Bid; here it is, everything you ever wanted to know about MEMO:
November 12, 1999
VOICE IT WORLDWIDE INC (MEMO)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview:
Voice It Worldwide, Inc. utilizes a broad range of silicon chip technology including digital and analog storage devices, flash memory and digital voice compression integrated circuits. Voice It combines these technologies with proprietary software which enables the Company to develop leading edge consumer voice recorder products. The Company protects its proprietary technology through a combination of pending patents, copyrights and trade secrets.
Until 1998, the Company's products were designed primarily for consumer use and sold through retail channels in the U. S., Canada and Europe. In 1998, the Company began development of a Mobile Dictation recorder designed for professional users and compatible with voice recognition software. The capabilities of the new Mobile Dictation recorder provided the Company with an opportunity to enter significant new markets. During 1998, the Company changed its business strategy to reduce its reliance on the retail market and expand its business through OEM, VAR, and vertical markets. In June 1998, the Company entered into an agreement with Dragon Systems Inc., the leading voice recognition software marketer in the U.S., to supply Mobile Dictation recorders for bundling with Dragon Systems voice recognition software. Shipments to this customer began in October 1998. In April 1999, the Company reported a new two year supply agreement with Dragon which will expire in December 2000. This agreement can be terminated by either party with 180 days notice.
The change in business strategy implemented in 1998 led to improved revenue and earnings performance for the first nine months of 1999. During the first three quarters of 1999, sales increased to $10,163,200 which was 263% higher than the similar period last year. The Company also showed a profit of $346,800 or $.05 per share.
Future periods may not show similar growth.
In early 1998, the Company lost distribution of its note recorder products in several important retail customers, resulting in a 31% decline in sales for the nine months ended September 30, 1998 versus the same period in 1997. The Company's failure to meet certain financial performance objectives resulted in the loss of its line of credit. Although the Company continued to invest in the development of the Mobile Dictation Recorder and had secured a substantial purchase order from Dragon Systems for this product, the loss of the line of credit, coupled with impending principle and interest loan payments, and past due payables to suppliers, resulted in the Company filing a petition for protection under reorganization provisions of Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court, district of Colorado, on November 2, 1998.
The Company continues its operations as a Debtor-in-Possession (`DIP'). On March 2, 1999, the Company submitted its initial proposed Plan of Reorganization dated March 2, 1999 to the United States Bankruptcy Court. On April 21, 1999 the Company submitted a new Plan of Reorganization along with its Disclosure Statement to the U. S. Bankruptcy Court. On October 22, 1999 the Company submitted a new Plan of Reorganization and Disclosure statement. The Company continues to meet its post-petition financial obligations from cash generated from receivables by the Company's primary customer.
Results of Operations:
The following table sets forth, for the periods indicated, items in the Statement of Operations expressed as a percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1999 1998 1999
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.9 103.1 68.7 72.6
------ ------ ------ ------
Gross profit 13.1 (3.1) 31.3 27.4
------ ------ ------ ------
Operating expenses
Administrative and general 30.1 25.5 25.6 9.6
Selling and marketing 31.3 73.1 51.2 7.7
Research and development 25.0 51.7 15.8 4.2
------ ------ ------ ------
Total operating expenses 86.4 150.3 92.6 21.5
Operating profit (loss) (73.3) (153.4) (61.3) 5.9
Other income (expense), net (13.4) 25.5 (8.6) (2.5)
Net profit (loss) before
income tax (86.7) (127.9) (69.9) 3.4
Income tax (benefit) 0.0 0.0 0.0 0.0
------ ------ ------ ------
Net profit (loss) (86.7)% (127.9)% (69.9)% 3.4%
====== ====== ====== ======
Three Months ended September 30, 1999 compared to Three Months ended September 30, 1998:
Net sales for the three months ended September 30, 1999 were $360,900 compared to $651,300 for the three months ended September 30, 1998. The decrease in sales were the result of Dragon systems postponing shipments scheduled for the 3rd quarter of 1999 until 2000. As the Company's largest customer, Dragon represented 85% of year to date 1999 revenue. The delay is the result of Dragon having excess inventory due to a full product pipeline and increased competition. The Company's personal note recorder business recorded sales of $198,000 during the period which represented 55% of third quarter revenue. The Company continues its strategy of focusing on OEM, VAR and distributor business as opposed to the retail market that was the emphasis in the first three quarters of 1998. Sales to international markets represented 46% of total revenue in the third quarter.
Cost of sales for the quarter ended September 30, 1999 decreased to $372,200 or 103.1% of net sales from $566,100 or 86.9% of net sales during the third quarter of 1998. The decrease in cost of sales is the result of the postponement of shipments of mobile digital recorders to Dragon Systems, the leading supplier of voice-to text software in the United States. These OEM sales to Dragon carry a lower product margin than the personal note recorders that represented the majority of sales in the first six months of 1999. But, the low sales volume resulted in the under absorption of the fixed manufacturing overhead.
General and administrative expenses were $92,200 during the third quarter of 1999 compared with $196,400 for the same period in 1998. As a percent of revenue, these expenses were only 25.5% in 1999 versus 30.1% in 1998. The decrease in expenses is primarily due to lower than expected accrued relocation costs related to the Company's move from its Ft. Collins, Colorado headquarters to Rancho Bernardo, California.
Sales and marketing expenses for the quarter ended September 30, 1999 increased $60,200 to $263,800 from $203,600 during the same quarter in 1998. This variance is primarily due to increases in public relations and the timing of meetings and show expense during the period. As a percent of net sales, sales and marketing expenses increased to 73.1% in the third quarter of 1999 from 31.3% in the comparable 1998 period, mainly due to the lower third quarter revenue volume.
Research and development costs increased $23,900 to $186,500 for the third quarter of 1999 from $162,600 for the same quarter in 1998. Research and Development costs increased primarily due to consulting and design expenditures for continued development of the Digital Voice Recorder. Fourth quarter research and development expenses are expected to be significantly higher due to development of a new mobile dictation recorder with USB and form filling capability and increased R & D staff. As a percent of net sales, research and development expenses increased from 25.0% in 1998 to 51.7% in 1999 mainly due to the low third quarter revenue volume.
The Company recorded an operating loss of approximately $553,800 or the third quarter ended September 30, 1999 compared with an operating loss of approximately $477,300 for the same quarter in 1998. The effect of the 45% sales decrease could not offset slightly lower operating expenses for the period.
Other income (expense) for the quarter ending September 30, 1999 showed a gain of $92,300 compared to a net loss of $87,400 during the same period last year. The primary components of other income (expense) in the third quarter of 1999 include interest expense on the $104,200 secured line of credit and interest income from money market accounts. The large increase in other income (expense) is due to a gain on the sale of marketable securities of $91,100. Third quarter 1998 other income (expense) was primarily comprised of interest expense on the $2.45 million convertible debt entered into the fourth quarter of 1995 and utilization of a line of credit. After other income (expense), net loss for the three months ended September 30, 1999 was $461,500 or $0.07 per share compared to a net loss of $564,700 or $0.09 per share for the third quarter of 1998.
Nine Months ended September 30, 1999 compared to Nine Months ended September 30, 1998:
Net sales for the nine months ended September 30, 1999 were $10,163,200 compared to $2,802,800 for the nine months ended September 30, 1998. Sales for the first three quarters of 1999 increased over 263% due to the change in marketing strategy where the Company began primarily selling its mobile dictation recorder as a bundled product with Dragon Systems voice recognition software. Sales in the first three quarters of 1998 were primarily the result of note recorder sales to retail markets where the Company had experienced significantly declining distribution and sales. Sales to Dragon Systems represented 85% of total sales through September of 1999 while sales to international markets contributed 8% of the Company's revenue.
Cost of sales for the first nine months ended September 30, 1999 increased to $7,379,800 or 72.6% of net sales from $1,925,200 or 68.7% of net sales during the nine months of 1998. The increase in cost of sales was the result of the increased sales volume. The lower gross margin as a percent of sales was the result of 1999 OEM sales of the new digital voice recorder that is compatible with continuous speech, voice-to-text software. These OEM sales carry a lower gross margin than note recorder sales that represented the majority of sales in the first three quarters of 1998.
General and administrative expenses increased $261,600 to $979,600 during the first nine months of 1999 compared with $718,000 for the same period in 1998. As stated previously, this increase in expenses is primarily due to increased legal, accounting, and banking expenses resulting from the Chapter 11 Bankruptcy reorganization proceedings. In addition, expenses for severance and relocation costs associated with the Company's decision to consolidate its operations and relocate its headquarters from Ft. Collins, Colorado to San Diego, California contributed to the increased costs.
Sales and marketing expenses for the nine months ended September 30, 1999 decreased $649,100 (or 45%) to $785,000 from $1,434,100 during the same period in 1998. This decrease is due to the reduction of cooperative and general print advertising that was required to support retail sales in 1998. The Company's strategic decision to market its mobile dictation recorder to OEM, VAR, and Distributor channels in 1999, significantly reduced its advertising requirements.
Research and development costs decreased $21,800 to $422,000 for the first three quarters of 1999 from $443,800 for the same period in 1998. A primary reason for this decrease is due to timing delays associated with software and design consultants. These savings offset increased amortization of capitalized software development costs that contributed to higher research and development costs in 1998.
The Company recorded an operating profit of approximately $596,900 for the first nine months ended September 30, 1999 compared with an operating loss of approximately $1,718,300 for the same period in 1998. The 263% increase in sales and lower operating expenses more than offset the lower gross margin as a percent of sales due to the change in sales strategy.
Other income (expense) for the nine months ending September 30, 1999 showed a loss of $250,100 compared to other expense during the same period last year of $242,400. The primary component of interest expense in 1998 was the interest on the $2.45 million convertible debenture the Company entered into during the fourth quarter of 1995. Additionally, the Company incurred interest expense from utilization of its line-of-credit facility as well as interest paid to one of the Company's vendors for extended payment terms. Other income (expense) in the first nine months of 1999 partly reflected interest on DIP loans provided by Management and interest on the secured line of credit. In addition, the Company recorded an unfavorable increase in prepetition liabilities of $297,300 in the second quarter and a favorable gain on the sale of marketable securities of $91,100 in the third quarter. After interest expense, the net profit for the nine months ended September 30, 1999 was $346,800 or $0.05 per share compared to a net loss of $1,960,700 or $0.30 per share for the first three quarters of 1998.
Liquidity and Capital Resources:
At September 30, 1999, the Company had cash and cash equivalents of approximately $1,475,000. The Company also had working capital deficit of approximately $1,624,400 at quarter end which is an improvement from the working capital deficit of approximately $2,050,400 at December 31, 1998. The primary reason for the increase in working capital is the Company's net profit for the nine months ended September 30, 1999 of approximately $346,800.
Cash provided by the Company for operating activities during the nine months ended September 30, 1999 was approximately $1,589,900. A primary component of operating cash was the Company's first nine months net income of $346,800 adjusted for non-cash adjustments of depreciation and amortization of approximately ($160,300). The largest source of cash for the period was the decrease in receivables of approximately $2,591,300. Other sources of operating cash through the third quarter include decreases in the Company's prepaid expenses of approximately $64,100 and increases in accrued liabilities of $244,500. Uses of operating cash include the increase in inventories and customer deposits of $241,500 and $65,400, respectively and decreases in account payables of $1,189,500. Additional uses of cash include $120,600 for leasehold improvements and the acquisition of tooling and other capital assets. Cash was also favorably impacted $30,000 by the sale of marketable securities. During the nine months ended September 30, 1999, the Company used approximately $260,000 by paying off Debtor in Possession notes provided by Management.
During the second quarter of 1999, the Company financed its working capital requirements through letters-of-credit from Dragon Systems, Inc. The Company believes that it will have sufficient working capital to finance operations during the FOURTH QUARTER of 1999 although this situation could change if the Company's current Plan of Reorganization is approved by the Court or the Creditor's Committee.
Seasonality:
The Company's business has traditionally been skewed toward the fourth quarter. In 1998, 61% of sales occurred in the fourth quarter. However, this was primarily the result of the introduction of the new Digital Voice Recorder commencing with initial pipeline shipments to its primary OEM customer Dragon Systems. These pipeline shipments continued through the first half of 1999. In the third quarter there were no product shipments to Dragon, the Company's largest customer. The Company anticipates that following the initial success and sell through of its product bundled with Dragon software, fourth quarter sales to Dragon will be also be severely limited due to a full product pipeline at the wholesale and retail level and increased competition. It is anticipated that shipments to Dragon will resume in 2000 as their inventory levels are reduced as a result of holiday sales and the introduction of Dragon's new 4.0 version software.
Foreign Exchange:
The Company's products are principally purchased from suppliers in the Far East with its prices negotiated on an annual basis in U.S. dollars at exchange rates reset annually. Exchange rate fluctuations between the U.S. Dollar and the Singapore dollar could have an adverse effect on the Company's costs of sales and gross margins. In the event of extreme exchange rate fluctuations, it may become uneconomical for the relationship between the Company and its suppliers to continue.
The Company also historically records less than 10% of its revenues in Europe and the Middle East. In most countries, the Company sets its sales prices in U. S. dollars so that any variances are for the purchaser's account. However, if the exchange rate fluctuates between these other currencies and the U. S. dollar, it may have an adverse effect on the Company's sales
Inflation:
Management believes that inflation has not and will not have a significant impact on its business.
Bankruptcy:
The Company continues its operations as a Debtor-in -Possession (`DIP'). On March 2, 1999, the Company submitted its initial proposed Plan of Reorganization to the U. S. Bankruptcy Court. On April 21, the Company submitted a new Plan of Reorganization and Disclosure Statement to the Trustee of the U. S. Bankruptcy Court.
In May, the U.S. Trustee found that the Company's initial Disclosure Statement to be inadequate and requested that the Company file an Amended Disclosure Statement. The Company filed a First Amended Disclosure Statement to accompany its First Amended Plan of Reorganization dated April 21, 1999. The Bankruptcy Court ordered that the hearing to consider the adequacy of the Debtor's First Amended Disclosure Statement originally set for July be reset at the request of the Company.
The Bankruptcy Court ordered that the Company file a status report with the Court on the progress of the Debtor and Renaissance Capital of the Creditors Committee in formulating a consensual plan of reorganization on or BEFORE
SEPTEMBER 20, 1999.
On October 6, 1999 the United States Trustee applied to the Bankruptcy Court for an order dismissing or converting to a proceeding under Chapter 7 liquidation. The trustee cited unreasonable delay, the inability to effectuate a plan and continuing loss to or diminution of estate and the absence of reasonable likelihood of rehabilitation as reasons for the motion to convert.
On October 22, 1999 the Company filed a new Plan of Reorganization and Disclosure Statement. The new Plan is proposed as a cramdown on unsecured creditors and shareholders. This Plan will effectively cancel all equity interest.
The U.S. Bankruptcy Court judge has scheduled a hearing on December 13, 1999 to review the Debtor's new Plan of Reorganization and the U. S. Trustee's application to convert under Chapter 7 liquidation.
Year 2000 Compliance:
The Company has conducted a review of its computer systems to identify the systems that could be affected by the Year 2000 Issue and is developing an implementation plan to resolve the issue. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company presently believes that, with modifications to existing software and conversions to new software, the Year 2000 problem will not pose significant operations problems for the Company's computer systems as so modified and converted. However, if such modifications and conversions are not completed in a timely manner, the Year 2000 problem may have a material impact on the operations of the Company.
The Company has not yet determined the impact if any, that Year 2000 issues may have on its vendors. However, the Company believes there are adequate alternative vendors that can supply products and services to the Company if necessary.
The microprocessors used in the Company's products operate on a 99-year Julian calendar. Thus, there will be no operational issues with these products related to the Year 2000 issue.
-------------------------------------------------------------------------------- |
