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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 30, 2002
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-021403
VOXWARE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3934824
- ------------------------------- -------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Lawrenceville Office Park
P.O. Box 5363
Princeton, New Jersey 08543
609-514-4100
(Address, including zip code, and telephone
number (including area code) of registrant's
principal executive office)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.001 par value per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $798,835 as of October 11, 2002, based upon the
closing sale price of the common stock as quoted on the Nasdaq OTC Bulletin
Board. This amount excludes an aggregate of 3,657,129 shares of common stock
held by executive officers, directors and by each individual and entity that
owns 5% or more of the common stock outstanding at September 30, 2002. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the registrant's common stock outstanding as of
October 11, 2002 was 22,823,860.
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VOXWARE, INC.
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended June 30, 2002
TABLE OF CONTENTS
PART I
Item 1. Business...........................................................3
Item 2. Properties........................................................17
Item 3. Legal Proceedings.................................................17
Item 4. Submission of Matters to a Vote of Security Holders...............18
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...............................................19
Item 6. Selected Financial Data...........................................20
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition...........................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........33
Item 8. Financial Statements and Supplementary Data.......................33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..............................................33
PART III
Item 10. Directors and Executive Officers of the Registrant................34
Item 11. Executive Compensation............................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management....40
Item 13. Certain Relationships and Related Transactions....................40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..41
Index to Financial Statements...............................................F-1
2
PART I
This annual report on Form 10-K contains some "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995 and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and the information currently available to our
management. When used in this annual report, the words "estimate, "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. These statements reflect our current
views with respect to future events and are subject to risks and uncertainties
that could cause actual results to differ materially from those contemplated in
these forward-looking statements, including those risks discussed in this annual
report. Such risks and uncertainties include, but are not limited to those
included under "Important Factors Regarding Forward-Looking Statements,"
attached as Exhibit 99. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this annual
report. Except for special circumstances in which a duty to update arises when
prior disclosure becomes materially misleading in light of subsequent
circumstances, we do not intend to update any of these forward-looking
statements to reflect events or circumstances after the date of this annual
report, or to reflect the occurrence of unanticipated events. You should
carefully review the risk factors set forth in other reports or documents we
file from time to time with the Securities and Exchange Commission.
ITEM 1. BUSINESS.
Overview
Voxware, Inc., a Delaware corporation, was incorporated in 1993. We design,
develop, market and sell voice-based solutions for the logistics, distribution
and package sorting industries. Our primary product offering,
VoiceLogistics(TM), is a voice-based solution set of software, hardware and
professional services used for various mobile industrial and warehouse
applications. Our solutions are designed specifically for use in warehouses,
distribution centers and other industrial settings, to enable workers to
perform, through speech interface, typical logistics tasks such as picking,
receiving, returns processing, cycle counting, cross-docking and order entry,
frequently in a more efficient and effective manner than with alternative
methods. Our products consist of software and proprietary hardware that will
generally work with wireless local area networks, networking, web and speech
technology to provide a mobile, networked connection between the warehouse
management system, workers and management. We believe that our
VoiceLogistics(TM) solution is unique in the industry today because it is the
first web-optimized speech recognition system, deployed in an industrial
application, that delivers a networked, interactive voice interface to computer
systems.
Our voice-based systems are designed to provide large companies that
operate warehouses and distribution centers a more efficient way for their
workers to perform a wide variety of logistics tasks. Our VoiceLogistics(TM)
solution has the ability to integrate easily (generally within 60 to 90 days)
with external warehouse management systems. This flexibility allows our
solutions to be deployed rapidly and work with the latest Internet protocol and
voice standards. Our solutions are designed to be used in many major market
industry sectors, including consumer goods manufacturers, consumer packaged
goods, direct to consumer, food and grocery, retail, third party logistics
providers and wholesale distribution. Our products have been and continue to be
deployed in package handling, mail sorting, manufacturing, inspection and
military combat applications. We generate revenues primarily from product sales,
licenses of technology, and development services. Product sales consist of our
VoiceLogistics(TM) product suite described above, stationary voice-based devices
primarily used for warehouse receiving and package sorting applications, and
accessories that complement our products. Accessories include microphones,
headsets and computer hardware. License fees are generally derived from
licensing our voice-based software applications, as well as from licensing the
Company's speech compression technologies to customers in the multimedia and
consumer devices market.
Our products are targeted primarily to be sold directly to large customers
with annual revenues in excess of $100 million. However, we also expect to
utilize other third party partners such as consultants, value-added resellers
and system integrators to also sell and/or assist us in selling our products to
these types of customers. To date, we have signed agreements with several third
party partners, and we expect to continue to generate at least 10% of our total
revenues in fiscal year 2003 from these third parties.
Speech recognition products are designed to provide the ability to input
data that cannot be easily bar-coded, where key entry is impractical or where
productivity or safety are enhanced by having both the workers' hands free
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while performing their jobs. We believe that the large market for speech
recognition products in the industrial workplace has emerged and continues to
grow due to the convergence of the following factors:
o design advances which permit speech recognition products to be
smaller, portable and more durable;
o advances in wireless communications permitting an enhanced interface
between mobile PCs and servers;
o the increasing deployment of wireless networks in warehouses and other
industrial operations;
o an increased industry focus on reducing the cost of logistics in order
to increase profitability and achieve competitive advantages;
o the growth in electronic commerce has resulted in an increase in the
number of businesses having significant warehouse picking functions;
and
o the decreasing cost of microprocessors and digital signal processors.
Until February 1999, our business was developing and licensing software for
speech compression technologies to be used in multimedia Websites, Internet
telephony and consumer devices. In February 1999, we acquired from Verbex Voice
Systems ("Verbex") the assets and technology on which VoiceLogistics(TM) is
based. We have since largely ceased our prior speech compression business and,
in September 1999, we sold substantially all of the assets relating to that
business.
Products
VoiceLogistics(TM), the Company's primary product line, is a voice-based
interface solution for various mobile industrial and warehouse applications. The
VoiceLogistics(TM) solution is comprised of software, hardware and professional
services for installation, implementation, and maintenance. The Company also
sells other voice-based devices used primarily for warehouse receiving and
package sorting applications where mobility is not required. Both of these
products are based on the Company's patented speech recognition technology and
VoiceXML voice browser. The Company also generates revenues from licensing
speech compression technologies that were developed prior to the sale of the
assets relating to that business in September 1999.
VoiceLogistics(TM). The VoiceLogistics(TM) solution consists of
standards-based software and special purpose wearable computer hardware that
utilizes wireless 802.11B local area networking, web based applications, and
patented speech technology to provide a mobile, networked, interface between the
warehouse management system, workers and the customer's operations and financial
systems. We believe this solution is the first web-based speech recognition
system, deployed in commercial applications, that delivers a networked,
interactive voice-interface to computer systems. This solution has been designed
by our engineers to integrate easily (generally within 60 to 90 days) with
virtually any external warehouse management system. The VoiceLogistics(TM)
solution includes the VoiceLogistics(TM) server software, called Vox Server(TM),
our patented noise-robust Voxware Integrated Speech-Recognition Engine
(VISE(TM)) speech recognizer designed specifically for high performance in
industrial environments, our VoiceXML browser, called VoxBrowser(TM),
VoxXchange(TM), our new standard integration methodology to interface
VoiceLogistics to virtually any warehouse management system (WMS) or system of
record, and the VoiceLogistics(TM)-310 wireless wearable computer. Warehouse
workers wear the computer around their waist and communicate with the system
through a headset that includes a close talking microphone. It is through this
headset that a worker in the warehouse or distribution center communicates
through voice with our VoiceLogistics(TM) application in order to complete their
assigned tasks, while at the same time updating inventory, customer invoices and
financial systems in real-time.
The VoiceLogistics(TM)-310 wearable client is a rugged, continuous speech
input/output device designed for industrial applications that require mobility
and full connectivity. The unit weighs approximately 40 ounces and measures 8.8
inches in length, 3 inches in width and 1.5 inches in depth. It is worn on the
waist of the user and is connected by wire to a headset with a microphone. The
user speaks into the microphone and the software processes the speech signal to
determine what was spoken. After the speech has been recognized, the system
processes the data or response and transmits the information by a wireless LAN
to the system of record, which, depending upon the application, could be a
warehouse management system, a manufacturing tracking system or another software
package that tracks inventory or operations. The system of record then records
and processes the information, sends
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additional instructions to the user or takes other action. Instructions sent
from the system of record to the user are communicated through the headset. In
applications such as receiving and package sorting, the information processed by
the VoiceLogistics(TM) system may sometimes be used for other purposes such as
printing a bar code label locally rather than being transmitted by a wireless
link to a system of record. Although the software "system" is the primary focus
of our product line, we recognize the VoiceLogistics(TM)-310 wearable client is
a critical component of the system, and as such we continue to research ways to
optimize the performance of the client, and reduce its cost.
We purchase parts and electronics assemblies for our products from external
vendors. We also have external vendors perform major sub-assemblies where
appropriate and cost efficient. Our employees perform final assembly and
testing. We also offer customers the opportunity to purchase accessories such as
headsets and computer hardware that we purchase from third party vendors for
resale.
Stationary Devices. Certain industrial applications do not require a high
degree of mobility by each user. For those applications, we design and
manufacture a family of stationary devices that house digital signal processing
chips and other electronics. The stationary devices, like the portable devices,
are connected by wire to a headset with a microphone. The speech information is
sent to the board in the computer. Much like the VoiceLogistics(TM) portable
device, the board employs its electronics and software to recognize what was
said and sends commands to the computer to take action such as communicating
with the system network or printing a label. This product line has been proven
in industrial applications such as receiving and package sorting. Our sales of
stationary products range from individual boards to complete computer
workstations, depending on the customer's application.
We subcontract the assembly of PC board products to local contract
manufacturers, but our manufacturing and assembly personnel perform final
testing and shipment of the PC boards. When a customer requires a fully
integrated computer loaded with our board products in the PC or workstation, our
personnel perform the integration and testing. We also offer customers the
opportunity to purchase accessories such as headsets and computer hardware that
we purchase from third party vendors for resale.
Speech Coding Technologies. On February 4, 1999, we entered into an asset
purchase agreement with Ascend (a wholly owned subsidiary of Lucent
Technologies, Inc.) to sell to Ascend substantially all of our assets relating
to what had historically been our primary business of developing and selling
speech compression technologies and products. The sale to Ascend was consummated
on September 21, 1999. The sale of the assets to Ascend did not include the
Company's rights and obligations under its then existing license agreements. We
continue to have revenue from existing licensees of our speech coding technology
in the form of periodic license renewal fees, royalties and service fees. With
the consent of Ascend, we may also license our speech coding technologies for
uses that are not competitive with Ascend. Although we do not have any
agreements or arrangements with Ascend relating to any general or specific
guidelines for obtaining Ascend's consent, we believe that Ascend will consent
to our licensing the speech coding technologies in the multimedia and consumer
devices markets. While we may continue to take advantage of favorable
opportunities to license our speech coding technologies in the future, we do not
dedicate significant resources to the development, marketing or licensing of our
speech coding technologies.
Applications
Our primary market area is the distribution and logistics market in
e-commerce, retail, and direct-to-consumer, wholesale and business-to-business
operations. This market is attractive because of the market's size, the move
toward automation and increased productivity, the advent of e-commerce and its
impact on the supply chain infrastructure and the Company's belief that
voice-based products can add considerable value to operational efficiency.
According to Brooker and Associates, an industry consultant we have retained,
North America has between 500,000 and 750,000 warehouses. Those warehouse
operations employ over 14 million people, including approximately 7 million
pickers, and 1.5 million receivers. Within this market, we intend to target the
relatively larger warehouse operations with our industrial voice-based
solutions. Less than half of the warehouse operations run by large US companies
are estimated to be automated with radio frequency ("RF") scanners, while less
than 15% of those operated by smaller companies use RF systems today. Figures
provided by the ARC Advisory Group indicate that worldwide shipments of
e-logistics solutions are expected to grow to $3.6 billion in 2004. The primary
applications that we target in this area are picking, receiving, returned goods
processing, cross-docking, directed put-away, inventory/cycle counting and
condition reporting processes. Our solutions are also deployed in package
handling, mail sorting, manufacturing, inspection and military combat
applications.
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The following is a description of target application areas, within and
outside the warehousing market in which we believe our products have market
value.
Warehouse Picking. A large part of the distribution industry involves the
assembly of orders for individual customers by workers who walk through
warehouses, individually selecting items and preparing orders for shipment. This
"picking" function employs millions of workers in North America alone. Our
products are designed to be used by the worker doing the picking (the "picker")
to enhance the accuracy and speed of these operations. Using our system, picking
instructions are synthetically generated from electronic or written orders
received from the warehouse's customers and are communicated via voice to a
picker on the warehouse floor who is wearing a headset and a portable
VoiceLogistics(TM) client. While keeping both hands free the picker walks
through the warehouse and listens to the instructions, acts upon those
instructions and confirms the selections using voice commands spoken into the
headset's microphone. We believe that our voice-based products for picking
applications have provided customers with the benefits of increased
productivity, accuracy and the elimination of paper.
An example of a warehouse picking application which we believe provides a
large target market for our products is grocery picking. Grocery warehouse
pickers are typically filling small, case-based orders very quickly and handling
hundreds of different items. In this environment, products that offer
hands-free, eyes-free operation can enhance speed and accuracy, and may be
particularly attractive in freezers where heavy gloves limit the pickers'
ability to execute the fine motor movements necessary to work with paper and
pen, keyboards or hand held computers or even scanners.
Warehouse Receiving, Package Sorting and Returns Order Processing. A
distribution and warehousing facility may receive anywhere from hundreds to tens
of thousands of packages daily. Each of these packages must be formally received
such that the warehouse's system can account for and track the package. The
receiving process can be cumbersome, often relying on paper or PCs and manual
recording and input of information that may lead to high error rates and low
productivity. When a package arrives, dock workers wearing a headset and a
portable device speak information into their headsets about the arriving
packages, such as the purchase order number corresponding to the package or some
other identification information. The portable device recognizes the information
and communicates it to the distribution center or warehouse software system,
which adjusts the inventory count. Alternatively, the speech data may be
transmitted to a bar code printer that immediately prints a bar code label to be
adhered to the package and used to track the package internally thereafter.
An example of a logistics receiving market is the retail clothing industry,
which often uses a distribution method known as "cross-docking" in which goods
arrive in the distribution center on one truck and exit on another truck minutes
or hours later. The goods are routed to the appropriate trucks using bar code
scanners on conveyers inside the facility. However, since many packages arrive
without usable bar codes, labels must be generated on the receiving dock and
adhered to the package immediately. Because of the fast-paced, high-volume
receiving operations typical in clothing distribution operations, and because a
high percentage of arriving packages do not have usable bar codes, we believe
that this application lends itself well to a voice-based solution.
Two specialized versions of the "receiving" application are package sorting
and returns order processing. In both circumstances, warehouse or distribution
center employees are formally accepting goods into their system, and information
must be recorded so that the central system can properly route and disposition
those items. We consider the application mechanics to be similar among
cross-docking, receiving, returns order processing and package sorting, and have
therefore discussed them as a single application category.
Manufacturing and Other Inspection. Newly manufactured goods are often
inspected at the end of or during the manufacturing process to highlight defects
and to ensure the proper disposition of the finished good. These inspections are
typically accomplished with pen and paper. Our products are designed to allow
inspectors to input more information faster without removing their hands or eyes
from the item under inspection.
Other Applications & Markets. We have also licensed our technology or sold
products to dentists interested in charting patient conditions without the use
of an assistant and customers deploying lumber grading systems for saw mills. In
addition, we have marketed a PC-based product targeted to consumers and an
automated telephony personal assistant software package for the small
office/home office market, and built speech-recognition OEM boards for a
hospital bed manufacturer to allow bed-ridden patients to control bed position,
television settings and other room devices using voice commands.
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Although standard products will be available for these "other" applications
when we encounter an opportunity, and we intend to fulfill support obligations
to existing customers, we do not intend to invest substantial sales, marketing,
or development resources to maintain or increase revenue from market areas other
than our primary target areas identified above.
Sales and Distribution
We believe that the industrial marketplace for our products is large and
diverse. We are targeting primarily to sell solutions direct to large customers.
However, we also expect to utilize other third parties such as consultants,
value added resellers (VARs) and system integrators to also sell and/or assist
us in selling our products to these types of large customers. To date, we have
signed agreements with several of these third party partners. We believe that
the establishment of a network of third party partners with extensive and
specific knowledge of the various applications critical in the industrial market
is important in order for us to succeed in that market. In developing a
marketing and sales presence in Europe, we anticipate that this market will be
supported primarily through both third party partnerships and on direct selling
in the European market. Some third party partners purchase products from us at
discounts ranging from 30-35% and incorporate them into "application systems"
for various target markets and/or consult us in the development of application
systems for end-users. These application systems integrate our products with
additional hardware and software components and include service and product
support. They then resell or lease the application systems to end-user
customers. Under these types of partnership agreements, we warrant to repair,
replace or refund the purchase price of any defective product delivered to a
third party partner or their customer, provided that we are notified of the
defective product within 90 days from delivery of the product to the end-user in
the case of software and one year from such delivery in the case of hardware.
Building a network of third party partners takes time and requires different
sales and marketing expertise than that required when building a consumer
software distribution channel, or an OEM relationship for technology.
We have continued to expand our partnership channel not only in North
America, but abroad, with particular emphasis on the development of strategic
relationships with VAR's, logistics consultants, warehouse management system
("WMS") vendors and RF system vendors. Assuring that our products are easily
integrated with these vendors' processes and systems, as well as other
components of customers' asset management and information systems, will be a key
factor in our success. We believe that in the industrial speech recognition
market, strategic partnerships with the appropriate VAR's, logistics
consultants, WMS vendors, as well as the major RF infrastructure corporations,
are critical to success. As is the case with the development of an effective
third party partner channel discussed above, nurturing and building these
relationships takes time. There can be no assurance that we will be successful
in developing strategic partnerships with VAR's, logistics consultants and WMS
and RF system vendors.
In July 1999, we entered into an agreement with a division of ITT
Industries, Inc. under which we have licensed our speech recognition products
and technologies to ITT for the creation of speech recognition products for sale
to military and other governmental customers. The agreement creates a strategic
relationship involving joint product development, cross licensing of technology,
marketing and co-branding. Under the agreement, Voxware is evaluating ITT's
speech products and technologies for potential combination with Voxware's
products to create products for sale to non-military or governmental customers.
Voxware received license fees of $265,000 from ITT during the year ended June
30, 2000 and, if ITT develops and sells products incorporating our technologies,
ITT will pay royalties to Voxware. We recognized the ITT license fee in the year
ended June 30, 2000, and royalty revenues, if received, will be recognized in
the fiscal quarters in which they are reported to us by ITT. As of June 30,
2002, no royalties have been recognized. We cannot assure you as to whether ITT
products incorporating Voxware's technologies will be developed or sold, or what
amount of royalty revenues, if any, Voxware will receive from ITT.
Customers
We currently generate revenues through both our voice-based solutions
business and our speech coding business. Historically, the Company has derived a
significant portion of our revenues from licensing and royalties related to our
speech compression technologies business and sales of our voice-based solutions
through VARs and systems integrators. We also sell our products directly to
customers. For the fiscal year ended June 30, 2002, 94% of our revenue was
derived from our voice-based solutions business and 6% from our speech
compression business. For the year ended June 30, 2002, three customers
accounted for 65% of our total revenues. For the fiscal year ended June 30,
2001, 59% of our revenue was derived from our voice-based solutions business and
41% from our speech compression business. For the year ended June 30, 2001,
three customers accounted for 37% of our total revenues. There can be no
assurance that these customers will continue to seek our products and services
at the same levels as they have in the past, or at all.
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Our standard warranty policy generally allows customers or end-users to
return defective products for repair, replacement or refund of purchase price,
provided that we are notified of the defect within 90 days from delivery to the
customer or end-user in the case of software and one year from the delivery in
the case of hardware. Substantially all components, parts and subassemblies
purchased by Voxware are covered by warranty by the manufacturer for periods
ranging from 30 days to one year.
Technology
Speech recognition technology can be broadly segregated into two
categories: speaker-independent and speaker-dependent systems.
Speaker-independent products can recognize the utterances of many speakers using
a specific language, while speaker dependent systems require that each
individual user train the system to recognize his or her specific voice.
Speaker-dependent systems are typically much more accurate than
speaker-independent systems, while speaker-independent products often require
less training. Speaker-independent systems may be less effective in applications
where there is a diverse speaker population having regional accents and/or
speaking different languages.
As a practical matter, many applications cannot use speaker-dependent
technology. A telephone-based airline reservation system is a good example of
the appropriate use of a speaker-independent technology. In general, the system
must support many different users and the number of interactions in a single
call is minimal. In this example the use of a speaker-independent technology is
ideal because the airline cannot predict who will be calling or what actions it
may be requested to perform. Thus, the airline will sacrifice some accuracy in
exchange for speaker independence. In addition, these phone-based interactive
voice response systems operate in a relatively stable acoustic environment,
which contributes to improving the overall system performance of the
speaker-independent application. The users of this type of non-mission critical
application of speech technology will often tolerate occasional
mis-recognitions, as the cost is usually very low.
In industrial applications such as logistics, fulfillment, warehousing,
package handling or manufacturing, where the applications are mission critical,
the acoustic environment is often in excess of 90 decibels and the use is
directive and repetitive in nature, we believe that significant accuracy
improvements are offered by speaker-dependent technologies over
speaker-independent technologies. In warehouse and manufacturing environments,
where accuracy in noisy environments is critical, the accuracy improvements
offered by speaker-dependent technologies over speaker-independent technologies
are typically considered to be worth the time required to train the system for
the user's voice. In addition, speaker-dependent systems are by nature language
independent, so workers with multiple accents, dialects and native languages can
use the system without custom development.
Our current VoiceLogistics(TM) product line is based on our patented,
proprietary Voxware Integrated Speech Engine (VISE(TM)) speaker-dependent speech
recognition technology, which is a continuous speech recognizer, and highly
noise-tolerant. Users of products based on our VISE(TM) engine must initially
train the system to recognize their individual voices in order to achieve an
optimum level of performance. Initial training is often a necessity for most
industrial applications, and is typically something customers are willing to
accept for the resulting improvement in performance. Our VoiceLogistics(TM)
product line and all of our other voice-based products sold to industrial
customers are based on our VISE(TM) technology. Our VoiceLogistics(TM) computer
incorporates an embedded version of our VISE(TM) speech recognition engine with
a standards based interface that allows for interfaces with a wide variety of
warehouse management systems. This embedded engine is also suitable for
applications such as handheld, portable or mobile devices, phones and other
applications, which may benefit from a noise robust speech interface, and employ
some type of processing capability. As a result of our filing a patent
application in March 2001, our VoiceLogistics(TM) solution also employs our
patent-pending invention of systems and methods for using standard Internet
protocols in conjunction with VoiceXML web pages to remotely program portable
voice devices, such as our VoiceLogistics(TM) computer, that direct and guide
users through defined tasks and work.
In addition to our VISE(TM) speaker-dependent technology, prior to our
acquisition of Verbex, Verbex had developed FlexVISE(TM), a noise robust large
vocabulary speaker-dependent technology designed to provide additional
flexibility for applications that may require a larger vocabulary, yet provide
high accuracy in high noise environments. We believe that this technology, which
is still in the early stages of development, may be included in some future
level for our voice-based products. At this time we have not determined the
level at which we would dedicate resources to the further development of
FlexVISE(TM), however we may examine the feasibility of including
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this as part of a future product offering. We believe that owning and developing
our core technologies represents a significant strategic and competitive
advantage for the Company at this time.
Competition
We encounter competition from two sources: direct competition from
companies offering similar voice-based solutions, and technologies that may be
considered an alternative to voice-based solutions.
Companies that build competitive voice-based systems comprise a source of
competition for Voxware. To date, we are aware of only one small, private
company that currently directly sells voice-based systems within the logistics
and distribution market. Vocollect, Inc., a privately held Pittsburgh, PA-based
company, markets a wearable voice-based computer and complementary software
targeted primarily at the food and grocery warehouse picking market. Vocollect,
Inc. also indirectly sells voice-based systems within the logistics and
distribution market to resellers who also compete against us.
In each application area, there exist alternatives to voice-based
solutions. In the logistics and fulfillment market, bar code scanning devices,
for example, represent a competitive alternative to voice-based products in
warehouse picking applications. Thus, bar code product companies such as Symbol
Technologies, Inc., Intermec Technologies Corporation (a subsidiary of UNOVA,
Inc.), LXE Inc. (a wholly-owned subsidiary of Electromagnetic Sciences, Inc.),
and Psion Teklogix, can be considered competitors in the logistics and
fulfillment marketplace. Likewise, in the package sorting and remittance
processing segments, keyboards are the most prevalent alternative along with an
increasing use of bar code scanning as is applicable. Inspection, receiving, and
inventory applications use keyboards as well, but often pen and paper comprise
the primary alternative method in those cases. Many applications have access to
more technologically sophisticated alternatives, but few have implemented them.
Sale of Speech Coding Business
Prior to our acquisition of Verbex, Voxware developed, marketed, licensed
and supported digital speech and audio technologies, solutions and applications.
On September 21, 1999, our stockholders approved the sale of substantially all
of the assets of our speech coding business to Ascend (a wholly owned subsidiary
of Lucent Technologies, Inc.). Upon closing, Voxware received $4,146,000 in
cash. We had previously received $204,000 of the purchase price, and the
remaining $750,000, which was held in escrow for 18 months to secure Voxware's
indemnification provisions under the sale of assets agreement, was released from
restriction as of March 21, 2001. The sale to Ascend did not include our rights
and obligations under our existing speech coding license agreements. As part of
the sale, we received a license from Ascend to use the speech coding
technologies necessary to service those existing licensees. With the consent of
Ascend, we may also license the speech coding technologies to new licensees for
uses that are not competitive with Ascend. Although we do not have any
agreements or arrangements with Ascend relating to any general or specific
guidelines for obtaining Ascend's consent, we believe that Ascend will consent
to our licensing the speech coding technologies in the multimedia and consumer
devices markets. Voxware's revenue from licensing speech coding technologies and
audio compression technologies has been steadily decreasing. While we may
continue to take advantage of favorable opportunities to license our speech
coding technologies in the future, we do not dedicate significant resources to
the development, marketing or licensing of our speech coding technologies.
Patents and Proprietary Information
With our acquisition of Verbex, we acquired certain patents and patent
applications related to the Verbex technology. In addition, we have recently
filed a patent application for our VoiceLogistics(TM) wireless client, which
incorporates applications of some of our other patented technologies as well. We
expect to routinely file patent applications as deemed appropriate. Our success
will depend in part on our ability to obtain patent protection for our products,
preserve our trade secrets and operate without infringing the proprietary rights
of other parties. We cannot assure you that those patent applications to which
we hold rights will result in the issuance of patents, or that any issued
patents will provide commercially significant protection to our technology,
products and processes. In addition, we cannot assure you that others will not
independently develop substantially equivalent proprietary information not
covered by patents to which we own rights or obtain access to our know-how or
that others will not claim to have or will not be issued patents which may
prevent the sale of one or more of our products. In addition, the laws of
certain countries may not protect our intellectual property. The software market
has traditionally experienced widespread unauthorized reproduction of products
in violation of manufacturers' intellectual property rights. Such activity is
difficult to detect and legal proceedings to enforce the manufacturers'
intellectual property
9
rights are often burdensome and involve a high degree of uncertainty and costs.
Our success is also dependent upon unpatented trade secrets, which are difficult
to protect. To help protect our rights, we require employees and consultants to
enter into confidentiality agreements that prohibit disclosure of our
proprietary information and require the assignment to us of their ideas,
developments, discoveries and inventions. We cannot assure you, however, that
these agreements will provide adequate protection for our trade secrets,
know-how, or other proprietary information in the event of any unauthorized use
or disclosures.
Employees
As of June 30, 2002, we had 39 full-time employees, consisting of 4 in
manufacturing, 23 in research and development, 7 in sales and marketing, and 5
in general and administrative. Twenty-six of our employees are located at our
Cambridge, Massachusetts's facility, and 6 are located at our corporate offices
in Lawrenceville, New Jersey. The remainder of or employees work at various
other locations. None of our employees is represented by a labor union or is
subject to a collective bargaining agreement. We believe that our employee
relations are good.
Risk Factors
We operate in a rapidly changing business environment that involves
substantial risk and uncertainty. The following discussion addresses some of the
risks and uncertainties that could cause, or contribute to causing, actual
results to differ materially from expectations. We caution all readers to pay
particular attention to the descriptions of risks and uncertainties described
below and in other sections of this report and our other filings with the
Securities and Exchange Commission.
We do not presently know of any additional risks and uncertainties that are
currently deemed material and which may also impair our business operations and
financial results. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of our Common Stock could decline and
we may be forced to consider additional alternatives.
This Annual Report on Form 10-K also contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of certain
factors, including the risks described below and elsewhere in this Annual Report
on Form 10-K.
If we continue to incur operating losses, we may be unable to continue our
operations. We have incurred losses since we started our company in August 1993.
As of June 30, 2002, we had an accumulated deficit of $47,834,000. If we
continue to incur operating losses and fail to become a profitable company, we
may be unable to continue our operations. We incurred net losses of
approximately $2,245,000 in fiscal 2000, $15,669,000 in fiscal 2001 and
$3,993,000 in fiscal 2002. In addition, we expect to continue to incur net
losses in at least the near term quarters. Our future profitability depends on
our ability to obtain significant customers for our products, to respond to
competition, to introduce new and enhanced products and to successfully market
and support our products. We cannot assure you that we will achieve or sustain
significant sales or profitability in the future.
If we are unable to raise additional capital in the future, we will be
unable to continue our product development, marketing and business generally. In
the future, we will need to raise substantial additional capital to fund
operations, including product development and marketing. Funding from any source
may not be available when needed or on favorable terms. If we cannot raise
adequate funds to satisfy our capital requirements, we may have to limit, delay,
scale-back or eliminate product development programs or marketing or other
activities. We might be forced to sell or license our technologies. Any of these
actions might harm our business. We cannot assure you that any additional
financing will be available or, if available, that the financing will be on
terms favorable to us. If financing is obtained, the financing may be dilutive
to our current stockholders. We believe that unless we are able to secure
additional financing, our cash and cash equivalents and short-term investments
will not be adequate to meet our cash requirements over the next twelve months.
The Company's independent certified public accountants included a going concern
modification in their audit report for the year ended June 30, 2002.
There is a substantial doubt about our ability to continue as a going
concern. We incurred net losses of approximately $2,245,000 in fiscal 2000,
$15,669,000 in fiscal 2001 and $3,993,000 in fiscal 2002. Our ability to
generate positive cash flows from operations will have a significant impact on
the period through which our existing cash will be sufficient to fund
operations. Based on our plan, which included the merger with ISPsoft and the
resulting cash requirements for operations, we believe that our existing
available cash may not be adequate to satisfy current and planned operations for
the next 12 months. Additionally, we expect that we will require substantial
10
additional capital to fund operations. All of these factors raise a substantial
doubt as to our ability to continue as a going concern. The Company's
independent public auditors included a going concern modification in their audit
report for the year ended June 30, 2002. If we cannot sufficiently improve our
cash flow or raise more funds at acceptable terms, we could be required to
further reduce our capital expenditures, reduce our workforce and possibly
explore additional alternatives.
We rely substantially on key customers. Our customer base is highly
concentrated. For the year ended June 30, 2002, three customers accounted for
65% of our total revenues. We believe that a substantial portion of our net
sales will continue to be derived from sales to a concentrated group of
customers. However, the volume of sales to a specific customer is likely to vary
from period to period, and a significant customer in one period may not purchase
our products in a subsequent period. In general, there are no ongoing written
commitments by customers to purchase our products. Our net sales in any period
generally have been and likely will continue to be in the near term, derived
from a relatively small number of sales transactions. Therefore, the loss of one
or more major customers could materially adversely affect our results of
operations.
If our speech recognition products are not adopted for use in our target
markets, it will be difficult for us to generate revenues and profits. The
speech industry is relatively new and rapidly evolving. Accordingly, it is
difficult to accurately predict demand and market acceptance for our recently
introduced products. The speech industry currently has a limited number of
proven products and popular perceptions about the use of speech recognition
products (including reliability, cost, ease-of-use and quality) may impact the
growth of the market for such products. While we believe that speech recognition
technology offers significant advantages over competing products for a broad
range of warehouse and industrial applications, we cannot assure you that the
market for voice-based products will grow significantly or that our products
will become widely accepted. Therefore, it is difficult to predict the size and
future growth rate, if any, of this market. If the market for our products does
not develop or if our new products do not achieve market acceptance, our future
financial results will be adversely affected.
If our VoiceLogistics(TM) family of products is not successful in the
market, we will not be able to generate substantial revenues or achieve
profitability. Our success is substantially dependent on the success of our
VoiceLogistics(TM) family of products. Sales of our older generation voice-based
products accounted for approximately 47%, 58% and 8% of our net revenue for the
fiscal years ended 2000, 2001 and 2002, respectively. In addition, 53%, 42% and
6% of our net revenues in fiscal 2000, 2001 and 2002 respectively were licensing
revenues from our prior business of licensing speech compression technologies.
Since we sold our speech compression business in September 1999, we expect our
revenues from licensing speech compression technologies to decrease. If our
VoiceLogistics(TM) products are accepted by the market, these products will
account for a large percentage of our net revenue in the future. If our
VoiceLogistics(TM) products are unsatisfactory, or if we are unable to generate
significant demand for these products, or we fail to develop other significant
products, our business will be materially and adversely affected.
If we are unsuccessful in managing our recently acquired business, we will
be unable to grow the business and generate revenues and profits. In February
1999, we acquired from Verbex the assets and technology relating to our business
of selling speech recognition-based products for the warehousing and
manufacturing markets and other industrial markets. In September 1999, we also
sold the assets relating to our prior business of licensing speech coding and
audio compression technologies. We therefore have very limited operating history
and experience in our primary line of business. In particular, most of our
senior management, including Dr. Bathsheba J. Malsheen, our President and Chief
Executive Officer, have been operating the Verbex business only since February
1999. Accordingly, we cannot assure you that our management will be effective in
operating our business in order to generate substantial revenues, or operating
or net income.
If we do not develop or acquire and introduce new and enhanced products on
a timely basis, our products may be rendered obsolete. The markets for our
speech recognition products and technologies are characterized by rapidly
changing technology. The introduction of products by others based on new or more
advanced technologies could render our products obsolete and unmarketable.
Therefore, our ability to build on our existing technologies and products to
develop and introduce new and enhanced products in a cost effective and timely
manner will be a critical factor in our ability to grow and compete. We cannot
assure you that we will develop new or enhanced products successfully and in a
timely manner. Further, we cannot assure you that new or enhanced products will
be accepted by the market. Our failure to develop new or enhanced products,
including our failure to develop or acquire the technology necessary to do so,
would have a material adverse effect on our business.
11
If our competitors introduce better or cheaper products, our products may
not be profitable to sell or to continue to develop. The business in which we
engage is highly competitive. Success is influenced by advances in technology,
product improvements and new product introductions, as well as marketing and
distribution capabilities, and price competition. Failure to keep pace with
product and technological advances could adversely affect our competitive
position and prospects for growth. Our products compete with those being offered
by larger, traditional computer industry participants who have substantially
greater financial, technical, marketing and manufacturing resources than us. We
cannot assure you that we will be able to compete successfully against these
competitors or that competitive pressures faced by us would not adversely affect
our business or operating results.
If we cannot integrate our speech recognition products with other
components of customer systems, we may not be able to sell our products.
Although state-of-the-art speech recognition technology is important to
generating sales in our target markets, other components of a voice-based system
are also necessary. Our products must be easily integrated with customers' asset
management and information systems. The ability to incorporate speech
recognition products into customers' systems quickly and without excessive cost
or disruption will be a key factor in our success. We do not now possess all the
necessary components for system integration. Acquisitions, joint ventures or
other strategic relationships may be required for us to develop or obtain access
to the necessary components to achieve market penetration. We cannot assure you
that our efforts will be successful and, to the extent we are unsuccessful, our
business may be materially adversely affected.
There are a number of factors, which may cause substantial variability in
our quarterly operating results. Our revenue, gross profit, operating income and
net income may vary substantially from quarter to quarter due to a number of
factors. Many factors, some of which are not within our control, may contribute
to fluctuations in operating results. These factors include the following:
o market acceptance of our new products;
o timing and levels of purchases by customers;
o new product and service introductions by our competitors or us;
o market factors affecting the availability or costs of qualified
technical personnel;
o timing and customer acceptance of our new product and service
offerings;
o length of sales cycle; and
o industry and general economic conditions.
If our third-party partners do not effectively market and service our
products, we will not generate significant revenues or profits from sales of our
products. We expect to utilize third parties, such as consultants, value added
resellers, or VARs, and system integrators, to sell and/or assist us in selling
our products. To date, we have signed agreements with several of these
third-party partners. We believe that the establishment of a network of
third-party partners with extensive and specific knowledge of the various
applications critical in the industrial market is important for us to succeed in
that market. Some third-party partners also purchase products from us at a
discount and incorporate them into application systems for various target
markets, and/or consult us in the development of application systems for end
users. For the foreseeable future, we may sell fewer products if we cannot
attract and retain third-party partners to sell and service our products
effectively and that provide timely and cost-effective customer support. An
increasing number of companies compete for access to the types of partners we
use. Our current arrangements with third-party partners generally may be
terminated by either party at any time upon 30 days prior written notice. We
cannot assure you that our partners will continue to purchase and re-sell our
products or provide us with adequate levels of support. If our partner
relationships are terminated or otherwise disrupted our operating performance
and financial results will be adversely affected.
If we cannot attract and retain management and other personnel with
experience in the areas of our business focus, we will not be able to manage and
grow our business. We have been developing and selling our speech recognition
products and technologies only since February 1999. Since that time, we have
been hiring personnel with skills and experience relevant to the development and
sale of these products and technologies. If we cannot continue to hire such
personnel and to retain any personnel hired, our ability to operate our business
12
profitably will be materially adversely affected. Competition for qualified
personnel is intense and we cannot assure you that we will be able to attract,
assimilate or retain qualified personnel.
If we cannot protect our proprietary rights and trade secrets or if we are
found to be infringing on the patents and proprietary rights of others, our
business would be substantially harmed. Our success depends in part on our
ability to protect the proprietary nature of our products, preserve our trade
secrets and operate without infringing the proprietary rights of others. If
others obtain and copy our technology or others claim that we are making
unauthorized use of their proprietary technology, we may get involved in lengthy
and costly disputes to resolve questions of ownership of the technology. If we
are found to be infringing on the proprietary rights of others, we could be
required to seek licenses to use necessary technology. We cannot assure you that
licenses of third-party patents or proprietary rights would be made available to
us on acceptable terms, if at all. In addition, the laws of certain countries
may not protect our intellectual property. To protect our proprietary rights, we
seek patents and we enter into confidentiality agreements with our employees and
consultants with respect to proprietary rights and unpatented trade secrets. We
cannot assure you that patent applications in which we hold rights will result
in the issuance of patents. We cannot assure you that any issued patents will
provide significant protection for our technology and products. In addition, we
cannot assure you that others will not independently develop competing
technologies that are not covered by our patents. We cannot assure you that
confidentiality agreements will provide adequate protection for our trade
secrets, know-how, or other proprietary information in the event of any
unauthorized use or disclosures. Any unauthorized disclosure and use of our
proprietary technology would have a material adverse effect on our business.
The price of our common stock has been highly volatile due to factors that
will continue to affect the price of our stock. Our common stock closed as high
as $0.33 and as low as $0.05 per share between July 1, 2001 and June 30, 2002.
Historically, the over-the-counter markets for securities such as our common
stock have experienced extreme price fluctuations. Some of the factors leading
to this volatility include:
o fluctuations in our quarterly revenue and operating results;
o announcements of product releases by us or our competitors;
o Announcements of acquisitions and/or partnerships by us or our
competitors; and
o increases in outstanding shares of common stock upon exercise or
conversion of derivative securities
Certain factors may continue to affect the price of our common stock in the
future. If the trading price of our common stock falls, our stockholders could
experience substantial dilution as a result of the terms of our Series B
Preferred Stock, Series C Preferred Stock and warrants originally issued in
private placements in August 2000 and April 2001, as amended in August 2001.
We issued 4,000 shares of our Series A Preferred Stock and a common stock
purchase warrant (the "2000 Warrant") to Castle Creek Technology Partners, LLC
("Castle Creek") in a private placement on August 15, 2000. As of August 28,
2001 Castle Creek held 3,635 of such shares. On August 29, 2001, all 3,635 of
such Series A Preferred Stock were converted into the same number of Series B
Preferred Stock pursuant to the terms of an exchange agreement (the "Exchange
Agreement") between us and Castle Creek. The number of shares of common stock
issuable by us upon conversion of the Series B Preferred Stock and exercise of
the 2000 Warrant can increase substantially in certain events. If these events
were to occur, we would not receive any additional payment from the holders of
the Series B Preferred Stock and the 2000 Warrant for the additional shares. Any
increase in the number of shares of common stock issuable may result in a
decrease in the value of the outstanding shares of common stock.
In April 2001, we issued 714,000 shares of common stock and a common stock
purchase warrant (the "2001 Warrant") to purchase 2,142,000 shares of common
stock to Castle Creek. Two hundred thousand shares of the common stock were
subsequently given as a gift by Castle Creek to a non-profit organization. As of
August 28, 2001, Castle Creek had sold an additional 475,000 of such shares. On
August 29, 2001, the 2001 Warrant was cancelled and a new warrant (the "New
Warrant") was issued to Castle Creek to purchase 2,142,000 shares of common
stock, pursuant to the Exchange Agreement. The securities issued in these
transactions are subject to anti-dilution protection in the event we issue
securities prior to specified dates at a price below the purchase price of the
shares, which is $0.34 per share. The anti-dilution protections set forth in the
agreements which we and Castle Creek entered into in April 2001, as amended by
the Exchange Agreement, require us to issue to Castle Creek additional
13
warrants to purchase shares of our common stock any time we issue our common
stock (or securities convertible into our common stock) at a price below $0.34.
Such additional warrants, if issued, will have a term of ten years, an exercise
price of $0.01 per share and will be exercisable only to the extent that the
number of shares of common stock issuable upon such exercise, together with the
number of shares of common stock then owned by Castle Creek does not exceed
4.99% of our then outstanding shares of common stock. In addition, the number of
shares of common stock which we must issue pursuant to additional warrants may
increase substantially in the event we fail to maintain the effectiveness of the
registration statement on Form S-2 declared effective on August 3, 2001 and the
registration statement on Form S-2 declared effective on September 6, 2001, or
adequately update either registration statement. The sale of shares to Castle
Creek in April 2001 reset the conversion price of the Series A Preferred Stock
to $0.34.
The Series B Preferred Stock is currently convertible into 1,483,078 shares
of our common stock (as a result of a limitation on conversions in the Exchange
Agreement) and the 2000 Warrant is currently exercisable for 727,273 shares of
our common stock. If conversions of the Series B Preferred Stock were not
limited by the Exchange Agreement, such shares would be convertible into
17,187,500 shares of common stock, at the current conversion price of $0.16 per
share. The number of shares of common stock which we must issue upon conversion
of the Series B Preferred Stock may increase substantially in the following
events:
o if we do not allow conversion of the shares of Series B Preferred
Stock or we fail to deliver a stock certificate for common stock
within the required time periods after we receive notice of an intent
to convert the Series B Preferred Stock; and
o if we fail to maintain the effectiveness of our registration statement
on Form S-3 declared effective on September 15, 2000 or adequately
update such registration statement.
The number of shares of common stock which we must issue upon exercise of
the 2000 Warrant may increase substantially in the event we issue securities at
a price below the exercise price of the 2000 Warrant, which is currently
$0.1255, or at prices below the prevailing market price at the time of issuance.
We issued 1,865 shares of our Series C Preferred Stock and common stock
purchase warrants (the "December 2001 Warrants") to certain existing and new
investors in a private placement on December 12, 2001. The number of shares of
common stock issuable by us upon conversion of the Series C Preferred Stock can
increase substantially in certain events. If these events were to occur, we
would not receive any additional payment from the holders of the Series C
Preferred Stock for the additional shares. Any increase in the number of shares
of common stock issuable may result in a decrease in the value of the
outstanding shares of common stock.
The Series C Preferred Stock is currently convertible into 14,661,365
shares of our common stock and the December 2001 Warrants are currently
exercisable for 6,402,384 shares of our common stock. The number of shares of
common stock which we must issue upon conversion of the Series C Preferred Stock
may increase substantially in the following events:
o if we do not allow conversion of the shares of Series C Preferred
Stock or we fail to deliver a stock certificate for common stock
within the required time periods after we receive notice of an intent
to convert the Series C Preferred Stock; and
o if we issue securities at a price below the conversion price of the
Series C Preferred Stock, which is currently $0.1255, or at prices
below the prevailing market price at the time of issuance.
In connection with the Series C private placement, Castle Creek agreed to
forgo its rights under the 2001 Securities Purchase Agreement with respect to
additional warrants and to forgo any reduction in the conversion price for the
Series B Preferred Stock which would otherwise result from such private
placement.
The perceived risk of dilution or any actual dilution occasioned by Series
B Preferred Stock, the Series C Preferred Stock, the 2000 Warrant, the New
Warrant or the December 2001 Warrants may cause our stockholders to sell their
shares, which would contribute to the downward movement in stock price of the
common stock. In addition, the significant downward pressure on the trading
price of the common stock could encourage investors to engage in short sales,
which would further contribute to the downward spiraling price of the common
stock.
14
The perceived risk of dilution or any actual dilution occasioned by the
conversion of Series B Preferred Stock or the Series C Preferred Stock, or the
exercise of the 2000 Warrant, the New Warrant or the December 2001 Warrants
could also make it difficult to obtain additional financing. New investors could
either decline to make an investment in Voxware due to the potential negative
effect of the dilution on a potential investment or require that their
investment be on terms at least as favorable as the terms of the transactions
with Castle Creek.
Future sales of our common stock in the public market could adversely
affect the price of our common stock. Sales of substantial amounts of our common
stock in the public market that are not currently freely tradable, or even the
potential for such sales, could impair the ability of our stockholders to recoup
their investment or make a profit. As of October 11,2002, these shares include:
o approximately 72,403 shares of common stock owned by our executive
officers and directors;
o approximately 7,716,544 shares of common stock which may be sold under
various prospectuses filed under the Securities Act of 1933, as
amended (the "Act");
o approximately 6,362,544 shares issuable to the selling stockholders
upon the exercise of the December 2001 Warrants which may be sold
under a prospectus filed under the Act;
o approximately 14,361,365 shares of common stock issuable upon
conversion of the Series C Preferred Stock which may be sold under a
prospectus filed under the Act;
o approximately 3,082,371 shares of common stock potentially issuable as
dividends on the Series C Preferred Stock which may be sold under a
prospectus filed under the Act;
o up to 1,483,078 shares of common stock issuable upon conversion of the
Series B Preferred Stock (as a result of a limitation on conversion in
the Exchange Agreement) issued in August 2001 which may be sold under
a prospectus filed under the Act;
o approximately 3,599,158 shares issuable to warrant holders and option
holders which may be sold under a prospectus filed under the Act; and
o additional shares that may be issuable under anti-dilution and penalty
clauses contained in agreements with certain stockholders.
If the holders of the Series B Preferred Stock, the Series C Preferred
Stock and the 2000 Warrant elect to have the Series B Preferred Stock, the
Series C Preferred Stock and the 2000 Warrant assumed by a potential acquirer of
Voxware, the acquirer could be deterred from completing the acquisition.
The Series B Preferred Stock, the Series C Preferred Stock and the 2000
Warrant permit the holders to elect to have their shares of Series B Preferred
Stock, Series C Preferred Stock and the 2000 Warrant remain outstanding after an
acquisition of Voxware, and to have the acquirer assume all of our obligations
to the holders. This could deter a potential acquirer from completing an
acquisition of Voxware.
Among our obligations which an acquirer might be forced to assume which
would act as a deterrent are:
o the price adjustment provisions which could have an adverse effect on
the market value of the acquirer's outstanding securities;
o the obligation to register the re-sale of the common stock issuable
upon conversion of the Series B Preferred Stock and the 2000 Warrant
which could result in the sale of a substantial number of shares in
the market;
o the obligation to pay dividends on the Series B Preferred Stock and
Series C Preferred Stock;
o the obligation to pay the holders of Series B Preferred Stock and
Series C Preferred Stock the amount invested plus accrued dividends
before any other stockholder receives any payment if we are
liquidated;
15
o the obligation to seek the consent of the holders of the Series B
Preferred Stock before we can issue securities which have senior or
equal rights as the Series B Preferred Stock, sell all or
substantially all of our assets, or take other actions with respect to
the Series B Preferred Stock or securities which have less rights than
the Series B Preferred Stock; and
o the obligation to seek the consent of the holders of the Series C
Preferred Stock before we can issue securities which have senior or
equal rights as the Series C Preferred Stock, sell all or
substantially all of our assets, or take other actions with respect to
the Series C Preferred Stock or securities which have less rights than
the Series C Preferred Stock.
Our common stock is considered "a penny stock" and may be difficult to sell. The
Securities and Exchange Commission ("SEC") has adopted regulations which
generally define "penny stock" to be an equity security that has a market price
of less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to specific exemptions. Presently, the market price of our common stock
is substantially less than $5.00 per share and therefore may be designated as a
"penny stock" according to SEC rules. This designation requires any broker or
dealer selling these securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may
affect the ability of investors to sell their shares. In addition, since our
common stock is traded on the NASD OTC Bulletin Board, investors may find it
difficult to obtain accurate quotations of our common stock.
16
ITEM 2. PROPERTIES.
Effective July 1, 2000 we entered into a lease for our executive facility,
which contains approximately 4,000 square feet of office space in Lawrenceville,
NJ. The initial term of this lease will expire on June 30, 2003. Total payments
under this lease consist of a base rent of $16.00 per square foot in the first
year, $17.00 per square foot in the second year, and $18.00 per square foot in
the third year, plus escalations for property operating expenses, property taxes
and other items. We entered into a Sublease Agreement in February 2002, under
which we subleased to a third party approximately 34% of the space in the
facility. The initial term of that Sublease Agreement will expire on June 30,
2002, and thereafter shall automatically renew from month to month.
Our prior principal facility, which contains approximately 18,000 square
feet of office space, was located in Princeton, New Jersey. We leased this space
under a lease which was scheduled to expire on May 31, 2003. Total payments
under this lease consisted of a base rent of $21.30 per square foot, plus
escalations for property operating expenses, property taxes and other items. We
entered into a Sublease Agreement in July 1998, under which we subleased to a
third party approximately 47% of the space in the facility. The initial term of
that Sublease Agreement was due to expire on May 31, 2003. Effective June 30,
2000, we were released from our lease commitment for 9,500 square feet of the
office space in Princeton, New Jersey. The remaining 8,500 square feet of this
space was occupied by the sub-lessee, and payments received under the Sublease
Agreement offset all but $0.30 per square foot of our remaining lease
commitment. Effective January 31, 2002, we and our sub-lessee concurrently were
released from this lease commitment for the remaining 8,500 square feet of this
space.
Our principal facility, which is located in Cambridge, Massachusetts,
contains approximately 9,535 square feet of office space. We lease this space
for research and development, customer support, professional services, product
marketing, product engineering, and final assembly and testing. Total payments
under this lease consist of a base rent of $27.00 per square foot, an
electricity charge of $1.50 per square foot, and an expense charge of 14.9% of
the landlord's building expenses. The initial term for the lease of this office
space will expire on June 30, 2004.
We believe that existing facilities are adequate for operations through the
fiscal year ending June 30, 2003.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
these claims cannot be predicted with certainty, we do not believe that the
outcome of any of these legal matters will have a material adverse effect on our
business, operating results or financial condition.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Our annual meeting of stockholders was held on May 1, 2002. Three matters
were submitted to a vote of the stockholders. These matters were:
1. To elect one director to serve until the next annual meeting of
stockholders or until their respective successor shall have been duly
elected and qualified.
2. To approve an amendment to the Company's 1994 Stock Option Plan in
order to increase the number of shares of common stock reserved for
issuance under the plan by 4,000,000 shares to an aggregate of
8,000,000 shares.
3. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of common stock by
120,000,000 to 180,000,000.
David B. Levi was elected as a Director of the Company. The terms of
Bathsheba J. Malsheen, Ph.D. and Eli Porat as Directors extended beyond the
meeting and they continued as Directors after the meeting.
The proposals and results of the vote of the stockholders taken at the
meeting by ballot and proxy were as follows:
1. The results of the vote taken at the meeting with respect to the
election of the nominees for the Board of Directors of the Company
were as follows:
Nominee For Withheld
------------- ----------------- ---------------
David B. Levi 17,752,705 Votes 1,265,315 Votes
2. The proposal to amend the Company's 1994 Stock Option Plan was not
adopted due to less than 50% of the outstanding shares of common stock
voted on the issue.
3. A proposal to amend the Company's Certificate of Incorporation to
increase the number of authorized shares of common stock from
60,000,000 shares to 180,000,000 shares was approved by the
stockholders with the following vote:
FOR 15,295,435 Votes AGAINST 3,598,017 Votes ABSTAIN 124,568 Votes
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Market Information
Our common stock was traded on the National Market segment of The Nasdaq
Stock Market through February 28, 2001. Since March 1, 2001, our common stock
has traded on the Nasdaq OTC Bulletin Board under the symbol "VOXW." The
following table sets forth the high and low sale prices as quoted on The Nasdaq
Stock Market and on the Nasdaq OTC Bulletin Board for our two most recent fiscal
years.
High Low
---- ---
FISCAL YEAR ENDED JUNE 30, 2001
Quarter ended September 30, 2000 $ 4.375 $ 1.969
Quarter ended December 31, 2000 $ 3.000 $ 0.500
Quarter ended March 31, 2001 $ 1.406 $ 0.375
Quarter ended June 30, 2001 $ 0.825 $ 0.250
FISCAL YEAR ENDED JUNE 30, 2002
Quarter ended September 30, 2001 $ 0.340 $ 0.140
Quarter ended December 31, 2001 $ 0.270 $ 0.060
Quarter ended March 31, 2002 $ 0.190 $ 0.100
Quarter ended June 30, 2002 $ 0.140 $ 0.050
As of June 30, 2002, there were approximately 150 holders of record of our
common stock. We have never declared or paid any cash dividends on our common
stock. We do not anticipate paying any cash dividends in the foreseeable future.
On August 29, 2001, the Company entered into an Exchange Agreement (the
"Exchange Agreement") with Castle Creek Technology Partners, LLC ("Castle Creek"
or the "Investor") which modified the terms of the private placements described
below that the Company had entered into with the Investor in August 2000 and
April 2001.
On August 15, 2000, the Company sold to the Investor 4,000 shares of Series
A Preferred Stock, $0.001 par value (the "Series A Preferred Stock") and a
Warrant (the "2000 Warrant") to purchase 727,273 shares of Common Stock, $0.001
par value (the "Common Stock") for an aggregate purchase price of $4 million,
pursuant to the terms of a Securities Purchase Agreement (the "2000 Securities
Purchase Agreement"). The number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock was limited to 2,850,413 shares.
On April 19, 2001, the Company sold to the Investor 714,000 shares of
Common Stock and a Warrant (the "2001 Warrant") to purchase 2,142,000 shares of
Common Stock for an aggregate purchase price of $242,000, pursuant to the terms
of a Securities Purchase Agreement (the "2001 Securities Purchase Agreement").
The Common Stock was sold at a price of $0.34 per share. The Company and the
Investor also entered into a Registration Rights Agreement (the "2001
Registration Rights Agreement") pursuant to which the Company agreed to file a
Registration Statement with the SEC relating to the shares of Common Stock
purchased pursuant to the 2001 Securities Purchase Agreement. Since this
registration statement was not declared effective by the SEC by the 90th day
following the closing of the 2001 Securities Purchase Agreement, the Company was
obligated to issue to the Investor a warrant to purchase 708,656 additional
shares of Common Stock of the Company (the "Remedy Warrant"). The exercise price
of the Remedy Warrant is $0.01 per share. During the year ended June 30, 2002,
the entire remedy warrant was exercised and the Company received $7,000 in gross
proceeds.
Pursuant to the 2001 Securities Purchase Agreement, Castle Creek exercised
three purchase warrants to purchase 714,000 shares of common stock each on
December 21, 2001, February 8, 2002, and April 19, 2002, respectively. The price
of all three warrant exercises was $0.13 per share, resulting in cash proceeds
of $278,000. Simultaneously, the Company applied the proceeds to retire an
aggregate of 251 shares of Series B Preferred. No additional warrants to
purchase common stock are outstanding pursuant to the 2001 Securities Purchase
Agreement.
19
By execution of the Exchange Agreement, the Company agreed to the following
modifications to the private placements:
First, all of the outstanding shares of Series A Preferred Stock were
exchanged for the same number of shares of Series B Preferred Stock, $0.001 par
value (the "Series B Preferred Stock") upon the effectiveness of the
registration described below. As of the date of execution of the Exchange
Agreement, there were 3,635 shares of Series A Preferred Stock outstanding. The
rights, preferences and privileges of the Series B Preferred Stock are as
described in the certificate of designations filed with the Secretary of State
of the State of Delaware on August 29, 2001, as amended (the "Certificate of
Designations"). The rights, preferences and privileges of the Series B Preferred
Stock are substantially similar to those of the Series A Preferred Stock, except
that they are amended in order to include the anti-dilution protection for the
Series A Preferred Stock which was afforded by the applicable Additional Warrant
provisions in the 2001 Securities Purchase Agreement. In addition, the
limitation on conversion of the Series B Preferred Stock was eliminated from the
Certificate of Designations, and by the Exchange Agreement the Investor agreed
to limit the aggregate number of shares issuable upon conversion of the Series B
Preferred Stock to 3,956,997. Series A Preferred Stock had previously been
converted into 1,043,003 shares of Common Stock.
Second, the 2001 Warrant was cancelled and a new warrant (the "New
Warrant") was issued, the terms of which are substantially similar to the 2001
Warrant except that it does not contain the provision of the 2001 Warrant which
required that the Company's right to require the Investor to exercise the 2001
Warrant be conditioned, among other things, on the Company's Common Stock
trading at a minimum market price.
Third, the 2000 Warrant was amended to eliminate the provision which
required a minimum exercise price for the exercise of the 2000 Warrant to
purchase shares in excess of a specified number.
Finally, the 2001 Registration Rights Agreement was amended to require the
registration of the shares of Common Stock issuable upon conversion of the
Series B Preferred Stock and upon exercise of the New Warrant and the Remedy
Warrant. Such agreement also was amended to obligate the Company to register the
shares of Common Stock issuable upon the exercise of the Additional Share
Warrants, if issued.
On December 12, 2001, the Company completed a $1,765,000 private placement
of Series C Preferred and common stock warrants to various accredited investors.
On February 1, 2002, the Company also received $100,000 in cash from an
additional accredited investor in connection with this private placement. In
total, the Company issued 1,865 shares of Series C Preferred Stock, which shares
are convertible into shares of common stock, resulting in proceeds to the
Company of approximately $1,572,000, net of transaction costs. In addition to
the cash transaction costs, the Company issued warrants to acquire 458,165
shares of common stock to investment advisors as finder's fees. The exercise
price for the warrants issued as finder's fees is $0.1255 per share, and the
warrant expires in five years. Using the Black-Scholes option-pricing model, the
Company determined the fair value of the warrants to be $350,000. The Company is
obligated to redeem the Series C Preferred Stock 36 months from the closing. The
Series C Preferred Stock has a 7% dividend payable in cash or equity, at the
election of Voxware, and are convertible into Voxware common stock at an initial
conversion price of $0.1255 per share, subject to adjustment, as defined in the
transaction documents. In addition, the investors have received warrants to
purchase 5,944,219 shares of common stock at an exercise price of $0.1255 per
share. The Series C Preferred stockholders have certain registration rights, as
defined in the transaction agreements.
The securities issued in the private placements were offered and sold
pursuant to an exemption from the registration requirements provided by
Regulation D under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
The selected statement of operations data for the year ended June 30, 2002,
and the selected balance sheet data as of June 30, 2002, have been derived from
the financial statements of the Company, which have been audited by WithumSmith
& Brown, PC independent certified public accountants, and which financial
statements are included elsewhere in this Form 10-K. The selected statement of
operations data for the years ended June 30, 2000 and 2001, and the selected
balance sheet data as of June 30, 2000 and 2001, have been derived from the
financial statements of the Company, which have been audited by Arthur Andersen
LLP, independent public accountants, and which financial statements are included
elsewhere in this Form 10-K. The selected statements of operations data for the
fiscal years ended June 30, 1998 and 1999, and the balance sheet data as of June
30, 1998 and 1999, have been derived from the Company's audited financial
statements not included herein. The selected statement of operations data set
forth
20
below should be read in conjunction with "Management's Discussion and Analysis
of Results of Operations and Financial Condition" and the financial statements
and notes thereto included elsewhere in this Form 10-K.
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Product revenues:
Product sales......................... $ -- $ 791 $ 1,419 $ 1,020 $ 2,994
License fees........................... 2,935 705 1,668 336 389
Royalties and recurring revenues....... 1,918 511 488 387 233
Total product revenues............... ------- ------- ------- ------- -------
4,853 2,007 3,575 1,743 3,616
Service revenues........................ 1,029 879 226 302 885
------- ------- ------- ------- -------
Total revenues.................. 5,882 2,886 3,801 2,045 4,501
------- ------- ------- ------- -------
Cost of revenues:
Cost of product revenues............. 142 429 799 1,185 1,997
Cost of service revenues............. 441 542 70 348 420
------- ------- ------- ------- -------
Total cost of revenues.......... 583 971 869 1,533 2,417
------- ------- ------- ------- -------
Gross profit.................... 5,299 1,915 2,932 512 2,084
------- ------- ------- ------- -------
Operating expenses:
Research and development............. 4,726 2,058 2,835 3,317 1,728
Sales and marketing.................. 3,844 2,513 2,870 3,263 1,166
General and administrative........... 2,467 1,691 2,140 2,647 1,946
Amortization of purchased intangibles -- 478 1,989 4,099 1,298
Asset impairment charge.............. -- -- -- 4,902 --
------- ------- ------- ------- -------
Total operating expenses........ 11,037 6,740 9,834 18,228 6,138
------- ------- ------- ------- -------
Operating loss.................. (5,738) (4,825) (6,902) (17,716) (4,054)
Interest income........................... 844 539 357 234 11
Gain on write down of warrants to fair
value..................................... -- -- -- 784 23
Gain on sale of tax loss carryforwards.... -- -- 501 279 27
Gain on sale of assets.................... -- -- 3,799 750 --
------- ------- ------- ------- -------
Net loss.................................. $ (4,894) $ (4,286) $ (2,245) $(15,669) $ (3,993)
Accretion of preferred stock to redemption
value..................................... $ -- $ -- $ -- $ (652) $ (1,749)
Warrants issued to preferred stockholders
treated as a dividend................... $ -- $ -- $ -- $ -- $ (480)
Beneficial conversion feature treated as
a dividend.............................. $ -- $ -- $ -- $ (2,913) $ (82)
------- ------- ------- ------- -------
Net loss applicable to common shareholders $ (4,894) $ (4,286) $ (2,245) $(19,234) $ (6,304)
======== ======= ======== ======= =======
Basic and diluted net loss applicable to
common stockholders per common share.... $ (0.38) $ (0.32) $ (0.16) $ (1.32) $ (0.34)
======== ======= ======== ======= =======
Shares used in computing basic and diluted
net loss applicable to common stockholders
per common share........................... 12,890 13,330 13,667 14,517 18,575
======== ======= ======== ======= =======
June 30,
------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short term
investments............................... $ 13,357 $ 4,446 $ 3,226 $ 578 $ 6
Working capital (deficit)................... 13,743 4,446 4,351 573 (386)
Total assets................................ 15,557 12,592 17,440 5,813 3,191
Series A mandatorily redeemable convertible
preferred stock........................... -- -- -- 3,193 --
Series B mandatorily redeemable convertible
preferred stock........................... -- -- -- -- 2,900
Series C mandatorily redeemable convertible
preferred stock........................... -- -- -- -- 1,299
Total stockholders' equity (deficit)........ 13,913 9,709 16,053 285 (3,475)
On February 18, 1999, the Company acquired substantially all of the assets
of Verbex. On April 4, 2000, the Company purchased certain assets of InRoad Inc.
On September 21, 1999, the Company sold to Ascend Communications substantially
all of the Company's assets relating to the business of developing and licensing
speech compression technology and products.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
This report contains forward-looking statements. Such statements are
subject to certain factors that may cause Voxware's plans to differ or results
to vary form those expected, including the risks associated with: Voxware's need
to raise additional capital in order to meet the Company's cash requirements
over the next twelve months and continue as a going concern; Voxware's need to
introduce new and enhanced products and services in order to increase market
penetration, and the risk of obsolescence of its products and services due to
technological change; Voxware's need to attract and retain key management and
other personnel with experience in providing integrated voice-based solutions
for e-logistics, specializing in the supply chain sector; the potential for
substantial fluctuations in Voxware's results of operations; competition from
others; Voxware's evolving distribution strategy and dependence on its
distribution channels; the potential that voice-based products will not be
widely accepted; and a variety of risks set forth from time to time in Voxware's
filings with the Securities and Exchange Commission. Voxware undertakes no
obligation to publicly release results of any of these forward-looking
statements that may be made to reflect events or circumstances after the date
hereof, or to reflect the occurrences of unexpected results.
Overview
Voxware designs, develops, markets and sells voice-based products for the
logistics, fulfillment, distribution, and package and mail sorting industries.
Until February 1999, our business was developing, marketing and selling speech
compression technologies and products to be used in websites, Internet telephony
and consumer devices. In February 1999 we acquired from Verbex the assets and
technology on which our current voice-based products are based. Since our
acquisition of Verbex, we have significantly curtailed our speech compression
technology business, and in September 1999 we sold substantially all of the
assets relating to that business. Our solutions are designed specifically for
use in warehouses, distribution centers and other industrial settings, to enable
workers to perform, through an interactive speech interface, the least automated
logistics and fulfillment tasks such as picking, receiving, returns processing,
cycle counting, cross-docking and order entry, more efficiently and effectively
than with alternative technologies or methods. Voxware solutions are designed to
be used in the logistics and fulfillment operations of most major market
industry sectors, including consumer goods manufacturers, consumer packaged
goods, direct to consumer (e-commerce and catalog), food and grocery, retail,
third party logistics providers and wholesale distribution. Voxware's products
are also deployed in package handling, mail sorting and manufacturing,
inspection and military combat applications. Revenues are generated primarily
from product sales, licenses and development services. Product sales consist of
portable devices and software used for various mobile industrial and warehouse
applications; stationary voice-based devices, primarily used for warehouse
receiving and package sorting applications; and accessories that complement our
product offerings, including microphones, headsets and computer hardware. We
still generate some license fees and royalty and recurring revenues from
licensing our former speech compression products. Professional services consists
of providing technical resources and assistance for customer-specific
applications. Revenues from product sales are generally recognized when products
are deployed for their intended use, or when they are shipped to a specific
third party partner.
Software product revenues are generally recognized upon shipment, provided
persuasive evidence of an arrangement exists, pricing is fixed or determinable,
the payment is due within one year, and collection of the resulting receivable
is deemed probable. If an acceptance period is required, revenues are recognized
upon customer acceptance. Royalty revenues are recognized in the period of
customer shipment. Service revenues consist of customer maintenance support and
engineering fees. Customer maintenance support revenues are recognized over the
term of the support period, which typically lasts for one year. Engineering fees
are generally recognized upon customer acceptance or upon delivery, if customer
acceptance is not required. The products and services are sold separately as
well as combined. The Company combines software, hardware and professional
services for installation, implementation and maintenance as part of its
industrial voice-based solutions.
The products and services are sold separately as well as combined. The
Company combines software, hardware and professional services for installation,
implementation and maintenance as part of its industrial voice-based solution.
The Company entered into and completed its initial solution arrangements
during 2001. Based on the Company's limited experience with implementation,
installation and customer acceptance, solution revenue for the hardware,
software and professional services, has been recorded upon the completion of
installation and customer acceptance.
22
During 2002, the Company entered into solution arrangements with customers
that resulted in or are expected to result in losses. The Company accrues these
losses when it is probable and can be reasonably estimated. As of June 30, 2002,
the Company evaluated such contracts and no losses on such contracts existed.
The sale to Ascend of the assets relating to the speech and audio coding
business did not include Voxware's rights and obligations under its then
existing license agreements. We continue to derive revenue from existing
licensees of our speech coding technology in the multimedia and consumer devices
markets in the form of periodic license renewal fees, royalties and service
fees. With the consent of Ascend, we may also license our speech coding
technologies for uses that are not competitive with Ascend. Although we do not
have any agreements or arrangements with Ascend relating to any general or
specific guidelines for obtaining Ascend's consent, we believe that Ascend will
consent to our licensing the speech coding technologies in the multimedia and
consumer devices markets. Our licensing activity relating to the speech coding
technologies had been decreasing prior to the sale to Ascend, and we expect this
trend to continue. Furthermore, as we focus on voice-based systems for
industrial markets, revenues from licenses of speech coding technologies will
become a less significant portion of our revenues. For the fiscal year ended
June 30, 2002, revenues related to the speech coding business accounted for 6%
of total revenues for the year, while revenue from our voice-based solutions
accounted for 94% of the fiscal year's revenues. While we may continue to take
advantage of favorable opportunities to license our speech coding technologies
in the future, we are not dedicating significant resources to the development,
marketing or licensing of our speech coding technologies.
Results of Operations
Fiscal 2002 Versus Fiscal 2001
Revenues
Voxware recorded revenues of $4,501,000 for the year ended June 30, 2002
compared to revenues of $2,045,000 for the year ended June 30, 2001. The
$2,456,000 increase in total revenues reflects an increase in product sales,
license fees and service fees, offset by a decrease of $154,000 in royalties and
recurring revenues. During the fiscal year ended June 30, 2002, Voxware
recognized $4,232,000 (94%) of total revenue from the sale of voice-based
solution products compared to $1,195,000 (58%) of total revenues during the
prior fiscal year ended June 30, 2001. We expect that over time, sales of
voice-based solutions will comprise the most significant portion of our revenue.
Revenues from speech compression technologies for the year ended June 30, 2002
approximated $269,000(6%) of total revenues versus $850,000 (42%) of total
revenues for the year ended June 30, 2001.
Total product revenues increased $1,873,000 to $3,616,000 during fiscal
year ended June 30, 2002 from $1,743,000 in the prior fiscal year ended June 30,
2001. The increase in total product revenues reflects an increase of $1,974,000
in product sales or $2,994,000 recognized in fiscal year ended June 30, 2002
compared to $1,020,000 of product sales recognized in the fiscal year ended June
30, 2001. During fiscal year ended June 30, 2002, Voxware recognized license
fees of $389,000 compared to $336,000 during fiscal year ended June 30, 2001,
resulting in a $53,000 increase. The increase in product revenues for fiscal
year 2002 is reflective of our change in business focus towards the development,
marketing and sale of our VoiceLogistics(TM) system. VoiceLogistics(TM) is a
voice-based solution set of software, hardware and professional services
designed specifically for use in warehouses, distribution centers and other
industrial settings to enable workers to perform typical logistics tasks such as
picking, receiving, returns processing, cycle counting and order entry through a
speech interface. The Company has focused its efforts on developing the market
for this product and has not aggressively pursued opportunities with its speech
compression business. Royalties and recurring revenues are primarily related to
the Company's speech compression business that was sold to Ascend, as discussed
previously. The decrease in these revenues represents the decline in use of our
speech coding products and we anticipate that revenues from the speech
compression business will continue to decline. We believe the factors discussed
in the "Overview" above are indicative of future revenues. For the fiscal years
ended June 30, 2002 and 2001, 83% and 59% of the Company's product revenues were
attributable to product sales, respectively, 11% and 19% were attributable to
license fees, respectively, and 6% and 22% were attributable to royalties and
recurring revenues, respectively.
Service revenues were primarily attributable to customer maintenance
support, fees for engineering services relating to our speech coding
technologies business, and professional service fees relating to voice-based
solutions. For the fiscal year ended June 30, 2002, service revenues totaled
$885,000, reflecting an increase of $583,000 from
23
service revenues of $302,000 for the fiscal year ended June 30, 2001. The
increase in service revenues is primarily attributable to the customer
maintenance support revenues related to our VoiceLogitics product suite and
professional service fees.
Cost of Revenues
Cost of revenues increased $884,000 from $1,533,000 for the fiscal year
ended June 30, 2001 to $2,417,000 for the fiscal year ended June 30, 2002. The
increase in cost of revenues is attributable to increases in fixed costs
associated with manufacturing as a percentage of cost of revenues.
Cost of product revenues increased $812,000 from $1,185,000 in the fiscal
year ended June 30, 2001 to $1,997,000 in the fiscal year ended June 30, 2002.
Such costs reflect materials, labor and overhead associated with the sale of our
voice-based products. As of June 30, 2002 and 2001, Voxware's manufacturing
staff, comprised of four individuals, is included in cost of product revenues.
Cost of services revenues consists primarily of the expenses associated
with customer maintenance support and professional services, including employee
compensation and travel expenditures. Cost of service revenues increased $72,000
from $348,000 in the fiscal year ended June 30, 2001 to $420,000 in the fiscal
year ended June 30, 2002. The increase in cost of service revenues was
reflective of our professional services fees charged for the installation of
VoiceLogistics in locations.
Operating Expenses
Total operating expenses decreased by $4,387,000 (47%) to $4,840,000 in the
fiscal year ended June 30, 2002 from $9,227,000 in the fiscal year ended June
30, 2001, excluding amortization and impairment of purchased intangibles
totaling $4,099,000 and $4,902,000, respectively, for the year ended June 30,
2001, compared to $1,298,000 and $0 for the year ended June 30, 2002. A decrease
in staff and the allocation of customer support, information technology and
professional services to cost of revenues attributed to cost reductions in
operations. As of June 30, 2002 headcount totaled 39 compared to 49 at June 30,
2001.
Research and development expenses primarily consist of employee
compensation and equipment depreciation and lease expenditures related to
product research and development. Voxware's research and development expenses
decreased $1,589,000 (48%) to $1,728,000 in the fiscal year ended June 30, 2002
from $3,317,000 in the fiscal year ended June 30, 2001. The decrease in research
and development expenses is due to efficiences and reductions in cost of sales
as a percentage of sales. As of June 30, 2002, the Company's research and
development team comprised 23 compared to 27 at June 30, 2001.
Sales and marketing expenses primarily consist of employee compensation
(including direct sales commissions), travel expenses and trade shows. Sales and
marketing expenses decreased $2,097,000 (64%) to $1,166,000 in the fiscal year
ended June 30, 2002 from $3,263,000 in the fiscal year ended June 30, 2001. The
decrease in sales and marketing expenses resulted from a reductions in Company
overhead and achievement of business objectives. Our sales and marketing staff
decreased 30% over the prior year period ended June 30, 2001, as we combined
sales personnel to strategically manage business opportunities. As of June 30,
2002, our sales and marketing personnel comprised 7 compared to 10 at June 30,
2001.
General and administrative expenses consist primarily of employee
compensation and fees for insurance, rent, office expenses and professional
services. General and administrative expenses decreased $701,000 (26%) to
$1,946,000 in the fiscal year ended June 30, 2002 from $2,647,000 in the fiscal
year ended June 30, 2001. As of June 30, 2002, the general and administrative
staff was 5, compared to 8 at June 30, 2001. The decrease in general and
administrative expenses is due to the allocation of costs associated with the
Information Technology department to cost of sales.
Amortization of purchased intangibles totaled $1,298,000 for the fiscal
year ended June 30, 2002 compared to $4,099,000 in fiscal year ended June 30,
2001. The amortization is attributable to the intangibles generated in the 1999
acquisition of Verbex and the April 2000 Inroad transaction. The intangibles for
the Verbex transaction are being amortized over a four-year period and for the
InRoad transaction were amortized over a three-year period. The decrease in
amortization expense is a result of a full year of amortization of the InRoad
transaction intangibles. The Company recorded a charge for the impairment of
InRoad goodwill and purchased intangible assets as of June
24
30, 2001. During the fourth quarter of fiscal 2001, the Company planned a
redesign of the hardware product that will most likely result in the phase-out
of the InRoad technology that makes up a large portion of the VoiceLogistics
hardware. This decision, combined with the company's recurring operating losses
and negative cash flow, limited capital availability and significantly depressed
stock price, resulted in a significant indicator of impairment. Pursuant to SFAS
No. 121, the Company evaluated the recoverability of the Company's acquired
long-lived assets, including goodwill and identifiable intangibles. During the
fourth quarter of fiscal 2001, the Company determined that the undiscounted cash
flow projections for the hardware component of the Verbex business segment (the
hardware platform for the VoiceLogistics product as influenced by InRoad
Technology) were lower than the carrying value of the related identifiable
intangible assets. Accordingly, the Company adjusted the carrying value to the
discounted cash flows of the assets to zero, resulting in a non-cash impairment
charge of approximately $4,902,000. This had no impact on the Company's cash
position.
Interest Income
Interest income decreased $223,000 to $11,000 for the fiscal year ended
June 30, 2002 from $234,000 for the fiscal year ended June 30, 2001. The
decrease is primarily related to the decrease in Voxware's total cash, cash
equivalents and short-term investments portfolio balance. As of June 30, 2002
Voxware's cash, cash equivalents and short-term investments portfolio totaled
$6,000 compared to $561,000 at June 30, 2001.
Income Taxes
As of June 30, 2002, we had approximately $27,000,000 of federal net
operating loss carryforwards which will begin to expire in 2009 if not utilized.
As of June 30, 2002, a full valuation allowance has been provided on the net
deferred tax asset because of the uncertainty regarding realization of the
deferred asset, primarily as a result of the operating losses incurred to date.
Gain on Writedown of Warrants to Fair Value
On August 15, 2000, the Company completed a $4,000,000 private placement of
Series A Preferred Stock and Warrants to Castle Creek Technology Partners, LLC.
The Company allocated the proceeds, net of cash and non-cash transaction costs,
to the Series A Preferred and Warrants sold to Castle Creek based on the
relative fair value of each instrument. The fair value of the warrants was
determined based on the Black-Sholes option-pricing model. As a result, the
Company allocated approximately $807,000 to the warrants as of September 30,
2000. The warrants are classified as a liability in the accompanying
consolidated balance sheets because the warrants give the holder the choice of
net cash settlement at a time when other shareholders would not have such a
choice (upon a merger or change in control, as defined). As of June 30, 2002,
the outstanding warrants are subject to variable accounting and were adjusted to
the fair value of the warrants based upon the closing stock price as of that
date. As a result, the Company adjusted the warrants to zero representing the
fair market value as of June 30, 2002, using the Black-Sholes option-pricing
model and recorded a gain on the write down of warrants to fair value of $23,000
and $784,000 for the year ended June 30, 2002 and 2001, respectively.
Gain on Sale of Tax Loss Carryforwards
During 1999, the State of New Jersey passed legislation which allows New
Jersey technology companies to apply for the transfer or sale of unused New
Jersey state net operating losses and research and development tax credits for
cash. Profitable companies can buy these losses and credits at a discount,
thereby reducing their state tax obligation. Voxware applied to the State of New
Jersey and received determination letters to sell up to approximately
$14,900,000 of its New Jersey State net operating loss carryforwards. The
Company sold $0 and $7,480,000 in fiscal year 2002 and 2001, respectively, of
its New Jersey state net operating losses which, upon sale, provided Voxware
none and $279,000 in cash. Voxware also received a determination letter from the
State of New Jersey to sell $33,000 of its New Jersey State research and
development credits which, upon the sale in December 2002 provided $27,000 in
cash in fiscal year 2002.These amounts were recorded as a gain on sale of tax
loss carryforwards in the accompanying Statements of Operations.
25
Gain on Sale of Assets
During the quarter ended September 30, 1999, the Company completed the sale
of substantially all of the assets relating to our speech coding technology
business for $5,100,000, of which $750,000 had been placed in escrow for a
period of 18 months from the closing date to secure our indemnification
obligations under the agreement with Ascend. Upon closing, we received
$4,146,000 from Ascend. We had previously received a payment of $204,000 of the
purchase price. For the year ended June 30, 2001, we recorded a gain on the sale
of speech coding assets totaling $750,000, which reflects the release from the
Ascend escrow account. Total proceeds received to date totaling $5,100,000,
including the $750,000 from the Ascend Escrow account released from restriction
as of March 21, 2001, less transaction costs of $517,000 and equipment
transferred to Ascend totaling $34,000.
Asset Impairment Charge
Periodically, the Company evaluates the recoverability of the net carrying
value of its intangible assets by comparing the carrying values to the estimated
future undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down was the difference between the carrying
amounts and the fair value of these assets. Losses on impairment are recognized
by a charge to earnings (loss). On April 4, 2000, the Company purchased certain
assets (primarily intangible) of InRoad, Inc. for 650,000 shares of common stock
valued at $5,375,000 and 375,000 warrants to purchase common stock valued using
the Black-Scholes pricing model. Substantially all of the purchase price was
assigned to intangible assets acquired, amounting to $8,404,000, including all
industrial and intellectual property rights including patents, trademarks,
licenses, copyrights and proprietary processes. As of June 30, 2001, these
intangibles have been fully amortized or written off. The asset purchase
provided the Company with a voice-based hardware platform for the new
VoiceLogistics(TM) product.
As a result of management's analysis, and using the best information
available, in the fourth quarter of the fiscal year ended June 30, 2001, the
Company recorded an assets impairment charge related to the goodwill and
intangible assets related to the prior acquisitions of certain assets of InRoad.
Additionally, during the fourth quarter of 2001, management determined that
approximately $4,902,000 of costs incurred had limited future value. As such, a
charge related to the write off of these assets is included in impairment of
intangible assets in the consolidated statements of operations for the year
ended June 30, 2001. As of June 30, 2002, management has evaluated the carrying
value of remaining intangibles (principally related to the Verbex acquisition)
and has concluded that an impairment charge is not required.
Fiscal 2001 Versus Fiscal 2000
Revenues
Voxware recorded revenues of $2,045,000 for the year ended June 30, 2001
compared to revenues of $3,801,000 for the year ended June 30, 2000. The
$1,756,000 decrease in total revenues reflects a decrease in product sales,
license fees and royalties and recurring revenues, offset by an increase in
service revenues from VoiceLogistics(TM). During the fiscal year ended June 30,
2001, Voxware recognized $1,195,000 (58%) of total revenue from the sale of
voice-based solution products compared to $1,786,000 (47%) of total revenues
during the prior fiscal year ended June 30, 2000. We expect that over time,
sales of voice-based solutions will comprise the most significant portion of our
revenue. Revenues from speech compression technologies for the year ended June
30, 2001 approximated $850,000 (42%) of total revenues versus $2,015,000 (53%)
of total revenues for the year ended June 30, 2000.
Total product revenues decreased $1,832,000 to $1,743,000 during fiscal
year ended June 30, 2001 from $3,575,000 in the prior fiscal year ended June 30,
2000. The decrease in total product revenues reflects a decrease of $399,000 in
product sales or $1,020,000 recognized in fiscal year ended June 30, 2001
compared to $1,419,000 of product sales recognized in the fiscal year ended June
30, 2000. During fiscal year ended June 30, 2001, Voxware recognized license
fees of $336,000 compared to $1,668,000 during fiscal year ended June 30, 2000,
resulting in a $1,332,000 decrease. The decrease in product revenues for fiscal
year 2001 is reflective of our change in business focus towards the development,
marketing and sale of our VoiceLogistics(TM) system. VoiceLogistics(TM) is a
voice-based solution set of software, hardware and professional services
designed specifically for use in warehouses, distribution centers and other
industrial settings to enable workers to perform typical logistics tasks
26
such as picking, receiving, returns processing, cycle counting and order entry
through a speech interface. The Company has focused its efforts on developing
the market for this product and has not aggressively pursued opportunities with
its speech compression business. Royalties and recurring revenues are primarily
related to the Company's speech compression business that was sold to Ascend, as
discussed previously. The decrease in these revenues represents the decline in
use of our speech coding products and we anticipate that revenues from the
speech compression business will continue to decline. For the fiscal years ended
June 30, 2001 and 2000, 59% and 40% of the Company's product revenues were
attributable to product sales, respectively, 19% and 47% were attributable to
license fees, respectively, and 22% and 13% were attributable to royalties and
recurring revenues, respectively.
Service revenues were primarily attributable to customer maintenance
support, fees for engineering services relating to our speech coding
technologies business, and professional service fees relating to voice-based
solutions. For the fiscal year ended June 30, 2001, service revenues totaled
$302,000, reflecting an increase of $76,000 from service revenues of $226,000
for the fiscal year ended June 30, 2000. The increase in service revenues is
primarily attributable to the decline in customer maintenance support revenues
related to our speech compression technologies, offset by professional service
fees relating to our voice-based logistics products.
Cost of Revenues
Cost of revenues increased $664,000 from $869,000 for the fiscal year ended
June 30, 2000 to $1,533,000 for the fiscal year ended June 30, 2001. The
increase in cost of revenues is attributable to increases in fixed costs
associated with manufacturing as a percentage of cost of revenues.
Cost of product revenues increased $386,000 from $799,000 in the fiscal
year ended June 30, 2000 to $1,185,000 in the fiscal year ended June 30, 2001.
Such costs reflect materials, labor and overhead associated with the sale of our
voice-based products. As of June 30, 2001 and 2000, Voxware's manufacturing
staff, comprised of four individuals, and is included in cost of product
revenues.
Cost of services revenues consists primarily of the expenses associated
with customer maintenance support and professional services, including employee
compensation and travel expenditures. Cost of service revenues increased
$278,000 from $70,000 in the fiscal year ended June 30, 2000 to $348,000 in the
fiscal year ended June 30, 2001. The increase in cost of service revenues was
partially offset by a decrease in service revenues for support and related
maintenance contracts associated with the speech compression technology
business.
Operating Expenses
Total operating expenses increased by $1,382,000 (18%) from $7,845,000 in
the fiscal year ended June 30, 2000 to $9,227,000 in the fiscal year ended June
30, 2001, excluding amortization and impairment of purchased intangibles
totaling $4,099,000 and $4,902,000, respectively, for the year ended June 30,
2001, compared to $1,989,000 for the year ended June 30, 2000. This increase is
due to the addition of several departments to provide VoiceLogistics(TM)
customers with a full service product offering. These departments include
Information Technology, Customer Service and Professional Service departments.
As of June 30, 2001 headcount totaled 49 compared to 39 at June 30, 2000.
Research and development expenses primarily consist of employee
compensation and equipment depreciation and lease expenditures related to
product research and development. Voxware's research and development expenses
increased $482,000 (17%) from $2,835,000 in the fiscal year ended June 30, 2000
to $3,317,000 in the fiscal year ended June 30, 2001. The increase in research
and development expenses is due to costs associated with the addition of
customer support and professional services teams. These teams will become an
integral part of our VoiceLogistics product offering and a greater portion of
cost of sales. As of June 30, 2001, the Company's research and development team
comprised 27 compared to 17 at June 30, 2000.
Sales and marketing expenses primarily consist of employee compensation
(including direct sales commissions), travel expenses and trade shows. Sales and
marketing expenses increased $393,000 (14%) from $2,870,000 in the fiscal year
ended June 30, 2000 to $3,263,000 in the fiscal year ended June 30, 2001. The
increase in sales and marketing expenses resulted from a 40% increase in trade
show attendance, speaking engagements and the achievement of sales and marketing
objectives. Our sales and marketing staff decreased 20% over the prior year
period ended June 30, 2000, as we combined sales personnel to strategically
manage business
27
opportunities. As of June 30, 2001, our sales and marketing personnel comprised
10 compared to 12 at June 30, 2000.
General and administrative expenses consist primarily of employee
compensation and fees for insurance, rent, office expenses and professional
services. General and administrative expenses increased $507,000 (24%) from
$2,140,000 in the fiscal year ended June 30, 2000 to $2,647,000 in the fiscal
year ended June 30, 2001. As of June 30, 2001, the general and administrative
staff was 8, compared to 6 at June 30, 2000. The increase in general and
administrative expenses is due to costs associated with the addition of an
Information Technology department.
Amortization of purchased intangibles totaled $4,099,000 for the fiscal
year ended June 30, 2001 compared to $1,989,000 in fiscal year ended June 30,
2000. The amortization is attributable to the intangibles generated in the 1999
acquisition of Verbex and the April 2000 Inroad transaction. The intangibles for
the Verbex transaction are being amortized over a four-year period and for the
InRoad transaction over a three-year period. The increase in amortization
expense is a result of a full year of amortization of the InRoad transaction
intangibles. The Company recorded a charge for the impairment of InRoad goodwill
and purchased intangible assets as of June 30, 2001. During the fourth quarter
of fiscal 2001, the Company planned a redesign of the hardware product that will
most likely result in the phase-out of the InRoad technology that makes up a
large portion of the VoiceLogistics hardware. This decision, combined with the
company's recurring operating losses and negative cash flow, limited capital
availability and significantly depressed stock price, resulted in a significant
indicator of impairment. Pursuant to SFAS No. 121, the Company evaluated the
recoverability of the Company's acquired long-lived assets, including goodwill
and identifiable intangibles. During the fourth quarter of fiscal 2001, the
Company determined that the undiscounted cash flow projections for the hardware
component of the Verbex business segment (the hardware platform for the
VoiceLogistics(TM) product as influenced by InRoad Technology) were lower than
the carrying value of the related identifiable intangible assets. Accordingly,
the Company adjusted the carrying value to the discounted cash flows of the
assets to zero, resulting in a non-cash impairment charge of approximately
$4,902,000. This had no impact on the Company's cash position.
Interest Income
Interest income decreased $123,000 to $234,000 for the fiscal year ended
June 30, 2001 from $357,000 for the fiscal year ended June 30, 2000. The
decrease is primarily related to the decrease in Voxware's total cash, cash
equivalents and short-term investments portfolio balance. As of June 30, 2001
Voxware's cash, cash equivalents and short-term investments portfolio totaled
$578,000 compared to $3,226,000 at June 30, 2000.
Income Taxes
As of June 30, 2001, we had approximately $29,572,000 of federal net
operating loss carryforwards which will begin to expire in 2009 if not utilized.
As of June 30, 2001, a full valuation allowance has been provided on the net
deferred tax asset because of the uncertainty regarding realization of the
deferred asset, primarily as a result of the operating losses incurred to date.
Gain on Writedown of Warrants to Fair Value
On August 15, 2000, the Company completed a $4,000,000 private placement of
Series A Preferred Stock and Warrants to Castle Creek Technology Partners, LLC.
The Company allocated the proceeds, net of cash and non-cash transaction costs,
to the Series A Preferred and Warrants sold to Castle Creek based on the
relative fair value of each instrument. The fair value of the warrants was
determined based on the Black-Sholes option-pricing model. As a result, the
Company allocated approximately $807,000 to the warrants as of September 30,
2000. The warrants are classified as a liability in the accompanying
consolidated balance sheets because the warrants give the holder the choice of
net cash settlement at a time when other shareholders would not have such a
choice (upon a merger or change in control, as defined). As of June 30, 2001,
the outstanding warrants were adjusted to the fair value of the warrants based
upon the closing stock price as of that date. As a result, the Company adjusted
the warrants to $23,000, representing the fair market value as of June 30, 2001,
using the Black-Sholes option-pricing model and recorded a gain on the write
down of warrants to fair value of $784,000 for the year ended June 30, 2001.
Gain on Sale of Tax Loss Carryforwards
During 1999, the State of New Jersey passed legislation which allows New
Jersey technology companies to apply for the transfer or sale of unused New
Jersey state net operating losses and research and development tax
28
credits for cash. Profitable companies can buy these losses and credits at a
discount, thereby reducing their state tax obligation. Voxware applied to the
State of New Jersey and received determination letters to sell up to
approximately $14,900,000 of its New Jersey State net operating loss
carryforwards. The Company sold $7,480,000
and $7,420,000 in fiscal year 2001 and 2000, respectively, of its New Jersey
state net operating losses which, upon sale, provided Voxware $279,000 and
$501,000 in cash. These amounts were recorded as a gain on sale of tax loss
carryforwards in the accompanying Statements of Operations.
Gain on Sale of Assets
During the quarter ended September 30, 1999, the Company completed the sale
of substantially all of the assets relating to our speech coding technology
business for $5,100,000, of which $750,000 had been placed in escrow for a
period of 18 months from the closing date to secure our indemnification
obligations under the agreement with Ascend. Upon closing, we received
$4,146,000 from Ascend. We had previously received a payment of $204,000 of the
purchase price. For the year ended June 30, 2001, we recorded a gain on the sale
of speech coding assets totaling $750,000, which reflects the release from the
Ascend escrow account. Total proceeds received to date totaling $5,100,000,
including the $750,000 from the Ascend Escrow account released from restriction
as of March 21, 2001, less transaction costs of $517,000 and equipment
transferred to Ascend totaling $34,000.
Asset Impairment Charge
Periodically, the Company evaluates the recoverability of the net carrying
value of its intangible assets by comparing the carrying values to the estimated
future undiscounted cash flows. A deficiency in these cash flows relative to the
carrying amounts is an indication of the need for a write-down due to
impairment. The impairment write-down would be the difference between the
carrying amounts and the fair value of these assets. Losses on impairment are
recognized by a charge to earnings (loss). On April 4, 2000, the Company
purchased certain assets (primarily intangible) of InRoad, Inc. for 650,000
shares of common stock valued at $5,375,000, 375,000 warrants to purchase common
stock valued using the Black-Scholes pricing model. Substantially all of the
purchase price was assigned to intangible assets acquired, amounting to
$8,404,000, including all industrial and intellectual property rights including
patents, trademarks, licenses, copyrights and proprietary processes. As of June
30, 2001, these intangibles have been fully amortized. The asset purchase
provided the Company with a voice-based hardware platform for the new
VoiceLogistics(TM) product.
As a result of management's analysis, and using the best information
available, in the fourth quarter of the fiscal year ended June 30, 2001, the
Company recorded an assets impairment charge related to the goodwill and
intangible assets related to the prior acquisitions of certain assets of InRoad.
Additionally, during the fourth quarter of 2001, management determined that
approximately $4,902,000 of costs incurred had limited future value. As such, a
charge related to the write off of these assets is included in impairment of
intangible assets in the consolidated statements of operations for the year
ended June 30, 2001.
Liquidity and Capital Resources
As of June 30, 2002, we had a total of $6,000 in cash and cash equivalents
In December 2001 and February 2002, the Company completed a private placement of
$1,865,000 of Series C Convertible Preferred Stock, which resulted in proceeds
to the Company of approximately $1,566,000, net of transaction costs. In March
2001, we received $750,000 from the Ascend escrow account after fulfillment of
indemnification obligations. Voxware also received $27,000 and $279,000,
respectively, in December 2001 and 2000 from the sale of New Jersey State net
operating losses. Also, in August 2000 the Company completed a private placement
of $4,000,000 of Series A Convertible Preferred Stock, which resulted in
proceeds to the Company of approximately $3,660,000, net of transaction costs.
In addition, on April 19, 2001 the Company consummated a private placement of
shares of common stock and common stock warrants to Castle Creek Technology
Partners pursuant to the terms of a Securities Purchase Agreement. Net of
transaction costs, the Company received $276,000. Since inception, we have
primarily financed our operations through the sale of equity securities.
Cash of $5,629,000, $7,109,000 and $1,851,000 was used to fund operations
for the years ended June 30, 2000, 2001 and 2002, respectively. Cash used in
operating activities for fiscal 2002 primarily consists of the net loss of
$3,993,000, offset by amortization and depreciation $1,570,000. Cash used in
operating activities in 2001 primarily consists of the net loss of $15,669,000
and the gain on the write-down of warrants, sale of tax loss
29
carryforwards and assets of $784,000, $279,000 and $750,000, respectively,
offset by amortization and depreciation of $4,413,000, stock-based compensation
expense of $15,000 and the asset impairment charge of $4,902,000. In fiscal
2000, cash provided by investing activities totaled $3,375,000, which consisted
of proceeds from the sale of net operating loss carry forwards totaling $501,000
and proceeds from the sale of assets to Ascend of $4,146,000, which were offset
by $722,000 in net purchases of short-term investments, $259,000 in purchases of
property and equipment, a payment of $240,000 related to the purchase of certain
assets of InRoad, Inc. and $51,000 contingent purchase price adjustment to
Verbex for the purchase of substantially all of the assets in February 1999. In
fiscal 2001, cash provided by investing activities totaled $3,279,000 due to the
sale of $2,707,000 of short-term investments, carryforwards and $750,000
received from the Ascend escrow account, offset by $457,000 of property and
equipment purchases, $279,000 from the sale of net operating loss. In fiscal
2002, cash provided by investing activities totaled $29,000.
For the years ended June 30, 2000, 2001 and 2002, cash provided by
financing activities totaled $318,000, $3,888,000 and $1,267,000, respectively.
A total of $318,000 of cash was provided by financing activities in fiscal 2000,
reflecting $305,000 in proceeds from the exercise of common stock options and
$13,000 from the issuance of common stock pursuant to the Employee Stock
Purchase Plan. In fiscal 2001, $276,000 was provided by the private placement of
common stock and common stock warrants, $3,660,000, net of transaction costs,
from the issuance of Series A Convertible Preferred Stock and warrants
consummated in August 2001 and offset by $48,000 from the repurchase of Series A
Preferred Stock. In fiscal 2002, $1,566,000 was provided by the issuance of
Series C Convertible Preferred Stock and Warrants consummated in December 2001.
The Company has authorized 10,000,000 shares of Preferred Stock with a
$0.001 par value per share. On August 29, 2001, all of the outstanding shares of
Series A Mandatorily Redeemable Convertible Preferred Stock ("Series A
Preferred") were exchanged for Series B Mandatorily Redeemable Convertible
Preferred Stock ("Series B Preferred"). The Company also issued Series C
Mandatorily Redeemable Convertible Preferred Stock ("Series C Preferred") in
December 2001 and February 2002. The Series B Preferred and Series C Preferred
shares have a stated value of $1,000 per share. As of June 30, 2002, 2,750
shares of Series B Preferred and 1,840 shares of Series C Preferred were issued
and outstanding.
On August 15, 2000 the Company completed a $4,000,000 private placement of
Series A Preferred and a warrant (the "Warrant") to purchase common stock to
Castle Creek. The Company sold 4,000 shares of Series A Preferred, which shares
are convertible into shares of common stock, resulting in proceeds to the
Company of approximately $3,660,000, net of cash transaction costs. The Company
is obligated to redeem the Series A Preferred 30 months from the closing. The
Series A Preferred has a 7% dividend payable in cash or equity, at the election
of the holder, and is convertible into Voxware common stock at an initial
conversion price of $3.025 per share, subject to adjustment, as defined. In
addition, Castle Creek received a Warrant to purchase 727,273 shares of common
stock at an initial exercise price of approximately $3.44 per share, subject to
adjustment set forth in the Warrant. The Company has the right to require
conversion of the Series A Preferred, and to redeem the Warrant, if its common
stock reaches certain price levels over a specified period of time. The
preferred stockholders have certain registration rights, as defined.
The Company allocated the proceeds, net of cash and non-cash transaction
costs, to the Series A Preferred and Warrant sold to Castle Creek based on the
relative fair value of each instrument. The fair value of the Series A Preferred
was determined based on a discounted cash flow analysis and the fair value of
the Warrant was determined based on the Black-Sholes option-pricing model. As a
result, the Company initially allocated approximately $2,774,000 and $807,000 to
the Series A Preferred and Warrant, respectively. After considering the
allocation of the proceeds to the Series A Preferred and Warrant, the Company
determined that the Series A Preferred contained a beneficial conversion feature
(BCF). The Company recorded the BCF in the amount of approximately $1,244,000,
in a manner similar to a dividend during the quarter ended September 30, 2000.
The Warrant has been classified as a liability in the accompanying consolidated
balance sheet because the Warrant gives the holder the choice of net cash
settlement at a time when other shareholders would not have such a choice (upon
a merger or change in control, as defined). As of June 30, 2002, the outstanding
Warrant was adjusted to the fair value of the Warrant based upon the closing
stock price as of that date. As a result, the Company adjusted the Warrant to
zero, representing the fair market value as of June 30, 2002, using the
Black-Sholes option-pricing model, and recorded a gain on the write down of the
Warrant to fair value of $23,000 for the period ended June 30, 2002.
The Series B Preferred are convertible into shares of common stock on the
date of issuance.
On April 19, 2001, the Company consummated a private placement of shares of
common stock and a common stock warrant to Castle Creek pursuant to the terms of
a Securities Purchase Agreement (the "Purchase Agreement"). Pursuant to the
private placement, the Company sold 714,000 shares (the "Common Shares") of
30
common stock and a warrant to purchase an additional 2,142,000 shares of its
common stock (the "Purchase Warrant"). The Common Shares were sold at a price of
$.34 per share. The exercise price of the Purchase Warrant is $1.25 per share in
the case of an optional exercise by Castle Creek, or 80% of the then market
value (as defined in the Purchase Warrant) of the common stock in the case of a
mandatory exercise required by the Company. Net
proceeds to the Company from the private placement were approximately $276,000.
Pursuant to the terms of the Purchase Agreement, the Company used $48,200 of
such proceeds to repurchase 46 shares of the Company's Series A Preferred from
Castle Creek. The balance of the proceeds was used by the Company for general
working capital purposes.
On August 29, 2001 the Company issued 708,656 remedy warrants to Castle
Creek. These remedy warrants allow Castle Creek to purchase shares of common
stock at $0.01 per share and expire on August 28, 2011. Using the Black-Scholes
option-pricing model, the Company determined the fair value of the remedy
warrants to be $139,000. The Company recorded the issuance of the remedy
warrants as a Preferred Stock dividend during the quarter ended September 30,
2001. Through June 30, 2002, Castle Creek exercised 708,656 of the remedy
warrants, resulting in gross proceeds of $7,087.
In August of 2001, the Company exchanged its Series A Preferred for shares
of Series B Preferred. As the term, rights and preferences of the Series B are
substantially similar to those of the Series A, the Company recorded the
exchange based upon the carrying value of the Series A Preferred.
The Company has accreted the Series A Preferred and is accreting Series B
Preferred to their redemption values using the effective interest method through
the redemption period of 30 months. Accordingly, the Company recorded $1,382,000
and $652,000 of accretion during the years ended June 30, 2002 and 2001,
respectively.
In addition, pursuant to the terms of the August 2000 Series A Preferred
transaction, any reset of the conversion price is treated as a dividend to the
holder of the Series A Preferred. Since the conversion price adjustment was part
of the August 2000 transaction, a contingent BCF existed at the August 15, 2000
commitment date. The contingent BCF was recorded upon resetting the conversion
price to $0.34 on April 19, 2001 and the dividend was recorded.
In August 2000, the contingent BCF was measured at zero. As a result, the
dividend was calculated based on the difference between the reduced conversion
price ($0.34) and the fair value of the common stock issuable upon conversion of
the Series A Preferred as of April 19, 2001. The charge for the BCF is limited
to the carrying value of the Series A Preferred after the initial allocation of
the cash proceeds received from the Series A Preferred and the Warrant. At April
19, 2001, the Company recorded a $1,669,000 dividend charge for the contingent
BCF. Through August 31, 2001, the Series A holders converted 319 shares of
Series A Preferred into 1,043,003 shares of common stock at an exercise price of
$0.34. Through June 30, 2002, Castle Creek elected to convert shares of Series B
Preferred into shares of common stock as follows:
Shares
--------------------------------------------
Date Series B Preferred Common
--------------------- ----------------
November 8, 2001 40 271,826
November 19, 2001 50 340,208
November 26, 2001 40 272,653
November 29, 2001 75 511,497
December 11, 2001 106 724,462
June 21, 2002 50 312,500
--------------------- ----------------
361 2,433,146
For all transactions through June 2002, each share of Series A or Series B
Preferred, plus the applicable dividend, converted into a number of common
shares at conversion prices ranging from $0.16 per share to $0.34 per share. At
the August 2001 conversion, the conversion price was re-adjusted to the average
of the five lowest closing bid prices during the last ten days before the
conversion ($0.19). The conversion price was again re-adjusted to $0.16 in
accordance with the August 2000 agreement. Per the August 2000 agreement, any
reset of the conversion price would result in a BCF limited as defined above. As
the limit was reached on the April 2001 BCF, no BCF was recorded in conjunction
with the August 2001 or October 2001 resets.
On December 12, 2001, the Company completed a $1,765,000 private placement
of Series C Preferred and common stock warrants to purchase 5,944,219 shares of
common stock to various accredited investors. On February 1, 2002, the Company
also received $100,000 in cash from an additional accredited investor in
connection
31
with this private placement. In total, the Company issued 1,865 shares of Series
C Preferred, which shares are convertible into shares of common stock, resulting
in proceeds to the Company of approximately $1,566,000, net of transaction
costs. In addition to the cash transaction costs, the Company issued warrants to
investment advisors as finder's fees to acquire 458,165 shares of common stock
as of June 30, 2002. The exercise price for the warrants issued as finder's fees
is $0.1255 per share, and the warrants expire in five years. Using the
Black-Scholes option-pricing model, the Company determined the fair value of the
warrants to be $350,000. The Company is obligated to redeem the Series C
Preferred 36 months from the closing. The Series C Preferred have a 7% dividend
payable in cash or equity, at the election of Voxware, and are convertible into
Voxware common stock at an initial conversion price of $0.1255 per share,
subject to adjustment, as defined in the transaction documents. In addition, the
investors have received warrants to purchase 5,944,219 shares of common stock at
an exercise price of $0.1255 per share and expire five years from the date of
closing. The Series C Preferred stockholders have certain registration rights,
as defined in the transaction agreements.
The Company allocated the proceeds, net of cash and non-cash transaction
costs, to the Series C Preferred and the additional purchase warrants sold to
investors based on the relative fair value of each instrument. The fair value of
the Series C Preferred was determined based on a discounted cash flow analysis
and the fair value of the additional purchase warrants was determined based on
the Black-Scholes option-pricing model. As a result, the Company allocated
approximately $1,220,000 and $350,000 to the Series C Preferred and the
additional purchase warrants, respectively. The warrants have been classified as
additional paid-in capital in the accompanying consolidated balance sheet.
The Company is accreting the Series C Preferred to their redemption value
using the effective interest method through the redemption period of 36 months.
Accordingly, the Company recorded $367,000 of accretion during the year ended
June 30, 2002.
The Series C Preferred are convertible into shares of common stock on the
date of issuance. After considering the allocation of the proceeds to the Series
C Preferred and the additional purchase warrants, the Company determined that
the Series C Preferred contained a BCF. The Company recorded the BCF as a
reduction of the Series C and an increase to additional paid-in capital in the
amount of approximately $350,000. In accordance with Emerging Issues Task Force
00-27, the BCF is being amortized over the redemption period of 36 months using
the effective interest method, and is being recorded in a manner similar to a
dividend during the period ended June 30, 2002. As a result, the Company
recorded approximately $82,000 as a BCF treated as a dividend during the quarter
ended June 30, 2002.
On February 7, 2002 and March 12, 2002, Castle Creek exercised 100,000 and
108,656, respectively of remedy warrants. These exercises resulted in gross
proceeds of $2,087. As of June 30, 2002, there were no remedy warrants
outstanding.
On February 8, 2002, Castle Creek exercised a purchase warrant to purchase
714,000 shares of common stock in connection with the April 19, 2001 Securities
Purchase Agreement. The exercise price was $0.13 per share, resulting in cash
proceeds of $93,000. Simultaneously, the Company applied the proceeds received
to retire 84 shares of Series B Preferred. As of June 30, 2002, there was an
additional purchase warrant to purchase the remaining 714,000 shares of common
stock under the April 19, 2001 Securities Purchase Agreement.
The Company has only a limited operating history upon which an evaluation
of the Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties, frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. Since its inception, the Company
has incurred significant losses and, as of June 30, 2002, the Company had an
accumulated deficit of $47,834,000, including $2,401,000 from accretion of
preferred stock to redemption value and $2,995,000 from the beneficial
conversion feature as a result of the Castle Creek and Series C transactions
consummated in August 2000, April 2001, and December 2001. Management believes
that unless the Company is able to secure additional financing in the
short-term, its cash and cash equivalents and short-term investments will not be
adequate to meet the Company's cash requirements over the next twelve months.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
assets carrying amounts or the amount and uncertainty. The Company has minimal
cash on hand as of September 30, 2002 and management is in current negotiations
to secure all or at least a portion of its financing required for the next
twelve months. There can be no assurance that the negotiations will be
successful and result in
32
financing for the Company. If such financing is not obtained, the Company will
have to curtail a significant portion or all of its operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not usually utilize derivative financial instruments in
our investment portfolio. However, in conjunction with the August 2000 and
December 2001 private placement transactions, the Company issued derivative
financial instruments in the form of warrants, which are indexed to the
Company's own stock. The value of the warrants fluctuates with the market value
of the Company's common stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this Item are included in this Report
on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company and their respective
ages and principal occupations are as follows:
Name Age Offices with the Company Class
---- --- ------------------------ -----
Bathsheba J. Malsheen, Ph.D.. 51 President, Chief Executive Officer
and Director III
Nicholas Narlis.............. 42 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
David B. Levi (1)(2)......... 69 Director II
Eli Porat (1)(2)............. 56 Director I
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Bathsheba J. Malsheen, Ph.D. has served as President, Chief Executive
Officer and Director of the Company since October 1997. She previously served as
Chief Operating Officer of the Company from May 1997 through October 1997, and
as Vice President of OEM Licensing since joining Voxware in October 1996 through
April 1997. From April 1990 to October 1996, Dr. Malsheen held various executive
positions with Centigram Communications Corporation, a voice messaging company,
most recently as General Manager of their Technology Business Unit and was
responsible for licensing of text-to-speech software products. Previously, she
worked for Speech Plus, Inc. where she served as Director of Speech Technology
from 1985 to 1990. Dr. Malsheen holds a Ph.D. and M.A. from Brown University and
a B.A. from Hofstra University.
Nicholas Narlis has served as Senior Vice President, Chief Financial
Officer and Secretary of the Company since April 1998, and Treasurer of the
Company since June 1996. He previously served as Vice President and Chief
Accounting Officer of the Company from March 1997 through April 1998, and as
Controller and Chief Accounting Officer from March 1996 through February 1997.
From 1992 to March 1996, Mr. Narlis served in various capacities at Dendrite
International, Inc., a sales force automation software and service company,
including most recently Director of Finance. Previously, from 1983 to May 1992,
Mr. Narlis worked for KPMG Peat Marwick where he served as a Senior Manager from
1989 to May 1992 in the New Jersey Audit Practice Unit. Mr. Narlis holds a B.S.
from Rider University and is a Certified Public Accountant.
David B. Levi has served as a director of Voxware since January 1998. Mr.
Levi served as President of Natural MicroSystems Corporation, a provider of
hardware and software for developers of high-value telecommunications solutions
from June 1991 to April 1995. In November 1995 Mr. Levi became President of
Voice Processing Corp ("VPC"). VPC merged with Voice Control Systems, Inc.
("VCS"), a supplier of telecommunications based speech recognition systems, in
November 1996 and Mr. Levi served as Chief Operating Officer of VCS until his
retirement in October 1997. Prior to 1991, Mr. Levi held Chief Executive Officer
and Chief Operating Officer positions at Raytheon Data Systems (a division of
Raytheon Corp.), Centronics Data Computer Corp., and Raster Technologies Inc.
and consulted to Regional Bell Operating Companies. Mr. Levi currently serves on
the Board of Directors of PictureTel, Inc. (pending purchase by Polycom, Inc.),
and Microlog Corporation. Mr. Levi holds an A.B. from Harvard College and an
M.B.A. from the Harvard Graduate School of Business Administration.
Eli Porat has served as a Director of the Company since August 1998. Mr.
Porat is CEO and Director of Tvia, Inc., a leading provider of broadband gateway
semiconductor solutions for the broadband digital TV and Internet-enabled
markets. Mr. Porat has served as Executive CEO of Open Grid, a leader in mobile
business solutions focusing on the travel and conference industries, and as
Chairman and CEO of Ensemble Solutions Inc., a provider of electronic
distribution through a suite of electronic business products, since August 1997.
From May 1996 to August 1997 he was a General Partner of DEFTA partners, a
venture capital group specializing in Internet telephony investments. From 1991
to May 1996, Mr. Porat was the President and CEO of DSP Group, Inc., a developer
of digital signal processing cores used in a wide range of applications such as
wireless communications, telephony and personal computers. Prior to 1991 Mr.
Porat held various senior-level positions with ZYMOS Computer Systems Inc.,
Sytek Inc. and Intel Corporation. He also serves on the Board of Directors of
Starfish Software, Inc., a leading
34
supplier of core device, server and desktop technologies for wireless and wire
line connected information devices. Mr. Porat has an M.S.E.E.C.S. and a
B.S.E.E.C.S. from the University of California at Berkley.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) under the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than ten
percent of our common stock, to file initial reports of ownership and reports of
changes in ownership with the SEC. Executive officers, directors and greater
than ten percent beneficial owners are required by the SEC to furnish us with
copies of all Section 16 forms they file.
Based upon a review of the copies of such forms furnished to us and written
representations from our executive officers and directors, we believe that the
reporting requirements of Section 16, as amended, applicable to our executive
officers, directors and greater than ten percent beneficial owners, were
complied with on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides information concerning compensation paid to or
earned for the fiscal years ended June 30, 2002, 2001, and 2000 the Chief
Executive Officer of Voxware and the next most highly compensated executive
officer during the fiscal year ended June 30, 2002.
Summary Compensation Table
Long Term
Annual Compensation Compensation Compensation
-------------------------------- ------------
Securities
Fiscal Underlying All Other
Name and Principal Position Period Base Salary Bonus Options Compensation (1)
- --------------------------- ------ ----------- ----- ------- ----------------
Bathsheba J. Malsheen, Ph.D................. 2002 $163,875 -- -- $ ---
President and 2001 $231,109 $ 87,209 -- $ ---
Chief Executive Officer (2) 2000 $209,376 $102,521 300,000 $ ---
Nicholas Narlis............................. 2002 $138,806 -- -- $ ---
Senior Vice President, Chief Financial, 2001 $170,088 $ 63,750 -- $2,551
Officer, Secretary and Treasurer 2000 $155,000 $ 71,875 200,000 $2,362
- --------
(1) All Other Compensation for Mr. Narlis consists of $1,099, $2,551 and
$2,362, in Voxware contributions to Mr. Narlis' account under our 401(k)
Plan in fiscal 2002, 2001 and 2000, respectively.
(2) Dr. Malsheen joined Voxware in October 1996, and became an executive
officer in May 1997.
Option Grants in Last Fiscal Year
No stock options were granted to the Named Executive officers during fiscal
2002.
The following table sets forth certain information concerning the number
and value of unexercised options held by each of the Named Executive Officers on
June 30, 2002.
Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at Fiscal
Year-End (1)
------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------- ------------ -------------
Bathsheba J. Malsheen, Ph.D............... 810,000 150,000 $ -- $ --
Nicholas Narlis........................... 383,125 96,875 $ -- $ --
(1) Based on the difference between $0.05, which was the closing price per
share on June 30, 2002, and the exercise price of the option.
35
Employment Agreements
Bathsheba J. Malsheen, Ph.D., President and Chief Executive Officer of
Voxware, has a three-year employment agreement with Voxware which commenced in
August 1998. Dr. Malsheen currently receives an annual base salary of $184,680,
and also receives allowances for residential and vehicle lease payments.
Nicholas Narlis, Vice President, Chief Financial Officer and Treasurer of
Voxware, has a three-year employment agreement with Voxware which commenced in
August 1998. Mr. Narlis currently receives an annual base salary of $153,090.
Each of the foregoing employment agreements is automatically renewable for
successive one-year terms unless terminated by either party.
Under the employment agreements for each of Dr. Malsheen and Mr. Narlis, if
either of them, respectively, is dismissed for any reason other than Cause (as
defined in their respective employment agreements), death or disability, he or
she shall be entitled to receive an amount equal to: in the case of Dr.
Malsheen, twelve months salary at her then current rate; or in the case of Mr.
Narlis, nine months salary at his then current rate.
Each of the employment agreements grant to Voxware the rights to any
information created, discovered or developed by the executive which is related
to or useful in the business of Voxware. The employment agreements prohibit the
executive from disclosing our proprietary information, and contain certain
covenants by the executive not to compete with Voxware.
Director Compensation
Our 1998 Stock Option Plan for Non-Employee Directors was adopted by the
Board of Directors in October 1997 and approved by our stockholders in January
1998. The Plan provides for the automatic grant of options to purchase shares of
our common stock to directors who are not officers, nor employees, nor
consultants of Voxware or any of its subsidiaries (other than the Chairman of
the Board of Directors of Voxware, who shall be eligible if he or she is not
otherwise an officer, employee or consultant of Voxware). Subject to the
provisions of the Plan, the Board has the power and authority to interpret the
Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, and to make all other determinations deemed necessary or advisable for the
administration of the Plan.
Under the Plan, each eligible individual receives an option to purchase
30,000 shares of our common stock (the "Initial Options") on the date of his or
her initial election or appointment to the Board; provided that all outside
directors elected at the 1998 Annual Meeting of Stockholders in January 1998
received the initial option, whether or not they served on the Board of
Directors prior to the meeting. In addition, on the date of an eligible
individual's re-election to the Board, if he or she has attended at least
seventy-five percent (75%) of the meetings of the Board of Directors that were
held while he or she was a director in the just completed calendar year, he or
she will be granted an option to purchase an additional 10,000 shares of our
common stock. All options granted under the Plan will have an exercise price
equal to the fair market value on the date of grant. Options granted under the
Plan vest in 12 equal quarterly installments beginning at the end of the first
three-month period following the date of grant.
In September 1997, we implemented a plan, which was approved by our
stockholders at our 1998 Annual Meeting of Stockholders, pursuant to which we
pay (or paid as outlined in accordance with the plan):
o on the last day of the month in which the annual meeting of stockholders is
held in each calendar year commencing with the 1998 meeting, to each
non-employee director elected at the meeting, an annual retainer equal to a
number of shares of our common stock with a fair market value on that date
of $10,000;
o on the last day of the month in which any newly appointed non-employee
director is appointed after the annual meeting of stockholders in any year
(provided that the director is appointed at least six months prior to the
next annual meeting of stockholders), to the newly appointed director, a
retainer equal to a number of shares of our common stock with a fair market
value on that date of $10,000.
In addition, commencing on the date of the 1998 meeting, we have paid
$1,000 to each non-employee director
36
attending any regular or special meeting of the Board of Directors, and $500 to
each non-employee director attending any regular or special meeting of any
Committee of the Board of Directors. Since April_, 2001, all non-employee
directors have volunteered to not be paid for attending any regular or special
meeting of any committee of the Board of Directors until further notice.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee is currently composed of Messrs. David
B. Levi and Eli Porat. No interlocking relationship exists between any member of
the Compensation Committee and any member of the compensation committee of any
other company, nor has any such interlocking relationship existed in the past.
No member or nominee of the Compensation Committee is or was formerly an officer
or an employee of the Company.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors advises the Chief
Executive Officer and the Board of Directors on compensation matters generally,
determines the compensation of the Chief Executive Officer and the President,
reviews and takes action on the recommendation of the Chief Executive Officer as
to the appropriate compensation of other officers and key personnel, and
approves the grants of bonuses to officers and key personnel. The Compensation
Committee also is responsible for the administration of our 1994 Stock Option
Plan and 1998 Stock Option Plan for Outside Directors.
General Compensation Policy for Executive Officers. The fundamental policy
of the Compensation Committee is to provide our executive officers with
competitive compensation opportunities based upon their contribution to our
development and financial success and their personal performance. It is the
Compensation Committee's objective to have a portion of each executive officer's
compensation contingent upon Voxware's performance, as well as upon each
executive officer's own level of performance. Accordingly, the compensation
package for each executive officer is comprised of three elements: (1) base
salary which reflects individual performance and is designed primarily to be
competitive with salary levels in the industry, (2) cash bonuses which reflect
the achievement of performance objectives and goals, and (3) long-term
stock-based incentive awards which strengthen the mutuality of interests between
the executive officers and our stockholders.
Factors. The principal factors which the Compensation Committee considered
with respect to each executive officer's compensation for fiscal 2002 are
summarized below. The Compensation Committee may however, in its discretion,
apply entirely different factors with respect to executive compensation for
future years.
o Base Salary. The base salary for each executive officer is
determined on the basis of the following factors: experience,
personal performance, the salary levels in effect for comparable
positions within and without the industry, and internal base
salary comparability considerations. The weight given to each of
these factors differs from individual to individual, as the
Compensation Committee deems appropriate. Base salaries are
generally reviewed on an annual basis, with adjustments made in
accordance with the factors indicated above. The Compensation
Committee utilized specific compensation information available
for similar positions at competitor companies for comparative
compensation purposes in determining base salaries for fiscal
2002.
o Bonus. The incentive compensation of executive officers is
closely related to Voxware's performance, taking into account our
change in business focus to a voice-based logistics solutions
business. A portion of the cash compensation of executive
officers consists of contingent compensation. Bonus awards are
based on, among other things, performance objectives and goals
that are tailored to the responsibilities and functions of key
executives, including qualitative measures of Voxware's
performance such as progress in the development, marketing and
adaptation of Voxware's products to its target markets, the
establishment of key strategic relationships with customers and
other key partners in our target markets, and proficient usage of
our available financial and manpower resources.
o Long-Term Incentive Compensation. Long-term incentives are
provided through grants of stock options. The grants are designed
to align the interests of each executive officer with those of
the stockholders, and provide each individual with a significant
incentive to manage Voxware from the perspective of an owner with
an equity stake. Each option grant allows the individual to
acquire shares
37
of our common stock at a fixed price per share (generally, the
market price on the grant date) over a specified period of time
(up to ten years). Each option generally becomes exercisable in
installments over a four-year period, contingent upon the
executive officer's continued employment with Voxware.
Accordingly, the option grant will provide a return to the
executive officer only if the executive officer remains employed
by Voxware during the vesting period, and then only if the market
price of the underlying shares appreciates.
The number of shares subject to each option grant is set at a
level intended to create meaningful opportunity for appreciation
based on the executive officer's current position with Voxware,
the base salary associated with that position, the size of
comparable awards made to individuals in similar positions within
the industry, and the individual's personal performance in recent
periods. The Compensation Committee also considers the number of
unvested options held by the executive officer in order to
maintain an appropriate level of equity incentive for that
individual. However, the Compensation Committee does not adhere
to any specific guidelines as to the relative option holdings of
our executive officers
CEO Compensation. In determining the compensation payable to our Chief
Executive Officer, the Compensation Committee considered the CEO's performance
in fiscal 2002 and Voxware's performance, taking into account our change in
business focus to a voice-based logistics solutions business.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code generally denies a federal income tax deduction for
compensation exceeding $1,000,000 paid to the CEO or any of the four other
highest paid executive officers, excluding performance-based compensation.
Through June 30, 2002, this provision has not affected our tax deductions, but
the Committee will continue to monitor the potential impact of Section 162(m) on
our ability to deduct executive compensation.
Summary. The Compensation Committee believes that its compensation
philosophy of paying its executive officers well by means of competitive base
salaries and cash bonus and long-term incentives, as described in this report,
serves the interests of Voxware and its stockholders.
The Compensation Committee
Eli Porat
David B. Levi
38
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on our
common stock with the cumulative total stockholder return of (i) the Nasdaq
National Market--U.S. Index, and (ii) the Chase Hambrecht & Quist Technology
Index, assuming an investment in each of $100 on October 31, 1996. The graph
commences on the date our common stock became publicly traded.
[GRAPHIC OMMITTED]
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of our common stock as of June 30, 2002, by (i) each person or group
who is known by Voxware to own beneficially more than 5% of our common stock,
(ii) each of our directors, (iii) each of the Named Executive Officers, and (iv)
all executive officers and directors as a group. Unless indicated otherwise, the
address of each of these persons is c/o Voxware, Inc., Lawrenceville Office
Park, 168 Franklin Corner Road, Princeton, New Jersey 08648.
Number of Shares Percentage of
Beneficially Owned Shares
Name and Address of Beneficial Owner (1)(2) Beneficially Owned
- ------------------------------------ ------------------ ------------------
Castle Creek Technology Partners, LLC(3).... 4,441,427 11.3%
Bathsheba J. Malsheen, Ph.D.(4)............. 847,125 2.2%
Nicholas Narlis(5).......................... 402,750 1.2%
David B. Levi(6)............................ 112,192 6.1%
Eli Porat(7)................................ 84,711 *
Scorpion Nominees Limited................... 7,808,766 19.9%
All Directors and Executive Officers
as a group (4 persons)...................... 3,773,631 10.0%
- --------
*Less than 1% of outstanding shares of our common stock.
(1) Number of shares beneficially owned is determined by assuming that options
or other common stock equivalent that are held by such person or group (but
not those held by any other person or group) and which are exercisable or
convertible within 60 days have been exercised or converted.
(2) Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all shares beneficially
owned by them.
(3) Includes 1,483,078 shares of common stock issuable upon the conversion of
the Series B Preferred Stock without any price adjustments, 727,273 shares
of common stock issuable upon the conversion of the 2000 Warrant without
any price adjustments, 2,231,076 shares of common stock issuable upon
conversion of Series C Preferred and warrants.
(4) Includes 838,125 shares of our common stock issuable upon the exercise of
stock options.
(5) Includes 398,750 shares of our common stock issuable upon the exercise of
stock options. Includes 55,777 shares of common stock issuable upon
conversion of Series B Preferred Stock and warrants.
(6) Includes 67,083 shares of our common stock issuable upon the exercise of
stock options.
(7) Includes 70,417 shares of our common stock issuable upon the exercise of
stock options. Includes 2,231,076 shares of common stock issuable upon
conversion of Series B Preferred Stock and warrants.
(8) Includes 1,808,766 shares of common stock issuable upon conversion of
Series B Preferred Stock and warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
List of documents filed as part of this Form 10-K:
1. FINANCIAL STATEMENTS. The financial statements listed in the
accompanying Index to Financial Statements appearing on page F-1 are filed as
part of this annual report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule for each of the years ended June 30, 2000, 2001 and 2002, is filed as
part of this Form 10-K and should be read in conjunction with the Financial
Statements, and related notes thereto, of the Company.
VOXWARE, INC.
Schedule II--Valuation and Qualifying Accounts
Years Ended June 30, 2000, 2001 and 2002
(in thousands)
Allowance for doubtful accounts:
Balance at Charged
Beginning to Costs Balance at
of Period and Expenses Deductions End of Period
--------- ------------ ---------- -------------
Year ended June 30, 2000 $ 361 $ 15 $ 232 $ 144
===== ==== ===== =====
Year ended June 30, 2001 $ 144 $ -- $ -- $ 144
===== ==== ==== =====
Year ended June 30, 2002 $ 144 $ -- $ 50 $ 94
===== ==== ==== ====
Inventory reserves:
Balance at Charged
Beginning to Costs Balance at
of Period and Expenses Deductions End of Period
--------- ------------ ---------- -------------
Year ended June 30, 2000 $ 190 $ -- $ -- $ 190
===== ==== ==== =====
Year ended June 30, 2001 $ 190 $ 116 $ 150 $ 156
===== ===== ===== =====
Year ended June 30, 2002 $ 156 $ 100 $ 13 $ 243
===== ===== ==== =====
Schedules other than those listed above have been omitted since they are either
not required, not applicable, or the information is otherwise included in this
Form 10-K
3. CONTROLS AND PROCEDURES. Not applicable.
41
4. EXHIBITS. The following is a list of Exhibits filed as part of this
Annual Report on Form 10-K. Where so indicated by footnote, Exhibits that were
previously filed are incorporated by reference. For Exhibits incorporated by
reference, the location of the Exhibit in the previous filing is indicated in
parentheses.
Exhibit No. Description
- ---------- -----------
2.1 Asset Purchase Agreement dated as of February 4, 1999 by and between
Ascend Communications, Inc. and Voxware, Inc.**(1)
2.2 Acquisition Agreement by and among Voxware, Inc., Verbex Acquisition
Corporation and Verbex Voice Systems, Inc. dated as of February 4,
1999.**(1)
2.3 Acquisition Agreement dated as of April 4, 2000 by and among Voxware,
Inc., Verbex Acquisition Corporation and InRoad, Inc.**(3)
3.1 Certificate of Incorporation, as amended.**(2)
3.2 Bylaws.**(2)
3.3 Certificate of designations for the Series A Preferred Stock as filed
with the Secretary of State of the state of Delaware on August 14,
2000, as amended.**(4)
3.4 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock, as filed with the Secretary of State of
the state of Delaware on August 29, 2001.**(6)
4.1 Form of Warrant issued to InRoad, Inc.**(3)
4.2 Warrant issued to Stratos Product Development, LLC.**(3)
4.3 Stock purchase warrant, dated as of August 15, 2000, issued to Castle
Creek Technology Partners, LLC.**(4)
4.4 Stock restriction and registration rights agreement, dated April 4,
2000 among Voxware, Inc., Verbex Acquisition Corporation, InRoad, Inc.
and Stratos Product Development LLC.**(3)
4.5 Common Stock Purchase Warrant, dated as of April 19, 2001, issued to
Castle Creek Technology Partners, LLC.**(7)
4.6 Form of Warrant issued to Institutional Finance Group, Inc., dated
August 15, 2000.**(9)
4.7 Form of 10% Convertible Debenture dated October 2, 2002.*
4.8 Shareholders Agreement dated October 2, 2002 among the Company,
Voxware, NV and the Shareholders of Voxware NV.*
10.1 Voxware, Inc. 1994 Stock Option Plan.**(2)
10.2 Form of Voxware, Inc. Stock Option Agreement.**(2)
10.3 Form of Indemnification Agreement.**(2)
10.4 Securities Purchase Agreement, dated as of August 10, 2000, by and
between Voxware, Inc. and Castle Creek Technology Partners, LLC.**(4)
10.5 Registration Rights Agreement, dated as of August 15, 2000 by and
between Voxware, Inc. and Castle Creek Technology Partners, LLC.**(4)
10.9 Technology Transfer Agreement Effective May 19, 1995, between Suat
Yeldener Ph.D. and Voxware, Inc.**(2)
10.10 Exchange Agreement, dated as of August 29, 2001 by and between the
Company and Castle Creek Technology Partners, LLC, together with the
form of New Warrant and Remedy Warrant attached as exhibits
thereto.**(6)
10.11 Securities Purchase Agreement, dated as of April 19, 2001, by and
between the Company and Castle Creek Technology Partners, LLC,
together with the form of Additional Share Warrant as an exhibit
thereto.**(7)
10.12 Registration Rights Agreement, dated as of April 19, 2001, by and
between the Company and Castle Creek Technology Partners, LLC,
together with the form of Remedy Warrant as an exhibit thereto.**(7)
10.13 The Company's 1998 Stock Option Plan for Outside Directors.**(8)
10.14 Plan to Pay Non-Employee Directors an Annual Retainer.**(8)
10.20 1996 Employee Stock Purchase Plan.**(2)
10.23 Loan Modification Agreement dated May 9, 2000 between Silicon Valley
Bank and the Company.**(3)
10.24 Employment Agreement dated August 13, 1998, with Bathsheba J.
Malsheen.**(5)
10.25 Employment Agreement dated August 13, 1998, with Nicholas
Narlis.**(5)
23.1 Consent of WithumSmith + Brown, PC.*
42
- -----------
* Filed herewith.
** Previously filed with the Commission as Exhibits to, and incorporated by
reference from, the following documents:
(1) Filed in connection with the Company's quarterly report on Form 10-Q for
the quarter ended December 31, 1998.
(2) Filed in connection with Registration Statement on Form S-1 (File Number
33-08393).
(3) Filed in connection with the Company's quarterly report on Form 10-Q for
the quarter ended March 31, 2000.
(4) Filed in connection with the Company's current report on Form 8-K that was
filed on August 16, 2000.
(5) Filed in connection with the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1998.
(6) Filed in connection with the Company's registration statement on Form S-2
(File Number 33-68646).
(7) Filed inconnection with the Company's current report on Form 8-K that was
filed on April 20, 2001.
(8) Filed in connection with the Company's registration statement on Form S-8
(File Number 33-33342).
(9) Filed in connection with the Company's registration statement on Form S-3
(File Number 33-51358).
+ Confidential treatment has been granted for portions of such document.
5. REPORTS ON FORM 8-K. On August 28, 2002 and August 30, 2002, the Company
filed a Form 8-K and Form 8-K/A, respectively, reporting on Item 4 of Form 8-K,
Change in Registrant's Certifying Accountant. Such reports reported the
Company's dismissal of Arthur Andersen LLP as the Company's independent auditors
and the engagement of WithumSmith + Brown, PC as the Company's new auditors
43
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.
VOXWARE, INC.
By: /s/ Bathsheba J. Malsheen
-------------------------
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints each of BATHSHEBA J. MALSHEEN and
NICHOLAS NARLIS, or either of them, his true and lawful attorney-in-fact and
agent with full power of substitution and re-substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form 10-K Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting said attorney-in-fact and agent, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/Bathsheba J. Malsheen President, Chief Executive Officer and October 15, 2002
- ------------------------- Director (principal executive officer)
Bathsheba J. Malsheen
/s/Nicholas Narlis Senior Vice President, Chief Financial October 15, 2002
- ------------------------- Officer, Secretary and Treasurer
Nicholas Narlis (principal financial officer and principal
accounting officer)
/s/David B. Levi Director October 15, 2002
- -------------------------
David B. Levi
/s/Eli Porat Director October 15, 2002
- -------------------------
Eli Porat
44
CERTIFICATIONS
I, Bathsheba J. Malsheen, Ph.D., certify that:
---------------------------------------------
1. I have reviewed this annual report on Form 10-K of Voxware, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: October 15, 2002
/s/ Bathsheba J. Malsheen
-------------------------
Bathsheba J. Malsheen, Ph.D.
President, Chief Executive Officer and
Director
(principal executive officer)
I, Nicholas Narlis, certify that:
---------------------------------
1. I have reviewed this annual report on Form 10-K of Voxware, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
Date: October 15, 2002
/s/ Nicholas Narlis
-------------------------------------------
Nicholas Narlis
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
(principal financial and accounting officer)
45
VOXWARE, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants....................... F-2
Consolidated Balance Sheets............................................... F-4
Consolidated Statements of Operations..................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)................. F-6
Consolidated Statements of Cash Flows..................................... F-7
Notes to Consolidated Financial Statements................................ F-9
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Voxware, Inc.:
We have audited the accompanying consolidated balance sheet of Voxware,
Inc. and subsidiary as of June 30, 2002 and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the year then
ended. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Voxware, Inc.
and Subsidiary as of June 30, 2002 and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14 (a) 2
for the year ended June 30, 2002 is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic 2002
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ WithumSmith + Brown, PC
Princeton, New Jersey
October 14, 2002
F-2
The following report is a copy of a previously issued Report of Independent
Public Accounants. This report relates to the prior years' financial statements.
This report has not been reissued by Arthur Andersen LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Voxware, Inc.:
We have audited the accompanying consolidated balance sheets of Voxware,
Inc. (a Delaware corporation) and subsidiary as of June 30, 2001 and 2000 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2001. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Voxware, Inc. and subsidiary
as of June 30, 2001 and 2000 and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14 (a) 2
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Princeton, New Jersey
September 28, 2001
F-3
VOXWARE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30,
--------------------------------
--------------- ---------------
2002 2001
--------------- ---------------
(In thousands, except
share and per share data)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 6 $ 561
Short-term investments....................................... -- 17
Accounts receivable, net..................................... 1,315 849
Inventory, net............................................... 678 1,098
Prepaid expenses and other current assets.................... 82 360
---------- ------------
Total current assets...................................... 2,081 2,885
Property and equipment, net.................................... 297 584
Intangible assets, net......................................... 769 2,066
Other assets, net ............................................. 44 278
---------- ------------
$ 3,191 $ 5,813
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses....................... $ 2,080 $ 1,743
Deferred revenues........................................... 387 569
---------- ------------
Total current liabilities............................... 2,467 2,312
Commitments and contingencies
Warrants to purchase common stock............................. -- 23
Series A mandatorily redeemable convertible preferred stock
(liquidation value $0 and $3,811,140, respectively)......... -- 3,193
Series B mandatorily redeemable convertible preferred stock
(liquidation value $2,894,375 and $0, respectively).......... 2,900 --
Series C mandatorily redeemable convertible preferred stock
(liquidation value $1,839,904 and $0, respectively).......... 1,299 --
Stockholders' equity (deficit):
Common stock, $.001 par value, 180,000,000 and 60,000,000
shares authorized; 21,573,860 and 15,770,687 shares issued
and outstanding at June 30, 2002 and 2001, respectively..... 21 16
Additional paid-in capital................................ 44,338 42,070
Deferred compensation..................................... -- (1)
Accumulated deficit....................................... (47,834) (41,800)
---------- ------------
Total stockholders' equity (deficit)................... (3,475) 285
---------- ------------
$ 3,191 $ 5,813
========== ============
The accompanying notes are an integral part of these financial statements.
F-4
VOXWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
------------------------------------------------
2002 2001 2000
------------- ------------- ---------------
(In thousands, except per share data)
Revenues:
Product revenues:
Product revenues........................................... $ 2,994 $ 1,020 $ 1,419
License fees............................................... 389 336 1,668
Royalties and recurring revenues........................... 233 387 488
--------------- -------------- ---------------
Total product revenues.................................. 3,616 1,743 3,575
Service revenues:
Service revenues........................................ 885 302 226
--------------- -------------- ---------------
Gross revenue 4,501 2,045 3,801
Cost of revenues:
Cost of product revenues..................................... 1,997 1,185 799
Cost of service revenues..................................... 420 348 70
--------------- -------------- ---------------
Total cost of revenues..................................... 2,417 1,533 869
--------------- -------------- ---------------
Gross profit.................................... 2,084 512 2,932
--------------- -------------- ---------------
Operating expenses:
Research and development..................................... 1,728 3,317 2,835
Sales and marketing.......................................... 1,166 3,263 2,870
General and administrative................................... 1,946 2,647 2,140
Amortization of purchased intangibles........................ 1.298 4,099 1,989
Asset impairment charge...................................... -- 4,902 --
--------------- -------------- ---------------
Total operating expenses.................................... 6,138 18,228 9,834
--------------- -------------- ---------------
Operating loss............................................. (4,054) (17,716) (6,902)
Interest income................................................. 11 234 357
Gain on write down of warrants to fair value.................... 23 784 --
Gain on sale of tax loss carryforwards.......................... 27 279 501
Gain on sale of assets.......................................... -- 750 3,799
--------------- -------------- ---------------
Net loss........................................................ $ (3,993) $(15,669) $ (2,245)
=============== ============== ===============
Accretion of preferred stock to redemption value................ (1,749) (652) --
=============== ============== ===============
Beneficial conversion feature treated as a dividend............. (82) (2,913) --
=============== ============== ===============
Warrants issued to preferred stockholders treated as a dividend. (480) -- --
=============== ============== ===============
Net loss applicable to common shareholders...................... $ (6,304) $ (19,234) $ (2,245)
=============== ============== ===============
Basic and diluted net loss per share applicable to common
shareholders.................................................... $ (0.34) $ (1.32) $ (0.16)
=============== ============== ===============
Weighted average number of common shares outstanding............ 18,575 14,517 13,667
=============== ============== ===============
The accompanying notes are an integral part of these financial statements.
F-5
VOXWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Stockholders Equity
----------------------------------------------------------------------------
Accumulated
Additional Other
Common Stock Paid-in Deferred Comprehensive Comprehensive Accumulated
Shares Amount Capital Compensation Loss Loss Deficit Total
------ ------ ------- ------------ ---- ---- ------- -----
(in thousands, except share data)
Balance, June 30, 1999...............13,381,367 $ 13 $ 29,995 -- $ 4 (20,303) 9,709
Exercise of Common stock options.. 220,546 -- 305 -- -- -- 305
Issuance of common stock pursuant
to Employee Stock Purchase Plan.. 19,570 -- 13 -- -- -- 13
Directors' stock based compensation
expense.......................... 24,294 -- 40 -- -- -- 40
Issuance of common stock in
connection with the purchase of
certain assets of InRoad, Inc.... 650,000 1 8,236 -- -- -- 8,237
Option grants to consultants...... -- -- 141 (141) -- -- --
Comprehensive loss:
Net loss.......................... -- -- -- -- -- $ (2,245) (2,245) (2,245)
Unrealized loss on available-for-
sale securities.................. -- -- -- -- (6) (6) -- (6)
----------
Comprehensive loss................ $ (2,251)
==========
Balance, June 30, 2000...............14,295,777 $ 14 $ 38,730 $ (141) $ (2) $ (22,548) $ 6,053
Directors' stock based compensation
expense........................... 34,483 -- 10 -- -- -- 10
Conversion of Series A Preferred
Stock............................. 726,427 1 246 -- -- (4) 247
Sale of common stock............... 714,000 1 227 -- -- 224
Beneficial conversion feature
treated as a dividend............ -- -- 2,913 -- -- (2,913)
Warrants granted as finders fee
for sale of Series A Preferred
Stock............................ -- -- 79 -- -- -- 79
Accretion of preferred stock to
redemption value................. -- -- -- -- -- (652) (652)
Repurchase of Series A............ -- -- -- -- -- (14) (14)
Amortization of deferred
compensation..................... -- -- -- 5 -- -- 5
Option grants to consultants...... -- -- (135) 135 -- -- --
Comprehensive loss:
Net loss.......................... -- -- -- -- -- $(15,669) (15,669) (15,669)
Realized loss on available-for-sale
securities....................... -- -- -- -- 2 2 -- 2
---------
Comprehensive loss................ -- -- -- -- $(15,667) -- --
==========
Balance, June 30, 2001............... 15,770,687 $ 16 $ 42,070 $ (1) $ (41,800) $ 285
Directors' stock based compensation
expense.......................... 1
Amortization of Beneficial conversion
feature............................ -- 82 82
Conversion of Series B Preferred
Stock.............................. 2,749,722 2 25 1,089 1
Conversion of Series C Preferred
Stock............................. 202,792 -- 283 286
Sale of common stock.................. 2,850,656 3 286
Beneficial conversion feature treated
as a dividend...................... 349 349
Warrants issued to preferred
shareholders...................... 138 (139) (139)
Accretion of preferred stock to
redemption value................... (1,750) (1,750)
Sale of Prefered Stock and Warrants... 394 70 454
Repurchase of Series A................
Amortization of deferred Compensation...
Option grants to consultants..........
Comprehensive loss:
Net loss........................... (3,993)
Realized loss on available-for-sale
securities........................ ---------
Comprehensive loss................. (3,993) (3,993) (3,993)
--------- --------- ---------
Balance, June 30, 2002............... 21,573,860 21 44,338 -- (3,993) (47,834) (3,475)
=== ===== ========== == ====== ====== ======= ======
The accompanying notes are an integral part of these financial statements.
F-6
VOXWARE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended June 30,
------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Operating Activities:
Net loss........................................................ $ (3,993) $ (15,669) $ (2,245)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 1,570 4,413 2,265
Provision for doubtful accounts.............................. -- -- 15
Gain on write-down of warrants to fair value................. (23) (784) --
Gain on sale of tax loss carryforwards....................... (27) (279) (501)
Gain on sale of assets....................................... -- (750) (3,799)
Stock based compensation expense............................. 1 15 40
Asset impairment charge...................................... -- 4,902 --
Changes in assets and liabilities:
Accounts receivable.......................................... (466) 133 (8)
Inventory.................................................... 420 (9) (761)
Prepaid expenses and other current assets.................... 278 (113) (13)
Restricted cash.............................................. -- -- 604
Other assets, net............................................ 234 107 66
Accounts payable and accrued expenses........................ 337 745 (887)
Deferred revenues............................................ (182) 374 (336)
Deferred rent................................................ -- (194) (69)
-------------- -------------- ---------------
Net cash used in operating activities..................... (1,851) (7,109) (5,629)
-------------- -------------- ---------------
Investing Activities:
Purchases of short-term investments............................ -- -- (15,163)
Proceeds from sales and maturities of short-term investments... 17 2,707 14,441
Purchases of property and equipment............................ (15) (457) (259)
Proceeds from sale of tax loss carryforwards................... 27 279 501
Proceeds from sale of assets................................... -- 750 4,146
Purchase of certain assets of Inroad, Inc...................... -- -- (240)
Purchase of Verbex Voice Systems, Inc.......................... -- -- (51)
-------------- -------------- ---------------
Net cash provided by (used in) investing activities....... 29 3,279 3,375
-------------- -------------- ---------------
Financing Activities:
Proceeds from issuance of short-term debt...................... 50 -- --
Proceeds from exercise of warrants............................. 97 -- --
Proceeds from issuance of Series C Convertible Preferred stock
and Warrants, net of expenses ............................. 1,694 -- --
Retirement of Series B Covnertible Preferred Stock............. (524) -- --
Proceeds from exercises of common stock options................ -- -- 305
Proceeds from private placement of common stock and warrants... -- 276 --
Issuance of common stock pursuant to Employee Stock Purchase
Plan....................................................... -- -- 13
Proceeds from issuance of Series A convertible preferred stock
and warrants............................................... -- 3,660 --
Repayment of short-term debt................................... (50) (48) --
-------------- -------------- ---------------
Net cash provided by financing activities................. 1,267 3,888 318
-------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents.................. (555) 59 (1,936)
Cash and cash equivalents, beginning of period.................... 561 502 2,438
-------------- -------------- ---------------
Cash and cash equivalents, end of period.......................... 6 561 502
Short-term investments, end of period............................. -- 17 2,724
-------------- -------------- ---------------
Cash, cash equivalents and short-term investments, end of period.. $ 6 $ 578 $ 3,226
============== ============== ===============
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Unrealized gain (loss) on short-term investments............. $ -- $ -- $ (6)
============== ============== ===============
Intangible assets recognized from InRoad transaction..... $ -- $ -- $ 8,404
============== ============== ===============
Purchase accounting adjustment related to inventory acquired
from Verbex....................................... $ -- $ -- $ (79)
============== ============== ===============
F-7
Accretion of Preferred Stock to redemption value......... $ 1,749 $ 652 $ --
============== ============== ===============
Conversion of Series A Preferred Stock................... $ 85 $ 247 $ --
============== ============== ===============
Conversion of Series B Preferred Stock................... $ 968 $ -- $ --
============== ============== ===============
Conversion of Series C Preferred Stock................... $ 25 -- $ --
============== ============== ===============
Exchange of Series A for Series B preferred stock,
including $38 of accretion to redemption value.... $ 3,231 $ -- $ --
============== ============== ===============
Warrant to acquire common stock for finders fee.......... $ 36 $ 79 $ --
============== ============== ===============
Warrant issued to preferred stockholders treated as a
dividend.......................................... $ 480 $ -- $ --
============== ============== ===============
Beneficial conversion feature treated as a dividend...... $ 82 $ 2,913 $ --
============== ============== ===============
The accompanying notes are an integral part of these financial statements.
F-8
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Background and Liquidity
Voxware, Inc.'s (the "Company") primary business is the development,
marketing and sale of industrial voice-based solutions for distribution and
logistics in e-commerce, retail, and direct-to-consumer, wholesale and
business-to-business operations. Products are sold direct to consumers, as well
as through third party partners such as consultants, value added resellers
(VARs) and system integrators. The Company's solutions enable workers to
perform, through speech input of data, routine logistics tasks such as picking,
receiving, returns processing, cycle counting, cross-docking and order entry.
Solutions are available for all major market industry sectors, including
consumer goods manufacturers, consumer packaged goods, direct to consumer
(e-commerce and catalog), food and grocery, retail, third party logistics
providers and wholesale distribution. Products are also deployed in package
handling, mail sorting, manufacturing inspection and military combat
applications. The Company has two major speech-recognition product lines:
software and portable devices used for various mobile industrial and warehouse
applications and stationary voice-based devices primarily used for warehouse
receiving and package sorting applications. Both types of devices are based on
the Company's proprietary speech recognition technology.
In addition to the industrial voice-based solutions business, the Company
also licenses its digital speech coding technologies and products on a limited
basis to customers in the multimedia applications and consumer devices markets.
Although the assets relating to the speech and audio coding business were sold
to Ascend (a subsidiary of Lucent Technologies), the sale did not include the
Company's rights and obligations under its then existing license agreements. In
addition, with the consent of Ascend, the Company may continue to license speech
coding technologies for uses that are not competitive with Ascend. While the
Company will continue to take advantage of favorable opportunities to license
our speech coding technologies, it does not dedicate significant resources to
the development, marketing or licensing of speech coding technologies.
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, including the Company's ability to compete
in the voice-based logistics market, the budgeting cycles of potential
customers, the lengthy sales cycle of the Company's solutions, the volume of,
and revenues derived from sales of products by the Company's value-added
resellers that incorporate the Company's products into third-party customers'
systems, the introduction of new products or services by the Company or its
competitors, pricing changes in the industry, the degree of success of the
Company's efforts to penetrate its target markets, technical difficulties with
respect to the use of products developed by the Company or its licensees, and
general economic conditions.
Going Concern
The Company has only a limited operating history upon which an evaluation
of the Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. Since its inception, the Company
has incurred significant losses and, as of June 30, 2002, the Company had an
accumulated deficit of $47,834,000, including $4,902,000 from the loss on the
asset impairment charge of intangibles, $2,401,000 from accretion of preferred
stock to redemption value and $2,999,000 from the beneficial conversion feature
as a result of the Castle Creek transactions consummated in August 2000 and
April 2001. Management believes that unless the Company is able to secure
additional financing, its cash and cash equivalents and short-term investments
will not be adequate to meet the Company's cash requirements over the next
twelve months. These factors raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of the uncertainty. The Company
has minimal cash on hand as of September 30, 2002 and Management is in current
negotiations to secure a portion of its financing required for the next twelve
months. There can be no assurance that the negotiations will be successful and
result in financing for the Company. If such financing is not obtained, the
Company will have to curtail significant portions or all of its operations.
F-9
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the financial
statements of Voxware, Inc. and its wholly owned subsidiary, Verbex Acquisition
Corporation. All significant intercompany balances and transactions have been
eliminated in consolidation.
Fourth Quarter Adjustments
In the fourth quarter of fiscal 2002, the Company recognized accretion of
$992,102 on its Series B mandatorily redeemable convertible preferred stock. Of
this amount, approximately $200,000 pertains to each of the first, second and
third quarters of 2002.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company generates revenues from products and services. The products and
services are sold separately as well as combined. The Company combines software,
hardware and professional services for installation, implementation and
maintenance as part of its industrial voice-based solutions ("the solution").
Product revenues consist of product sales, license fees, and royalties and
recurring revenues. Product sales represent shipments of portable and stationary
voice-based products and solutions for various industrial and warehouse markets.
Revenues from product sales are generally recognized upon shipment or completion
of the implementation, if applicable, provided there are no significant
post-delivery obligations. The Company began shipping voice-based products
subsequent to its acquisition of substantially all of the assets of Verbex Voice
Systems, Inc. ("Verbex"), which occurred on February 18, 1999. License fees are
generally derived from licensing the Company's voice-based software applications
acquired in the Verbex transaction, and from licensing the Company's speech
compression technologies to customers in the multimedia and consumer devices
markets. License fees are generally recognized upon delivery or implementation
of the underlying technologies, provided persuasive evidence of an arrangement
exists, pricing is fixed or determinable, the payment is due within one year,
and collection of the resulting receivable is deemed probable. If an acceptance
period is required, revenues are recognized upon customer acceptance. Royalties
and recurring revenues include royalties, which are generally based on a
percentage of licensees' sales or units shipped, and pre-determined periodic
license fees. Royalty revenues are recognized at the time of the customer's
shipment of products incorporating the Company's technology. Recurring product
license fees are generally recognized at the inception of the renewal period,
provided that persuasive evidence of an arrangement exists, pricing is fixed or
determinable, the payment is due within one year, and collection of the
resulting receivable is deemed probable. Service revenues from customer
maintenance support, including the amounts bundled with initial or recurring
revenues, are recognized over the term of the maintenance support period, which
is typically one year. Service revenues from engineering fees are recognized
upon customer acceptance, or over the period in which services are provided if
customer acceptance is not required. The Company entered into and completed its
initial solution arrangements during 2001. Based on the Company's limited
experience with implementation, installation and customer acceptance, solution
revenue for the hardware, software and professional services, has been recorded
upon the completion of installation and customer acceptance.
During 2001, the Company entered into solution arrangements with customers
that resulted in or are expected to result in losses. Them Company accrues these
losses when they become known.
The Securities and Exchange Commission has issued Staff Accounting Bulletin
No. 101 ("SAB 101"), "Revenue Recognition and Views on Selected Revenue
Recognition Issues" which was effective December 2000. The Company did not have
a material change to its accounting for revenues as a result of adopting the
provisions of SAB 101.
Research and Development
Research and development expenditures are charged to operations as
incurred. Pursuant to Statement of Financial Accounting Standards No. 86
"Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise
Marketed," development costs incurred in connection with the research and
development of software products and enhancements to existing software products
are charged to expense as incurred until technological
F-10
feasibility has been established, at which time such costs are capitalized until
the product is available for general release to customers. To date, the
establishment of technological feasibility of our product and general release of
such product have substantially coincided. As a result, costs incurred by the
Company between completion of the working model and the point at which the
product is ready for general release have been insignificant and, therefore, we
have not capitalized any such costs.
Net Loss Per Share
Basic net loss per share was computed by dividing the net loss available to
common shareholders by the weighted average number of common shares outstanding
for the fiscal years ended June 30, 2002, 2001 and 2000. Due to the Company's
net losses for the years ended June 30, 2002, 2001 and 2000, the effect of
including common stock equivalents in the calculation of net loss per share
would be anti-dilutive. Therefore, outstanding common stock equivalents have not
been included in the calculation of net loss per share and as a result, basic
net loss per share is the same as diluted net loss per share for the years ended
June 30, 2002, 2001 and 2000. All common stock equivalents consist of common
stock options and warrants to acquire common stock. As of June 30, 2002, stock
options and warrants to acquire common stock (3,599,149 shares) have not been
included in the diluted loss per common share calculation since the impact is
anti-dilutive.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of investments in highly liquid
short-term instruments with maturities of 90 days or less from the date of
purchase. Short-term investments consist primarily of high-grade United States
Government-backed securities and corporate obligations with maturities between
90 and 365 days from the date of purchase. The Company's entire short-term
investment portfolio in 2000 was classified as available-for-sale, and was
stated at fair value as determined by quoted market values. Changes in the net
unrealized holding gains and losses are included as a separate component of
stockholders' equity.
The following table details the Company's investments as of June 30, 2002
and 2001:
June 30, 2002
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ -----------
(in thousands)
Corporate obligations $ -- $ -- $ -- $ --
=======================================================
June 30, 2001
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ -----------
Corporate obligations $ 17 $-- $-- $ 17
========== ========= ========= =========
The Company has not experienced any significant realized gains or losses on
its investments during the years ended June 30, 2002 and 2001. For purposes of
determining gross realized gains and losses, the cost of short-term investments
sold is based upon specific identification. As of June 30, 2001, all short-term
investments were due within one year. As of June 30, 2002, there were no
short-term investments.
Accounts Receivable
Accounts receivable as of June 30, 2002 and 2001 consisted of the
following:
June 30,
--------------------------
2002 2001
----------- -----------
(in thousands)
Accounts receivable............................ $ 1,409 $ 993
Less--allowance for doubtful accounts.......... (94) (144)
---------- ----------
Accounts receivable, net....................... $ 1,315 $ 849
========== ===========
F-11
Inventory
Inventory is stated at lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. Inventory, net as of June 30, 2002 and
2001, consisted of the following:
June 30, 2002 2001
-------------------
(in thousands)
Raw materials....................................... $ 630 $ 810
Work-in process..................................... 152 108
Finished goods...................................... 139 336
Less - Inventory Reserve...................... (243) (156)
------- --------
Inventory, net...................................... $ 678 $ 1,098
======== =========
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the useful lives of the assets, ranging from three to
seven years. Maintenance, repairs and minor replacements are charged to expense
as incurred.
Long-Lived Assets (See Note 2)
The Company accounts for possible impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of; SFAS No.121 requires that long-lived assets and certain
identifiable intangibles to be held and used by the Company be reviewed for
possible impairment on a periodic basis whenever events and circumstances have
occurred that indicate the remaining balance may not be recoverable. If changes
in circumstances indicate that the carrying amount of an asset that the Company
expects to hold and use may not be recoverable, future cash flows expected to
result from the use of the asset and its disposition must be estimated. If the
undiscounted value of the future cash flows is less than the carrying amount of
the asset, an impairment will be recognized.
In July 2001, the FASB issued SFAS No. 141 , "Business Combinations" ("SFAS
141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators are apparent.) However, separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives. The Company considers its intangibles assets
to have finite lives and will continue to amortize such assets over their
remaining useful lives. As such, the Company does not expect the adoption of
SFAS 141 and 142 to have a material effect on comparative periods' results of
operations or financial position.
Warranty
The Company's standard warranty policy on the Company's legacy product
line, generally allows customers or end-users to return defective products for
repair, replacement or refund of purchase price, provided that notification of
the defect is provided within 90 days from delivery to the customer or end-user
in the case of software, and one year from delivery in the case of hardware.
Substantially all non-VoiceLogistics components, parts and sub-assemblies
purchased by the Company are covered by warranty by the manufacturer for periods
ranging from 30 days to one year.
The Company's standard warranty policy on the VoiceLogistics product line
generally upon first use in a production environment and extends for a twelve
month period that covers all manufacturer defects (the "Warranty Period"). The
Company accrues warranty costs based on historical experience and management's
estimates.
Loss Contingencies
In accordance with Statement of Financial Accounting Standards No. 5 ("SFAS
5"), the Company's policy is to accrue an estimated loss if it is both probable
that one or more future events will occur confirming the fact of the
F-12
loss, and the amount of the loss can be reasonably estimated. In the case of
legal claims, it is the Company's policy to accrue probable estimated losses
from legal claims upon receiving notice of such claims.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and trade receivables. The
Company invests its excess cash in highly liquid investments (short-term bank
deposits). The Company's customer base principally comprises distribution and
logistics companies in e-commerce, retail, direct-to-consumer, wholesale and
business-to-business operations, as well as value-added resellers. The Company
does not typically require collateral from its customers.
Major Customers
Three customers accounted for 47%, 11% and 7% of revenues for the year
ended June 30, 2002. Accounts receivable due from these customers as of June 30,
2002 approximated 47%, 11% and 8%, respectively. For the years ended June 30,
2001 and 2000, three customers accounted for 13%, 12% and 12% of 2001 revenues
and two customers accounted for 13% and 14% of 2000 revenues, respectively.
Income taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The measurement of
deferred income tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits that are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
establishes financial accounting and reporting standards for stock-based
employee compensation plans. SFAS No. 123 permits entities to provide pro forma
disclosures of net loss and net loss per share for employee stock option grants
as if the fair value based method of accounting defined by this standard had
been applied (see Note 6).
Comprehensive Loss
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income is a
more inclusive financial reporting methodology that includes disclosure of
certain financial information that historically has not been recognized in the
calculation of net income (loss). SFAS 130 requires that all items defined as
comprehensive income, including changes in the amounts of unrealized gains and
losses on available-for-sale securities, be shown as a component of
comprehensive income (loss). The only comprehensive income items the Company had
were unrealized gains (losses) on available-for-sale securities and net loss in
prior years.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Assets
Retirement Obligations." ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated assets retirement costs. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 is effective for
the first quarter in the fiscal year ending June 30, 2003. The Company does not
expect the adoption of this pronouncement to have a material impact on its
consolidated results of operations or financial position.
F-13
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment for the Disposal of Long-lived Assets" (SFAS 144"). This Statement
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to be Disposed of." However, SFAS 144 retains the fundamental
provisions of Statement No.121 for (a) recognition and measurement of the
impairment of long -lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS 144 is effective for the first
quarter in the fiscal year ending June 30, 2003. The Company does not expect the
adoption of this pronouncement to have a material impact on its consolidated
results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
financial accounting and reporting costs associated with the exit or disposal
activities and nullifies EITF Issue No 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (including
Certain Costs Incurred in a Restructuring)", It applies to costs associated with
an exit activity that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS 144. A liability for
costs associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred. SFAS 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of
this Statement to have a material impact its consolidated results of operations
or financial position.
2. ACQUISITIONS AND RELATED INTANGIBLES:
Acquisition of Verbex Voice Systems, Inc. and Intangible Assets
On February 18, 1999, the Company acquired substantially all of the assets
of Verbex for a total of $5,422,000, which consists of $4,800,000 paid upon
closing, a purchase price adjustment of $272,000 which was paid in October 1999,
and transaction costs of $350,000. Upon payment in October 1999, the purchase
price adjustment was released from an account that was established at the
closing of the Verbex transaction. As of December 31, 1999, the escrow balance
was released from restricted cash. The acquisition was accounted for under the
purchase method of accounting, whereby the purchase price was allocated to the
assets acquired and liabilities assumed based on their fair market values at the
acquisition date. The excess of purchase price over the fair value of net assets
acquired was assigned to identifiable intangibles and goodwill. Intangible
assets acquired from Verbex include capitalized software and underlying
intellectual property rights, value added reseller agreements and relationships,
customer lists, and engineering workforce. These intangibles and goodwill are
being amortized over four years, which represents the estimated economic life of
these assets.
Purchase and Impairment of Certain Assets of InRoad, Inc.
On April 4, 2000, the Company purchased certain assets (primarily
intangible) of InRoad, Inc. for 650,000 shares of common stock valued at
$5,375,000, 375,000 warrants to purchase common stock valued (using the
Black-Scholes pricing model) at $2,861,000, $240,000 in cash, $121,000 in
inventory, and $49,000 in transaction costs. Substantially all of the purchase
price was assigned to intangible assets acquired, amounting to $8,404,000,
including all industrial and intellectual property rights including patents,
trademarks, licenses, copyrights andproprietary processes. These assets were
being amortized over three years, which represents the original estimated
economic life of these assets.
During the fourth quarter of fiscal 2001, the Company planned a redesign of
the hardware product that will most likely result in the phase-out of the inroad
technology that makes up a large portion of the VoiceLogistics hardware. It is
believed that the only remaining portion of the InRoad hardware product will be
the casing for the hardware unit. All internal hardware structure will be
modeled off of a new platform and will utilize different technology. This
business decision, combined with the Company's recurring operating losses and
negative cash flows, limited capital availability and significantly depressed
stock price, resulted in a significant indicator of impairment. Pursuant to SFAS
No. 121, the Company evaluated the recoverability of the Company's acquired
long-lived assets, including goodwill and identifiable intangibles. During the
fourth quarter of fiscal 2001, the Company determined that the undiscounted cash
flow projections for the hardware component of the Verbex business segment (the
hardware platform for the VoiceLogistics product as influenced by InRoad
technology) were lower than the carrying value of the related identifiable
intangible assets. Accordingly, the Company adjusted the net carrying value of
these assets to zero, resulting in a non-cash impairment loss of approximately
$4,902,000. The asset purchase provided the Company with a voice-based hardware
platform for the VoiceLogistics product.
F-14
Sale of Assets to Ascend
On September 21, 1999, the Company's stockholders approved an agreement
with Ascend Communications, Inc. ("Ascend," which is now a wholly-owned
subsidiary of Lucent Technologies, Inc.), to sell to Ascend for approximately
$5.1 million in cash substantially all of the Company's assets relating to what
has historically been the Company's primary business of developing and licensing
speech compression technologies and products. Upon closing in September 1999,
the Company received $4,146,000 in cash. The Company had previously received
$204,000 of the purchase price. The remaining $750,000, which was held in escrow
for 18 months to secure Voxware's indemnification provisions, was released from
restriction on March 21, 2001. As a result of the sale, the Company recorded a
gain of $750,000 and $3,799,000 during the years ended June 30, 2001 and June
30, 2000, respectively. The sale to Ascend did not include the Company's rights
and obligations under its existing license agreements and, as part of the sale,
the Company received a license back from Ascend to use the technology necessary
to service the Company's existing licensees in the speech compression business.
With the consent of Ascend, the Company may also license the speech coding
technologies to new licensees for uses that are not competitive with Ascend.
Intangible Assets
June 30,
------------------------
2002 2001
---- ----
(in thousands)
- ------------------------------------------------------------------------------
Acquisition of Verbex Voice Systems, Inc....... $ 5,131 $ 5,131
Purchase of certain assets of InRoad, Inc...... -- 8,404
Asset impairment charge........................ -- (4,902)
--------- ---------
5,131 8,633
Less--Accumulated amortization................. (4,362) (6,567)
--------- ---------
Intangible assets, net......................... $ 769 $ 2,066
======== ========
- -------------------------------------------------------------------------------
Amortization expense was approximately $1,298,000, $4,099,000 and
$1,989,000 for the years ended June 30, 2002, 2001 and 2000, respectively.
3. PROPERTY AND EQUIPMENT:
June 30,
---------------------------
2002 2001
---- ----
(in thousands)
- -------------------------------------------------------------------------------
Equipment..................................... $ 919 $ 924
Leasehold improvements........................ 448 526
Furniture and fixtures........................ 80 105
--------- ---------
1,447 1,555
Less--Accumulated depreciation................ (1,150) (971)
--------- ---------
Property and equipment, net................... $ 297 $ 584
======== ========
- -------------------------------------------------------------------------------
Depreciation expense was approximately $272,000, $316,000 and $243,000 for
the years ended June 30, 2002, 2001 and 2000, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
June 30,
---------------------------
2002 2001
---- ----
(in thousands)
- -------------------------------------------------------------------------------
Accounts payable - trade...................... $ 1,382 $ 713
Accrued compensation and benefits............. 181 291
Accrued professional fees..................... 194 297
Other accrued expenses........................ 323 442
--------- ---------
Accounts payable and accrued expenses......... $ 2,080 $ 1,743
======== ========
- -------------------------------------------------------------------------------
F-15
5. SERIES A, SERIES B AND SERIES C MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND WARRANTS TO PURCHASE COMMON STOCK
The Company has authorized 10,000,000 shares of Preferred Stock with a
$0.001 par value per share. On August 29, 2001, all of the outstanding shares of
Series A Mandatorily Redeemable Convertible Preferred Stock ("Series A
Preferred") were exchanged for Series B Mandatorily Redeemable Convertible
Preferred Stock ("Series B Preferred"). The Company also issued Series C
Mandatorily Redeemable Convertible Preferred Stock ("Series C Preferred") in
December 2001 and February 2002. The Series B Preferred and Series C Preferred
shares have a stated value of $1,000 per share. As of June 30, 2002, 2,750
shares of Series B Preferred and 1,840 shares of Series C Preferred were issued
and outstanding.
On August 15, 2000 the Company completed a $4,000,000 private placement of
Series A Preferred and a warrant (the "Warrant") to purchase common stock Castle
Creek Technology Partners, LLC ("Castle Creek"). The Company sold 4,000 shares
of Series A Preferred, which shares are convertible into shares of common stock,
resulting in proceeds to the Company of approximately $3,660,000, net of cash
transaction costs. The Company is obligated to redeem the Series A Preferred 30
months from the closing. The Series A Preferred has a 7% dividend payable in
cash or equity, at the election of the holder, and is convertible into Voxware
common stock at an initial conversion price of $3.025 per share, subject to
adjustment, as defined. In addition, Castle Creek received a Warrant to purchase
727,273 shares of common stock at an initial exercise price of approximately
$3.44 per share, subject to adjustment set forth in the Warrant. The Company has
the right to require conversion of the Series A Preferred, and to redeem the
Warrant, if its common stock reaches certain price levels over a specified
period of time. The preferred stockholders have certain registration rights, as
defined.
The Company allocated the proceeds, net of cash and non-cash transaction
costs, to the Series A Preferred and Warrant sold to Castle Creek based on the
relative fair value of each instrument. The fair value of the Series A Preferred
was determined based on a discounted cash flow analysis and the fair value of
the Warrant was determined based on the Black-Sholes option-pricing model. As a
result, the Company initially allocated approximately $2,774,000 and $807,000 to
the Series A Preferred and Warrant, respectively. After considering the
allocation of the proceeds to the Series A Preferred and Warrant, the Company
determined that the Series A Preferred contained a beneficial conversion feature
(BCF). The Company recorded the BCF in the amount of approximately $1,244,000,
in a manner similar to a dividend during the quarter ended September 30, 2000.
The Warrant has been classified as a liability in the accompanying consolidated
balance sheet because the Warrant gives the holder the choice of net cash
settlement at a time when other shareholders would not have such a choice (upon
a merger or change in control, as defined). As of June 30, 2002, the outstanding
Warrant was adjusted to the fair value of the Warrant based upon the closing
stock price as of that date. As a result, the Company adjusted the Warrant to
zero, representing the fair market value as of June 30, 2002, using the
Black-Sholes option-pricing model and recorded a gain on the write down of the
Warrant to fair value of $23,000 for the period ended June 30, 2002,
respectively.
The Series B Preferred are convertible into shares of common stock on the
date of issuance.
On April 19, 2001, the Company consummated a private placement of shares of
common stock and a common stock warrant to Castle Creek pursuant to the terms of
a Securities Purchase Agreement (the "Purchase Agreement"). Pursuant to the
private placement, the Company sold 714,000 shares (the "Common Shares") of
common stock and a warrant to purchase an additional 2,142,000 shares of its
common stock (the "Purchase Warrant"). The Common Shares were sold at a price of
$.34 per share. The exercise price of the Purchase Warrant is $1.25 per share in
the case of an optional exercise by Castle Creek, or 80% of the then market
value (as defined in the Purchase Warrant) of the common stock in the case of a
mandatory exercise required by the Company. Net proceeds to the Company from the
private placement were approximately $276,000. Pursuant to the terms of the
Purchase Agreement, the Company used $48,200 of such proceeds to repurchase 46
shares of the Company's Series A Preferred from Castle Creek. The balance of the
proceeds was used by the Company for general working capital purposes.
On August 29, 2001 the Company issued 708,656 remedy warrants to Castle
Creek. These remedy warrants allow Castle Creek to purchase shares of common
stock at $0.01 per share and expire on August 28, 2011. Using the Black-Scholes
option-pricing model, the Company determined the fair value of the remedy
warrants to be $139,000. The Company recorded the issuance of the remedy
warrants as a Preferred Stock dividend during the quarter ended September 30,
2001. Through June 30, 2002, Castle Creek exercised 708,656 of the remedy
warrants, resulting in gross proceeds of $7,087.
F-16
In August of 2001, the Company exchanged its Series A Preferred for shares
of Series B Preferred. As the term, rights and preferences of the Series B are
substantially similar to those of the Series A, the Company recorded the
exchange based upon the carrying value of the Series A Preferred.
The Company has accreted the Series A Preferred and is accreting Series B
Preferred to their redemption values using the effective interest method through
the redemption period of 30 months. Accordingly, the Company recorded $1,382,000
and $652,000 of accretion during the years ended June 30, 2002 and 2001,
respectively.
In addition, pursuant to the terms of the August 2000 Series A Preferred
transaction, any reset of the conversion price is treated as a dividend to the
holder of the Series A Preferred. Since the conversion price adjustment was part
of the August 2000 transaction, a contingent BCF existed at the August 15, 2000
commitment date. The contingent BCF was recorded upon resetting the conversion
price to $0.34 on April 19, 2001 and the dividend was recorded.
In August 2000, the contingent BCF was measured at zero. As a result, the
dividend was calculated based on the difference between the reduced conversion
price ($0.34) and the fair value of the common stock issuable upon conversion of
the Series A Preferred as of April 19, 2001. The charge for the BCF is limited
to the carrying value of the Series A Preferred after the initial allocation of
the cash proceeds received from the Series A Preferred and the Warrant. At April
19, 2001, the Company recorded a $1,669,000 dividend charge for the contingent
BCF. Through August 31, 2001, the Series A holders converted 319 shares of
Series A Preferred into 1,043,003 shares of common stock at an exercise price of
$0.34. Through June 30, 2002, Castle Creek elected to convert shares of Series B
Preferred into shares of common stock as follows:
Shares
------------------------- ------------------------
Date Series B Preferred Common
------------------------- ------------------------
November 8, 2001 40 271,826
November 19, 2001 50 340,208
November 26, 2001 40 272,653
November 29, 2001 75 511,497
December 11, 2001 106 724,462
June 21, 2002 50 312,500
------------------------- ------------------------
361 2,433,146
For all transactions through June 30, 2002, each share of Series A or
Series B Preferred, plus the applicable dividend, converted into a number of
common shares at conversion prices ranging from $0.16 per share to $0.34 per
share. At the August 2001 conversion, the conversion price was re-adjusted to
the average of the five lowest closing bid prices during the last ten days
before the conversion ($0.19). The conversion price was again re-adjusted to
$0.16 in accordance with the August 2000 agreement. As stipulated in the August
2000 agreement, any reset of the conversion price would result in a BCF limited
as defined above. As the limit was reached on the April 2001 BCF, no BCF was
recorded in conjunction with the August 2001 or October 2001 resets.
On December 12, 2001, the Company completed a $1,765,000 private placement
of Series C Preferred and common stock warrants to purchase 5,944,219 shares of
common stock to various accredited investors. On February 1, 2002, the Company
also received $100,000 in cash from an additional accredited investor in
connection with this private placement. In total, the Company issued 1,865
shares of Series C Preferred, which shares are convertible into shares of common
stock, resulting in proceeds to the Company of approximately $1,566,000, net of
transaction costs. In addition to the cash transaction costs, the Company issued
warrants to investment advisors as finder's fees to acquire 458,165 shares of
common stock as of June 30, 2002. The exercise price for the warrants issued as
finder's fees is $0.1255 per share, and the warrants expire in five years. Using
the Black-Scholes option-pricing model, the Company determined the fair value of
the warrants to be $350,000. The Company is obligated to redeem the Series C
Preferred 36 months from the closing. The Series C Preferred have a 7% dividend
payable in cash or equity, at the election of Voxware, and are convertible into
Voxware common stock at an initial conversion price of $0.1255 per share,
subject to adjustment, as defined in the transaction documents. In addition, the
investors have received warrants to purchase 5,944,219 shares of common stock at
an exercise price of $0.1255 per share and expire five years from the date of
closing. The Series C Preferred stockholders have certain registration rights,
as defined in the transaction agreements.
The Company allocated the proceeds, net of cash and non-cash transaction
costs, to the Series C Preferred and the additional purchase warrants sold to
investors based on the relative fair value of each instrument. The fair value
F-17
of the Series C Preferred was determined based on a discounted cash flow
analysis and the fair value of the additional purchase warrants was determined
based on the Black-Scholes option-pricing model. As a result, the Company
allocated approximately $1,220,000 and $350,000 to the Series C Preferred and
the additional purchase warrants, respectively. The warrants have been
classified as additional paid-in capital in the accompanying consolidated
balance sheet.
The Company is accreting the Series C Preferred to their redemption value
using the effective interest method through the redemption period of 36 months.
Accordingly, the Company recorded $367,000 of accretion during the fiscal year
ended June 30, 2002.
The Series C Preferred are convertible into shares of common stock on the
date of issuance. After considering the allocation of the proceeds to the Series
C Preferred and the additional purchase warrants, the Company determined that
the Series C Preferred contained a BCF. The Company recorded the BCF as a
reduction of the Series C and an increase to additional paid-in capital in the
amount of approximately $350,000. In accordance with Emerging Issues Task Force
00-27, the BCF is being amortized over the redemption period of 36 months using
the effective interest method, and is being recorded in a manner similar to a
dividend during the year ended June 30, 2002. As a result, the Company recorded
approximately $82,000 as a BCF treated as a dividend during the year ended June
30, 2002.
During the year ended June 30, 2002, Castle Creek exercised 708,656 of
remedy warrants. These exercises resulted in gross proceeds of $7,087. As of
June 30, 2002, there were no remedy warrants outstanding.
On February 8, 2002, Castle Creek exercised a purchase warrant to purchase
714,000 shares of common stock in connection with the April 19, 2001 Securities
Purchase Agreement. The exercise price was $0.13 per share, resulting in cash
proceeds of $93,000. Simultaneously, the Company applied the proceeds received
to retire 84 shares of Series B Preferred.
On April 19, 2002, Castle Creek exercised a purchase warrant to purchase
714,000 shares of common stock in connection with the April 19, 2001 Securities
Purchase Agreement. The exercise price was $0.13 per share resulting in cash
proceeds of $92,820. Simultaneously, the Company applied the proceeds received
to retire 83 shares of Series B Preferred.
6. STOCKHOLDERS' EQUITY (DEFICIT):
Authorized Number of Shares
In May, 2002, the Company's stockholders approved an increase in the number
of authorized shares of common stock from 60 million shares to 180 million
shares.
Stock Option Plans
Pursuant to the 1994 Stock Option Plan as amended (the "Plan"), the Company
may grant to eligible individuals incentive stock options (as defined in the
Internal Revenue Code) and nonqualified stock options. An aggregate of 4,000,000
shares of common stock have been reserved for issuance under the Plan. The
exercise price for incentive stock options may not be less than 100% (110% for
holders of 10% or more of the combined voting power of all classes of stock of
the Company) of the fair value of the shares on the date of grant, and at least
par value for nonqualified stock options. The period during which an option may
be exercised is fixed by the Board of Directors, up to a maximum of ten years
(five years in cases of incentive stock options granted to holders of 10% or
more of the combined voting power of all classes of stock of the Company), and
options typically vest over a four-year period.
Additionally, pursuant to the 1998 Stock Option Plan for Outside Directors
(the "Outside Directors Plan"), which was approved by the Company's stockholders
in January 1998, the Company has granted a total of 120,000 options at exercise
prices of $0.40 to $3.75 per share. Pursuant to the Outside Directors Plan, each
non-employee director of the Company shall receive an option to purchase 30,000
shares of the Company's common stock (the "Initial Option") on the date of his
or her election or appointment to the Board of Directors, at an exercise price
equal to the Company's stock price at the end of the day of his or her election
or appointment to the Board of Directors (the "Initial Grant Date"). In
addition, on the date of his or her re-election to the Board of Directors, if he
or she is still a non-employee director on such date and has met certain other
requirements defined in the Outside Directors Plan, he or she shall receive an
option to purchase 10,000 shares of the Company's common stock (the "Additional
Option") on the date of his or her re-election or appointment to the Board of
Directors, at an exercise price equal to the Company's stock price at the end of
the day of his or her re-election or appointment to the Board of Directors (the
"Additional Grant Date"). All options granted under the Outside Directors Plan
shall be
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exercisable as to one-twelfth of the shares issued under each option on the last
day of each of the 12 three-month periods immediately following the applicable
grant date.
Information relative to the Option Plans is as follows:
Price Aggregate
Shares Per Share Proceeds
---------- -------------- -----------
Outstanding at June 30, 1999 (261,803 exercisable)........... 2,238,075 $ 0.50--$7.88 5,967,673
Granted....................................... 1,448,752 $ 0.69--$7.69 3,455,439
Exercised..................................... (220,546) $ 0.69--$7.50 (305,272)
Canceled...................................... (728,031) $1.50--$ 7.88 (2,314,595)
--------- -------------- -----------
Outstanding at June 30, 2000 (838,391 exercisable)........... 2,738,250 $ 0.50--$ 7.88 6,803,245
$ 0.40--$ 3.84 863,233
Granted....................................... 482,500
Exercised..................................... -- $ 0.40--$ 7.50 --
Canceled...................................... (457,500) $ 0.40--$ 7.88 (776,493)
---------- -------------- ----------
Outstanding at June 30, 2001(1,527,000 exercisable).......... 2,763,250 $ 0.40--$ 7.88 $ 6,889,985
Granted....................................... 70,000 $ 0.15 27,572
Exercised..................................... -- $ -- --
Canceled...................................... (311,375) $ 0.15--$ 7.88 (557,211)
---------- -------------- ----------
Outstanding at June 30, 2002 (1,819,313 exercisable)......... 2,451,875 $ 0.15--$ 7.88 $ 6,360,346
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation. Accordingly, compensation cost has been computed based
on the intrinsic value of the stock option at the date of grant, which
represents the difference between the exercise price and the fair value of the
Company's stock. As the exercise price of the stock options equaled the fair
value of the Company's stock at the date of option issuance, no compensation
cost has been recorded in the accompanying statements of operations. Had
compensation been determined consistent with SFAS No. 123, the Company's net
loss and net loss per share would have been adjusted to the following pro forma
amounts:
June 30,
---------------------------------------------------------
2002 2001 2000
---- ---- ----
(in thousands, except per share data)
Net loss applicable to common shareholders:
As reported...................................... $ (6,304) $ (19,234) $ (2,245)
Pro forma........................................ (6,437) (19,188) (3,601)
Net loss per share:
As reported...................................... $ (0.34) $ (1.32) $ (0.16)
Pro forma......................................... (0.35) (1.32) (0.26)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in fiscal years 2001, 2000 and 1999: risk-free interest rates ranging
from 5.7% to 7.1% based on the rate in effect on the date of grant; no expected
dividend yield; expected lives of 8 years for the options; and expected
volatility of 75%.
SFAS No. 123 method of accounting is not required to be applied to options
granted prior to the fiscal year ended June 30, 1996. The resulting pro forma
compensation cost may not be representative of that expected in future years.
The weighted average fair value of options granted was $1.42, $2.49 and $1.48
for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.
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Information with respect to options outstanding at June 30, 2002 is as
follows:
Weighted Weighted Average
Average Remaining Number of
Exercise Price Per Share Shares Exercise Price Contractual Life Vested Shares
- ------------------------ ------- --------------- ---------------- -------------
$ 0.15--$ 1.63 1,422,500 $1.14 7.4 1,087,948
$ 1.90--$ 3.00 142,000 $2.62 6.9 92,177
$ 3.08--$ 3.88 432,000 $3.75 7.5 255,938
$ 4.00--$ 7.88 589,875 $4.65 7.2 514,500
Total 2,451,875 $2.46 7.2 1,950,563
Annual Stock Grant Retainer to Directors
In January 1998 the Company's Board of Directors and stockholders approved
a plan, which provides for the granting of shares to non-employee directors.
Each calendar year in which the Company holds an Annual Meeting of Stockholders,
each non-employee director will receive shares valued at $10,000 based on the
market price of the Company's common stock, as defined in the plan. In fiscal
1998, as part of this plan the Company also granted shares to non-employee
directors who had served as directors since the Company's initial public
offering in October 1996. For the years ended June 30, 2002 and 2001, the
Company granted a total of zero and 34,483 shares, respectively, of common stock
pursuant to this plan and recorded zero and $10,000, respectively, associated
compensation expense.
Employee Stock Purchase Plan
In December 1996 the Company adopted an Employee Stock Purchase Plan under
Section 423 of the Internal Revenue Code and reserved 200,000 shares of common
stock for issuance under the plan. Under this plan, employees were entitled to
purchase shares at 85% of the fair market value. During the years ended June 30,
2000 and 1999, the Company issued 19,570 and 77,843 shares of common stock,
respectively, at average purchase prices of $0.69 and $0.82 per share,
respectively, pursuant to the Employee Stock Purchase Plan. No shares were
issued during the year ended 2001. As of June 30, 2000, all 200,000 reserved
shares of common stock had been issued and the Plan had been terminated.
7. 401(k) SAVINGS PLAN:
Effective January 1997 the Company adopted a 401(k) Savings Plan (the
"401(k) Plan") available to all employees. The 401(k) Plan permits participants
to contribute up to 10% of their base salary to the 401(k) Plan, not to exceed
the limits established by the Internal Revenue Code. In addition, the Company
matches 25% of employee contributions on the initial 6% contributed by
employees. Effective January 1, 2002, the Company suspended the Company match
until further notice.
Employees vest immediately in all employee contributions and Company match
contributions. In connection with the 401(k) Plan, the Company recorded
compensation expense of approximately $26,000, $38,000 and $27,000 for the years
ended June 30, 2002, 2001 and 2000, respectively.
8. INCOME TAXES:
As of June 30, 2002, the Company had approximately $27 million of federal
net operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards begin to expire in 2009. As of June
30, 2002, a full valuation allowance has been provided on the net deferred tax
asset because of the uncertainty regarding realization of the deferred asset as
a result of the operating losses incurred to date.
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9. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities and certain equipment under
operating leases with remaining non-cancelable lease terms generally in excess
of one year. Rent expense was approximately $451,000, $606,000 and $301,000 for
the years ended June 30, 2002, 2001 and 2000, respectively. Future minimum
rental payments for the Company's office facilities and equipment under
operating leases as of June 30, 2002 are as follows:
(in thousands)
Year Ending June 30,
2003.............................. $ 360
2004.............................. 258
----------
$ 618
In February 2002, the Company entered into a sublease agreement under which
the Company subleased 34% of its approximately 4,000 total square feet of office
space in its current Princeton, New Jersey facility.
In July 1998, the Company entered into a sublease agreement under which the
Company subleased approximately 47% of its 18,000 total square feet of office
space in its previous Princeton, New Jersey facility. Effective June 30, 2000,
the Company had been released from its lease commitment for 9,500 square feet of
that office space in, and effective January 31, 2002, the Company has been
released from its lease commitment for the remaining office space in the
previous Princeton, New Jersey facility.
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a material
adverse effect on the Company's business, operating results or financial
condition.
The Company has three-year employment and severance agreements with two
officers. The agreements provide for minimum salary levels, adjusted annually at
the discretion of the Board of Directors. Each of the agreements is
automatically renewable for successive one-year terms, unless terminated by
either party.
10. SEGMENT INFORMATION:
Prior to the Company's acquisition of Verbex in February 1999 (Note 1), the
Company had been managed in one operating segment. Since the Verbex acquisition,
the Company has been managed in two operating segments: industrial voice-based
solutions and speech compression technologies. The voice-based solutions
business relates to the Company's current business focus since the Verbex
acquisition. The speech compression technologies business relates to the
Company's business focus prior to the Verbex acquisition. In September 1999, the
Company sold substantially all of the assets related to the speech compression
business to Ascend. In connection with the sale to Ascend, the Company received
a license back from Ascend to service the Company's existing speech compression
licensees, and to continue to license the speech compression technologies for
uses that are not competitive with Ascend, subject to the consent of Ascend. The
Company does not expect to pro-actively market the speech compression
technologies in the future, and expects new licensing activity relating to the
speech compression technologies business to decrease significantly over time.
Business segment information for the years ended June 30, 2002 and 2001 is
included in the table below. Costs associated with corporate and administrative
overhead expenses, are included in the speech compression technologies segment.
Intangible assets and goodwill related to the Verbex acquisition (Note 2), and
the amortization of those assets, are included in the industrial voice-based
products segment.
F-21
Speech
Voice-Based Compression
Products Technologies
Segment Segment Total
----------- ----------- -----------
2002 2002 2002
---- ---- ----
Revenues............................. $ 4,243 $ 268 $ 4,501
Loss from operations................. (2,967) (1,087) (4,054)
Depreciation and amortization........ 1,527 43 1,570
Identifiable assets.................. 2,048 1,143 3,191
2001 2001 2001
---- ---- ----
Revenues............................. $ 1,195 $ 850 $ 2,045
Loss from operations................. (17,615) (101) (17,716)
Depreciation and amortization........ 4,308 105 4,413
Asset impairment charge.............. 4,902 -- 4,902
Identifiable assets.................. 1,232 4,581 5,813
For the years ended June 30, 2002, 2001 and 2000, revenue related to the
voice-based product segments included approximately $4,232,000, $94,000 and $0,
respectively, of sales to customers outside the United States. For the years
ended June 30, 2002, 2001 and 2000, revenues included approximately $303,000,
$82,000 and $400,000, respectively, of sales to customers related to the speech
compression technologies segment outside the United States.
11. SUBSEQUENT EVENTS (UNAUDITED):
Pursuant to the terms of the August 2000 Series A Preferred Transaction
(see Note 4), Castle Creek elected to convert additional shares of Sereis A
Preferred into shares of common stock. Each share of Series A Preferred, plus
the applicable dividend, converted int o a number of common shares at a
conversion price of $0.16 per share. The following table details the subsequent
conversions:
Shares
---------------------------------------------
Series B Common
Date Preferred
------- --------------- -------------------------
July 8, 2002 50 312,000
July 22, 2002 50 312,500
August 7, 2002 50 312,500
September 13, 2002 50 312,500
October 13, 2002 43 273,851
On October 2, 2002, the Company issued a series of 10% Convertible
Debentures due July 1, 2003 (the "Debentures") in the aggregate principal amount
of 300.699,32 Euro. The proceeds of the Debentures are to be used to fund the
Company's capital investment in Voxware NV, a limited liability company
organized under Belgian law, founded by Creafund NV ("Creafund") and the Company
on July 1, 2002 and to fund the operational expenses of Voxware NV, excluding
expenses or invoices generated by the Company (other than the acquisition of the
Company's voiced based solutions). Voxware NV was established to market the
Company's products in Europe. The holders of the Debentures own two-thirds of
the equity of Voxware NV and the Company owns the remaining one-third of equity.
The Debentures are mandatorily convertible into shares of capital stock of
the Company issued upon the closing of a Qualifying Fundraising (as specifically
defined in the debentures). A Qualifying Fundraising requires the execution, on
or before November 30, 2002, of subscription agreements providing for the
issuance of at least U.S.$2,500,000 of equity of the Company, and the closing of
such financing by February 28, 2003. In the event the
F-22
subscription agreements are not executed by November 30, 2002 or the Qualifying
Fundraising is not consummated by February 28, 2003, each of the holders of the
Debentures has the right, at any time prior to the close of business on July 1,
2003, to convert any or all of the outstanding principal amount and accrued
interest of the Debenture into shares of preferred stock of the Company, with
new rights, preferences and privileges senior to the Company's existing
preferred stock. The conversion price for such senior preferred stock shall be
33% of the average share price for the Company's common stock for the 30 trading
days prior to the date of the exercise of the conversion option, or, if the
Company's securities are not listed or traded on a stock exchange, a regulated
market or the OTC-BB, 33% of the intrinsic value of the Company's equity on the
date of the exercise of the conversion option, as determined by an independent
expert.
In the event the subscription agreements for the Qualifying Fundraising are
not executed by November 30, 2002 or the Qualifying Fundraising is not
consummated by February 28, 2003, the Debentures are redeemable at the option of
the Debenture holders. The redemption price is one hundred percent (100%) of the
principal amount so redeemed, plus accrued and unpaid interest.
Simultaneously with the execution of the Debentures, the Company, Creafund
and the other holders of equity in Voxware NV (which parties are also the
holders of the Debentures) executed a Shareholders Agreement pursuant to which
Creafund and the other equity holders have the option to convert their shares of
Voxware NV into shares of capital stock of the Company issued upon the closing
of a Qualifying Fundraising. In the event subscription agreements for the
Qualifying Fundraising are not executed by November 30, 2002 or the Qualifying
Fundraising is not consummated by February 28, 2003, the equity holders of
Voxware NV (other than the Company) have the right to convert their shares of
Voxware NV into shares of preferred stock of the Company, with new rights,
preferences and privileges senior to the Company's existing preferred stock. The
conversion price for such senior preferred stock shall be 33% of the average
share price for the Company's common stock for the 30 trading days prior to the
date of the exercise of the conversion option, or, if the Company's securities
are not listed or traded on a stock exchange, a regulated market or the OTC-BB,
33% of the intrinsic value of the Company's equity on the date of the exercise
of the conversion option, as determined by an independent expert. The exchange
rights described in this paragraph expire on December 31, 2004. The value of the
shares of Voxware NV for purposes of determining the exchange ratios is based
upon the net sales of Voxware NV.
The Company has granted Voxware NV a royalty free license to distribute
Voxware's voice-based solutions for the logistics, distribution and package
sorting industries in Europe on mutually acceptable commercially reasonable
terms. In the event that the Qualifying Financing is not consummated, such
license shall convert to a royalty-bearing license on such terms and conditions
as mutually agreed upon by the parties to the Shareholders Agreement.
F-23