in respect of any
breaches hereof and thereof.
By: DIALOGIC CORPORATION
By:_________________________________
Name:
Title:
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<PAGE> 35
SCHEDULE I
Selling Stockholders
<TABLE>
<CAPTION>
Number of Option
Number of Firm Shares Represented by
Name Shares to be Sold Options to be Sold
- ---- ----------------- ------------------------
<S> <C> <C>
Dialogic Investment Corporation 85,769 914,231
John Lucas-Tooth 13,035 -
Peter J. Foster - 104,119
Thomas B. Schalk 22,361 -
Melanie Watson 12,500 -
Brian Scott 43,750 -
Kim Terry 8,452 -
E. Ray Cotton 9,250 -
Marvin Preston IV 5,000 -
======= =========
Total 200,117 1,018,350
======= =========
</TABLE>
-35-
<PAGE> 36
SCHEDULE II
Underwriters
<TABLE>
<CAPTION>
Number of Option
Shares to be Acquired Upon
Exercise of Options
Underwriter Number of Firm Shares(1) to be Purchased
- ----------- --------------------- -------------------------
<S> <C> <C>
First Albany Corporation
First Analysis Securities
Corporation
Total
------------ ------------
1,451,650 1,018,350
============ ============
</TABLE>
____________________
(1) The Underwriters may purchase up to an additional 370,500 Over-allotment
Shares, to the extent the option described in Section 3 of the Agreement is
exercised, in the proportions and in the manner described in the Agreement.
-36-
<PAGE> 37
SCHEDULE III
Foreign Qualification
[List]
-37-
<PAGE> 1
EXHIBIT 5.1
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We are acting as counsel to Voice Control Systems, Inc., a Delaware
corporation (the "Company"), in connection with the filing by the Company of a
registration statement on Form SB-2, as amended (the "Registration Statement"),
under the Securities Act of 1933 (the "Act") for the respective accounts of the
Company and certain stockholders of the Company ("Selling Stockholders"),
relating to the registration of an aggregate of 2,840,500 shares (the "Shares")
of the Company's common stock par value $.01 per share of which 370,500 shares
are subject to a 30-day over-allotment option (the "Over-Allotment Option
Shares") granted by the Company and Selling Stockholder to the Representatives
of the Underwriters and of which 1,018,350 shares related to the option of a
Selling Stockholder to be issued to the Representatives of the Underwriters
(the "Option Shares").
We have reviewed corporate records and documents, other documents and
such questions of law as we have deemed necessary or appropriate for purposes
of this opinion.
Upon the basis of such examination, we advise you that, in our
opinion:
1. When the Registration Statement relating to the Shares has
become effective under the Act and the Shares, including Over-Allotment Option
Shares, if any, issued and sold by the Company have been duly issued and sold
as contemplated by the Registration Statement, such Shares will be validly
issued, fully paid and non-assessable.
2. The Shares, including Option Shares, being registered for the
respective accounts of the Selling Stockholders when issued and sold will be
validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement.
Very truly yours,
DICKINSON, WRIGHT, MOON,
VAN DUSEN & FREEMAN
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Voice Control Systems, Inc.
Dallas, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 2, 1995, relating to the
financial statements of Voice Control Systems, Inc. which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Dallas, Texas
January 16, 1996
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kim S. Terry, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and conforming
all that said attorney-in-fact and agent, or her substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
/s/ JOHN LUCAS-TOOTH
- ---------------------------------- January 14, 1996
John Lucas-Tooth
