<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the fiscal year ended December 31, 1998.
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 $ 14,225,691.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 17, 1999, was $17,536,894.
The number of shares of the registrant's Common Stock outstanding as of March
17, 1999 was 13,719,864.
The following documents are incorporated by reference into this Annual Report
on Form 10-KSB: Portions of the registrant's Proxy Statement for its 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
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Index to Exhibits on Page 27
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM
Page
PART I
<S> <C> <C>
1 DESCRIPTION OF BUSINESS
General 3
Speech Recognition 4
Software Development/OEM 5
Strategy 6
Products and Services 7
Technology Development 14
Sales and Marketing 14
Manufacturing 16
Competition 16
Patents 16
Employees 16
Risk Factors 17
2 DESCRIPTION OF PROPERTIES 20
3 LEGAL PROCEEDINGS 20
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II
5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common Stock Prices 20
Dividend Policy 20
6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
1998 vs 1997 21
Liquidity and Capital Resources 23
7 FINANCIAL STATEMENTS 23
8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 23
PART III
9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 23
10 EXECUTIVE COMPENSATION 23
11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 23
12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24
13 EXHIBITS AND REPORTS ON FORM 8-K 24
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Statements and information presented within this Annual Report on form 10-KSB
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. Effective April 12, 1998, VCS acquired 100 percent of the stock of
PureSpeech, a privately-held Massachusetts corporation, in return for VCS stock
and the rights to acquire VCS stock. The merger was accounted for as a purchase
with VCS acquiring PureSpeech.
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 20 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), 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, Glenayre,
InterVoice, Brite Voice Systems, Periphonics, OKI Telecom, Hughes Network
Systems, 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) royalties and license
fees generated from licensing of speech technologies to system and product
developers, (ii) sales of speech recognition hardware and software products to
system developers and original equipment manufacturers, and (iii) providing
specialized engineering services, principally to assist in the integration of
its technology into its customers' products and systems.
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SPEECH RECOGNITION
Speech is the most natural and convenient means of human communication and,
therefore, a natural means for a person to communicate with a machine. Speech
recognition technology converts spoken inputs into digital electronic signals,
which are then translated by a computer processor into specific computer
instructions or data. For example, words such as "stop" and "go" may be
translated using speech recognition into corresponding digital computer
commands, and words such as "one" and "two" may be translated into numeric
data.
Speech recognition applications are usually divided into two categories by the
type of technology required: speaker-dependent and speaker-independent
applications. Speaker-dependent technology requires a user to train a device to
recognize a particular command. This training process has the disadvantage of
requiring some effort on the part of the user, but has the advantage of
permitting the user to choose his or her own words for any command. For
example, speaker-dependent technology is usually used in telephone
voice-dialing applications since it permits a user to create custom name lists.
Speaker-independent technology allows the recognizer to accept speech input
from virtually any user, regardless of gender, age or regional accent, without
user training. It has found acceptance in applications used by the public, such
as telephone-based automated banking or telephone order entry.
Speech recognition systems or recognizers can require continuous or discrete
articulation of words. Continuous recognition permits users to speak a string
of digits without pausing, which is useful when entering a telephone or account
number. Discrete recognition requires speech to be said with short pauses
between words. This technology is useful in applications requiring single word
inputs, such as replying "yes" or "no" to questions. Discrete inputs might
include words, letters or numbers. Continuous recognizers require more computer
resources than discrete recognizers and, therefore, are more expensive.
Speaker verification technology converts speech into digital electronic signals
that are then analyzed by a computer processor for patterns of identifying
characteristics. These patterns are compared to stored memories of speech
patterns to determine if the patterns match. Matching patterns are used to
verify a subject's claimed identity. For example, a speaker verification system
could verify that a person reciting an employee identification number is in
fact that employee.
While various types of speech technology have existed for many years, early
speech technology applications were generally inadequate due to their
relatively high costs and low performance. However, as a result of the
decreased cost of computer processing hardware and the development of more
reliable and efficient technology, as well as increased public familiarity with
computer automated devices, speech recognition is now an accepted feature of
many telecommunications applications. 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 Pure ReQuest! product line 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, consumer
electronics, and speech-enabled auto attendant markets.
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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.
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
system nations
Artisoft Interactive voice response Distributors to small and medium
businesses
AVT Corporation Unified messaging on CTI platforms Small and medium businesses
Aspect Telecommunications ACD interactive voice response platform Large business (banks, financial,
travel) for call centers
Comverse Technology Voice mail and voice messaging Medium and large businesses
Brite Voice Systems, Inc. Wireless network-based voice dialing, Telephone companies and cellular
telephone network voice processing and PCS 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 components for voice Systems providers in voice mail,
processing systems in voice messaging, interactive voice
telecommunications and computer response and telephone network
telephony intelligent peripherals:
Digital Equipment Corp.
Offnet
Glenayre Messaging platform for paging, one Wireline and wireless telecom
number, and voice mail providers
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: 1998
General Motors Cadillac
IBM Corporation General interactive voice response Financial institutions, information
systems service providers, call center
operators, airlines and the travel
industry: CorePoint
Intellivoice Communications Wireless network-based voice dialing, Telephone companies and cellular
telephone network voice processing and PCS 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
computer telephone, voice processing system providers for wireline and
and telecommunications wireless communications
</TABLE>
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<TABLE>
<CAPTION>
Systems Integrators/OEMs Typical Applications Illustrative End Users/Products
- ------------------------------ ----------------------------------- ------------------------------------
<S> <C> <C>
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
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
telephone network-based voice operators, and wireless service
processing systems and call center providers:
automation "Atlas" Personal Telecommunications
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 1999 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, 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
During 1998, VCS established an independent subsidiary to develop and market
Pure ReQuest!, a speech recognition-enabled auto attendant system. Pure ReQuest
is marketed directly and indirectly, through a direct sales force and 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.
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PRODUCTS AND SERVICES
Core Technology Products
All VCS speech technology products are based upon VCS's proprietary speech
technology developed over the last 20 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 "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 Brazilian Portuguese
Greek Turkish British English
Hebrew U.S. English German
Hindi Vietnamese Swedish
Hong Kong Cantonese U.S. English
</TABLE>
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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--continuous
Phonetic "front-end" Phonetic dictionary Fixed point support
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 inputu Custom vocabulary DOS-based system 18 languages--CT
SAPI interfaceu development service OS/2-based system alphabetu
HMM decision strategyu Telephone or Supported processors: 18 languages--
OLE format softwareu desktop speech input Intel continuousu
Accurate in high noise Alphabet recognition OKI PC control library
"Close talk" or "far NEC
talk" microphone
input
- ----------------------------------------------------------------------------------------------------------------------------
Consumer/ SI, SD, SA, SV Alphabet recognition DSP embedded recognizer 51 languages--CT
Automotive Discrete speech input Voice activation DSP library recognizer discrete digitsu
"Close talk" or "far 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
processor required Intel library
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
DSP-based 1000-word recognizer using phonetic dictionary technology is currently
available from the Company in U.S. English, UK English and German. ReCite!,
VCS's host-hybrid phonetic technology is capable of recognizing up to 20,000
words and is currently available commercially in U.S. English and in beta form
for UK English and Spanish with additional languages planned for 1999.
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.
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 entered a strategic alliance with
IBM to bring IBM's Via Voice software into applications in telecommunications.
VCS is the primary path to market for IBM's large vocabulary, natural language
speech recognition software in telecommunications applications and is marketed
under the Company's SpeechWave product family as EnterPrise!. SpeechWave
EnterPrise! includes trainable language models, a second-generation approach to
natural language understanding that has never before been available for
commercial systems. Unlike first generation systems based on traditional
grammars that require extensive hand-crafting by highly skilled personnel,
SpeechWave EnterPrise! can actually learn to understand callers' responses
based on example sentences provided by system developers, delivering superior
results with far less development effort.
Telecommunications--Technology 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
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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.
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 1998, 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 deployment of its products in
the DM3 product line until late in 1999.
Telecommunications--Whole Product Solutions
During 1998, the Company established an independent subsidiary to develop and
market Pure ReQuest! a speech recognition- enabled automated attendant. Pure
ReQuest! answers incoming calls and routes 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. Pure ReQuest! is marketed through direct sales
efforts and through indirect distribution. Pure ReQuest! systems were installed
at over 100 companies in 1998 including Pepperdine University, Kent State,
KLA-Tencor, Universal Studios, Royal Sonesta Hotel, Viacom, ADP, and Dialogic.
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.
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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 1999 Cadillac and Mercedes-Benz line of automobiles are sold with
these telephones as either standard or optional accessories. VCS also provides
recognizers that enable voice control of non-critical automobile functions,
such as seats, windshield wipers, windows, radios and mirrors. Using the
Company's voice activation vocabulary provides for total "hands-free" operation
of the target accessory thus increasing safety and convenience. To date, these
recognizers have been implemented only in concept cars.
Historically, manufacturers have been required to use a chip set consisting of
several single purpose chips in order to implement all of the necessary
functions for speech recognition. In 1994, OKI Semiconductor introduced a new
single chip speaker-independent speech recognition microcontroller, the MSM6679
Voice Recognition Processor ("VRP"), which incorporates VCS technology. This
offers an integrated "one-chip" implementation for OEMs desiring to add speech
recognition to their products. With the OKI Semiconductor VRP, the necessary
functions for speech recognition are combined on a single chip, which should
reduce cost. OKI Semiconductor is using its international distribution
capabilities to market the VRP to systems developers and OEMs for development
of applications using the VRP in the automotive, personal computer,
telecommunications and consumer electronics industries. OKI Semiconductor
introduced a cost-reduced version of the VRP late in 1998.
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<PAGE> 15
VCS PRODUCT SUMMARY
The following table sets forth certain summary information for certain of the
Company's products.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<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 alphabetu
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--cellular
Shared resource Phonetic dictionary 16 languages--
switching Voice activation continuous
Cut-thru
Alphabet recognition
- -----------------------------------------------------------------------------------------------------------------------------------
ReCite! Speaker-independent Word spotting NT 3 languages
Discrete input Natural language Intel or equivalent PC
Host or host/hybrid large Continuous Cut-thru
vocabulary engine Phonetic
Up to 20,000 words
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
FreedomRecognition(D) Speaker-independent Speaker-dependent(u) NT 51 languages--
Discrete and continuous Speaker-adaptive(u) Intel or equivalent discrete digits(u)
input
PC host processor-based No additional PC 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(u) 18 languages--
2 recognizers/PCB Cut-thru continuous
phonetic Alphabet recognition
- -----------------------------------------------------------------------------------------------------------------------------------
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 1998, the Company spent $5,302,000 (37% of revenues) on Company
sponsored research and development. The Company spent $5,253,000 (36% of
revenues) on Company sponsored research and development activities during 1997.
Currently, the Company employs 17 full-time people in research and development
and 27 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. In addition, during 1998 the Company paid
approximately $11,298,000 for the technology in connection with PureSpeech
acquisition which was expensed during 1998 as in-process research and
development.
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 inabilities to develop new technology
features, enhancements or products could have a material adverse effect on the
Company's business, operating results and financial condition.
SALES AND MARKETING
The Company markets its core speech recognition technologies to systems
integrators and OEMs for incorporation into their products as well as to the
buyers of their products. VCS sells to systems integrators and OEMs through its
own sales force. When marketing to the buyers of their products, the Company
frequently coordinates its selling efforts with the sales force of a systems
integrator or OEM. The Company markets its speech-recognition enabled auto
attendant through direct sales efforts and through indirect distribution.
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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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 1998 were Dialogic (21%) and OKI Telecom
(17%). Sales of hardware to OKI Telecom 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. The Company historically sold hardware products
incorporating licensed technologies to Dialogic. Dialogic's Antares products
incorporating licensed technologies are manufactured by Dialogic and the
Company receives royalties for VCS speech recognition technologies incorporated
and sold by Dialogic. While gross sales to Dialogic decreased with the
transition from hardware sales to royalty revenue, cost of sales also decreased
as the hardware cost component was 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>
<CAPTION>
Active Voice Global Communications, Ltd. Siemens, AG
- ------------ --------------------------- -----------
<S> <C> <C>
AG Communication Systems Group 2000 Stylus Innovation, Inc.
Apex Voice Communication, Inc. Hammer Technologies Syntellect, Inc.
Applied Voice Technology Hewlett Packard Company TALX Corporation
Artisoft IBM Corporation Telecorp Systems, Inc.
Aspect Telecommunications Intellivoice Unisys
Brite Voice Systems, Inc. InterVoice, Inc. Vicorp Interactive Systems, Inc.
Centigram MicroLog Corporation VoiceQue
Compaq Natural MicroSystems VoiceTech Communications
Comverse Technology, Inc. Nortel Volt Delta
Dialogic Corporation Octel Communications West Interactive Corporation
Deutsche Telekom AG Periphonics Corporation
Enhanced Systems Precision Systems, Inc.
Glenayre Priority Call Management
</TABLE>
AUTOMOTIVE AND CONSUMER ELECTRONICS
NEC (U.K.) OKI Telecom Hughes Network Systems
OKI Semiconductor
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<PAGE> 18
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
Hadco.
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 SpeechWorks, 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, Speech
Systems, Inc., and Voxware, Inc. In the speech-enabled auto-attendant market,
the Company's competitors include Carnegie International, Locus Speech, Lucent
Technologies, Nortel, Nuance Communications, Parlance Corporation, Phonetic
Systems, Ltd., and Registry Magic. 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 sixteen 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, 1998, the Company had 94 employees, of which 17 are engaged
in research and development, 27 in product development, application engineering
and customer support, 30 in sales and marketing and 20 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.
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RISK FACTORS
In addition to the 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 forth in the following risk factors and
elsewhere in this report.
HISTORY OF LOSSES
The Company has recorded cumulative losses of approximately $36.2 million
through December 31, 1998. These losses reflect the results of operations of
VCS Industries, Inc. ("Industries") prior to its merger (the "Scott 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.
DIALOGIC RELATIONSHIP--MAJOR CUSTOMER; SIGNIFICANT STOCKHOLDER
The Company is dependent to a significant extent on sales through OEMs.
Dialogic Corporation ("Dialogic"), a leading supplier of components for
building, assembling and programming voice processing systems, accounted for
21% and 25% of the Company's revenue in 1998 and 1997, respectively.
Through a wholly owned subsidiary, Dialogic beneficially owns
approximately 10% of the Company Common Stock, as of December 31, 1998. 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
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<PAGE> 20
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, may have a substantial impact upon the Company's financial
results. No assurances can be given that the Company's OEM and systems
integrator customers will continue to use the Company as a supplier of speech
recognition technology or that customers of the Company will not experience
financial or other difficulties that will adversely affect their revenues and,
in turn, the results of operations and financial condition of the Company.
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 SpeechWorks, 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, Speech Systems, Inc., and Voxware, Inc. In the speech-enabled
auto-attendant market, the Company's competitors include Carnegie
International, Locus Speech, Lucent Technologies, Nortel, Nuance
Communications, Parlance Corporation, Phonetic Systems, Ltd., and Registry
Magic. Many of the Company's competitors are substantially larger than the
Company, are well established, and have greater financial, technical,
marketing, service and operating resources than the Company. The Company's
competitors can be expected to continue to make substantial commitments to
research and product development.
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. 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
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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.
21
<PAGE> 22
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 10,553 square feet of office space at 125
Cambridge Park Drive, Cambridge, Massachusetts pursuant to a lease that expires
in December, 2004. 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 1998.
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 Nasdaq National Market, as
applicable, for the periods indicated.
<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>
<TABLE>
<CAPTION>
FISCAL 1998: High Low
------------ ---- ---
<S> <C> <C>
1st Quarter $7.50 $2.25
2nd Quarter 7.53 3.09
3rd Quarter 3.31 1.56
4th Quarter 3.00 1.50
</TABLE>
As of March 17, 1999, there were 1,838 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 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
22
<PAGE> 23
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.
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
Operation 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 71% 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 have shifted from predominantly hardware to
predominantly software, as the market demand for Dialogic SCSA products
increased. 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".
During 1998, the Company acquired PureSpeech with two major products under
development, PureReQuest!, a speech-driven auto-attendant, and ReCite!, a large
vocabulary speech recognition engine. The PureReQuest! product is a
speech-driven automated attendant designed to handle up to 10,000 names.
ReCite! is a natural language speech engine designed to recognize up to 10,000
words or names. Both products required research and development resources for
market acceptance. During 1998, the Company completed a majority of the
research and development required for the PureReQuest! product to meet end user
acceptance. The PureReQuest! product began generating revenue in late 1998 and
increased shipments are expected in 1999. During 1998, the Company's scientists
identified specific areas of the ReCite! speech recognition engine which
require additional research and development to meet commercial acceptance.
Additional research and development will be required during 1999 to meet the
rapidly changing competitive landscape. Measurable sales of the ReCite! speech
recognition engine are expected to begin in the fourth quarter of 1999.
RESULTS OF OPERATIONS
Comparison of Results for Fiscal Years Ended December 31, 1998 and 1997
Sales decreased 1.4% from $14,430,000 during 1997 to $14,226,000 during 1998.
Two customers Dialogic and OKI Telecom accounted for 21% and 17%, respectively,
of total sales in 1998. Three customers, Dialogic, OKI Telecom and Glenayre
accounted for 29%, 14% and 10% of total sales for 1997. Hardware sales
decreased 21% from 1997 and were 48% of revenues in 1998. Royalty, development
and license fees, which increased 40% over 1997, were 49% of total sales for
1998. 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 increased from
78% in 1997 to 81% in 1998 as a result of the shift from hardware sales to
software sales.
Research and development expenses increased 1% from $5,253,000 in 1997 to
$5,302,000 in 1998.
Selling, general and administrative expenses increased 62% from $7,144,000 in
1997 to $11,590,000 in 1998. This increase is due to the increased cost of
expansion of the sales force for the auto attendant business.
In-process R & D costs of $11,298,000 related to the PureSpeech acquisition,
were incurred in 1998. The portion of the purchase price allocated to in-process
R&D was calculated using the income approach. Cost, as applied to this type of
intangible asset, would focus on the development costs associated with
individual R&D projects. Costs in this case normally indicate only a lower
limit to value, with the income approach being more predictive of value. We
were not aware of any active auction market for this type of asset, and
therefore this approach was not deemed feasible and excluded from our analysis.
Company data related to product line sales and margins, estimates of product
market size, and necessary expenditures to complete the designated R&D
projects, was supplemented by third-party forecasts of market size and expected
development horizons, and a review of the financial and operating data of
publicly traded companies for purposes of corroborating the estimated revenues,
margins, growth rates, and product life cycles for the various R&D projects of
the Company. Projected net income revenues net of provisions for cost of
goods, operating expenses, returns on requisite assets, and income taxes were
discounted to present value.
By including returns on requisite assets in the valuation model, an allowance
was made for fair returns on the assets other than the technology that are
required to realize the related revenues. These other assets include working
capital and other tangible assets.
From projected operating income, an amount was subtracted to reflect a return
on underlying assets whose employment predicated the operation of the business
and the generation of revenues for the R&D technology. These required assets
represent those assets needed before the business can begin operation and
include working capital and tangible assets. The return on requisite assets is
expressed as a percentage of projected revenue. Returns on each of the required
assets were estimated based on the current cost of funds, the type of asset,
risk associated with investment in the selected asset, and its potential
service life. Returns on requisite assets for the Company were estimated at
1.3% of revenues.
After deducting the various expenses referenced above, the net amounts were
brought to present value at a rate of 25%, commensurate with risk. Consideration
was given to the fact that the R&D technology is an intangible asset that forms
the core of this business. The risks associated with incomplete technology are
considered greater than those of complete technology due to the uncertainty of
the projections and the rapidly changing competitive landscape. Complete
technology represents products that are in the marketplace or that will be
released shortly, and hence, are considered to be of less risk than incomplete
technology. As of December 31, 1998, there were no material variations from
Company's original assumptions.
23
<PAGE> 24
All of the outstanding convertible debt of the Company was converted to equity
on January 1, 1997.
The combined net operating loss (NOL) carryforwards of the Company expire from
1999 to 2013 and total approximately $38,845,000 as of December 31, 1998. The
Company has provided an allowance against its entire deferred tax asset
relating primarily to NOL carryforwards of approximately $13,227,000 since
management can not determine that it is more likely than not that the deferred
tax asset will be realized. Approximately $29,800 in NOL carryforwards expired
for the year ended December 31, 1998. 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 for a maximum
of fifteen years.
Year 2000 Issues
The Company's internal business information systems are primarily comprised of
commercial application software products offered for license by recognized
providers. Because these provider's products are widely distributed,
commercially developed applications, the Company anticipates these applications
have been or will be brought into compliance by the manufacturers. 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.
The Company does not anticipate any Year 2000 compliance issues to arise
related to its primary internal business information systems. The Company is
not aware of any further material operational issues or costs associated with
preparing internal systems for the Year 2000. However, the Company utilizes
other third party network equipment, telecommunications products, and other
third party software products that may or not be Year 2000 compliant. Although
the Company is currently taking steps to address the impact, if any of Year
2000 issue surrounding such third party products, failure of any critical
technology to operate properly in the Year 2000 may have an adverse impact on
business operations of financial results.
The Company can not anticipate the impact of Year 2000 compliance on its
clients at this time. The Company is unaware of any client who may be impacted
by the Year 2000 issue. A failure of a client to appropriately handle issues
related to the Year 2000 might have an adverse impact on the financial results
of the Company.
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 modification, and/or implementation modifications, will by
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.
Impact of Recently Issued Accounting Standards
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for the Company's financial statements for the year
ended December 31, 2000 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
In May 1998, the Financial Accounting Standards Board adopted Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities". This SOP
established standards for reporting start-up activities of an enterprise and
requires that the start-up activities of an enterprise, including organizational
costs, be expensed as incurred. SOP 98-5 is effective for fiscal years beginning
after December 15, 1998, and the Company does not expect this statement to have
an effect on its financial statements.
24
<PAGE> 25
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, 1998 was $7,157,000. 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.
At December 31, 1998 the Company had $5,303,000 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 76 days at
December 31, 1998.
The Company's net inventory as of December 31, 1998 was $342,000. Reserves of
$149,000 have been established for obsolescence as of December 31, 1998.
The Company's debt at December 31, 1996 consisted of a convertible promissory
note due to Dialogic on January 1, 1997. 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 years ended December
31, 1998 and 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 1999 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 1999 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 1999 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 1999 Annual Meeting of
Stockholders is incorporated herein by reference.
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 28 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.
25
<PAGE> 26
VOICE CONTROL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
ITEM 13 (a)
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet as of December 31, 1998 F-3
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 and 1997. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997. F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 27
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Voice Control Systems, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Voice
Control Systems, Inc. as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Voice
Control Systems, Inc. as of December 31, 1998, 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
Dallas, Texas
January 28, 1999
F-2
<PAGE> 28
VOICE CONTROL SYSTEMS, INC.
Consolidated Balance Sheet
December 31, 1998
===============================================================================
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,303,069
Accounts receivable (net of allowance
for doubtful accounts of $365,000) (Note 13) 2,956,714
Inventory (Note 4) 341,708
Prepaid expenses 274,882
------------
TOTAL CURRENT ASSETS 8,876,373
NET PROPERTY AND EQUIPMENT (NOTE 5) 1,602,313
OTHER ASSETS 1,348,892
------------
$ 11,827,578
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 7) $ 1,314,009
Deferred revenue (Note 6) 405,523
------------
TOTAL CURRENT LIABILITIES 1,719,532
LONG TERM:
Note Payable 18,283
TOTAL LIABILITIES 1,737,815
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY (NOTES 2, 3, 8 AND 13):
Preferred stock; $1.00 par value; 300,000 shares authorized; --
none issued
Common stock, $.01 par value: 20,000,000 shares
authorized; shares 13,871,131 issued and 13,660,731 outstanding 138,711
Additional paid-in capital 46,797,489
Treasury stock (563,256)
Receivable from stockholders (70,010)
Accumulated Deficit (36,213,171)
------------
TOTAL STOCKHOLDERS' EQUITY 10,089,763
------------
$ 11,827,578
============
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 29
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
===============================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C> <C>
SALES (NOTE 13) $ 14,225,691 $ 14,429,867
COST OF SALES 2,703,682 3,221,629
------------ ------------
GROSS PROFIT 11,522,009 11,208,238
COSTS AND EXPENSES:
OPERATING EXPENSES:
Research and development 5,302,006 5,252,801
Selling, general and administrative (Note 11) 11,589,020 7,143,619
In-process R&D costs (Note 2) 11,298,128 --
------------ ------------
TOTAL OPERATING EXPENSES 28,189,154 12,396,420
OTHER EXPENSES (INCOME):
Interest income (450,354) (748,924)
------------ ------------
TOTAL OTHER EXPENSES (INCOME) (450,354) (748,924)
TOTAL COSTS AND EXPENSES 27,738,800 11,647,496
------------ ------------
NET LOSS $(16,216,791) $ (439,258)
============ ============
NET LOSS PER SHARE: BASIC AND DILUTED $ (1.25) $ (0.04)
============ ============
WEIGHTED AVERAGE OUTSTANDING SHARES: BASIC
AND DILUTED 12,942,364 11,176,173
============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 30
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
===============================================================================
<TABLE>
<CAPTION>
REC
COMMON STOCK PAID-IN TREASURY FROM RETAINED
STOCK DOLLARS CAPITAL STOCK S/H DEFICIT TOTAL
------------ ---------- ------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 9,715,065 $ 97,151 $ 35,781,937 $ 0 $ (118,755) $(19,557,122) $ 16,203,211
Accrued interest on Convertible
Debt converted to shares of
stock 36,220 362 32,917 33,279
Principal on Convertible Debt
Converted to shares of stock 1,264,474 12,645 1,149,154 1,161,799
Excercised options and warrants 321,707 3,217 391,922 395,139
Treasury stock purchases (25,000
shares) (75,313) (75,313)
Repayment of promissory note 48,745 48,745
Net Loss -- -- -- -- -- (439,258) (439,258)
------------ ---------- ------------ ------------ ---------- ------------ -------------
BALANCE, December 31, 1997 11,337,466 113,375 37,355,930 (75,313) (70,010) (19,996,380) 17,327,602
Exercised options and warrants 854,690 8,547 1,105,888 1,114,435
Treasury stock purchases (185,400
shares) (487,943) (487,943)
Employee Stock Purchase Plan 39,542 395 117,271 -- -- -- 117,666
Pure Speech acquisition 1,639,433 16,394 8,218,400 8,234,794
Net Loss -- -- -- -- -- (16,216,791) (16,216,791)
------------ ---------- ------------ ------------ ---------- ------------ -------------
BALANCE, December 31, 1998 13,871,131 $ 138,711 $ 46,797,489 $ (563,256) $ (70,010) $(36,213,171) $ 10,089,763
============ ========== ============ ============ ========== ============ =============
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 31
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
===============================================================================
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,216,791) $ (439,258)
Adjustments to reconcile net loss to
net cash used in operating activities:
In-process research & development (Note 2) 11,298,128 --
Depreciation and amortization 945,351 514,619
Provision for bad debts 100,000 135,500
Changes in operating assets and liabilities:
Accounts receivable 1,135,519 (1,697,429)
Other assets (77,697) (101,988)
Prepaid expenses (103,560) (61,657)
Inventory 116,144 (5,174)
Accounts payable and accrued expenses (215,266) (22,630)
Deferred revenue (897,054) (677,639)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (3,915,226) (2,355,656)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (571,795) (571,760)
Acquisition of PureSpeech (2,140,330) --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,712,125) (571,760)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from note payable 18,283 --
Proceeds from repayment of stockholder loan -- 48,745
Retirement of note payable (1,500,000) --
Purchase of treasury stock (370,277) (75,313)
Proceeds from exercise of stock options and warrants 1,114,435 395,139
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (737,559) 368,571
------------ ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (7,364,910) (2,558,845)
CASH AND CASH EQUIVALENTS at beginning of year 12,667,979 15,226,824
------------ ------------
CASH AND CASH EQUIVALENTS at end of year $ 5,303,069 $ 12,667,979
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION Non Cash Investing and Financing
Activities:
Assumption of PureSpeech liabilities (Note 2) $ 2,569,111
Issuance of stock in PureSpeech acquisition (Note 2) $ 8,362,240
Conversion of debt and accrued interest to
1,300,694 shares of stock--
all issued to an affiliate (Note 3 ) -- $ 1,195,078
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 32
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Basis of 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
has offices in Dallas, Texas and Cambridge Mass. and has customers worldwide.
The accompanying consolidated financial statements include the accounts of VCS
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
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.
On April 14, 1998 Voice Control Systems, Inc acquired 100% of the common
stock, preferred stock, and common stock equivalents of PureSpeech, Inc. in
exchange for shares of common stock and rights to purchase common stock. This
includes the conversion of PureSpeech warrants to VCS warrants. The transaction
was accounted for using the purchase method of accounting. (See Note 2)
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
amounts.
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. The carry
value of property and equipment is evaluated periodically in relation to the
operating performance and future undiscounted net cash flows of the related
business.
Long-term Assets
The Company applies SFAS 121, "Accounting for Impairment of Long-Lived
Assets". Under SFAS 121, long lived assets and certain intangibles are reported
at the lower of the carrying amount or their estimated recoverable amounts.
F-7
<PAGE> 33
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
Goodwill
The Company amortizes cost in excess of net assets acquired on
straight-line basis over the estimated benefit period, which has been determined
to be five years. The carrying value of the goodwill is evaluated periodically
in relation to the operating performance and future undiscounted net cash flows
of the related business. Accumulated amortization totaled approximately $209,000
as of December 31, 1998. Included in other assets are goodwill, net of its
related accumulated amortization totaling approximately $1,120,000 and $209,000
respectively as of December 31, 1998.
Management Estimates and Assumptions
The presentation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reported
period. Actual results could differ from those estimates.
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. 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.
Loss 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 1998 and
1997. The current options and warrants outstanding are not included in the
calculation as their effect would be anti-dilutive and accordingly, Basic and
Diluted earnings per share are the same.
Cash Flows
For purposes of the statement of cash flows, the Company considers highly
liquid financial instruments with original maturities of three months or less to
be cash equivalents. No income taxes and minimal interest was paid during the
years ended December 31, 1998 and 1997.
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 13). 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.
F-8
<PAGE> 34
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
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.
Recently Issued Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for the Company's
financial statements for the year ended December 31, 2000 and the adoption of
this standard is not expected to have a material effect on the Company's
financial statements.
In May 1998, the American Institute of Certified Public Accountants adopted
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities". This SOP established standards for reporting start-up activities of
an enterprise and requires that the start-up activities of an enterprise and
requires that the start-up activities, including organizational costs, be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, and the Company does not expect this statement to have an
effect on its financial statements.
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.
On April 14, 1998 Voice Control Systems, Inc acquired 100% of the common
and preferred stock of PureSpeech, Inc. in exchange for 1,639,433 shares of
common stock, the assumption of liabilities in the amount of $2,569,000, and
cash of $2,140,000, including transaction costs. In addition, the PureSpeech
options and warrants were exchanged for options and warrants to purchase 301,953
and 317,608, respectively, shares of common stock of the Company. The
transaction was accounted for using the purchase method of accounting and all
operations of PureSpeech are included in operations of the Company subsequent to
April 14, 1998. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Goodwill $ 1,329,000
Net value of remaining assets 403,000
Acquired in process R&D 11,298,000
------------
$ 13,030,000
</TABLE>
The purchase price was determined by the market price of the Company stock
to be issued, less an applicable discount rate plus the options and warrants
which were valued using a a Black-Scholes model. The fair value of the common
stock was approximately $8,321,000. The acquired research and development was
charged to expense as in-process research and development.
During 1998, the Company acquired PureSpeech with two major products under
development, PureReQuest!, a speech-driven auto-attendant, and ReCite!, a large
vocabulary speech recognition engine. The PureReQuest! product is a
speech-driven automated attendant designed to handle up to 10,000 names.
ReCite! is a natural language speech engine designed to recognize up to 10,000
words or names. Both products required research and development resources for
market acceptance. During 1998, the Company completed a majority of the
research and development required for the PureReQuest! product to meet end user
acceptance. The PureReQuest! product began generating revenue in late 1998 and
increased shipments are expected in 1999. During 1998, the Company's scientists
identified specific areas of the ReCite! speech recognition engine which
require additional research and development to meet commercial acceptance.
Additional research and development will be required during 1999 to meet the
rapidly changing competitive landscape. Measurable sales of the ReCite! speech
recognition engine are expected to begin the fourth quarter of 1999.
F-9
<PAGE> 35
The following unaudited pro forma summary presents the effect on the statements
of loss for the years ended 1997 and 1998 as if the purchase had occurred at the
beginning of 1997, after giving effect to certain adjustments including
amortization and acquired in-process research and development.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales $ 14,261,000 $ 15,825,000
Net loss $ (6,351,000) $ (4,624,000)
Net loss per share; Basic and Diluted $ (.47) $ (.40)
Weighted average shares outstanding;
Basic and Diluted: 13,404,998 $ 12,815,606
</TABLE>
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisition
been made as of these dates or of results which may occur in the future.
F-10
<PAGE> 36
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
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.
NOTE 4--INVENTORY
Inventory consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Finished goods ......................... $ 490,603
Reserve for excess and obsolescence .... (148,895)
------------
$ 341,708
============
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Research and development equipment ..... $ 4,607,901
Furniture and fixtures ................. 823,632
------------
5,431,531
Accumulated depreciation ............... (3,829,218)
------------
$ 1,602,313
============
</TABLE>
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 royalties against future product sales.
During the years ended December 31,1998 and 1997, $200,000 and $500,000
respectively, has been recognized as revenue. In addition $300,000 remains as
deferred revenue as of December 31, 1998 in connection with this transaction.
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31, 1998:
<TABLE>
<S> <C>
Trade accounts payable ................. $ 237,160
Accrued payroll ........................ 843,644
Other accrued expenses ................. 233,205
------------
$ 1,314,009
============
</TABLE>
NOTE 8--COMMON STOCK
STOCK OPTIONS
At December 31, 1998 the Company has five 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, when 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.
F-11
<PAGE> 37
Under its 1992 Plan, the Company may grant options to its employees for
up to 1,700,000 shares of common stock. Under its 1997 Non-Qualified Stock
Option Plan, the Company may grant options to its employees for up to 373,000
shares of common stock. As a result of mergers and acquisitions, the Company
assumed three option plans as follows:
<TABLE>
<S> <C> <C> <C>
Date Plan Assumed Options Assumed Exercise Prices
--------------- ------------ --------------- ---------------
August 11, 1994 VCS Industries 1,166,490 $1.15 - $1.53
November 4, 1996 VPC 1,318,382 $ .57 - $3.97
April 14, 1998 PureSpeech 301,953 $ .21 - $1.48
</TABLE>
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, 1998 and
1997, 1,647,394 and 649,484 shares, respectively, were granted under the plans.
All figures include, on a pro forma basis, options issued by VPC and PureSpeech
using the applicable exchange rate, due to the merger with the Company.
F-12
<PAGE> 38
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
STOCK OPTIONS (CONTINUED)
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
Shares Exercise Price
------------ --------------
<S> <C> <C>
January 1, 1997 2,799,958 $ 2.82
Options granted 649,484 3.90
Options forfeited (530,648) 6.45
Options exercised (317,353) 1.24
------------ ------------
December 31, 1997 2,601,441 2.54
Options granted 1,647,394 3.21
Options forfeited (1,032,115) 4.14
Options exercised (844,409) 1.29
------------ ------------
Outstanding at December 31, 1998 2,372,311 $ 2.90
============ ============
Options exercisable at December 31, 1998 1,012,314 $ 2.57
Options exercisable at December 31, 1997 1,434,322 $ 1.85
Weighted-average fair value of options granted
during 1998 $ 2.60
Weighted-average fair value of options granted
during 1997 $ 2.66
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted -Average
Exercise Prices 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- --------------- -------- ---------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ .21 to $2.99 1,169,273 3.2 years $1.76 679,749 $1.53
$3.00 to $6.00 1,203,038 7.7 4.01 332,565 4.70
$ .21 to $6.00 2,372,311 6.2 $2.90 1,012,314 $2.57
========= ===== ========= =====
</TABLE>
F-13
<PAGE> 39
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
================================================================================
STOCK WARRANTS
In 1998 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 20,000 shares of the Company's common stock. An additional
250,000 five-year warrants were issued to non-employee directors, and five-year
warrants to purchase 75,000 shares of the Company's common stock were issued to
a director for services. Total stock warrants issued in 1998 and 1997 were
345,000 and 30,000. As a result of the PureSpeech acquisition, the Company
exchanged PureSpeech warrants for 317,608 warrants to purchase the Company's
common stock, with exercise prices of $.04 to $.22. At December 31, 1998
warrants to purchase 626,250 shares of the Company's common stock were
outstanding at prices ranging from $.04 to $6.250 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.
F-14
<PAGE> 40
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
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. In total the
Company has purchased 210,400 shares since the announcement of the buyback.
Pro forma information is required by SFAS No. 123 to reflect the estimated
effect on net loss and net 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 for the
year ended December 31, 1998 and 1997, respectively: risk-free interest rate of
5.4% for both years; dividend yield of 0%; volatility factor of 85.81% and
76.5%; weighted-average expected life of 5.5 years for both years. The following
shows the effects on net loss, if SFAS No. 123 had been adopted:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Net Loss (As Reported) $ (16,216,791) $ (439,258)
Pro forma Loss (Under SFAS No. 123) $ (17,771,856) $ (1,230,577)
Losses Per Share (As Reported) $ (1.25) $ (0.04)
Pro forma Loss Per Share (Under SFAS No. 123) $ (1.37) $ (0.11)
</TABLE>
NOTE 9--SEGMENT REPORTING:
For the year ended December 31, 1998, the Company operated in two industry
segments: speech recognition engines and services (Engines) and speech
recognition enabled auto attendants (Systems). Segment information consists of
the following:
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 1998
<S> <C> <C>
SALES:
Engines $13,066,841 $14,429,867
Systems $ 1,158,850 --
----------- -----------
$14,225,691 $14,429,867
EXPENSES:
Engines $13,438,011 $12,396,420
Systems $ 3,453,180 --
----------- -----------
$16,891,026 $12,396,420
INVENTORY:
Engines $ 233,597
Systems $ 108,111
-----------
341,708
</TABLE>
F-15
<PAGE> 41
VOICE CONTROL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 10--INCOME TAXES
Significant components of the Company's net deferred tax assets for
federal and state income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Net operating losses $ 13,227,000 $ 7,717,000
Valuation allowance (13,227,000) (7,717,000)
------------ -----------
$ -- $ --
============ ===========
</TABLE>
The net operating loss (NOL) carryforwards of the Company expire from 1999
to 2013 and total approximately $38,845,000 as of December 31, 1998. The
Company has provided an allowance against its entire deferred tax asset
relating primarily to NOL carryforwards of approximately $13,227,000 since
management can not determine that it is more likely than not that the deferred
tax asset will be realized. Approximately $29,800 in NOL carryforwards expired
for the year ended December 31, 1998. 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 11--RELATED PARTY
For the year ended December 31, 1998, the Company paid a director $225,000
for consulting services and expenses, a portion of which was paid in connection
with the acquisition of PureSpeech. For the year ended December 31, 1997, the
Company paid $60,000 for financial consulting to Princeton Venture Research, a
company owned by a director.
NOTE 12--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, 1998 are $211,066 annually through 2000 for
Dallas office space and a separate lease of $342,972 annually through 2004 for
Cambridge office space. For the years ended December 31, 1998 and December 31,
1997 rent expense is $933,595 and $723,500 respectively. The Company accrued
$200,000 in 1998 for a potential claim from an employee.
NOTE 13--MAJOR CUSTOMERS
In 1998, two customers accounted for 21% and 17% of total sales revenue.
Three customers accounted for 29%, 14% and 10 % of total sales revenue for the
year ended December 31, 1997. The Company's largest customer was also the
holder of the convertible debt and option agreement described in Note 3.
Accounts receivable from the largest customers were 18% of the total receivable
balance at December 31, 1998.
F-16
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Voice Control Systems, Inc.
Date: March 30, 1999
By: /s/ Ronald Larkin
-------------------------------
Ronald Larkin,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Date
- ---------- ----
<S> <C>
/s/ Neal J. Robinson March 30, 1999
- -----------------------------------------------
Neal J. Robinson
Chairman and Director
/s/ Ron Larkin March 30, 1999
- -----------------------------------------------
Ron Larkin
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Peter J. Foster March 30, 1999
- -----------------------------------------------
Peter J. Foster
Director
/s/ Kim S. Terry March 30, 1999
- ------------------------------------------------
Kim S. Terry
Vice President Finance and Corporate Secretary
(Principal Financial and Accounting Officer)
/s/ Kenneth Burkhardt March 30, 1999
- ------------------------------------------------
Kenneth Burkhardt
Director
/s/ Melvyn J. Goodman March 30, 1999
- ------------------------------------------------
Melvyn J. Goodman
Director
/s/ John Lucas-Tooth March 30, 1999
- ------------------------------------------------
John Lucas-Tooth
Director
/s/ John Torkelsen March 30, 1999
- ------------------------------------------------
John Torkelsen
Director
</TABLE>
<PAGE> 43
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).
2.3 Agreement and Plan of Merger between Voice Control Systems, Inc.
and PureSpeech, Inc. dated March 28, 1998 (filed with the
Securities and Exchange Commission on April 28, 1998 as Exhibit
2.1 to the Company's Form 8-K, 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).
</TABLE>
<PAGE> 44
<TABLE>
<S> <C>
10.5 Form of Stock Option Agreement between Industries and various
non-employee option holders (filed with the Securities and
Exchange Commission on April 11, 1994 as Exhibit 10.39 to the
Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.6 Form of Warrant Agreement between the Company and various
directors, officers and affiliates (filed with the Securities
and Exchange Commission on March 31, 1994 as Exhibit 10.18 to
the Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.7 Stock Option Agreement dated September 20, 1991 executed by the
Company in favor of Dialogic Corporation (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit
10.29 to the Company's Registration Statement on Form S-4 dated
April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.8 Form of Convertible Note between the Company and an officer
(filed with the Securities and Exchange Commission on March 23,
1995, as Exhibit 10.15 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994, and
incorporated by reference herein).
10.9 Form of subscription agreement for the private offering of the
Company's Common Stock in March and June 1994 (filed with the
Securities and Exchange Commission on April 11, 1994 as Exhibit
10.43 to the Company's Registration Statement on Form S-4 dated
April 11, 1994, Registration No. 33-77658, and incorporated by
reference herein).
10.10 Employment agreement dated June 18, 1993 between the Company and
Peter J. Foster (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.15 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference
herein).
10.11 Amendment to employment agreement dated November 14, 1995
between the Company and Peter J. Foster (filed with the
Securities and Exchange Commission on December 8, 1995 as
Exhibit 10.11 to the Company's Registration Statement on Form
SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.12 Employment agreement dated June 18, 1993 between the Company and
Thomas B. Schalk (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.16 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference
herein).
10.13* Amendment to employment agreement dated July 20, 1995 between
the Company and Thomas B. Schalk (filed with the Securities and
Exchange Commission on November 15, 1995 as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-QSB, and incorporated by
reference herein).
10.14* License Agreement dated June 8, 1990 by and between the Company
and Dialogic Corporation (filed with the Securities and Exchange
Commission on April 11, 1994 as Exhibit 10.30 to the Company's
Registration Statement on Form S-4 dated April 11, 1994,
Registration No. 33-77658, and incorporated by reference
herein).
10.15* Amendment to License Agreement dated September 20, 1991 between
the Company and Dialogic Corporation (filed with the Securities
and Exchange Commission on April 11, 1994 as Exhibit 10.31 to
the Company's Registration Statement on Form S-4 dated April 11,
1994, Registration No. 33-77658, and incorporated by reference
herein).
10.16* Amendment No. 2 to the Licensee Agreement dated September 20,
1991 between the Company and Dialogic Corporation (filed with
the Securities and Exchange Commission on April 11, 1994 as
Exhibit 10.32 to the Company's Registration Statement on Form
S-4 dated April 11, 1994, Registration No. 33-77658, and
incorporated by reference herein).
10.17* Amendment No. 4 to the License Agreement dated October 1, 1995
between the Company and Dialogic Corporation (filed with the
Securities and Exchange Commission on December 8, 1995 as
Exhibit 10.17 to the Company's Registration Statement on Form
SB-2 dated December 8, 1995 Registration No. 33-64835, and
incorporated by reference herein).
10.18* License Agreement dated October 7, 1994 between the Company and
Dialogic Corporation (filed with the Securities and Exchange
Commission on December 8, 1995 as Exhibit 10.18 to the Company's
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
</TABLE>
<PAGE> 45
<TABLE>
<S> <C>
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).
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 Independent Certified Public Accountants
23.2# Consent of Independent Certified Public Accountants
23.3# Consent of Independent Certified Public Accountants
23.4# Consent of Independent Certified Public Accountants
23.5# Consent of Independent Certified Public Accountants
23.6# Consent of Independent Certified Public Accountants
27# Financial Data Schedule
99** 1998 Proxy Statement of the Company
* Confidential treatment has been requested for a portion of this
exhibit.
** To be filed with the Commission no later than April 30, 1999.
# Filed herewith
</TABLE>
* Confidential treatment has been requested for a portion of this exhibit.
** To be filed with the Commission no later than May 31, 1999.
# 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 28, 1999, 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, 1998.
/s/ BDO Seidman, LLP
Dallas, Texas
March 30, 1999
<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 1997 Stock
Plan of our report dated January 28, 1999, 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, 1998.
/s/ BDO Seidman, LLP
Dallas, Texas
March 30, 1999
<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 in the Registration
Statement on Form S-3 (File No. 333-28721), of our report dated January 28,
1999, 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, 1998.
/s/ BDO Seidman, LLP
Dallas, Texas
March 30, 1999
<PAGE> 1
EXHIBIT 23.4
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. 333-55845), pertaining to the Voice Control Systems,
Inc. 1998 Employee Stock Purchase Plan of our report dated January 28, 1999,
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,
1998.
/s/ BDO Seidman, LLP
Dallas, Texas
March 30, 1999
<PAGE> 1
Exhibit 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Voice Control Systems, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (File No. 333-52679), of our report dated January 28,
1999, 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, 1998.
/s/ BDO SEIDMAN, LLP
Dallas, Texas
March 30, 1999
<PAGE> 1
Exhibit 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Voice Control Systems, Inc.
Dallas, Texas
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (File No. 333-28721), of our report dated January 28,
1999, 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, 1998.
/s/ BDO Seidman, LLP
Dallas, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,303,069
<SECURITIES> 0
<RECEIVABLES> 2,956,714
<ALLOWANCES> 365,000
<INVENTORY> 341,708
<CURRENT-ASSETS> 8,876,373
<PP&E> 5,,431,531
<DEPRECIATION> 3,829,218
<TOTAL-ASSETS> 11,827,578
<CURRENT-LIABILITIES> 1,719,532
<BONDS> 0
0
0
<COMMON> 138,316
<OTHER-SE> 9,951,447
<TOTAL-LIABILITY-AND-EQUITY> 10,089,763
<SALES> 14,225,691
<TOTAL-REVENUES> 14,225,691
<CGS> 2,707,682
<TOTAL-COSTS> 11,589,020
<OTHER-EXPENSES> 5,302,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (16,216,791)
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,225,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,216,791)
<EPS-PRIMARY> (1.25)
<EPS-DILUTED> (1.25)
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