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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the fiscal year ended December 31, 1997.
_______ Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 from the transition period from ________ to __________.
Commission File Number 0-10385
VOICE CONTROL SYSTEMS, INC.
(Name of small business issuer in its charter)
DELAWARE 75-1707970
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14140 MIDWAY ROAD
DALLAS, TEXAS 75244
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number,
including area code: (972) 726-1200
Securities registered pursuant to Section 12(g)of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
---
The issuer's revenues for its most recent fiscal year $14,429,867.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 12, 1998, was $53,112,767.
The number of shares of the registrant's Common Stock outstanding as of March
12, 1998 was 11,299,237.
The following documents are incorporated by reference into this Annual Report on
Form 10-KSB: Portions of the registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.
Index to Exhibits on Page 24
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM Page
PART I
<S> <C> <C>
1 DESCRIPTION OF BUSINESS
General 3
Speech Recognition 3
Software Development/OEM 4
Strategy 7
Products and Services 7
Technology Development 14
Sales and Marketing 14
Manufacturing 16
Competition 16
Patents 16
Employees 16
Risk Factor 16
2 DESCRIPTION OF PROPERTIES 19
3 LEGAL PROCEEDINGS 19
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
PART II
5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock Prices 19
Dividend Policy 19
6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
1997 vs 1996 20
Liquidity and Capital Resources 21
7 FINANCIAL STATEMENTS 21
8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 21
PART III
9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 21
10 EXECUTIVE COMPENSATION 21
11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 21
12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
13 EXHIBITS AND REPORTS ON FORM 8-K 22
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Statements and information presented within this Annual Report on Form 10-K for
Voice Control Systems, Inc. ("VCS" or the "Company") contain "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. These forward-looking statements can be identified by the use
of predictive, future-tense or forward-looking terminology, such as "believes,'
"anticipates," "expects," "estimates," "may," "will" or similar terms.
Forward-looking statements also include projections of financial performance,
statements regarding management's plans and objectives and statements
concerning any assumptions relating to the foregoing. Certain important factors
which may cause actual results to vary materially from these forward-looking
statements accompany such statements and appear elsewhere in this report,
including without limitation, the factors disclosed under "Risk Factors". All
subsequent written or oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified by these
factors.
GENERAL
VCS 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. Effective November 4, 1996, Voice
Processing Corporation, a Delaware corporation ("VPC") was merged with and into
the Company and the separate corporate existence of VPC ceased. The transaction
was accounted for as a pooling-of-interests, and therefore all financial
information (except for stock prices) included herein is that of the Company and
VPC.
VCS is a leading international supplier of speech recognition and related speech
input technologies. The Company believes that it offers the widest selection of
speech recognition and speaker verification products and vocabulary libraries.
These products employ a proprietary phonetic approach to speech recognition
developed by VCS over the past 19 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 2.5 million 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), government services (Revenue
Canada-Canada), computer multimedia sound boards (Creative Labs-U.S.), 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, Natural MicroSystems, InterVoice, Brite Voice Systems, Periphonics,
Glenayre, OKI Telecom, Hughes Network Systems, Creative Labs 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 Company's principal sources of revenue are from (i) sales of speech
recognition hardware and software products to system developers and original
equipment manufacturers, (ii) royalties and license fees generated from
licensing of speech technologies to system and product developers, and (iii)
providing specialized engineering services, principally to assist in the
integration of its technology into its customers' products and systems.
SPEECH RECOGNITION
Speech is the most natural and convenient means of human communication and,
therefore, a natural means for a person to communicate with a machine. Speech
recognition technology converts spoken inputs into digital electronic signals,
which are then translated by a computer processor into specific computer
instructions or data. For example, words such as "stop" and "go" may be
translated using speech recognition into corresponding digital computer
commands, and words such as "one" and "two" may be translated into numeric data.
Speech recognition applications are usually divided into two categories by the
type of technology required: speaker- dependent and speaker-independent
applications. Speaker-dependent technology requires a user to train a device to
recognize a particular command. This training process has the disadvantage of
requiring some effort on the part of the user, but has the advantage of
permitting the user to choose his or her own words for any command. For example,
speaker-dependent technology is usually used in telephone voice-dialing
applications since it permits a user to create custom name lists.
Speaker-independent technology allows the recognizer to accept speech input from
virtually any user, regardless of gender, age or regional accent, without user
training. It has found acceptance in applications used by the public, such as
telephone-based automated banking or telephone order entry.
Speech recognition systems or recognizers can require continuous or discrete
articulation of words. Continuous recognition permits users to speak a string of
digits without pausing, which is useful when entering a telephone or account
number. Discrete recognition requires speech to be said with short pauses
between words. This technology is useful in applications 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.
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Speaker verification technology converts speech into digital electronic signals
that are then analyzed by a computer processor for patterns of identifying
characteristics. These patterns are compared to stored memories of speech
patterns to determine if the patterns match. Matching patterns are used to
verify a subject's claimed identity. For example, a speaker verification system
could verify that a person reciting an employee identification number is in fact
that employee.
While various types of speech technology have existed for many years, early
speech technology applications were generally inadequate due to their relatively
high costs and low performance. However, as a result of the decreased cost of
computer processing hardware and the development of more reliable and efficient
technology, as well as increased public familiarity with computer automated
devices, speech recognition is now an accepted feature of many
telecommunications applications. The Company's technology is presently used in
the telecommunications industry and is also increasingly being accepted into
applications designed for desktop computing, including computer telephony and
consumer electronics. Recent implementations of speech recognition in consumer
electronics include control of personal computers, hands-free dialing of car
phones and transaction processing through interactive voice response systems.
The Company believes that speech-based control and operation of electronic
devices will be incorporated in an increasing variety of applications as speech
recognition becomes easier to use and more natural, accurate and affordable.
VCS views the market for speech recognition as four horizontal or industry
segments and four vertical layers of distribution. The industry segments are
telecommunications, consumer electronics, automotive, 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 automotive 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.
VCS views the four vertical layers of market distribution as: (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 Ready Receptionist product is currently 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 automotive and consumer
electronic markets.
SOFTWARE DEVELOPMENT/OEM
Delivering VCS speech recognition technology to end-users requires that a
systems integrator or OEM first complete a product development program during
which the Company's speech technology is incorporated into a product. This
requires an investment of both time and resources on the part of the systems
integrator or OEM. The Company believes that successful completion of a product
development program with a systems integrator or OEM gives VCS an advantage at
that VCS account.
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VCS first began commercial delivery of speech recognition in 1986. Since then
the Company's technology has been or is being integrated in many systems and
products including:
<TABLE>
<CAPTION>
Systems Integrators/OEMs Typical Applications Illustrative End Users/Products
- ------------------------------ --------------------------------------- -------------------------------------------
<S> <C> <C>
Active Voice Voice mail Distributors to small and medium businesses
Apex Voice Communication, Inc. Virtual telephone network messaging Telephone companies in developing nations
system
Applied Voice Technology Unified messaging on CTI platforms Small and medium businesses
Aspect Telecommunications ACD interactive voice response platform Large business (banks, financial, travel)
for call centers
Atlas Telecom Voice mail and voice dialing Central office voice messaging
Comverse Tech Voice mail and voice messaging Medium and large businesses
Brite Voice Systems Inc. Wireless network-based voice dialing, Telephone companies and cellular and PCS
telephone network voice processing service providers:
systems AT&T Wireless VoiceTouch
Ameritech VoiceSelect
Centigram Voice mail and voice messaging US telephone companies and international
PTTs
CCS Interactive voice response Banks, financial institutions, healthcare
organizations
Dialogic Corporation Call processing Systems providers in voice mail,
components for voice voice messaging, interactive voice
processing systems in response and telephone network
telecommunications and intelligent peripherals:
computer Digital Equipment Corp.
telephony Offnet
Glenayre Messaging platform for paging, one Wireline and wireless telecom providers
number, and voice mail
Hammer Technologies Testing platform Voice mail, voice messaging, voice dialing,
interactive voice response
Hewlett Packard Enhanced services platform Information service providers
Hughes Network Systems Cellular, PCS and SMR voice-activated Automobile manufacturers, cellular
telephones equipment retailers and wireless telephone
service providers: 1997 General Motors
Cadillac
IBM Corporation General interactive voice response Financial institutions, information
systems service providers, call center operators,
airlines and the travel industry:
DirectTalk
Intellivoice Communications Wireless network-based voice dialing, Telephone companies and cellular and PCS
telephone network voice processing service providers:
systems Bell Atlantic Nynex Easy Dial
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
Natural MicroSystems Call processing components for Voice mail, voice messaging, IVR system
computer telephone, voice processing providers for wireline and wireless
and telecommunications communications
Octel Communications Voice mail platform Medium-large businesses and institutions,
information service providers, telephone
companies and wireless providers
OKI Semiconductor Speech recognition chip Manufacturers in the automotive,
consumer electronics and computer
industries:
MSM 6679 VRP
</TABLE>
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<TABLE>
<CAPTION>
Systems Integrators/OEMs Typical Applications Illustrative End Users/Products
- ------------------------------ --------------------------------------- -------------------------------------------
<S> <C> <C>
OKI Telecom Voice-activated wireless telephones Automobile manufacturers, cellular
equipment retailers and wireless
telephone service providers:
Mercedes-Benz 500 and 600 series
Periphonics Corporation Interactive voice response systems Banks, financial institutions,
and intelligent peripherals information service providers, telephone
companies, airlines and travel related
companies:
Precision Systems, Inc. Telephone messaging systems, Telephone companies, call center operators,
telephone network-based voice and wireless service providers:
processing systems and call center "Atlas" Personal Telecommunications
automation Assistant
Priority Call Management Enhanced services platform for Information service providers
debit card, one number and voice
activated dialing
Siemens, AG Voice activation in telephone Telephone companies worldwide
network switching systems
Syntellect Pay-per-view automated order entry Cable television companies and subscription
television companies
Technically Speaking Application generator tools for System providers
(Brooktrout) interactive voice response applications
</TABLE>
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STRATEGY
Speech recognition technology is in the early stage of market development. The
early market is characterized by technologists and early adopters who seek
technology and solutions to differentiate themselves from their competitors.
Design wins and high profile deployments are key during the early market stage.
As a result, the Company plans to take responsibility for major key deployments
of its technologies and product solutions during 1998 to ensure VCS
participation and leadership as speech recognition moves from the early market
development stage to mainstream market deployments. 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 reputation as a leading supplier of speech recognition technology
The Company believes it is the leading supplier of speech recognition technology
used in telecommunications. The Company plans to maintain its position by
developing and deploying new products primarily across its existing distribution
network. 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.
Develop whole product solutions
Currently, speech recognition technology is in the early market development
stage. The Company believes that it will be successful in furthering market
acceptance of speech recognition enhanced applications by working with its
existing systems integrators to develop "whole product solutions". The Company's
vision of a "whole product solution" includes not only advanced technologies,
but the applications, tools and support necessary to bring solutions to the end
user. To accelerate and support its customers' deployments of speech driven
applications to end-user customers, the Company will develop and provide speech
technologies; applications; tools, such as Conversational SpeechBlocks
(applets); support and training.
Diversify its markets to include consumer electronics, and automotive market
segment
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 automotive market segment. 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.
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 products
The Company has recently introduced a speech recognition-based auto attendant
system marketed directly and indirectly, through telephone equipment
distributors, to the end user. Historically, the Company sold technology
principally 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 51 languages and
dialects.
PRODUCTS AND SERVICES
Core Technology Products
All VCS speech technology products are based upon VCS's proprietary speech
technology developed over the last 19 years and refined by VCS's field
experience gained by helping its customers implement speech recognition. Speech
input is typically the most natural and efficient means of human communication.
With the increase in the power of personal computers, 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
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"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 51 languages,
alphanumeric vocabularies in 18 languages, continuous vocabularies in 18
languages. For applications requiring custom speaker-independent vocabularies,
VCS offers a vocabulary development service program. In the last two years, VCS
has processed several hundred custom vocabularies in connection with this
program. The Company's Word Builder tool allows users to select and create
speaker-independent vocabularies using its phonetic dictionary technology. VCS
has collected British English, German, and U.S. English for use with Word
Builder. See "--Enhanced Technologies."
TELECOMMUNICATIONS LANGUAGES PROCESSED
<TABLE>
<CAPTION>
Discrete Digits & Control Words Alphanumeric Continuous
- ---------------------------------------------- ------------------------ ---------------------
<S> <C> <C> <C>
Afrikaans Hong Kong English Australian English Australian English
Argentine Spanish Hungarian British English Brazilian Portuguese
Australian English Italian Canadian English British English
Austrian German Japanese Canadian French Canadian English
Belgian French Korean Dutch Canadian French
Brazilian Portuguese Malaysian European French Cantonese
British English Malaysian English Finnish Castilian
Canadian Cantonese Mandarin German Dutch
Canadian English N. American Spanish German Military Alphabet European French
Canadian French Norwegian Greek European Portuguese
Cantonese Polish Hebrew Finnish
Castilian Puerto Rican English Hong Kong English German
Catalan Puerto Rican Spanish Italian Hong Kong English
Croatian Russian N. American Spanish Mexican Spanish
Czech Singapore English S. American Spanish New Zealand English
Danish S. African English Singapore English N. American Spanish
Dutch S. American Spanish U.S. English S. American Spanish
European French Swedish U.S. Military Alphabet U.S. English
European Portuguese Swiss French
Finnish Swiss German
Flemish Swiss Italian Phonetic
German Thai ------------------------
Greek Turkish British English
Hebrew U.S. English German
Hindi Vietnamese U.S. English
Hong Kong Cantonese
</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 allows a system to verify that a
user is who he claims to be. Because it has been designed to run on the same
components as VCS's speech recognition technologies, no additional hardware is
required to implement speaker verification in a recognizer that already employs
the Company's technology.
The Company believes that its approach to speech recognition and speaker
verification delivers significant performance advantages in terms of the
requirements for processing power, memory and vocabulary size. The Company's
technology is capable of supporting the largest channel density of any
commercial product currently on the market.
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CORE TECHNOLOGY PRODUCT SUMMARY
The following table sets forth certain summary information for the Company's
current core technology products.
<TABLE>
<CAPTION>
Core Technology Options and Customer
Application Features Enhanced Technologies Operating Environment Vocabularies
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telecommunications SI, SD, SA, SV User selectable triggering DSP embedded recognizer 51 languages -- discrete
Continuous speech input Voice activation DSP library recognizer digits
Discrete speech input Word spotting Microprocessor 18 languages -- alphabet
HMM decision strategy High rejection vocabularies embedded recognizer 18 languages --
Phonetic "front-end" Phonetic dictionary Fixed point support continuous
Vocabulary masking Cut-thru (barge-in) Floating point support 9 languages -- cellular
High accuracy in tele- Large vocabulary Supported processors: 3 languages -- phonetic
phone environment capability(u) Texas Instruments
Multi-channel/high Alphabet recognition Intel
density Custom vocabulary NEC
Software-based development service OKI
Type-in vocab creation Analog Devices
- --------------------------------------------------------------------------------------------------------------------------------
Desktop SI, SD, SA, Voice activation Microprocessor 51 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 alphabet(u)
HMM decision strategy(u) Telephone or Supported processors: 18 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 talk" NEC
microphone input
- --------------------------------------------------------------------------------------------------------------------------------
Consumer/ SI, SD, SA, SV Alphabet recognition DSP embedded recognizer 51 languages -- CT
Automotive Discrete speech input Voice activation DSP library recognizer discrete digits(u)
"Close talk" or "far talk" SI & SD operation Microprocessor 18 languages -- CT
microphone input Celldial interface embedded recognizer alphabet(u)
Accurate in high noise Custom vocabulary Fixed point support 7 languages --
Low memory required development service Floating point support automotive
Phonetic "front-end" Supported processors: PC control library
Low "horsepower" Texas Instruments military alphabet library
processor required Intel machine control library
NEC
OKI
- --------------------------------------------------------------------------------------------------------------------------------
SI -- speaker-independent SD -- speaker-dependent SA -- speaker-adaptive SV -- speaker verification
u-- under development CT -- computer telephony
</TABLE>
GLOSSARY OF TERMS
"Back end" -- The portion of the speech recognition algorithm which determines
the word spoken. It uses the information from the "front end" to arrive at its
decision.
"Celldial" -- A VCS parametric-based programming interface to simplify voice
dialing application software.
"Close talk" -- Speaking into a microphone close to the mouth, such as a
telephone handset microphone.
"Far talk" -- Speaking into a microphone at a distance from the speaker, such as
a telephone speakerphone microphone.
"Front end" -- The feature extraction portion of a speech recognizer. The
"features" or speech characteristics desired are computed by this part of the
speech algorithm and passed to the "back end."
"HMM" -- Hidden Markov Modeling. A mathematical database search model which is
commonly used for complex computer database modeling problems, such as speech
recognition.
"OLE" -- Object linking and embedding. A programming environment that simplifies
application software development through the use of software "libraries" that
contain code to implement special program features.
"Phonetic" -- Relating to phonemes, the basic sounds or units of spoken
language.
"SAPI" -- Speech application program interface. This is a standard established
by Microsoft for programmers of speech applications to enable integration of
third party software products with other applications running in a Microsoft
environment.
"Software-based" -- Technology which is embodied in software only and is thereby
capable of operating in any hardware environment.
"Vocabulary masking" -- A technique by which a speech recognizer vocabulary is
divided into smaller sub-vocabularies in "real time" to improve recognition
accuracy.
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Enhanced Technologies
As end users become more accustomed to interacting with products incorporating
speech recognition technologies, firms utilizing speech recognition in their
systems request advanced features, such as continuous digit input, the ability
to override outgoing system prompts with voice commands, natural language
capabilities and conversational speech. The Company currently has several
projects under development or in beta test which are aimed at providing these
enhanced speech recognition solutions.
Natural language refers to the capability of speaking digits combined with other
key numeric words, such as "hundred" or "thousand," in a continuous manner.
Speech recognition technology available today requires that the user speak
digits in a more structured manner. For example, a number such as 2400 must be
spoken either discretely or continuously as "two-four-oh-oh." Natural language
technology permits the user to say "twenty-four hundred" or "two thousand four
hundred" as well. The Company currently has beta versions of vocabularies to
enable natural language input available in U.S. English.
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. 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. PhoneticVR(TM), a
1000-word recognizer using phonetic dictionary technology is currently available
from the Company in U.S. English, UK English and German with additional
languages planned during 1998.
To support "type-in" phonetic dictionary implementations, the Company developed
Word Builder, a tool which allows users to easily create new speaker-independent
vocabularies. WordBuilder(TM) automatically translates typed input into one or
more phonetic transcriptions of the different ways a word is pronounced. An
application developer can select and test the appropriate phonetic
transcriptions of the typed word through a unique speech-driven process.
WordBuilder is currently available in U.S. English, UK English and German with
additional languages planned for 1998.
Large speech recognition vocabularies are becoming increasingly feasible due to
technology advancements, such as phonetic dictionary. The Company has
technologies under development that will accommodate medium vocabulary sizes.
The Company plans to commercialize this technology during 1998. The Company will
also continue to evaluate large vocabulary speech recognition engines that are
available in the marketplace, with a view toward licensing or acquisition if
necessary.
Conversational speech recognition is a sophisticated implementation of the
speech recognition products described above, combined with additional
application software. 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. Today,
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. During 1998, the Company will offer a variety of
Conversational SpeechBlocks(TM) designed to aid in building applications by
reducing the new application code necessary for significant portions of speech
recognition applications. Often referred to as middleware or applets,
Conversational SpeechBlocks are intended to be easy-to-use software modules for
building applications that include vocabularies, grammars, and conversational
flow logic.
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 alphanumeric recognition, phonetic dictionary, and 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.
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<PAGE> 11
The Company also offers its Voice Cut-Thru(TM) 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.
Dialogic's 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 Antares Software is currently commercially available in Windows NT, DOS,
OS/2 and many varieties of UNIX operating environments. 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, 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.
In February 1997, Dialogic introduced DM3(TM) mediastream resource architecture.
The DM3 mediastream resource architecture is a set of specifications and core
firmware modules that govern how new Dialogic computer telephony products are
designed. Its features include graphical open development tools, widely adopted
real time operating systems, DSP kernels, and reusable and mixable media
processing software modules, such as VCS' speech recognition products. DM3 will
allow VCS' broad family of speech recognition products to even more effectively
meet the needs of customers, especially large telecommunications companies. VCS
has been working with Dialogic during the development of the DM3 architecture to
incorporate VCS speech recognition products. The Company does not expect to
achieve wide deployment of its products in the DM3 product line until late in
1998.
During 1997, the Company introduced Ready Receptionist(TM), a speech driven
automated attendant. Ready Receptionist will answer incoming calls and route
them to the proper extension by the spoken command of the caller. The system is
also useful for routing internal office calls, eliminating the need to remember
employee extensions and publish expensive internal directories. The Company
plans to distribute Ready Receptionist through direct sales and PBX and key
system distributors (interconnects). For those companies who want to incorporate
the software features of Ready Receptionist into existing products, VCS will
offer a Ready Receptionist SDK and consulting services.
Computer/Desktop Products
The Company sells a software recognizer capability based upon a proprietary
application programming interface for software developers. 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.
VCS supports Microsoft's standard for speech applications, SAPI, which will be
implemented in Microsoft operating systems. The Company has developed a speech
engine (i.e., a speech recognizer) that is SAPI compliant. This speech engine is
marketed to software developers whose applications use speech recognition in
Microsoft's Windows 95 and Windows NT operating systems. The speech recognition
engine initially supports desktop and telephone speech input, making it suitable
for both desktop and computer telephony applications. These applications might
include any voice driven interactive software applications, such as interactive
games, interactive learning software, interactive multimedia software, soft
telephones (software with telephone capabilities in the PC), PC-based answering
machines, PC- based voice dialers, voice accessed rolodex software, voice driven
window and menu operation and voice driven access to communications software,
such as that used to access the Internet.
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 1998 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 noncritical 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.
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<PAGE> 12
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. OKI Semiconductor plans
to introduce a cost-reduced version of the VRP during 1998.
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<PAGE> 13
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>
VCS Antares Speaker-independent Speaker-dependent DOS, UNIX, OS/2, 51 languages --
Software(D) 2 to 32 recognizers Speaker-adaptive NT discrete digits
2 to 8 recognizers/DSP Speaker verification SCSA interface 18 languages --
Speech recognition for continuous Word spotting TI 320C31 alphabet(u)
Dialogic Antares SCSA 8 recognizers/DSP Hi-rejection firmware 8 languages --
products discrete Phonetic dictionary cellular
4 recognizers/DSP Voice activation 18 languages --
discrete w/cut-thru Cut-thru continuous
2 recognizers/DSP Alphabet recognition
phonetic
- ------------------------------------------------------------------------------------------------------------------------------------
SpeechWave Speaker-independent Speaker-dependent NT 51 languages --
Discrete input Speaker-adaptive SCSA interface discrete digits(u)
Speech software Continuous input Speaker verification TI 320C31 16 languages --
platform Phonetic approach Word Builder tupe-in tool alphabet
1 to 32 recognizers Hi-rejection 8 languages --
Shared resource Phonetic dictionary cellular
switching Voice activation 16 languages --
Cut-thru continuous
Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
PRL Speaker-independent Alphabet recognition TI 320C31 51 languages --
Discrete input Custom vocabulary discrete digits
Portable speech recognition Continuous input development service 18 languages --
library for implementation Phonetic approach Speaker-dependent alphabet
in proprietary platforms 1 to N recognizers Speaker-verification 8 languages --
customer hardware Voice activation cellular
dependent
- ------------------------------------------------------------------------------------------------------------------------------------
Freedom Recognition(D) Speaker-independent Speaker-dependent(u) NT 51 languages --
Discrete and continuous input Speaker-adaptive(u) Intel or equivalent PC discrete digits(u)
PC host processor-based No additional 16 languages --
Speech recognizer hardware required continuous
2 or 8 recognizers 6 languages
per PC system cellular
- ------------------------------------------------------------------------------------------------------------------------------------
DVM2c and DVM4s Speaker-independent Speaker-dependent 1/4 PC board 51 languages --
2 recognizers/PCB Speaker-adaptive form-factor discrete digits
Speech recognition continuous Speaker verification Flexible VCS API 18 languages --
hardware for proprietary 8 recognizers/PCB Word spotting Operating system alphabet
architecture voice discrete Hi-rejection independent 8 languages --
processing systems 4 recognizers/PCB Phonetic dictionary cellular
discrete w/cut-thru Voice activation 18 languages --
2 recognizers/PCB Cut-thru continuous
phonetic Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
VPro-42, VPro-84 Speaker-independent Speaker verification DOS, OS/2, UNIX, NT 51 languages --
and VPro-88 Speaker-dependent Word spotting ISA bus compliant discrete digits(u)
4 to 8 recognizers/PCB Alphabet recognition PEB interface 18 languages --
Speech recognition continuous and discrete Cut-thru MVIP interface alphabet(u)
platform for Dialogic Voice activation TI 320C31 18 languages
PEB products and continuous(u)
Natural MicroSystems
MVIP products
- ------------------------------------------------------------------------------------------------------------------------------------
OKI MSM 6679 VRP Speaker-independent VCS "phonetic" Stand-alone speech 51 languages --CT
Speaker-dependent front- end recognition processor discrete digits(u)
Single chip integrated Speaker-adaptive High noise accuracy Meets SAE 18 languages -- CT
speech recognition Single chip operation(u) Single chip package specifications alphabet(u)
processor Discrete input Low cost "on-board" Parallel or serial Machine control
25 word vocabulary interface library(u)
Modular 20 word PC control library
vocab. expansion 7 languages --
Built-in OKI automotive(u)
synthesizer control
Voice activation(u)
Alphabet recognition
- ------------------------------------------------------------------------------------------------------------------------------------
(D) -- Sold exclusively by Dialogic PCB -- Printed Circuit Board (u) under development CT -- computer telephony
</TABLE>
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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 two
years. During 1997, the Company spent $5,253,000 (36% of revenues) on Company
sponsored research and development. The Company spent $6,006,000 (44% of
revenues) on Company sponsored research and development activities during 1996.
Currently, the Company employs 29 full-time people in research and development
and 20 people in product development, application engineering and customer
support. 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. VCS is currently developing and
commercializing new products, including a large vocabulary phonetic recognizer,
improved word spotting technology, improved voice activation, natural language
understanding and Conversational SpeechBlocks. In addition, the Company has
active programs to develop new languages for its phonetic dictionary technology.
The Company believes that the timely development and enhancement of its
technologies is necessary to remain competitive in the industry. Delays or
inability's 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 and
Natural MicroSystems, which in turn sells 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 Creative Labs and Micronics
(Orchid Technology). The Company receives either a fixed fee or a royalty for
each copy of the technology shipped with the integrated product.
Cellular and Consumer Electronics Markets
The Company sells its technology products directly to cellular telephone
manufacturers, such as OKI Telecom and Hughes Network Systems, for integration
into end user products. The cellular telephone manufacturer typically either
purchases an enabling computer chip or licenses technologies directly from the
Company. When the Company sells a computer chip, a software license for the
single copy of the Company's technology is included with the chip. Under
licensing agreements, customers of the Company pay a royalty for each product
sold that incorporates the Company's technology.
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<PAGE> 15
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 during 1997 were Dialogic (29%), OKI Telecom
(14%) and Glenayre (11)%. Sales of hardware to OKI Telecom and Glenayre are made
pursuant to purchase orders, the form of which are updated from time to time.
Sales of technology or products to Dialogic are generally made under agreements
that do not obligate Dialogic 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.
The Company's technology is used by many customers in telecommunications,
desktop and consumer electronics markets. A partial list of the Company's
customers/integrators is as follows:
TELECOMMUNICATIONS
<TABLE>
<S> <C> <C>
Active Voice Enhanced Systems Octel Communications
AG Communication Systems Glenayre Periphonics Corporation
Apex Voice Communication, Inc. Global Communications, Ltd. Precision Systems, Inc.
Applied Voice Technology Group 2000 Priority Call Management
Atlas Network Systems Hammer Technologies Siemens, AG
Aspect Telecommunications Hewlett Packard Company Stylus Innovation, Inc.
Brite Voice Systems, Inc. IBM Corporation Syntellect, Inc.
Centigram Intellicall TALX Corporation
Comverse Technology, Inc. Intellivoice Telecorp Systems, Inc.
Dialogic Corporation InterVoice, Inc. Vicorp Interactive Systems, Inc.
Digital Equipment Corporation MicroLog Corporation VoiceTech Communications
Deutsche Telekom AG Natural MicroSystems Voicetek Corporation
Nortel West Interactive Corporation
</TABLE>
AUTOMOTIVE AND CONSUMER ELECTRONICS
<TABLE>
<S> <C> <C>
HighwayMaster Communications, Inc. NEC (U.K.) OKI Telecom
Hughes Network Systems OKI Semiconductor Pacific Communication Sciences,
Inc. (PCSI)
</TABLE>
15
<PAGE> 16
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, 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 Altech, Nuance Communications, Parlance, Dragon Systems, Marconi Speech
and Information Systems, Microsoft and Texas Instruments; and pure speech
recognition companies, such as Lernout & Hauspie Speech Products, Pure Speech,
Inc., Speech Systems, Inc., and Verbex, Inc. Many of the Company's competitors
are substantially larger than the Company, are well established and have greater
financial, technical, marketing, service and operating resources than the
Company. These competitors can be expected to continue to make substantial
commitments to research and product development.
PATENTS
The Company does not apply for patents on its speech recognition techniques that
it maintains as trade secrets because of the disclosure requirements in doing
so. The Company holds ten patents relating to certain methods or systems by or
in which speech recognition or speaker verification may be implemented. The
issuance of a patent is not conclusive as to its validity or enforceability, nor
does it prevent another party from designing around the claimed invention. Much
of the Company's proprietary technology is implemented in software that is
protected under copyright and trade secret law and subject to licensing
agreements.
EMPLOYEES
As of December 31, 1997, the Company had 95 employees, of which 29 are engaged
in research and development, 20 in product development, application engineering
and customer support, 24 in sales and marketing and 22 in finance,
administration and information systems. In addition, the Company employs three
people on a part-time basis to assist with speech data processing. 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.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business. This
report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
report.
HISTORY OF LOSSES
The Company has recorded cumulative losses of approximately $19.1 million
through December 31, 1997. These losses reflect the results of operations of VCS
Industries, Inc. ("Industries") prior to its merger (the "Scot Merger") with and
into Scott Instruments Corporation ("Scott"); whereupon Scott changed its name
to the current company name of "Voice Control Systems, Inc"), losses incurred by
the Company after the Scott Merger; and losses incurred by Voice Processing
Corporation "VPC" prior to the merger. In addition, Industries' predecessors
incurred losses. While the Company was profitable for the quarter ended December
31, 1997, there can be no assurance that the Company will continue to generate
profits.
RELIANCE ON MAJOR CUSTOMER
The Company is dependent to a significant extent on sales through OEMs. Dialogic
Corporation ("Dialogic"), a leading
16
<PAGE> 17
supplier of components for building, assembling and programming voice processing
systems, accounted for 29% and 25% of the Company's revenues in 1997 and 1996,
respectively.
DIALOGIC RELATIONSHIP - SHIFT TO OPEN ARCHITECTURE; SIGNIFICANT STOCKHOLDER
Prior to 1995, the Company technology was the only speech recognition technology
sold by Dialogic. In 1995, Dialogic began commercial distribution of a new open
architecture platform, Antares, for use in its SCSA product line. The Company's
Antares Software is currently in production for six computer operating systems
and in beta test for certain other computer operating systems. The Company is
developing support for additional operating systems. The Antares platform
supports several capabilities including speech recognition, thereby making the
speech recognition technology of the Company's competitors available as an
alternative to the Company'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 the Company products from
Dialogic until they are able to purchase a Dialogic SCSA product incorporating
the Company technology that meets their needs. These factors may negatively
impact the Company's sales and profitability through the Dialogic distribution
channel.
In addition, through a wholly owned subsidiary, Dialogic beneficially owns
approximately 12% of the Company Common Stock, as of December 31, 1997. 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.
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.
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.
DEPENDENCE ON SALES BY THIRD PARTIES
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,
because the Company generally does not sell its technology directly to end
users. 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, amy 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.
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.
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 Altech, Nuance Communications, Parlance, Dragon Systems, Microsoft, and
Texas Instruments; and speech recognition suppliers, such as Lernout & Hauspie
Speech Products, Pure Speech, Inc., Speech Systems, Inc. and Verbex. Many of
the
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<PAGE> 18
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.
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
an employment agreement with Thomas B. Schalk, Chief Technical Officer. The
agreement contain customary non-disclosure and non-competition covenants, but
there can be no assurance that these are enforceable under Texas law, where the
Company corporate offices are located. 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.
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. 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.
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.
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.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
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.
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. 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.
18
<PAGE> 19
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases 20,581 square feet for its headquarters facility, pursuant to
a lease that expires September 30, 2000, at 14140 Midway Road, Dallas, Texas
75244. The Company also leases 19,525 square feet of office space at One Main
Street, Cambridge, Massachusetts. In addition, the Company leases an office in
Waterlooville, Hampshire, England for use by sales and marketing personnel. The
Company believes these facilities will be adequate for its purpose for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICES
Prior to February 14, 1996, VCS's Common Stock traded on the American Stock
Exchange/Emerging Company Marketplace ("AMEX/ECM"), originally under the ticker
symbol SIC.EC. On August 11, 1994, the Company's ticker symbol was changed to
VPS.EC. In February 1996, the Company filed an application to delist from the
American Stock Exchange with the Securities and Exchange Commission. Effective
February 14, 1996, the Company's Common Stock began trading on The Nasdaq
National Market under the symbol "VCSI". The following table sets forth the
quarterly high and low sales prices on the AMEX/ECM or on The Nasdaq National
Market, as applicable, for the periods indicated.
<TABLE>
<CAPTION>
FISCAL 1996: High Low
------------ ------ ------
<S> <C> <C>
1st Quarter $14.00 $ 7.00
2nd Quarter 15.13 8.88
3rd Quarter 9.25 5.00
4th Quarter 9.50 5.63
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997: High Low
------------ ------ ------
<S> <C> <C>
1st Quarter $ 9.00 $ 5.50
2nd Quarter 5.88 4.38
3rd Quarter 5.94 3.63
4th Quarter 4.22 2.50
</TABLE>
As of March 12, 1998, there were 1,839 holders of record of outstanding Common
Stock of the Company.
DIVIDEND POLICY
No dividends have been declared or paid on the Company's Common Stock to date.
The declaration of dividends is subject to the discretion of the Company's Board
of Directors and will depend on a number of factors including the cash position,
earnings, financial position and anticipated financial requirements of the
Company and other factors deemed relevant by the Board of Directors. The Company
is limited by law to paying dividends on its Common Stock (i) out of its
surplus, which is the excess, if any, of the net assets over the stated capital,
or (ii) in case the Company has no surplus, out of its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Recent Sales of Unregistered Securities
In January 1996, the Company's general counsel exercised a non-assignable option
to purchase 4,897 shares of Common Stock for an aggregate purchase price of
$7,500 in a transaction exempt from registration pursuant to Section 4 (2) of
the Securities Act of 1993, as amended (the "Securities Act").
In March and September, 1996, Dialogic Investment Corporation, a wholly owned
subsidiary of Dialogic Corporation, converted $4,601 and $86,379, respectively,
of accrued but unpaid interest on its convertible note into 5,008 and 94,013
shares, respectively, of the Company's Common Stock in a transaction exempt from
registration pursuant to Section 4 (2) of the Securities Act. On January 1, 1997
Dialogic converted its promissory note and accrued interest to 1,300,694 of
common stock.
19
<PAGE> 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the financial statements, including the notes thereto, and the
other financial information appearing elsewhere in this Report. Statements
regarding future economic performance, management's plans and objectives, and
any statements concerning its assumptions related to the foregoing contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations constitute forward-looking statements. Certain factors which may
cause actual results to vary materially from these forward-looking statements
accompany such statements and appear elsewhere in this report, including
without limitation, the factors disclosed under "Risk Factors".
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 78% of the Company's sales are from the telecommunications market
segment. A significant percentage of the Company's sales are made under
agreements with major customers. See "Sales and Marketing."
The Company's sales and profitability may vary significantly from quarter to
quarter due to a variety of factors, including the Company's dependence upon a
small number of customers, timing of customer orders, and changes in the
Company's product and customer mix. The Company typically operates with
relatively little backlog and substantially all of its revenues in each quarter
results from orders and royalty payments received in that quarter.
The Company's sales to Dialogic are expected to shift over time from
predominantly hardware to predominantly software, as the market demand for
Dialogic SCSA products increases. This shift is expected to occur over the next
three to six months. With the shift from hardware sales to software sales, the
Company's gross revenue from Dialogic may decrease while increased royalty
revenue should improve gross margins. See "Products and
Services--Telecommunications Products".
RESULTS OF OPERATIONS
Comparison of Results for Fiscal Years Ended December 31, 1997 and 1996
Sales increased 6.3% from $13,577,000 during 1996 to $14,430,000 during 1997.
Three customers, Dialogic, OKI Telecom and Glenayre, accounted for 29%, 14% and
11%, respectively, of total sales in 1997. Two customers, Dialogic and
Periphonics, accounted for 25% and 12% of total sales for 1996. Hardware sales,
which were flat from 1996, were 60% of revenues in 1997. Royalty, development
and license fees, which increased 20% over 1996, were 34% of total sales for
1997. This increase resulted primarily from increased revenues from royalties
and license fees.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales decreased from
80% in 1996 to 78% in 1997 as a result of the OKI Telecom orders for hardware
for the automotive segment which have a lower gross margin.
Research and development expenses decreased 13% from $6,006,000 in 1996 to
$5,253,000 in 1997, due to consolidation in 1997 of the research departments
from VCS and VPC.
Selling, general and administrative expenses increased 5% from $6,818,000 in
1996 to $7,144,000 in 1997. Selling, general and administrative expenses as a
percent of sales were comparable from 1996 to 1997.
Nonrecurring merger costs of $1,377,000 related to the VPC merger were incurred
in 1996.
The Company incurred interest cost of $120,000 in 1996. All of the outstanding
convertible debt of the Company was converted to equity by January 1, 1997.
The combined net operating loss (NOL) carryforwards of the merged Company expire
from 1998 to 2012 and total approximately $22,688,000 as of December 31, 1997.
The Company has provided an allowance against its entire deferred tax asset
relating primarily to NOL carryforwards of approximately $7,717,000 since
management can not determine that it is more likely than not that the deferred
tax asset will be realized. Approximately $1,225,000 in NOL carryforwards
expired for the year ended December 31, 1997. In connection with its merger and
acquisition activity the Company and its predecessors have experienced ownership
changes as defined by the Internal Revenue Code Section 382 (IRC 382) the effect
of such changes limits the use the Company's NOL in future years to
approximately $1,405,000 annually. Any portion of an NOL limited by IRC 382 not
used in a given year can be carried forward to subsequent years.
YEAR 2000 COMPLIANCE
Currently, there is significant uncertainty in the software industry and among
software users regarding the impact of the year 2000 on installed software.
Software database modifications, and/or implementation modifications, will be
required to enable such software to distinguish between 21st and 20th century
dates. The Company is in the process of determining the extent to which its
licensed and proprietary software is year 2000 compliant and the cost of
obtaining such compliance. The Company considers the cost to become year 2000
compliant to be a normal operating cost necessary to periodically upgrade
system software. As a result, the Company believes that neither the cost of
addressing the Year 2000 issue nor the costs or consequences of its incomplete
or untimely resolution of such issue will result in any material adverse impact
on the Company's future financial or business condition or results.
20
<PAGE> 21
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, 1997 was $15,649,000. In the past, the Company's
working capital needs were financed primarily through cash flow from operations
and proceeds from the exercise of warrants and stock options. A stock offering
was completed during the first quarter of 1996 that provided net proceeds of
$14,408,000 to the Company.
At December 31, 1997 the Company had $12,668,000 in cash and cash equivalents.
Cash and cash equivalents are invested in institutional cash investment accounts
with preservation of capital being the primary consideration. All investments
currently have overnight liquidity. Historically, the Company's primary source
of liquidity has been the timely collection of its accounts receivable. The
average days sales in accounts receivable were 81 days at December 31, 1997.
In January of 1998, the Company announced its intention to buy-back up to one
million shares of its capital stock. The buy-back will be financed from the
Company's cash and cash equivalents. As of December 31, 1997, the Company had
acquired 25,000 shares for total consideration of $75,300.
The Company's inventory as of December 31, 1997 was $458,000. Reserves of
$169,000 have been established for obsolescence as of December 31, 1997. The
reserve is primarily related to the Personal Voice Dialer product whose sales
have been less than anticipated. The reserve was established to record the
dialer product to its expected net realizable value based on revised sales
projections.
The Company's debt at December 31, 1996 consisted of a convertible promissory
note due to Dialogic on January 1, 1997. Dialogic converted accrued interest on
its note to common stock during 1996. On January 1, 1997 Dialogic converted its
promissory note and accrued interest to common stock.
The Company's capital expenditures were $572,000 for the year ended December 31,
1997. The Company has no specific commitments with regard to capital
expenditures.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this Item begin at page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The discussion under "Directors, Executive Officers, promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act" in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The discussions under "Compensation of Directors" and "Executive Compensation"
in the Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement for its 1998 Annual Meeting of Stockholders
is incorporated herein by reference.
21
<PAGE> 22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the Annual Report
on Form 10-KSB.
1. Financial Statements
The financial statements filed as part of the Annual Report
on Form 10-KSB are listed in the "Index to Financial
Statements" on page F-1 hereof.
2. Exhibits
The exhibits filed as part of the Annual Report on Form
10-KSB are listed in the "Index to Exhibits" on page 16
hereof.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this report.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VOICE CONTROL SYSTEMS, INC.
Date: September 1, 1998
By: /s/ Peter J. Foster
----------------------------------
Peter J. Foster,
President and Chief Executive Officer
23
<PAGE> 24
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
<S> <C>
2.1 Agreement and Plan of Reorganization between Voice Control Systems, Inc. and Voice Processing
Corporation dated July 16, 1996, (filed with the Securities and Exchange Commission on September 4,
1996 as Exhibit 2.1 to the Company's Registration Statement on Form S-3 dated September 4, 1996
Registration No. 333-11367, and amendment thereto filed on September 24, 1996, as Exhibit 2.1 to the
Company's Amendment No. 1 to the Registration Statement on Form S-3 dated September 24, 1996,
Registration No. 333-11367, and incorporated by reference herein).
2.2 Agreement and Plan of Reorganization between Scott Instruments Corporation and VCS Industries, Inc.
dated April 11, 1994, as amended (filed with the Securities and Exchange Commission on April 11, 1994
as Exhibit 2.1 to the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and amendment thereto filed on June 1, 1994, as Exhibit 2.1a to the Company's Amendment
No. 1 to the Registration Statement on Form S-4 dated June 1, 1994, Registration No. 33-77658, and
amendment thereto filed on July 12, 1994, as Exhibit 2.1b to the Company's Amendment No. 2 to the
Registration Statement on Form S-4 dated July 12, 1994, Registration No. 33-77658, and incorporated by
reference herein).
3.1 Certificate of Incorporation of the Company, as amended (filed with the Securities and Exchange
Commission on March 11, 1986, as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985, and amendment thereto filed on March 30, 1987, as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, and amendments
thereto filed July 8, 1993 as Exhibit 4.3 to Form S-8 Registration Statement of Scott, as further
amended by the Certificate of Merger between Scott Instruments and VCS Industries, Inc., dated August
9, 1994 filed on March 23, 1995, as Exhibit 3.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994 and incorporated by reference herein).
3.2 By-Laws of the Company (filed with the Securities and Exchange Commission on March 11, 1986, as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, and
amendment thereto filed on March 30, 1987, as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, and amendment thereto filed on March 23, 1995, as Exhibit
3.2 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994, and
incorporated by reference herein).
4.1 Specimen certificate representing shares of the Company's Common Stock, $0.01 par value (filed with the
Securities and Exchange Commission on December 8, 1995 as Exhibit 4.1 to the Company's Registration
Statement on Form SB-2 dated December 8, 1995, Registration No. 33-64835, and incorporated by reference
herein).
4.2 Promissory Note dated September 20, 1991 in the principal amount of $1,161,798.90 executed by the
Company and payable to Dialogic Corporation (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.27 to the Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
4.3 Loan and Security Agreement dated September 20, 1991 by and between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.28 to
the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
4.4 Omnibus Amendment Agreement dated March 14, 1994 between the Company and Dialogic Corporation (filed
with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.35 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.1 1992 Stock Option Plan of the Company (filed with the Securities and Exchange Commission on March 30,
1993 as Exhibit 10.25 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992 and incorporated by reference herein).
10.2 1992 Stock Option Agreement of the Company (filed with the Securities and Exchange Commission on March
30, 1993 as Exhibit 10.26 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992 and incorporated by reference herein).
10.3 Industries 1986 Incentive Stock Plan (filed with the Securities and Exchange Commission on April 11,
1994 as Exhibit 10.37 to the Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.4 Form of 1986 Incentive Stock Option Agreement of Industries, (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.38 to the Company's Registration Statement on Form S-4 dated
April 11, 1994, Registration No. 33-77658, and incorporated by reference herein).
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).
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.8 Form of Convertible Note between the Company and an officer (filed with the Securities and Exchange
Commission on March 23, 1995, as Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated by reference herein).
10.9 Form of subscription agreement for the private offering of the Company's Common Stock in March and June
1994 (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.43 to the
Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.10 Employment agreement dated June 18, 1993 between the Company and Peter J. Foster (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.15 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.11 Amendment to employment agreement dated November 14, 1995 between the Company and Peter J. Foster
(filed with the Securities and Exchange Commission on December 8, 1995 as Exhibit 10.11 to the
Company's Registration Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.12 Employment agreement dated June 18, 1993 between the Company and Thomas B. Schalk (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.16 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.13* Amendment to employment agreement dated July 20, 1995 between the Company and Thomas B. Schalk (filed
with the Securities and Exchange Commission on November 15, 1995 as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB, and incorporated by reference herein).
10.14* License Agreement dated June 8, 1990 by and between the Company and Dialogic Corporation (filed with
the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.30 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.15* Amendment to License Agreement dated September 20, 1991 between the Company and Dialogic Corporation
(filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.31 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.16* Amendment No. 2 to the Licensee Agreement dated September 20, 1991 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.32 to
the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.17* Amendment No. 4 to the License Agreement dated October 1, 1995 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on December 8, 1995 as Exhibit 10.17 to
the Company's Registration Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.18* License Agreement dated October 7, 1994 between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on December 8, 1995 as Exhibit 10.18 to the Company's Registration
Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and incorporated by reference
herein).
10.19* Support Agreement dated September 20, 1991 between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.33 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.20* Addendum No. 1 to the Support Agreement dated January 31, 1993 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.34 to
the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.21* Addendum No. 3 to the Support Agreement dated October 1, 1995 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on December 8, 1995 as Exhibit 10.21 to
the Company's Registration Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.22* Omnibus Amendment Agreement dated March 14, 1994 between the Company and Dialogic Corporation (filed
with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.35 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.23* VR/xx-PEB letter agreement dated January 31, 1992 between the Company and Dialogic Corporation (filed
with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.36 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.25 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).
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C>
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 Employment and Consulting Agreement between Voice Processing Corporation and Merrill Solomon (filed
with the Securities and Exchange Commission on September 4, 1996 as Exhibit 10.28 to the Company's
Registration Statement on Form S-3 dated September 4, 1996 Registration No. 333-11367, and amendment
thereto filed on September 24, 1996, as Exhibit 10.28 to the Company's Amendment No. 1 to the
Registration Statement on Form S-3 dated September 24, 1996, Registration No. 333-11367, and
incorporated by reference herein).
10.29 Voice Processing Corporation 1989 Stock Option Plan (filed with the Securities and Exchange Commission
on January 6, 1997 as Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No.
333-19309, and incorporated by reference herein).
10.30 Voice Processing Corporation 1996 Stock Option Plan (filed with the Securities and Exchange Commission
on January 6, 1997 as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No.
333-19309, and incorporated by reference herein).
23.1 # Consent of BDO Seidman, LLP
23.2 # Consent of BDO Seidman, LLP
23.3 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
99** 1997 Proxy Statement of the Company
</TABLE>
* Confidential treatment has been requested for a portion of this exhibit.
** To be filed with the Commission no later than April 29, 1998.
# Filed herewith
26
<PAGE> 27
VOICE CONTROL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
ITEM 13 (a)
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Certified Public Accountants' Report F-2
Balance Sheet as of December 31, 1997 F-3
Statements of Operations for the years ended December 31, 1997 and 1996. F-4
Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996. F-5
Statements of Cash Flows for the years ended December 31, 1997 and 1996. F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE> 28
Independent Certified Public Accountants' Report
The Board of Directors and Stockholders
Voice Control Systems, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of Voice Control Systems,
Inc. as of December 31, 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years ended December
31, 1997. 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. The statements of operations, stockholders
equity and cash flows for the year ended December 31, 1996 give retroactive
effect to the merger of Voice Processing Corporation which has been accounted
for as a pooling of interests as described in Note 2 to the financial
statements.
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. as
of December 31, 1997, and the results of its operations and its cash flows for
each of the two years then ended in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Dallas, Texas
January 30, 1998
F-2
<PAGE> 29
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1997
================================================================================
<TABLE>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,667,979
Accounts receivable (net of allowance
for doubtful accounts of $215,000) 4,069,692
Inventory (Note 4) 457,852
Prepaid expenses 159,247
------------
TOTAL CURRENT ASSETS 17,354,770
NET PROPERTY AND EQUIPMENT (NOTE 5) 1,524,904
OTHER ASSETS 153,841
------------
$ 19,033,515
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 7) $ 957,789
Deferred revenue (Note 6) 748,124
------------
TOTAL LIABILITIES 1,705,913
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY (NOTES 2, 3, 6, 8 AND 12):
Preferred stock; $1.00 Par value; 300,000 shares authorized; --
none issued
Common stock, $.01 Par value: 20,000,000 shares authorized;
11,337,466 shares issued and 11,312,466 outstanding 113,375
Paid-in capital 37,355,930
Treasury stock (75,313)
Receivable from stockholders (70,010)
Accumulated Deficit (19,996,380)
------------
TOTAL STOCKHOLDERS' EQUITY 17,327,602
------------
$ 19,033,515
============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 30
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
SALES (NOTE 12) $ 14,429,867 $ 13,577,420
COST OF SALES 3,221,629 2,721,934
------------ ------------
GROSS PROFIT 11,208,238 10,855,486
COSTS AND EXPENSES:
OPERATING EXPENSES:
Research and development 5,252,801 6,005,644
Selling, general and administrative 7,143,619 6,817,599
Merger costs -- 1,376,533
------------ ------------
TOTAL OPERATING EXPENSES 12,396,420 14,199,776
OTHER EXPENSES (INCOME):
Interest Income (749,273) (676,560)
Interest Expense 349 7,182
Interest, to affiliates (Note 3) -- 119,661
------------ ------------
TOTAL OTHER EXPENSES (INCOME) (748,924) (549,717)
TOTAL COSTS AND EXPENSES 11,647,496 13,650,059
------------ ------------
NET LOSS $ (439,258) $ (2,794,573)
============ ============
NET LOSS PER SHARE: BASIC $ (0.04) $ (0.34)
============ ============
WEIGHTED AVERAGE OUTSTANDING SHARES: 11,176,173 8,274,984
============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 31
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
================================================================================
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK PAID-IN TREASURY
STOCK DOLLARS STOCK DOLLARS CAPITAL STOCK
--------- --------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 880,978 $ 8,810 5,600,948 $ 56,010 $20,452,004 $0
Accrued interest On Convertible
Debt converted to shares of stock 131,903 1,319 119,874
Exercised options and warrants 1,262,962 12,630 1,282,180
Issuance of shares in exchange
For Convertible Debt 348,363 3,483 496,517
Stock Offering 1,489,902 14,899 13,431,362
Conversion of series A preferred
Stock to common stock (880,978) (8,810) 880,978 8,810
NET LOSS -- -- -- -- -- --
--------- --------- ---------- --------- ----------- ----------
BALANCE, December 31, 1996 0 0 9,715,056 97,151 35,781,937 0
Accrued interest on Convertible
Debt converted to shares of stock 36,220 362 32,917
Principal on Convertible Debt
Converted to shares of stock 1,264,474 12,645 1,149,154
Exercised options and warrants 321,716 3,217 391,922
Treasury Stock Purchases (75,313)
Repayment of Promissory Note
Net Loss -- -- -- -- --
--------- --------- ---------- --------- ----------- ----------
BALANCE, December 31, 1997 -- -- 11,337,466 $ 113,375 $37,355,930 $ (75,313)
========= ========= ========== ========= =========== ==========
<CAPTION>
REC
FROM ACCUMULATED
S/H DEFICIT TOTAL
---------- ------------- -----------
<S> <C> <C> <C>
BALANCE, January 1, 1996 $ (154,381) $ (16,762,549) $ 3,599,894
Accrued interest On Convertible
Debt converted to shares of stock 121,193
Exercised options and warrants 1,294,810
Issuance of shares in exchange
For Convertible Debt 500,000
Stock Offering 35,626 13,481,887
Conversion of series A preferred
Stock to common stock
NET LOSS -- (2,794,573) (2,794,573)
---------- ------------- -----------
BALANCE, December 31, 1996 (118,755) (19,557,122) 16,203,211
Accrued interest on Convertible
Debt converted to shares of stock 33,279
Principal on Convertible Debt
Converted to shares of stock 1,161,799
Exercised options and warrants 395,139
Treasury Stock Purchases (75,313)
Repayment of Promissory Note 48,745 48,745
Net Loss (439,258) (439,258)
---------- ------------- -----------
BALANCE, December 31, 1997 $ (70,010) $ (19,996,380) $17,327,602
---------- ------------- ===========
</TABLE>
See accompanying notes to the financial statements
F-5
<PAGE> 32
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (439,258) $ (2,794,573)
Adjustments to reconcile net loss to
net cash provided in operating activities:
Depreciation and amortization 514,619 460,962
Provision for bad debts 135,500 125,122
Changes in operating assets and liabilities:
Accounts receivable (1,697,429) (654,797)
Other assets (101,988) 143,587
Prepaid expenses (61,657) 27,750
Inventory (5,174) 382,338
Accounts payable and accrued expenses (22,630) 193,832
Deferred revenue (677,639) 109,852
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,355,656) (2,005,927)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (571,760) (600,663)
Treasury purchased (75,313) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (647,073) (600,663)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 500,000
Proceeds from repayment of stockholder loan 48,745 35,626
Proceeds from sale of series A preferred stock -- --
Proceeds from issuance of common stock -- 13,446,261
Proceeds from exercise of stock options 395,139 1,294,810
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 443,884 15,276,697
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,558,845) 12,670,107
CASH AND CASH EQUIVALENTS at beginning of year 15,226,824 2,556,717
------------ ------------
CASH AND CASH EQUIVALENTS at end of year $ 12,667,979 $ 15,226,824
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Non Cash Investing and Financing Activities:
Conversion of debt and accrued interest to
1,300,694, and 480,267 shares of stock--
all issued to affiliates (Notes 3) 1,195,078 621,193
Conversion of note payable to an affiliate
to a prepaid royalty -- 1,000,000
Conversion of series A preferred stock to
880,978 shares of common stock -- 880,978
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 33
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Presentation
Voice Control Systems, Inc. (the "Company") engages in the design of speech
recognition systems which allow for the voice control of electronic machines
and/or devices. The Company's revenues are historically derived from the design
of speech recognition systems as value added features for products manufactured
and marketed by others, both domestically and internationally. In addition to
this source of revenue, the Company is currently marketing products on its own
behalf, principally in the telecommunications industry.
The Company and Voice Processing Corporation ("VPC") entered into an
Agreement and Plan of Merger, approved on October 29, 1996 by each Company's
stockholders of record, pursuant to which VPC was merged into the Company. The
merger was effective as of November 4, 1996. The transaction was accounted for
as a pooling-of-interests.
Revenue Recognition
Other than for long-term contracts, revenue is 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 recognizes any loss related to long-term contracts immediately when it
is determined that the expected cost to complete a contract exceeds the
contract amount.
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. License fees are recognized in the period
earned based on the individual license agreement. Licensees pay royalties to the
Company based on the volume of products sold by the licensee utilizing the
licensed technology. Royalty revenue is reported to the Company by licensees
pursuant to contractual obligations, monthly or quarterly, and is recognized as
revenue when reported by the customer.
Property and Equipment
Property and equipment are recorded at cost. Additions and major
improvements are capitalized while expenditures for maintenance and repairs are
charged to expense when incurred. Depreciation is provided by the straight-line
method over estimated useful lives ranging from three to seven years.
Inventory
Inventory consists of speech recognition products and raw materials used in
the construction of speech recognition products. Inventory is stated at the
lower of cost or market value. Cost is determined on a first-in, first-out
basis.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
F-7
<PAGE> 34
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Income Taxes (continued)
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.
Earnings Per Share
Net income (loss) per share is based on the weighted average number of
shares of common stock outstanding. The Financial Accounting Standards Board
recently adopted, SFAS No. 128, Earnings Per Share (SFAS 128). SFAS 128 requires
a calculation of book "Basic" and "Diluted" earnings per share. Basic earnings
per share includes no dilution. As the Company incurred a loss in both 1997 and
1996, the adoption of SFAS 128 had no impact on the calculation of
"Basic"earnings per share.
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 12). 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.
Almost 100% of the Company's cash and cash equivalents are in one bank.
Thus, the balance over $100,000 exceeds the federally insured deposit limit.
Stock Based Compensation
For options issued to employees, the Company has elected to continue using
the intrinsic value based method of accounting prescribed in Accounting
Principles Board Opinion No. 25. "Accounting for Stock Issued to Employees," as
permitted by SFAS No. 123. Options issued to non-employee directors and other
non-employees are accounted for based on the options fair value as prescribed by
SFAS No. 123. Fair value is determined by using a Black - Scholes model.
NOTE 2 -- BUSINESS ACQUISITION
Effective November 4, 1996, the Company acquired VPC in a transaction
accounted for using the pooling-of-interests method of accounting (see Note 1).
Each outstanding share of VPC common stock was converted into and exchanged for
0.87091 shares of VCS common stock. In addition, all options and warrants to
purchase VPC shares were exchanged for options and warrants to purchase VCS
shares at the .87091 exchange rate. The stock conversion referred to above has
been retroactively reflected in the financial statements for all periods
presented. The financial statements present the financial data for the Company
and VPC on a combined basis as if the transaction had occurred on January 1,
1996.
F-8
<PAGE> 35
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 2 -- BUSINESS ACQUISITION (CONTINUED)
Separate results of operations, excluding merger costs of $1,377,000, for
the periods in 1996 prior to the merger with VPC are provided below
<TABLE>
<CAPTION>
TEN MONTHS ENDED
REVENUES: OCTOBER 29,1996
----------------
<S> <C>
VCS $ 7,048,425
VPC 4,650,168
-----------
COMBINED: 11,698,593
NET INCOME (LOSS):
VCS $ 584,563
VPC (1,682,934)
-----------
COMBINED: $(1,098,371)
===========
</TABLE>
NOTE 3 -- ISSUANCE OF CONVERTIBLE DEBT
In September 1991, the Company issued a three year convertible 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
conversion price was set at the Company's then market value per share. The note
bore interest at a floating rate with a New Jersey bank plus 2%; with interest
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. Interest in the amount of
$121,193 was converted to 131,903 shares of stock in 1996. The promissory note
and accrued interest was converted to 1,300,694 shares of common stock on
January 1, 1997 at the conversion price established in September of 1991.
In March 1996, prior to merger discussions with the Company, VPC issued
convertible notes to stockholders in the amount of $500,000. The notes earned
interest at a rate of 7% per year and were convertible into common stock at a
rate of $1.4352 per share, VPC's then market value per share. The notes were due
on July 31, 1996 and converted to 348,364 shares of common stock on July 31,
1996.
NOTE 4 -- INVENTORY
Inventory consists of the following at December 31, 1997:
Finished goods $ 626,573
Reserve for excess and obsolescence (168,721)
------------
$ 457,852
============
NOTE 5 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
Research and development equipment $ 3,573,129
Furniture and fixtures 684,007
-------------
4,257,136
Accumulated depreciation ( 2,732,232)
-------------
$ 1,524,904
=============
F-9
<PAGE> 36
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 6 - DEFERRED REVENUE
During 1995, VPC received advances from Creative Technology Ltd., a
customer and stockholder, based on arrangements included in a development
agreement. In connection with the merger described in Note 2, Creative agreed to
convert the payable to prepaid license fees and royalties against future
product sales. As a result of this agreement deferred revenue of $1,000,000
was recorded in 1996. In March of 1997, the Company completed certain
milestones contained in the agreement and recorded $500,000 in revenue. At
December 31, 1997, $500,000 remains in deferred revenue related to this
agreement.
NOTE 7 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December 31,
1997:
Trade accounts payable $ 468,770
Accrued payroll 150,834
Other accrued expenses 338,185
------------
$ 957,789
============
NOTE 8 -- COMMON STOCK
STOCK OPTIONS
At December 31, 1997 the Company has three stock option plans, which are
described below. The Company applies APB Opinion 25, Accounting for Stock Issued
to Employees, and related Interpretations in accounting for the plans. Under APB
Opinion 25, because the exercise price of the Company's employee stock options
equals or exceeds the market price of the underlying stock on the date of
grant, no compensation is recognized.
Under its 1992 Plan, the Company may grant options to its employees for
up to 1,300,000 shares of common stock. The Company on August 11, 1994 assumed
as a result of an acquisition, stock options totaling 1,166,490 at an exercise
price ranging from $1.15 to $1.53 per share. As of November 4, 1996, as result
of the merger described in Note 2, the Company assumed stock options totaling
1,318,382 at exercise prices ranging from $.57 to $3.97.
Options to purchase the Company's common stock have been granted to
directors, officers and most classes of employees working for the Company.
Options generally become exercisable in 20% cumulative annual increments
beginning with the anniversary of the first year after the date of grant and
expire at the end of ten years. During the years ended December 31, 1997 and
1996, 649,484 and 1,070,657 shares, respectively, were granted under the plans.
All figures include, on a pro forma basis, options issued by VPC, using the
applicable exchange rate, due to the merger with the Company.
In November 1997, the Board of Directors approved the repricing of employee
stock options with exercise prices at or above $6.00, to $3.75, the then market
price. The repriced options vest 20% per year beginning in 1998. The options had
original exercise prices ranging from $6.00 to $12.00. and original vesting of
25% per year beginning in 1997.
The following includes all options presently outstanding:
<TABLE>
<CAPTION>
Weighted-Average
Weighted-Average Fair Value
Shares Exercise Price at Grant Date
--------- ---------------- ----------------
<S> <C> <C> <C>
January 1, 1996 2,011,663 $1.96
Options granted 1,070,657 4.46 4.46
Options cancelled or forfeited (155,623) 3.65
Options exercised (126,739) 2.15
--------- -----
December 31, 199 2,799,958 2.63
Options granted 649,484 3.90 3.90
Options cancelled or forfeited (530,648) 6.45
Options exercised (317,353) 1.24
--------- -----
Outstanding at December 31, 1997 2,601,441 $2.54
========= =====
Options exercisable 1,434,322 $1.85
========= =====
</TABLE>
F-10
<PAGE> 37
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 8 -- COMMON STOCK (CONTINUED)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------
Number Weighted-Average Number
Range of Outstanding Estimating Weighted-Average Exercisable Weighted-Average
Exercise Prices 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------- ------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.57 to 2.99 1,533,623 4.9 years $1.40 1,205,101 $1.39
3.00 to 6.00 1,067,818 7.9 4.17 229,221 4.23
--------- --- ---- --------- -----
$.57 to 6.00 2,601,441 6.2 2.54 1,434,322 1.85
========= === ==== ========= =====
</TABLE>
STOCK WARRANTS
Pursuant to a director compensation plan discussed in 1995 and adopted in
March 1996, the Company issued five-year warrants to non-employee Directors to
purchase 40,000 shares of the Company's common stock for $5.63 per share. As a
result of the merger with VPC, the Company assumed 99,975 warrants with an
exercise price of $2.07, which expire September 30, 1998. At December 31, 1997
warrants to purchase 433,725 shares of the Company's common stock were
outstanding at prices from $2.07 to $8.00 per share.
The warrant agreements require that the exercise price per share of
warrants granted cannot be less than the fair market value of the Company's
stock at the date of grant and provide for adjusting both the exercise price and
the number of shares purchasable based on various criteria, including the
Company's issuing shares of common stock, convertible securities, or certain
options at less than market price or the warrant exercise price.
STOCK BUYBACK
The Company completed a stock buyback of 100,000 shares in January of 1998.
The shares were acquired to fund its employee stock purchase plan which was
established in November of 1997. The Board of Directors approved a second stock
buyback of up to 1,000,000 shares in January of 1998. The Company has purchased
10,000 shares since the announcement of the buyback.
Pro forma information is required by SFAS No. 123 to reflect the estimated
effect on net income (loss) and net income (loss) per share as if the company
had accounted for the stock options and other awards granted using the fair
value method described in the statement. The fair value was estimated at the
date of grant using the Black-Scholes options pricing model and with the
following assumptions: risk-free interest rate of 5.4%; dividend yield of 0%;
volatility factor of 76.5%; weighted-average expected life of 5.5 years and a
forfeiture rate of 25%. The following effects on net income (loss), if SFAS No.
123 had been adopted, may not be reliable and are based on subjective
assumptions.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net Loss (As Reported) $ (439,258) $(2,794,573)
Net Earnings (Under SFAS No. 123) $(1,230,577) $(4,752,858)
Earnings Per Share (As Reported) $ (0.04) $ (0.34)
Earnings Per Share (Under SFAS No. 123) $ (0.11) $ (0.57)
</TABLE>
F-11
<PAGE> 38
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 9 -- INCOME TAXES
Significant components of the Company's net deferred tax assets for federal
and state income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Net operating losses $ 7,717,000 $ 8,432,000
Valuation allowance (7,717,000) (8,432,000)
--------------- ---------------
$ -- $ --
=============== ===============
</TABLE>
The net operating loss (NOL) carryforwards of the Company expire from 1998 to
2012 and total approximately $22,688, 000 as of December 31, 1997. The Company
has provided an allowance against its entire deferred tax asset relating
primarily to NOL carryforwards of approximately $7,717,000 since management can
not determine that it is more likely than not that the deferred tax asset will
be realized. Approximately $1,225,000 in NOL carryforwards expired for the year
ended December 31, 1997. In connection with its merger and acquisition activity
the Company and its predecessors have experienced ownership change as defined by
Internal Revenue Code 382 the effect of such changes limits the use of the
Company's NOL in future years to approximately $1,405,000 annually. Any portion
of an NOL limited by IRC 382 not used in a given year can be carried forward to
subsequent years.
The Company has provided an allowance for its entire deferred tax asset, as
its realization is dependent upon the future generation of taxable income since
management can not determine that it is more likely than not that the deferred
tax asset will be realized. Until such realization can be reasonably determined
based on established sources of earnings sufficient to utilize the NOL
carryforward, management will continue to provide an allowance for the entire
deferred tax asset.
NOTE 10 - - RELATED PARTY
The Company has paid $60,000 for financial consulting to Princeton Venture
Research a company owned by a director.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company rents offices and equipment under noncancelable and cancelable
operating agreements. Minimum future rental obligations under noncancelable
agreements as of December 31, 1997 are $211,066 annually through 2000 for Dallas
office space and a separate lease of $504,132 annually through 1998 for
Cambridge office space. For the years ended December 31, 1997 and December 31,
1996 rent expense is $723,500 and $713,000, respectively.
NOTE 12 -- MAJOR CUSTOMERS
In 1997, three customers accounted for 29%, 14% and 10% of total sales
revenue. Two customers accounted for 25% and 12 % of total sales revenue for the
year ended December 31, 1996. The Company's largest customer was also the holder
of the convertible debt described in Note 3. Accounts receivable from the
largest customer were 23% of the total receivable balance at December 31, 1997.
F-12
<PAGE> 39
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
<S> <C>
2.1 Agreement and Plan of Reorganization between Voice Control Systems, Inc. and Voice Processing
Corporation dated July 16, 1996, (filed with the Securities and Exchange Commission on September 4,
1996 as Exhibit 2.1 to the Company's Registration Statement on Form S-3 dated September 4, 1996
Registration No. 333-11367, and amendment thereto filed on September 24, 1996, as Exhibit 2.1 to the
Company's Amendment No. 1 to the Registration Statement on Form S-3 dated September 24, 1996,
Registration No. 333-11367, and incorporated by reference herein).
2.2 Agreement and Plan of Reorganization between Scott Instruments Corporation and VCS Industries, Inc.
dated April 11, 1994, as amended (filed with the Securities and Exchange Commission on April 11, 1994
as Exhibit 2.1 to the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration
No. 33-77658, and amendment thereto filed on June 1, 1994, as Exhibit 2.1a to the Company's Amendment
No. 1 to the Registration Statement on Form S-4 dated June 1, 1994, Registration No. 33-77658, and
amendment thereto filed on July 12, 1994, as Exhibit 2.1b to the Company's Amendment No. 2 to the
Registration Statement on Form S-4 dated July 12, 1994, Registration No. 33-77658, and incorporated by
reference herein).
3.1 Certificate of Incorporation of the Company, as amended (filed with the Securities and Exchange
Commission on March 11, 1986, as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985, and amendment thereto filed on March 30, 1987, as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, and amendments
thereto filed July 8, 1993 as Exhibit 4.3 to Form S-8 Registration Statement of Scott, as further
amended by the Certificate of Merger between Scott Instruments and VCS Industries, Inc., dated August
9, 1994 filed on March 23, 1995, as Exhibit 3.1 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994 and incorporated by reference herein).
3.2 By-Laws of the Company (filed with the Securities and Exchange Commission on March 11, 1986, as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, and
amendment thereto filed on March 30, 1987, as Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1986, and amendment thereto filed on March 23, 1995, as Exhibit
3.2 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994, and
incorporated by reference herein).
4.1 Specimen certificate representing shares of the Company's Common Stock, $0.01 par value (filed with the
Securities and Exchange Commission on December 8, 1995 as Exhibit 4.1 to the Company's Registration
Statement on Form SB-2 dated December 8, 1995, Registration No. 33-64835, and incorporated by reference
herein).
4.2 Promissory Note dated September 20, 1991 in the principal amount of $1,161,798.90 executed by the
Company and payable to Dialogic Corporation (filed with the Securities and Exchange Commission on April
11, 1994 as Exhibit 10.27 to the Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
4.3 Loan and Security Agreement dated September 20, 1991 by and between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.28 to
the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
4.4 Omnibus Amendment Agreement dated March 14, 1994 between the Company and Dialogic Corporation (filed
with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.35 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.1 1992 Stock Option Plan of the Company (filed with the Securities and Exchange Commission on March 30,
1993 as Exhibit 10.25 to the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992 and incorporated by reference herein).
10.2 1992 Stock Option Agreement of the Company (filed with the Securities and Exchange Commission on March
30, 1993 as Exhibit 10.26 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992 and incorporated by reference herein).
10.3 Industries 1986 Incentive Stock Plan (filed with the Securities and Exchange Commission on April 11,
1994 as Exhibit 10.37 to the Company's Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference herein).
10.4 Form of 1986 Incentive Stock Option Agreement of Industries, (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.38 to the Company's Registration Statement on Form S-4 dated
April 11, 1994, Registration No. 33-77658, and incorporated by reference herein).
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).
</TABLE>
<PAGE> 40
<TABLE>
<S> <C>
10.8 Form of Convertible Note between the Company and an officer (filed with the Securities and Exchange
Commission on March 23, 1995, as Exhibit 10.15 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994, and incorporated by reference herein).
10.9 Form of subscription agreement for the private offering of the Company's Common Stock in March and June
1994 (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.43 to the
Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.10 Employment agreement dated June 18, 1993 between the Company and Peter J. Foster (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.15 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.11 Amendment to employment agreement dated November 14, 1995 between the Company and Peter J. Foster
(filed with the Securities and Exchange Commission on December 8, 1995 as Exhibit 10.11 to the
Company's Registration Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.12 Employment agreement dated June 18, 1993 between the Company and Thomas B. Schalk (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.16 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.13* Amendment to employment agreement dated July 20, 1995 between the Company and Thomas B. Schalk (filed
with the Securities and Exchange Commission on November 15, 1995 as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB, and incorporated by reference herein).
10.14* License Agreement dated June 8, 1990 by and between the Company and Dialogic Corporation (filed with
the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.30 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.15* Amendment to License Agreement dated September 20, 1991 between the Company and Dialogic Corporation
(filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.31 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.16* Amendment No. 2 to the Licensee Agreement dated September 20, 1991 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.32 to
the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.17* Amendment No. 4 to the License Agreement dated October 1, 1995 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on December 8, 1995 as Exhibit 10.17 to
the Company's Registration Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.18* License Agreement dated October 7, 1994 between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on December 8, 1995 as Exhibit 10.18 to the Company's Registration
Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and incorporated by reference
herein).
10.19* Support Agreement dated September 20, 1991 between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit 10.33 to the Company's Registration
Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by reference
herein).
10.20* Addendum No. 1 to the Support Agreement dated January 31, 1993 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.34 to
the Company's Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.21* Addendum No. 3 to the Support Agreement dated October 1, 1995 between the Company and Dialogic
Corporation (filed with the Securities and Exchange Commission on December 8, 1995 as Exhibit 10.21 to
the Company's Registration Statement on Form SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.22* Omnibus Amendment Agreement dated March 14, 1994 between the Company and Dialogic Corporation (filed
with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.35 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.23* VR/xx-PEB letter agreement dated January 31, 1992 between the Company and Dialogic Corporation (filed
with the Securities and Exchange Commission on April 11, 1994 as Exhibit 10.36 to the Company's
Registration Statement on Form S-4 dated April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.25 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).
</TABLE>
<PAGE> 41
<TABLE>
<S> <C>
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 Employment and Consulting Agreement between Voice Processing Corporation and Merrill Solomon (filed
with the Securities and Exchange Commission on September 4, 1996 as Exhibit 10.28 to the Company's
Registration Statement on Form S-3 dated September 4, 1996 Registration No. 333-11367, and amendment
thereto filed on September 24, 1996, as Exhibit 10.28 to the Company's Amendment No. 1 to the
Registration Statement on Form S-3 dated September 24, 1996, Registration No. 333-11367, and
incorporated by reference herein).
10.29 Voice Processing Corporation 1989 Stock Option Plan (filed with the Securities and Exchange Commission
on January 6, 1997 as Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No.
333-19309, and incorporated by reference herein).
10.30 Voice Processing Corporation 1996 Stock Option Plan (filed with the Securities and Exchange Commission
on January 6, 1997 as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No.
333-19309, and incorporated by reference herein).
23.1 # Consent of BDO Seidman, LLP
23.2 # Consent of BDO Seidman, LLP
23.3 # Consent of Independent Certified Public Accountants
27 # Financial Data Schedule
99** 1997 Proxy Statement of the Company
</TABLE>
* Confidential treatment has been requested for a portion of this exhibit.
** To be filed with the Commission no later than April 29, 1998.
# Filed herewith
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Voice Control Systems, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-65842), pertaining to the Voice Control Systems, Inc.
1992 Stock Option Plan (formerly Scott Instruments Corporation 1992 Stock Option
Plan), of our report dated January 30, 1998, relating to the financial
statements of Voice Control Systems, Inc. appearing in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Dallas, Texas
March 23, 1998
25
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Voice Control Systems, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-19309), pertaining to the Voice Processing
Corporation 1989 Stock Plan and the Voice Processing Corporation 1996 Stock Plan
of our report dated January 30, 1998, relating to the financial statements of
Voice Control Systems, Inc. appearing in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Dallas, Texas
March 23, 1998
26
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Voice Control Systems, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference into the Registration
Statement on Form S-3 (File No. 333-28721) of our report dated January 30, 1998,
relating to the financial statements of Voice Control Systems, Inc. appearing in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Dallas, Texas
March 26, 1998
27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,667,979
<SECURITIES> 0
<RECEIVABLES> 4,069,692
<ALLOWANCES> 215,000
<INVENTORY> 457,852
<CURRENT-ASSETS> 17,354,770
<PP&E> 4,259,547
<DEPRECIATION> 2,734,643
<TOTAL-ASSETS> 19,033,515
<CURRENT-LIABILITIES> 1,705,913
<BONDS> 0
0
0
<COMMON> 113,375
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,033,515
<SALES> 14,429,867
<TOTAL-REVENUES> 14,429,867
<CGS> 3,221,629
<TOTAL-COSTS> 3,221,629
<OTHER-EXPENSES> 11,647,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (439,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (439,258)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
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