SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-30040
VOICEIQ INC.
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(Exact name of Registrant as specified in its charter)
VOICEIQ INC.
---------------------------------------------
(Translation of Registrant's name into English)
Province of Ontario, Canada
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(Jurisdiction of incorporation or organization)
240 Riviera Drive
Markham, Ontario L3R 5M1 Canada
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, no par value
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(Title of Class)
1
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common shares as of the close of the period covered by the
annual report.
13,145,896
==========
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 which financial statement item the Registrant
has elected to follow. Item 17 . Item 18 X .
--- ---
2
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
A. SELECTED FINANCIAL DATA.
Following is selected financial data of the Company, expressed in
Canadian dollars, for each of the last five fiscal years ended September 30,
calculated in accordance with Canadian generally accepted accounting principles,
which differ substantially from United States generally accepted accounting
principles. See Note 18 to the financial statements.
SIX MONTHS
MONTHS ENDED
(unaudited)
03/31/01 03/31/00 03/31/99
$ $ $
Sales 2,541,848 2,759,661 1,208,772
Cost of Sales 1,499,410 1,005,020 670,711
Loss from Operations (3,883,968) (761,234) (1,600,981)
Loss for the period (4,247,224) (758,298) (2,102,731)
Loss per share (.25) (.09) (.38)
Total assets 10,540,191 7,464,954 4,300,987
Liabilities 1,492,156 2,049,747 1,067,035
Long term debt 1,025,896 2,262,079 3,201,871
Dividends declared per share Nil Nil Nil
Share Capital 31,124,474 18,151,301 10,760,209
Deficit (23,102,335) (14,998,173) (10,574,738)
Shareholders' equity 8,022,139 3,153,128 185,471
YEARS ENDED SEPTEMBER 30
9/30/00 9/30/99 9/30/98 9/30/97 9/30/96
$ $ $ $ $
Sales 7,167,514 2,889,244 1,763,345 1,442,768 1,059,236
Cost of Sales 2,353,783 1,956,965 1,118,712 994,304 722,368
Loss from Operations (2,407,050) (5,134,946) (3,443,380) (2,176,162) (1,133,814)
Loss for the period (4,607,536) (5,767,468) (4,050,911) (2,252,134) (1,120,389)
Loss per share (0.53) (1.02) (1.05) (0.81) (0.57)
Total assets 6,850,379 3,733,695 5,460,255 2,411,381 2,574,720
Liabilities 3,905,114 5,901,597 3,172,053 1,752,597 733,444
Long term debt 945,706 2,770,327 991,628 520,710 393,493
Dividends declared per share Nil Nil Nil Nil Nil
Share Capital 21,792,276 12,071,573 10,760,209 5,079,880 4,010,238
Deficit (18,847,011) (14,239,475) (8,472,007) (4,421,096) (2,168,967)
Shareholders' equity 2,945,265 (2,167,902) 2,288,202 658,785 1,841,276
3
All dollar amounts herein are expressed in Canadian dollars1, unless
otherwise indicated. Reference is made to footnote number 1 for a summary of the
exchange rates between the U.S. and Canadian dollars.
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1 The following table sets forth the exchange rate for one Canadian
dollar expressed in terms of one U.S. dollar for the fiscal years 1996 - 2000
and for October 1, 2000 - June 30, 2001.
AVERAGE
1996 .7332
1997 .7286
1998 .6742
1999 .6744
2000 .6723
LOW HIGH
October 2000 .6547 .6687
November 2000 .6410 .6552
December 2000 .6969 .6669
January 2001 .6595 .6692
February 2001 .6494 .6697
March 2001 .6336 .6491
April 2001 .6333 .6510
May 2001 .6435 .6532
June 2001 .6516 .6604
The exchange rates are based upon the noon buying rate in New York City
for cable transfers in foreign currencies as certified for customs purposes by
the Federal Reserve Bank of New York. At July 9, 2001, one Canadian dollar, as
quoted by Reuters and other sources at 4 P.M. Eastern Time for New York foreign
exchange selling rates (for bank transactions of at least $1,000,000), equaled
$.6575 in U.S. dollars. (Source: The Wall Street Journal)
4
Reference is made to Note 18 of the Company's audited financial
statement for the year ended September 30, 2000, in "Item 18. Financial
Statements" for a description of the differences between Canadian and United
States generally accepted accounting principles, and how these differences
affect the Company's financial statements.
The following table sets forth how the Selected Financial Data
presented above would be presented under United States generally accepted
accounting principles ("US GAAP") for the fiscal years ended September 30, 2000,
1999, and 1998:
FISCAL YEARS ENDED SEPTEMBER 30
2000 1999 1998
$ $ $
Net Loss Before Discontinued Operations
According to US GAAP (4,723,658) (5,912,752) (2,820,196)
Loss for the Period According to US GAAP (4,723,658) (5,912,752) (2,872,349)
Deficit, end of year (18,919,233) (14,195,575) (8,282,823)
Net Loss per common share before
discontinued operations, basic and diluted (0.54) (1.04) (0.73)
Discontinued Operations (0.01)
Net Loss per common share, basic and diluted (0.54) (1.04) (0.74)
Intangibles 55,957 66,456 73,144
Shareholders Equity 1,992,466 (2,204,618) 1,710,522
B. CAPITALIZATION AND INDEBTEDNESS.
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
Not applicable.
D. RISK FACTORS.
RISK FACTORS AFFECTING THE COMPANY
5
The business of the Company entails significant risks, and an
investment in the Company's common shares (`Shares") should be considered highly
speculative for a variety of reasons. An investment in the Shares should only be
undertaken by persons who have sufficient financial resources to enable them to
assume such risks. In addition to the usual risks associated with investment in
a business, the following is a general description of significant risk factors,
which should be considered.
LACK OF PROFITABLE OPERATIONS/DEPENDENCE UPON EXTERNAL FINANCING. Since
its inception, and despite the fact that it has generated revenues from
operations, the Company has not been profitable. As of September 30, 2000, the
Company had an accumulated deficit of approximately $18.8 million. Accordingly,
the Company's business operations are subject to all of the risks inherent in
the establishment and maintenance of a developing business enterprise, such as
competition and viable operations management. The future earnings, if any, and
cash flow from operations of the Company are dependent, in part, on its ability
to further develop and market its products. There can be no assurances that the
Company will grow and be profitable. The Company is currently dependent upon
external sources of financing to fund its operations. If sufficient cash flow
from operations or earnings are not generated in the future, additional
financing will be required. There is no assurance that such external financing
will be secured or, if secured, be on terms acceptable to Management.
ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL. The Company
may need to raise additional funds to provide working capital for its ongoing
operations, bring its products to market and establish manufacturing and
marketing capabilities and for other purposes. The Company's future capital
requirements will depend on many factors, including continued progress in its
research and development programs, competing technological and market
developments, the cost of manufacturing scale_up, effective commercialization
activities and arrangements and other factors, some of which are outside of the
Company's control. The Company intends to seek additional funding through public
or private financings. Adequate funds may not be available when needed or at all
or on unattractive terms. Insufficient funding may necessitate the Company to
scale back or eliminate some or all of its research and development programs or
license to third parties products or technologies that the Company would
otherwise seek to develop itself.
DISPUTE WITH LERNOUT & HAUSPIE/LITIGATION POTENTIAL. Beginning in 1998
the Company engaged in a series of transactions with Lernout & Hauspie Speech
Products, N.V. ("L&H"). These transactions resulted in L&H becoming a major
shareholder of the Company. At July 5, 2001, L&H was the beneficial owner of
1,559,090 Shares or 7.2% of the outstanding Shares. On November 29, 2000 L&H
filed for protection under Chapter 11 of the U.S. Bankruptcy Act. On April 30,
2001, The Wall Street Journal published an
6
article in which it stated that the founders of L&H, Jo Lernout and Pol Hauspie,
along with Nico Willaert, L&H's former Vice-Chairman, were arrested in Belgium
on charges of forgery and stock manipulation. The article also stated that L&H
had decided to sell its assets to repay L&H's debts, and that Management of L&H
has warned that L&H might become insolvent before buyers for all of L&H's
assets, which include 7% of the Company's Shares, could be found. The sale of
approximately 7% of the Company's Shares under these conditions could have a
depressive effect on the price of the Shares.
The Company believes that it was induced to enter the series of
transactions mentioned above with L&H based upon publicly available information
which Management of the Company now believes was materially inaccurate at the
time. Management is seeking to unwind certain of its transactions with L&H and
has demanded damages from L&H. In connection with its dispute with L&H, share
certificates for 650,000 Shares relating to the attempted exercise of share
purchase warrants were never distributed to L&H because L&H never fully paid for
the Shares. The Company has informed L&H that it does not intend to deliver the
share certificate for 650,000 Shares. It is possible that L&H may commence
litigation to obtain these Shares and the Company may face liability if it is
ultimately determined that it improperly refused to provide the certificate to
L&H.
It is possible that the Company may commence litigation against L&H
regarding its claims or that the Company could be named as a party in a
litigation brought by third parties or regulatory bodies arising from its
involvement with L&H. Litigation would be very time consuming, expensive, and
otherwise cause a tremendous distraction to Management. Furthermore, the course
of any litigation, including the outcome, is impossible to determine. It is
possible that the results arising from any such litigation may not be
satisfactory, or perceived as satisfactory, by outside parties, including the
investment community.
FLUCTUATIONS IN PERIODIC RESULTS. The Company's operating results can
vary substantially from period to period. Planned operating expenses are
normally targeted to planned revenue levels for the period and are incurred
ratably throughout the period. If expenses remain relatively fixed, and the
Company's revenues are less than planned in any quarter, the Company's operating
results would be adversely affected for that quarter. In addition, incurring
unplanned expenses could adversely affect operating results for the period in
which such expenses are incurred.
Failure to achieve periodic revenue, earnings and other operating and
financial results as anticipated by brokerage firms or industry analysts could
result in an immediate and adverse effect on the market price of the Shares. The
Company may not discover, or
7
be able to confirm, revenue or earnings shortfalls until the end of a quarter,
which could result in a greater immediate and adverse effect on the price of the
Shares.
PRODUCT DEVELOPMENT. The Company's long-term success will depend on its
ability to enhance its product offerings and to introduce new products on a
timely and cost-effective basis which meet the needs of its current and future
customers. The Company remains committed to adding new technologies and products
through continued investments in research and development and through strategic
alliances. However, there can be no assurance the Company will be successful in
developing new products or in enhancing existing products or that new or
enhanced products will meet market requirements. The Company has, from time to
time, experienced delays in introducing new products. Future delays could
adversely impact acceptance of and revenue generated from the sale of any
delayed products.
COMPETITION. The Company competes with an array of established and
emerging companies. Many of these companies have greater financial,
technological and personnel resources than those of the Company. Some
competitors may be willing to offer lower price or other favorable terms for its
products. This could result in pressure on the Company to reduce prices on its
products. Moreover, new competitors, new technology and new marketing techniques
may cause customer confusion, thereby lengthening the sales cycle process for
the Company's products and reducing overall demand.
RETENTION OF KEY PERSONNEL. The Company's ability to achieve its
revenue and operating performance objectives will depend in large part on its
ability to attract and retain technically qualified and highly skilled sales,
consulting, technical, marketing and management personnel. It vies for all of
its personnel with other companies, where competition for such personnel is
intense and is expected to remain so for the foreseeable future. Failure to
recruit and retain its key employees could adversely affect the Company's
business and operating results.
SALES CHANNELS. The Company has both indirect and direct product resale
channels in the United States. The existence of direct and indirect sales
channels may lead to internal competition for the same customer, pressure by
current and prospective customers for price reductions on the Company's products
and reductions in the Company's gross margin and operating profit.
SUPPLIER DEPENDENCE. Some of the Company's products contain critical
components supplied by a single or a limited number of third parties. The
Company may be required to purchase a substantial inventory of such components
to ensure an available supply of its product for sale. Any significant shortage
of these components or the failure of the third party supplier to maintain or
enhance these products could lead to
8
cancellations of customer orders or delays in placement of orders which could
materially, adversely affect the Company's results of operations. If the
Company's purchase of such components exceeds demand, the Company could incur
losses or other charges in disposing of excess inventory, which could also
materially adversely affect the Company's operating results.
PROPRIETARY TECHNOLOGY. The Company owns all of its key technologies.
However, as the development of its products continues, the functionality of its
products may overlap with competitor's products, and as a result, may become
subject to claims of intellectual property infringement by third parties. To
date, the Company is unaware of infringement claims made or planning to be made
against it. There can be no assurance that, in the future, third parties will
not assert infringement claims against the Company, or require the Company to
obtain a license for the intellectual property rights of third parties. There
can be no assurance that such licenses, if required, will be available on
reasonable terms, or at all.
POTENTIAL CONFLICTS OF INTERESTS. Some of the directors and officers of
the Company are also directors and officers of other companies. Consequently,
there exists the possibility for these persons to be in a position of conflict.
Any decision made by any of such directors and officers involving the Company
are required to be made in accordance with their duties and obligations to deal
fairly and in good faith with the Company and such other companies. In addition,
each of the directors of the Company are required to declare a conflict in, and
refrain from voting on, any matter in which such director may have a conflict of
interest. Reference is made to "Related Party Transactions".
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company's
operations are currently located in Canada and Australia, with sales worldwide.
There are certain risks inherent in international operations including, but not
limited to, remote management, unexpected changes in regulatory requirements,
export restrictions, export controls relating to technology, tariffs and other
trade barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates, and potential adverse tax
consequences, which could materially adversely affect the Company's business,
operating results, and financial condition.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company has filed a patent
application for DOS compatible dictation and voice mail systems in the United
States and in other countries. The Company has been issued a patent covering
product streaming, a fundamental aspect of its technology. The Company relies,
to a significant extent, upon unpatented trade secrets, know how, and copyright
protection in respect of its proprietary software. No assurance can be given
that others will not independently develop
9
substantially equivalent trade secrets or know how or infringe upon the
Company's intellectual property.
The Company also relies on protecting its proprietary technology, in
part, through confidentiality agreements with its corporate collaborators,
employees, consultants and certain contractors. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known or independently discovered by its competitors. It is possible that
the Company's products or processes will infringe, or will be found to infringe,
patents not owned or controlled by the Company. If any relevant claims of
third_party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses or redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available at
all or on terms commercially reasonable to the Company or that the Company could
redesign its products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement,
to enforce patents issued to the Company or to protect trade secrets. Such
litigation could result in substantial costs and diversion of management efforts
regardless of the results of such litigation and an adverse result could subject
the Company to significant liabilities to third parties, require disputed rights
to be licensed or require the Company to cease using such technology.
TECHNOLOGICAL CHANGE AND COMPETITION. The industry in which the Company
competes, developing software systems and technology, continues to undergo rapid
change and competition is intense and is expected to increase. There can be no
assurance that competitors have not or will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by the Company or which would render the Company's
technology and products obsolete and noncompetitive. Many of the Company's
competitors have substantially greater experience, financial and technical
resources and production, marketing and development capabilities than the
Company. Accordingly, competitors may succeed in obtaining regulatory approval
for products more rapidly or effectively than the Company. The Company also will
be competing with respect to manufacturing efficiency and sales and marketing
capabilities.
DEPENDENCE ON THIRD PARTIES. The Company's strategy for the expanded
commercialization of its products includes entering into various technology
integration agreements with corporate collaborators, with complementary
technology. The Company's commercial success is, in part, dependent upon these
parties fulfilling their respective obligations pursuant to these agreements.
The amount and timing of resources
10
such third parties will devote to these activities are not within the control of
the Company. There can be no assurance that such parties will perform their
obligations as expected or that the Company will derive any revenue from such
agreements. There can be no assurance that these collaborations will result in
the development of any commercial products. The Company intends to seek
additional collaborative arrangements with additional third parties to develop
and commercialize certain of its products. There can be no assurance that the
Company will be able to negotiate collaborative agreements on favorable terms,
or at all, in the future, or that its current or future collaborative agreements
will be successful.
PRODUCT LIABILITY EXPOSURE. The Company faces an inherent business risk
of exposure to product liability and other claims in the event that the
development or use of its technology or prospective products is alleged to have
resulted in adverse effects. Although the Company has taken, and will continue
to take, what it believes are appropriate precautions, there can be no assurance
that it will avoid significant liability exposure. Although the Company
currently carries product liability insurance, there can be no assurance that
the Company has sufficient coverage, or can obtain sufficient in the future at a
reasonable cost. An inability to obtain product liability insurance at
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of products developed by
the Company. A product liability claim could have a material adverse effect on
the Company's business, financial condition and results of operations.
RISKS RELATED TO POSSIBLE ACQUISITIONS. The Company may expand its
operations or product offerings through the acquisition of additional
businesses, products or technologies. There can be no assurance that the Company
will be able to identify, acquire or profitably manage additional businesses or
successfully integrate any acquired businesses, products or technologies into
the Company without substantial expenses, delays or other operational or
financial problems. Furthermore, acquisitions may involve a number of special
risks, including diversion of Management's attention, failure to retain key
acquired personnel, unanticipated events or circumstances, lawsuits and legal
liabilities, some or all of which could have a material adverse effect on the
Company's acquired businesses, products or technologies. Furthermore, there can
be no assurance that any acquired business, product, or technologies will be
profitable or achieve anticipated revenues and income. The failure of the
Company to manage its acquisition strategy successfully could have a material
adverse effect on the Company's business, results of operations and financial
condition.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS. The market price of
the Shares, like that of the common shares of many other software companies, has
been and is likely
11
to remain highly volatile. Factors such as its strategic alliances or its
competitors, announcements of technological innovations or new products by the
Company or its competitors, governmental regulatory actions, developments with
the Company's collaborators, developments concerning patent or other proprietary
rights of the Company or its competitors (including litigation),
period_to_period fluctuations in the Company's operating results, changes in
estimates of the Company's performance by securities analysts, market conditions
for shares of software companies in general and other factors beyond the control
of the Company could have a significant adverse impact on the market price of
the Shares. The Company has never paid cash dividends on its Shares and does not
anticipate paying any cash dividends in the foreseeable future.
ITEM 4. INFORMATION ON THE COMPANY.
A. History and Development of the Company.
VoiceIQ Inc. (hereinafter referred to as the "Company" or "VIQ") was
incorporated pursuant to the laws of the Province of Alberta by certificate of
incorporation on July 12, 1993 under the name Torque Industries Inc. On March
15, 1994, the Corporation acquired The BCB Technology Group Inc. ("BCB
Technology"), a private Ontario corporation, through a share exchange. By
articles of amendment dated March 18, 1994, the name of the Company was changed
to BCB Holdings Inc. By articles of continuance dated October 1, 1996, the
Company was continued under the laws of Ontario. By articles of amendment dated
August 17, 1998 and August 31, 1998, the Company changed its name to BCB Voice
Systems Inc. and consolidated its common shares ("Shares") on a 1-for-10 basis;
unless otherwise indicated, all references to Shares in this annual report gives
effect to this consolidation. By articles of amendment filed on October 4, 2000,
the name of the Company was changed to VoiceIQ Inc. The name change was intended
to reflect the Company's vision of bringing intelligent conversational computing
to a broad number of markets through the delivery of a complete voice-operating
platform that utilizes artificial intelligence to enable secure voice-driven
transactions, sophisticated internet and database searches and data mining
applications within mobile, desktop, telephony, handheld and e-commerce
environments. The architecture of the platform is an open standard based and
include public specifications. Please refer to the Glossary herein for
definitions of technical terms used in this document.
The registered and principal office of the Company is located at 240
Riviera Drive, Markham, Ontario, L3R 5M1. Its telephone number is (905)
948-8266.
During the three years ended September 30, 2000, the Company spent a
total of $1,561,142 on capital expenditures and acquisitions. Its largest
expenditures related to its acquisition in April 2000 of a 36.5% interest in
International Neural Machines
12
Incorporated ("INM"), a company based in Ontario, Canada. The Company purchased
36.5% of the issued common shares, and a $625,000 10% debenture, of INM for a
purchase price of $2,270,000 which was satisfied by the payment of $1,250,000
and the issuance of 400,000 Shares at a deemed price of $2.55 per Share.
In March 2001, the Company entered into agreements to acquire the
remainder of INM's outstanding shares. The agreements enabled the Company to
acquire the remaining 63.5% of INM through the issuance of 4,316,000 of its
Shares. This transaction was completed in May 2001.
The Company funded a 10-month development program with INM relating to
building an intelligent voice platform for the Company, for which the Company
paid INM $100,000 per month. The Company has continued to advance $100,000 per
month, and has advanced a total of $1,300,000 to date. This development program
will enable the Company to incorporate speaker verification and identification,
speech to text and text to speech conversion, keyword spotting, advanced
concept-based search and retrieval on transcribed text and data mining activated
through natural query language in its Intelligent Voice Operating Platform as
well integrate this technology into the Company's current products such as
Courtflow and Voiceflow.
INM has developed Artificial Intelligence software that assists
companies to detect fraudulent practices in the financial services industry. INM
believes that, through the use of a combination of processing technique and its
advanced cognitive technology, its software offers one of the most comprehensive
fraud detection solutions on the market.
In March 2001, the Company acquired 50% of B2G Legal Pty Limited
("B2G"), an Australian company. B2G owns 100% of Auscript Pty Limited which
Management believes is the largest court reporting services company in
Australia. Reference is made to "Business Overview-Acquisition of Interest in
B2G Legal Pty Limited."
Beginning in 1998 the Company engaged in a series of transactions with
Lernout & Hauspie Speech Products, N.V. ("L&H"). These transactions resulted in
L&H becoming a major shareholder of the Company beneficially owning 7.21% of the
Company's Shares on June 15, 2001. In November 2000 L&H filed for protection
under Chapter 11 of the U.S. Bankruptcy Act. The Company believes that it was
induced to enter the agreements with L&H based upon publicly available
information which Management of the Company now believes was materially
inaccurate at the time. Management is seeking to unwind certain of its
transactions with L&H and has demanded damages from L&H. Reference is made to
"Risk Factors" and "Related Party Transactions" for a description of the
Company's various dealings with L&H.
13
B. Business Overview (2).
The Company develops software and systems that capture, digitize,
compress and store voice from a variety of sources, including microphones,
telephones and hand held recorders. The software can be used to manage the flow
of voice files over virtually any computer network, including the Internet. The
Company supplies, through a network of distributors and dealers, solutions to
end-users ranging from individual medical and legal practices to large
hospitals, legislative assemblies, courthouses and general businesses.
The Company is the first digital recording vendor to adopt
TrueSpeech(TM), a compression algorithm used with digital voice files that
Microsoft has embedded in its Windows(TM) operating system. This allows the
Company to compress a voice file at least 75% smaller than any ADPCM-based
competitor's algorithm and send it to any PC operating under Windows(TM), where
the voice file can easily be played back with no additional software. Also,
Management believes the open architecture of its software gives the Company a
competitive advantage, enabling it to use other standard compression algorithms
and adapt to newer ones as they become available.
The Company's main focus now is on its sales channel development and
marketing. With the acquisition of INM complete, the Company plans to integrate
its technology with compatible technology, products and systems in related
fields including voice recognition, case management, document management,
medical workflow software, speech-to-text and text-to-speech, data mining and
voice authentication. See "Description of International Neural Machines
Incorporated".
Since its inception, the Company has focused on developing
open-architecture, PC-based digital recording and voice file management systems.
Historically, the systems were comprised of special hardware cards, which were
installed inside voice processor PCs, plus application software and peripherals
such as microphones and foot pedals. This modular approach offered flexibility
and systems were configured to meet specific customer needs at competitive
prices.
Introduced in 1993, the Company's flagship product has been PC-DART(TM)
(Digital Audio Record and Transcribe) and was based on proprietary "packet
streaming" technology developed and patented by the Company. This product has
evolved into PC-DART(TM) VoiceFLOW and PC-DART(TM) CourtFLOW(TM), which have
gained acceptance in the healthcare and legal markets.
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(2) See Glossary for terms used throughout this Annual Report.
14
In 1998, in order to increase margins on sales and to reduce inventory
requirements, the Company began to shift from producing products that combined
proprietary hardware and software to systems which are based on software only,
with the result that the Company now produces only the software portion of its
systems, and the required hardware, such as foot pedals, hand microphones, with
and without bar code readers, VP chassis plus certain computer cards, is sourced
from third parties.
The Company's products are engineered based upon the philosophy of
"Voice as Data". In the past, the data elements that have most typically been
used were alphanumeric text, relational links and still images. While these
elements have been able to capture and encapsulate many types of information,
they lack the ability to convey the nuances and subtleties of the human voice.
Historically, voice data has been recorded on analog audio tapes and
was considered too large to use efficiently in computer applications. The
opportunity to change this paradigm arose when Microsoft embedded into its
Windows(TM) operating system a high quality voice format which provided superior
speech compression (TrueSpeech(TM)). This technological advancement enabled
voice data to be stored inexpensively on desktop computers and transmitted
quickly over standard networks.
The Company believes that it is the first systems vendor to offer users
the ability to treat voice as a distinct data element. The Company's technology
allows voice files to be searched, manipulated, stored in a database and linked
to other data elements. The Company utilizes a unique method of capturing,
digitizing, compressing, storing and routing voice files which can then be moved
across virtually any type of network, particularly the Internet.
The Company's Products
The Company's products encompass the entire voice data management
process. They capture voice data in digital form at the point of origin from a
wide variety of input devices, transform the audio files into highly compressed
packages and send them to their destination, where the data is processed or
stored. The Company's products address a broad and growing array of markets
wherever it is desirable to communicate by voice and preserve a record of such
communication for quick recall, playback, distribution and transcription.
All of the Company's products are modular and scalable, permitting the
Company to provide the appropriate voice data management system for any size
installation at a highly competitive price. The Company produces two categories
of solutions: entry-level and network-based.
15
Entry-level products make digital recording and transcribing dictation
easy and affordable for small organizations. These solutions are aimed at
individuals for use on a stand-alone basis or small work groups who may be
linked through the Internet or local networks. The Company's entry-level
products include the Olympus DS3000 PlayALL combination, QuickCALL and VoiceMIC.
Typical entry-level products are sold at prices ranging from under $1,000 U.S.
to $5,000 U.S.
Network-based users range from professionals linked through a local
area network with an Internet gateway to large corporations having an unlimited
number of users that are linked through any type of computer network or
Intranet. The Company's network-based solutions include VoiceFLOW, CourtFLOW and
MURF. Typical small business and CourtFLOW solutions (less than 25 users) sell
from $5,000 U.S. to $50,000 U.S. Typical enterprise solutions (more than 25
users) sell from $50,000 U.S. to $250,000 U.S. or more. Typical MURF solutions
sell for more than $100,000 U.S.
The Company purchases foot pedals, headsets and cables from third
parties, which are manufactured according to the Company's specifications. The
Company's in-house employees conduct the quality testing prior to release of the
products to customers. The Company employs three persons to monitor the quality
of its products.
The Company's current products are described below.
PLAYALL(TM). The Company's entry-level transcription product is a
software-only stand-alone transcription solution that plays back audio dictation
files using only a SoundBlaster(TM) compatible sound card. The software will
ship with Olympus DS3000, a portable digital hand held recorder. No other
proprietary hardware is required, although an external reader is necessary for
downloading dictation files into a multimedia PC, and software is provided to
effectively control the application.
The Olympus DS3000 and PlayALL combined enable any office to have
trained transcriptionists on an as-needed basis only, thus reducing costs and
increasing efficiency. These two products are designed for transcription
companies, medical clinics or small law firms with a relatively small volume of
dictation by authors who are mobile.
QUICKCALL(TM). QuickCALL is a standalone software package that combines
with a third-party telephone dictation card. This product is used to manage and
route telephone-based dictations. QuickCALL offers telephone dictation, review
capabilities and basic administration tools for small offices needing
phone-based dictation solutions. Authors and transcriptionists can work from any
location provided they have access to a touch-tone telephone.
16
VOICEMIC(TM). VoiceMIC is voice recording software that allows the user
to dictate directly into their personal computer. The product will ship with
Philips(TM) new SpeechMIKE(TM), an integrated mouse/microphone/barcode scanner.
It is especially effective in medical environments because VoiceMIC provides a
transparent gateway with existing medical applications to allow for the use of
dictation so that workflow information may be captured on the fly and stored as
voice data. The software is also Internet-enabled and allows users to speak
through their e-mails.
VOICEFLOW(TM). VoiceFLOW is the Company's dictation and workflow
management system for medical applications. It is a complete databased network
solution for moving and managing voice files. VoiceFLOW systems are designed for
any number of users, typically ranging from eight to several hundred and are
aimed at customers who generate large volumes of dictation and are in need of
sophisticated management of voice files.
In the case of larger businesses, or enterprise-size users, the
VoiceFLOW system is designed to handle high volumes of dictation and intricate
workflow streams. It is expandable to an unlimited number of ports and provides
solutions where management of a group of authors and transcriptionists with
different needs is required.
The VoiceFLOW software package is a collection of integrated software
programs with numerous reporting and utility features.
COURTFLOW.(TM) The CourtFLOW system is similar to the VoiceFLOW
solution but has been customized for use in courtrooms. For example, the
software has features that allow management of lawyers, prosecutors and
witnesses and can even interface with the court docketing system so that
defendant lists can be downloaded without the need to re-enter names.
CourtFLOW allows an in-courtroom reporter to annotate speaker names and
events directly into a PC while the trial is proceeding. These annotations and
names are automatically married to the audio. The end result is a seamless user
interface that allows a reporter to visually see who is speaking while listening
to the digital recording and producing a transcript.
The CourtFLOW system is comprised of four parts: LAN, Voice Server,
Voice Processor(s), and an annotate/control station. In a typical courthouse, a
LAN and associated cabling is already in place. To this existing infrastructure,
a CourtFLOW server is added using any high-speed Pentium-based PC. Only one
CourtFLOW server is required per courthouse (and this server can support all
courtrooms in the courthouse).
17
Voice Processors and annotate/control stations are required in each
courtroom and use a third party's hardware within an industry standard chassis.
All microphones in the courtroom are plugged into the Voice Processor, and an
audio playback capability (powered speakers) is provided at the annotate/control
station for reviewing testimony within the courtroom itself. While installation
in the initial courtroom is expensive ($30,000 U.S.+), it provides the entire
infrastructure necessary for all other courtrooms within the same court house;
additional courtrooms generally cost $10,000 U.S. each to install.
MURF(TM). The MURF (Multiple Unit Recording Facility) is a product
designed for the legislative assembly digital recording market. A MURF system
resembles the CourtFLOW enterprise installation with the major differences being
one of scale and the software installed. While a courtroom uses 4-8 microphones
to record voices, a large legislative assembly may use 20 or more microphones.
MURF systems are all network-based in nature using a LAN, a Voice Server and
multiple Voice Processors. The MURF system has been installed in the House of
Commons in Ottawa since 1994. MURF is also installed in the Canadian Senate, the
legislative assembly in the Province of New Brunswick, the Danish Parliament and
the legislative Parliaments of the State of Victoria in Australia and the
Territory of Nunavut. The Company's MURF system is Hansard-qualified, the
highest standard for legislative transcription services.
MARKETS
The Company considers the world its potential market. Currently over
70% of its revenues involve exports. The current exports are predominantly to
the United States, but also include South Africa, Denmark, Australia and the
United Kingdom. It is anticipated by the Company that a comparable ratio of
exports will continue for the core products. The market mix percentages by
product line for the past three years are as follows:
Products 2000 1999 1998 Market Segments
Courtflow 33% 45% 40% Courts
Voiceflow 40% 40% 50% Medical
MURF 9% 15% 10% Legislative Assemblies
License/Royalties 18% - - All Market Segments
18
The major markets on which the Company is focused are courts and
healthcare, with legislative assembly, legal and general business markets also
increasing in importance. Rapid growth is expected in the primary markets as an
increasing number of courts and hospitals acquire the infrastructure to utilize
digital systems and replace outdated analogue (tape-based) systems. The Company
already has multiple installations of its software in these markets.
The voice data market is growing rapidly as the replacement of
traditional tape-based recording devices with digital systems accelerates. The
Company's strategy is to focus first on healthcare and courtroom applications to
demonstrate the benefits of incorporating voice as data within today's
information systems. These markets are clearly defined and easily targeted.
The benefits of digital systems are being seen in other sectors as
well, such as law enforcement, sales automation and technician-performed
maintenance in the field. Included in this market is telephone recording for
emergency services, securities trading, insurance claims handling and any other
segment that needs to record, store and index ongoing verbal transactions. These
are long-term markets that the Company will target.
The following analysis provides an overview of the courts and
healthcare markets.
COURTS. The courtroom digital recording industry is in its infancy. The
digital recording market for courtrooms is expected to grow significantly as
legislative assemblies and courtrooms move to replace analog and other outdated
systems. In the U.S. alone, there are approximately 40,000 courtrooms and an
equal or greater number of quasi-judicial hearing rooms as well as state
legislatures, county administration and municipal council rooms, all of which
have some form of recording system. Few of these facilities have installed
digital recording systems and administrators are seeking cost effective and
efficient technology solutions.
The National Center for State Courts estimates that annual IT spending
in the United States will nearly double to $1 billion by the year 2003. Digital
recording is expected to comprise an important part of this forecast. The shift
to digital recording systems is not restricted to North America and is becoming
a worldwide trend. Court automation is long overdue, as legacy systems are no
longer cost efficient. Court administrators have relied on multiple track
tape-based recording systems for the past 20 years. Court reporters and clerks
are required to monitor the recording and write their annotations on paper log
sheets during the proceedings.
19
The movement towards courtroom automation is being mandated by the U.S.
government. According to the July 1999 report from the National Task Force on
Court Automation and Integration, a $1.25 billion U.S. budget over a 5-year
period beginning in 1999 has been allocated by the U.S. government with the
passage of the Crime Identification Technology Act of 1998. Under this Act,
state grants will promote the integration of information and identification
technology.
Moreover, the U.S. Department of Justice is supporting a Court
Information Systems Technical Assistance Project that has been designed to focus
on developing practical resources for courts for use in automating and
integrating information systems, both within the courts and throughout the
justice system.
The Company is targeting the courtroom market with the CourtFLOW
product, which addresses these issues and makes the digital recording process
easier to use and more efficient.
HEALTHCARE. The number of hospitals in the U.S. is decreasing due to a
number of contributing factors. As outpatient clinics and ambulatory care
services increase in number across the U.S., hospitals are consolidating to
achieve economies of scale. According to an annual survey conducted by the
American Hospital Association, the number of hospitals in the U.S. has decreased
from 6,780 hospitals in 1980 to 6,097 hospitals in 1997.
The U.S. healthcare industry currently spends upwards of $6.6 billion
U.S. a year on dictation processing, according to the leader in medical
transcription, MedQuist Transcription Ltd. A substantial part of healthcare
information management costs stem from paper handling and storage. As a result,
transcription, dictation, speech recognition and integration companies are all
attempting to find ways to make dictation processing more effective and
efficient.
Outsourcing dictations now generates revenues of more than $1 billion
U.S. annually. Offsite transcriptionists receive voice files and return typed
transcripts via computer networks, with the Internet rapidly becoming the
network of choice.
Most healthcare information continues to be stored in a wall chart as a
paper document generated through the physician's pen. For reasons that include
federally regulated billing practices, higher quality healthcare and reduced
liability risks, the electronic medical record (EMR) is quickly becoming a
mandatory method of record storage. Since 30% to 40% of a medical record is
typically created though dictation, new digital voice recording and management
solutions offer an opportunity to streamline the health information process.
20
Results from a survey conducted by the Medical Records Institute
indicate that the major factors driving the demand for EMRs are the need to
improve processes, workflow efficiency and clinical data capture. Providing
access to patient records at remote locations was also considered an important
factor. Nearly 20% of the survey respondents expressed a need to implement a
clinical data repository that could store voice or sound, indicating a need for
voice to be integrated into EMRs.
The Company is targeting the healthcare market by positioning the
VoiceFLOW system as the one that can provide the infrastructure for making voice
data a key part of the electronic medical records.
MARKETING
The Company's major promotional thrust is to market its products and
solutions via its agents and other distribution channel partners. The Company
has developed an Authorized Partnership Program (APP) to enable the Company to
sell its products to partners under both its own brand or a private label at a
set discount from suggested retail prices, yet still provide training, support
and product integration services. Other marketing tools that the Company
utilizes in promoting to its target markets include:
o "in-house" print advertisements;
o specification sheets;
o flyers & brochures;
o direct mail;
o web site; and
o trade show and conference participation.
The Company has created a "retail" price for all products. Dealers
receive a discount of 40% off the retail list price. This generally includes
companies buying from a distributor, as well as Unisys, Data General and direct
EDS sales.
The Company uses its sales channels to sell either directly to the
customer (typically the larger contracts) or through its agents acting as
resellers (usually the smaller contracts).
COMPETITION
The markets in which the Company competes are highly competitive. The
Company competes with large and established national and multinational
companies, as well as smaller niche companies. Some of these competitors have,
and new competitors may have, greater resources than the Company.
21
Competition for the Company in the traditional digital dictation and
recording markets includes two major established players, Dictaphone Corporation
("Dictaphone") and Lanier Worldwide, Inc. ("Lanier"), as well as a number of
smaller niche players.
Dictaphone and Lanier have a large installed base of products and
strong brand recognition and represent the major share of the current market.
The niche players are several small companies that have taken traditional
interactive voice response products and added applications generally for
specific aspects of the market in which they are involved.
INTELLECTUAL PROPERTY
The Company protects its intellectual property using a combination of
patent protection, trademarks, trade secrets, licenses, non-disclosure
agreements and contractual provisions.
The Company currently owns one patent relating to its packet-streaming
architecture, which allows the Company's systems to capture and digitize speech
and then break down voice data into tiny "packets" that can be "streamed"
through any computer network.
PC-DART has been registered by the Company in Canada and the United
States.
RESEARCH AND DEVELOPMENT
The Company has invested heavily in research and development. Given the
nature of the technology and forecasting longer term market demand, the
Company's focus has been on product development and marketing of its voice
enabled technology.
In 1998, the Company spent approximately $998,000 in research and
development, representing about 57% of total sales.
In 1999, the Company spent approximately $1,100,000 in research and
development, representing about 38% of total sales.
In 2000, the Company spent approximately $828,000 in research and
development, representing about 14% of total sales and plans to continue this
level of research and development into the future.
In order to deliver a true voice operating platform, the Company has
identified four major development stages for its products as follows:
22
(1) Current - Voice as a Data Object (independent applications)
(2) Near-term (6 - 12 months) - Voice Data Manipulation and
Customization Tools (interconnected applications)
(3) Mid-term (12 - 24 months) - Artificial Intelligence and Application
Generation Tools (interactive voice forms and interactive voice response)
(4) Long-term (24 - 48 months) - Automated Voice/Data Exchange System
(voice operating platform)
Management of the Company believes its acquisition of INM will enable
it to incorporate speaker verification and identification, speech-to-text and
text-to-speech conversion, keyword spotting, advanced concept-base search and
retrieval on transcribed text and data mining activated through natural query
language in its Intelligent Voice Operating Platform. Working together, the
Company and INM's near-term objectives are to integrate and test INM's existing
technologies to add the following capabilities to the CourtFLOW and VoiceFLOW
products:
(1) Voice print identification;
(2) Keyword spotting;
(3) Image enabling;
(4) Command and control speech recognition;
(5) Automated voice mail and email response;
(6) Concept-based searches;
(7) Natural language queries;
(8) Data mining;
(9) Text-to-speech; and
(10) Speech-to-text.
******************************************************
DESCRIPTION OF INTERNATIONAL NEURAL MACHINES INCORPORATED
GENERAL
In 2000, the Company purchased 36.5% of the issued common shares, and a
$625,000 10% debenture, of INM. In March 2001 the Company entered into
agreements to acquire the remainder of INM's common shares. This transaction was
completed on May 17, 2001. Reference is made to "Item 4. Information on the
Company. A. History and Development of the Company."
23
The Company funded a 10-month development program with INM relating to
building an intelligent voice platform for the Company, for which the Company
paid INM $100,000 per month beginning on May 2000 and ending February 2001. The
Company is continuing to advance $100,000 per month. Reference is made to
"History and Development of the Company."
INM was incorporated as a private company under the laws of Ontario by
certificate and articles of incorporation dated April 10, 1990. The registered
and principal offices of INM are located at 175 Columbia Street West, Suite 203,
Waterloo, Ontario.
INM has developed Artificial Intelligence software that assists
companies to detect fraudulent practices in the financial services industry. INM
believes that, through the use of a combination of processing technique and its
advanced cognitive technology, its software offers one of the most comprehensive
fraud detection solutions on the market. Moreover, INM's software has been
tested in installations with large corporate clients and government agencies in
Canada, the U.S. and Europe.
The INM software automates data entry (written, voice), data mining
(use of data for prediction/forecasting) and data retrieval (automated searching
of the data) for financial, healthcare, insurance, e-business and
telecommunication applications. INM's products incorporate the use of pattern
recognition which eliminate the need for typing; the use of neural networks to
automate data mining; genetic algorithms and fuzzy logic for prediction,
forecasting and diagnostic modeling; and concept based search-and-retrieval
technology for sophisticated Internet searches. As an example, the software is
able to accept fraud detection queries via email and recognize the query via its
proprietary Concept Discovery Engine. It then proceeds with data mining and/or
direct retrieval of the desired information from the database. Finally, it can
read back the retrieved information via speech synthesis, or send it to the end
user via email or facsimile.
BUSINESS OF INM
Management of the Company believes that demand for an intelligent and
artificial intelligence-based voice platform technology is substantial. It
includes all the existing functions (i.e., capture, compression, storage,
retrieval, routing and text annotation of audio), as well as speaker
verification and identification, speech-to-text and text-to-speech conversion,
keyword spotting, advanced concept-base search and retrieval on transcribed
text, and data mining activated through natural query language.
INM's predictive technology is designed to solve decision problems by
applying specific and relevant past experience. These systems learn by examples
taken from the
24
actual histories embedded in existing data samples and objectively look across
many data variables to assess the whole web of activity before advising a
decision. In analyzing the variables and interactions between variables, the
technology learns to recognize complicated and subtle patterns - patterns too
complex to be expressed with traditional numerical techniques that deal with
individual variables in isolation.
INM was founded in 1990 in Waterloo, Ontario, with a core competency in
Artificial Intelligence software. INM entered the high-end of the business
intelligence market by building products for Decision Support Systems in
Customer Relationship Management ("CRM")/Enterprise Resource Planning ("ERP")
environments. Today, INM provides a set of comprehensive solutions for Internet,
telephony and E-commerce applications via data entry, data mining and data
retrieval products for insurance, healthcare and financial services markets.
To automate the data entry process, INM has developed commercial image
and speech pattern recognition products. INM's data mining and decision support
systems are based on its patented technology GENNIE(TM) - Genetically Enhanced
Neural Network Identification Engine comprised of neural networks, genetic
algorithms and fuzzy logic. In addition, INM uses its unique concept-based
search and retrieve technology CM(TM) - Cognitive Modalities, for data retrieval
from large databases of text via Internet.
The INM Artificial Intelligence approach mimics human brain properties
through learning by exposure, without being constrained by explicit algorithms
or rules. In INM's view this provides INM with a major advantage over
conventional pattern recognition systems which typically rely on highly
proprietary algorithms requiring extensive development programs and limited
applications. Further, INM's solutions have built on its experience in utilizing
techniques developed for single market sectors by systematically applying these
techniques across multiple sectors. INM then uses its ability to marry genetic
algorithm/neural network technology with fuzzy logic and add a natural
language/concept-based query technology to the mix. Combining these techniques,
INM is able to provide a complete multi-staged decision-support solution by
utilizing data entry, data mining and data retrieval to deliver a complete
solution for complex business requirements.
INM has worked for international businesses located in the United
States, Mexico, Sweden, Denmark, Australia and Germany including the following:
o World Bank (money laundering detection in Estonia)
o Royal Bank of Canada (pattern recognition in VISA fraud detection)
25
o Canadian Imperial Bank of Commerce (pattern recognition in internal
fraud detection)
o Toronto Dominion Bank (pattern recognition and competency analysis
at HR)
o EDS Systemhouse (fraud detection in financial services)
o Unisys (pattern recognition in law enforcement)
o C Technologies/Ericsson (embedded OCR for electronic highlighter of
text - PDA)
o Bell Atlantic (speech recognition in correctional institutions)
o Fujitsu (pattern recognition in imaging)
o Elscint/GE Medical (pattern recognition in nuclear medicine
diagnostic)
o Canada's Department of National Defense (concept-based search and
retrieval of data)
o National Research Council (pattern recognition in imaging and
speech)
o the former Ontario Hydro (pattern recognition, prediction and
forecasting in security assessment)
Technology developed by INM includes the following:
DATA ENTRY
SPEECHIQ(TM)(TM) speaker independent recognition software and speech
synthesis used in database queries and keyword spotting. This software was
originally developed for the law enforcement, healthcare, financial and
telecommunication industries. It can be embedded inside OEM products for
Internet/telephone based transactions and customized to add security level and
biometrics verification to phone access (automatic speaker identification
through voice print), text-to-speech, interactive-voice-response and automated
transcriptions of speaker-independent dictation systems.
IMAGEIQ(TM) NeuroTalker(TM) OCR (optical character recognition) is a
line of products, winner of Imaging Magazine's Product of the Year. Embedded
applications and developers toolkits are licensed to various OEMs in North
America and Europe. The
26
latest embedded Personal Digital Assistant software was licensed to C
Technologies, in Sweden, a start-up company financed by Ericsson.
DATA RETRIEVAL
SEARCHIQ(TM) is a concept-based text search engine using natural
language queries and indexing over the Internet. This product resolves the
ambiguity associated with keyword searches and offers a concept-based means of
locating and filtering of information.
EMAILIQ(TM) is software with the ability to understand email/voicemail
questions without human intervention, generate response, record, acknowledge,
route, queue and generate reports and an order of magnitude more advanced than
competitive products, worldwide.
DATA MINING
FRAUDIQ(TM) is a fraud detection software and data mining technology
developed for banking, healthcare and telecommunication (call centers)
industries. It is applicable to fraud detection and money laundering detection
in electronic banking, E-commerce and Internet-based transactions processing.
MEDIQ(TM) is medical diagnostic software and decision support systems
for nuclear medicine industry. INM's long-term strategic partner on this project
is GE Medical through, ELGEMS, its joint venture with the Elscint Ltd.
MARKETS
INM believes that the major opportunities for its software solutions
lie in fraud detection, specifically in two key sectors - financial services and
insurance fraud. In addition, opportunities exist in the telecommunications and
medical industries. The major opportunities that INM is currently pursuing
include:
BANKING INDUSTRY INM has received over $250,000 from the banking
industry for pilot projects for fraud detection. Bank losses due to fraud is an
area of major concern to the U.S. and Canadian banking industries. INM is
working with a major system supplier on a proposal to a Canadian bank for a
fraud detection system which will address debit card, loan applications and
other fraud prevalent areas of the bank's operations.
INSURANCE INDUSTRY Fraud loss in the U.S. healthcare insurance system
is a major issue. INM has been working with a major U.S. consulting company that
administers
27
insurance claims in twenty states in the United States and is interested in
INM's ability to use pattern recognition for prediction and ability to analyze
unusual correlations to determine new fraud patterns.
WORKERS COMPENSATION Fraud in this area is a major concern. To help
address this problem, INM recently submitted a proposal to the Workers Safety
and Insurance Board in Ontario as a culmination of long term discussions on the
development of such a system.
WIRELESS PDA INM has an agreement with a European company to provide
its software for a wireless personal digital assistant. INM provides the OCR
software for the PDA. Additional features, such as speech recording and speech
synthesis, are expected to be added in the next year.
******
SELECTED FINANCIAL INFORMATION OF INM
The following selected financial information, which is expressed in
Canadian dollars, has been derived from the Financial Statements of INM and
should be read in conjunction with such statements and notes thereto:
FIVE MONTHS YEAR ENDED APRIL YEAR ENDED APRIL
ENDED SEPTEMBER 30, 2000 ($) 30, 1999 ($)
30, 2000 ($) (AUDITED) (AUDITED)
(AUDITED)
Revenue 642,863 634,355 941,969
Expenses 510,679 1,220,908 928,763
Income (Loss) from Operations 132,184 (586,553) 13,206
Other Income (Expense) (44,136) (94,805) (84,278)
Net Income (Loss) 88,048 (681,358) (71,072)
Total Assets 421,674 392,168 1,018,850
Current Liabilities 279,647 309,314 163,138
Long Term Debt 810,398 839,273 930,773
Share Capital 936,257 936,257 936,257
28
(Deficit) (1,604,628) (1,692,676) (1,011,318)
Shareholders' Equity (Deficit) (668,371) (756,419) (75,061)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF INM
The following discussion and analysis covers the five months ended
September 30, 2000 and the years ended April 30, 2000 and 1999, and should be
read in conjunction with the financial statements of INM and notes thereto
appearing elsewhere in this Annual Report. These statements were prepared in
accordance with Canadian generally accepted accounting principles, which differ
in certain respects from United States generally accepted accounting principles.
INM's fiscal year end was changed in 2000 from April 30 to September 30. INM's
ability to continue as a going concern is dependent upon obtaining continued
support from its lenders, additional financing, its engaging in development
contracts with third parties, generating product or licensing revenues, or
combinations of these activities, as described in Note 1 to its audited
financial statements for the five months ended September 30, 2000.
FIVE MONTHS ENDED SEPTEMBER 30, 2000
Sales revenue for the five months ended September 30, 2000 totaled
$642,863, of which approximately $550,000 was revenue from VoiceIQ Inc. for
software enhancements. INM continued to focus almost exclusively on developing
its software and marketing its products through VoiceIQ inc. INM has continued
to reduce its long-term debt. Research and development continued at the pace of
previous years.
YEAR ENDED APRIL 30, 2000 COMPARED WITH YEAR ENDED APRIL 30, 1999.
Sales revenue for the year ended April 30, 2000 totaled $634,355, a
decrease of $307,614 over the prior year as a result of reduced focus on
marketing and more emphasis being placed on developing the software in the short
term. INM continued to reduce its long-term debt. Research and development
continued at the pace of previous years.
LIQUIDITY AND CAPITAL RESOURCES
In order for INM to continue its product development and technology,
management estimates $1,000,000 in funding is required. It is anticipated that
the Company would provide the necessary funds through revenues from operations,
government grant programs, and any shortfalls would be funded by the Company's
working capital.
29
ACQUISITION OF INTEREST IN B2G LEGAL PTY LIMITED
In March 2001 the Company acquired 50% of B2G Legal Pty Limited
("B2GL"), an Australian company. B2GL owns 100% of Auscript Pty Limited
("Auscript"), which Management of the Company believes is the largest court
reporting services firm in Australia.
B2G.com Limited ("B2G.com") currently owns 100 ordinary shares of B2GL,
which represents 50% of B2GL's outstanding ordinary shares. In 2000 the Company
made a loan of $450,000 AUS(3) to B2G.com, the proceeds of which were used by
B2GL to acquire all of the issued and outstanding shares of Auscript.
Auscript had owed Lost Ark Nominees Pty Limited ("Lost Ark") $1,000,000
AUS. B2GL asked the Company for an additional loan of $1,000,000 AUS to be used
to repay the loan to Lost Ark and the Company made this loan. In March 2001 the
Company converted the two loans into 100 ordinary shares of B2GL, representing
50% of its outstanding shares.
The Company believes that Auscript services more than 400 court rooms
in Australia. In addition, Auscript has contracts with Federal and State law
enforcement agencies, the Defense Department, the Australian Taxation Office,
the Australian Securities and Investment Commission, the Australian Industrial
Relations Tribunal, the Australian Competition and Consumer Commission, the
Federal Parliament Hansard and New South Wales Hansard. Auscript services these
clients through its staff of 300, which includes 180 full time employees. For
the fiscal year ended June 30, 2000, Auscript had revenues of $14.4 million AUS
($12.1 million Can.) and net losses of $335,000 AUS (?).
Management believes that its interest in Auscript could provide an
opportunity for growth in two ways. The first way is through growth
opportunities within the Australian market by introducing VIQ Products to the
Australian market through Auscript. The second way is by sending transcription
from North America to Australia for completion the next day that Auscript would
be well suited to process because of the fifteen hours time difference from
Eastern Standard Time in Ontario.
- ---------------------
(3) At July 9, 2001, one Australian dollar equaled $.5104 in U.S. dollars.
(Source: The Wall Street Journal).
30
Following is a summary of Auscript's unaudited quarterly operating
results from September 1998 to March 2001, expressed in Australian dollars.
These results were calculated using Australian generally accepted accounting
principles, which differ in certain respects from United States generally
accepted accounting principles.
- -----------------------------------------------------------------------------------------------------------------------------------
AUSCRIPT PTY LTD
- -----------------------------------------------------------------------------------------------------------------------------------
Quarterly Operating Results from Sept 98 to Mar 2001 (000) (unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Quarters Ended
- -----------------------------------------------------------------------------------------------------------------------------------
Sept. Dec. March June 12 Sept. Dec. March June 12 Sept. Dec. March
98 98 99 99 Months 99 99 99 99 Months 00 00 01
- -----------------------------------------------------------------------------------------------------------------------------------
REVENUE 3,967 3,538 3,235 4,201 14,941 3,659 3,875 3,343 3,641 14,518 2,974 2,834 2,550
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Variable Costs 2,394 1,917 1,899 2,515 8,725 2,445 2,214 1,950 2,097 8,706 1,769 1,813 1,690
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 1,573 1,621 1,336 1,686 6,216 1,214 1,661 1,393 1,544 5,812 1,205 1,021 860
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed Costs 1,272 1,695 1,423 1,496 5,886 1,194 1,675 1,516 1,614 5,999 1,200 1,164 1,018
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
EBIT 301 -74 -87 190 330 20 -14 -123 -70 -187 5 -143 -158
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Interest 50 56 34 48 188 46 34 33 35 148 32 32 1
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NPBT 251 -130 -121 142 142 -26 -48 -156 -105 -335 -27 -175 -159
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 2000 COMPARED WITH YEAR ENDED JUNE 30, 1999
Sales revenue for the year ended June 30, 2000 totaled $14,518,000 AUS,
a decrease of $423,000 from the previous year. These revenues were generated
primarily through one to three year contracts entered into with various levels
of the Australian government pursuant to which Auscript performed its core
business of court recording and transcription. The operating loss for the year
was $335,000 AUS, compared to an operating profit in the prior year of $142,000
AUS. Part of this difference is attributable to the costs involved in Auscript
developing software to manage a one-time large contract it had secured for its
litigation support services. Management believes this software can be used on
future potential contracts.
TRANSACTIONS WITH FLANDERS VALLEY FUND, C.V.A.
31
Beginning in 1998 the Company engaged in a series of transactions with
Flanders Language Valley Fund, C.V.A. ("FLV") . These transactions resulted in
FLV currently owning 11.3% of the Company's outstanding Shares. A description of
the Company's various arrangements with FLV follows.
A. AGREEMENTS WITH FLANDERS LANGUAGE VALLEY FUND C.V.A.
1. June 26, 1998 Agreement
Pursuant to an agreement dated June 26, 1998 with Flanders Language
Valley Fund, C.V.A. ("FLV")( the "FLV Agreement"), the Company issued to FLV a
$1,500,000 U.S. 10% Convertible Unsecured Promissory Note (the "FLV Note"), with
attached share purchase Class A warrants which entitled FLV to purchase up to
8,522,725 Shares at any time on or before December 26, 1998, at an exercise
price of $0.22 U.S. per Share.
In 1998 the FLV Note was converted into 852,272 Shares, giving effect
to the 1 for 10 Share consolidation in 1998. The warrants were exercised in
fiscal 1998.
2. December 11, 1998 Agreement
Pursuant to an agreement dated December 11, 1998 with FLV, the Company
issued to FLV a $400,000 U.S. 10% Unsecured Promissory Note (the "FLV Note"),
with attached share purchase warrants entitling FLV to purchase up to 505,082
Shares at any time on or before December 11, 2000, at an exercise price of
$0.0792 U.S. per Share. On September 29, 2000 FLV exercised the warrants,
resulting in proceeds to the Company of $400,000 U.S. The FLV Note was repaid in
November 2000.
3. February 5, 1999 Investment
On February 5, 1999 FLV purchased from the Company $750,000 U.S. of 10%
unsecured debentures of the Company. The debentures were due on February 28,
2004, and initially were convertible into 600,000 Shares of the Company at the
rate of $1.25 U.S. per Share. A rights offering by the Company in the fall of
1999 triggered an anti-dilution provision of these debentures. On April 24, 2000
FLV converted the debentures into 1,223,606 Shares.
Under the debentures, FLV received warrants to purchase, in the
aggregate, an additional 1,054,852 Shares at an exercise price of $0.711 U.S.
per Share, exercisable until February 5, 2001. In February 2001, FLV sold the
warrants to an unaffiliated third party. The warrants were exercised, resulting
in the issuance of 1,054,852 Shares and net proceeds to the Company of
approximately $1.1 million.
32
AGREEMENTS WITH LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
During 1998 the Company entered several agreements with Lernout &
Hauspie Speech Products N.V. ("L&H"). L&H, based in Belgium, attempted to
develop products in the area of advanced speech and language solutions for
computers, automobiles, telecommunications, embedded products, consumer goods
and the Internet. L&H's products and services were designed to originate in four
basic areas: automatic speech recognition, text-to-speech, digital speech and
music compression, and text-to-text (translation).
On November 29, 2000, L&H filed for protection under Chapter 11 of the
U.S. Bankruptcy Act making its future uncertain. Reference is made to "Item 3.
Key Information. D. Risk Factors. Dispute with Lernout & Hauspie/Litigation
Potential."
In 1998, the Company entered into a share exchange agreement with L&H
in which the Company and L&H each received shares in the other company, and a
license agreement pursuant to which the Company licensed from L&H certain of its
technology. Each of these agreements are described below.
1. Share Exchange Agreement
Pursuant to an agreement dated July 15, 1998 between the Company and
L&H (the "Share Exchange Agreement"), the Company issued to L&H a $1,600,000
U.S. non-interest bearing convertible unsecured promissory note (the "L&H Note")
in exchange for 26,667 shares of common stock of L&H ("L&H Shares"). At the time
of the Share Exchange Agreement, July 15, 1998, the L&H Shares were quoted on
NASDAQ and the closing sales price of the L&H Shares on such date was $59.1875
U.S. During the first quarter of fiscal year 2000, the Company sold all of its
L&H Shares, receiving proceeds of $900,250 U.S.
The L&H Note was non-interest bearing and was payable on demand at any
time on or after October 26, 1998, in the event it was not converted into Shares
prior to that date. The L&H Note was converted into 909,091 Shares, giving
effect to the 1 for 10 Share consolidation in 1998.
2. Guarantee by Lernout & Hauspie Speech Products, N.V.
Concurrently with the sale of the $750,000 of debentures to FLV in
February 1999, the Company sold to a Belgian venture capital company, Trust
Capital Partners, a 7% $750,000 U.S. secured debenture, secured by the guarantee
as to repayment of principal
33
by L&H, due on February 28, 2004, and which was convertible into 600,000 Shares
at a price of $1.25 U.S. per Share. A rights offering by the Company in the fall
of 1999 triggered an anti-dilution clause provision in these debentures.
Accordingly, the debentures became convertible into Shares of the Company at
$0.90 per Share with conversion taking place in 2000, resulting in the issuance
of 1,223,606 Shares.
In March 2000, a group of investors, consisting primarily of senior
management of the Company, purchased the $750,000 U.S. debenture from Trust
Capital Partners and a $400,000 8% Convertible Debenture of the Company from
FLV. Concurrent with the completion of these transactions, the $400,000 8%
Convertible Debenture was converted into 357,989 Shares and the holders of share
appreciation rights issued under the Share Appreciation Rights Plan of the
Company relinquished all of their interest in such rights and the plan was
terminated. Reference is made to "Acquisition of Interest - $750,000 U.S.
Debenture in Management." and "Item 7. Major Shareholders and Related Party
Transactions."
In connection with L&H providing guarantees for the Company's sale of
the debenture, the Company granted L&H warrants to purchase 500,000 Shares, at
an exercise price of $0.711 U.S. per Share, exercisable until February 5, 2001.
These warrants were exercised in May 2000, netting the Company approximately
$689,000 Can.
In addition, on February 5, 1999, L&H guaranteed a $750,000 U.S.
operating line of credit for the Company. In connection with L&H guaranteeing
the line of credit, the Company granted L&H warrants to purchase 250,000 Shares,
at an exercise price of $0.711 per Share, exercisable until February 5, 2001.
The line of credit was subsequently paid before the guarantee expired. In May
2000, 150,000 warrants were exercised and the balance of 100,000 warrants
expired.
The Company also agreed, subject to the approval of the Alberta Stock
Exchange (now the Canadian Venture Exchange), that if the $750,000 U.S.
debenture was outstanding on February 5, 2001, and L&H had not exercised its
warrants to purchase 500,000 shares, to issue L&H new warrants at a price equal
to the then current market price.
In March 2001 the Company notified L&H that it believed it was induced
to enter into the above transactions with L&H based upon publicly available
information relating to L&H which Management of the Company believes was
materially inaccurate at the time. It is the Company's belief that L&H's
guarantees are worthless at this time. Accordingly, the Company is seeking
unspecified damages from L&H relating to these transactions. Reference is made
to "Item 3. Key Information. D. Risk Factors. Dispute with Lernout &
Hauspie/Litigation Potential."
34
3. License Agreement with L&H
Pursuant to a Value Added Reseller Computer Software License Agreement
dated March 26, 1998, as amended June 30, 1998, between the Company and L&H, the
Company licensed from L&H a world-wide, non-exclusive, non-transferable license,
to use L&H's dictation software programs for use in the medical fields
("Software") in connection with the Company's development, distribution and
provision of technical support for the Company's PC-DART's family of products
incorporating L&H's software.
Pursuant to the license agreement, and its amendment, the Company has
paid L&H a non-refundable, pre-payment of $950,000 U.S. to be credited against
royalties due L&H. L&H is charging the Company a per copy royalty for the
Software sold of between $250 U.S. to $750 U.S. No royalty credits have been
earned by L&H under this arrangement.
In addition, the Company also paid L&H a non-refundable engineering fee
of $50,000 U.S. to help the Company determine which of the Software could be
incorporated into the Company's products.
It was originally anticipated that the Company and L&H would integrate
L&H's speech recognition technology with the Company's patented digital
dictation and recording systems and that the Company would resell L&H continuous
speech recognition software through its dictation-specific distribution network.
However, these developments have never occurred.
In March 2001, the Company notified L&H that believes it is owed
$1,485,000 by L&H for prepaid royalty services paid by the Company to L&H, and
that L&H has failed to provide the agreed upon services.
4. June 2000 License Agreement
On June 30, 2000, VIQ issued to L&H a non-exclusive, non-assignable,
perpetual and worldwide license for the use of features of VIQ's PC-DART(TM)
VoiceFLOW product and received an initial license fee of $680,000 U.S. and an
initial royalty payment of $220,000 U.S.. Additional royalty payments of
$220,000 U.S. are due on July 15, 2001 and July 15, 2002. The Company believes
it is owed $440,000 U.S. in licensing fees from L&H and is seeking recovery for
these fees. However, because L&H has filed for protection under Chapter 11 of
the U.S. Bankruptcy Act it is uncertain whether the Company will be able to
recover any fees.
ACQUISITION OF INTEREST IN $750,000
35
U.S. DEBENTURE BY MANAGEMENT
In February 1999 the Company sold a 7% $750,000 U.S. debenture to a
Belgian venture capital company, Trust Capital Partners. The debenture is due on
February 28, 2004 and is convertible into Shares of the Company at a price of
$0.61 U.S. per Share.
In March 2000 a group of investors consisting primarily of senior
management of the Company purchased the $750,000 U.S. debenture from Trust
Capital Partners and a $400,000 8% Convertible Debenture of the Company,
originally issued in 1996. $125,000 of the principal amount of the $750,000 U.S.
Debenture was acquired by persons not affiliated with the Company. Reference is
made to "Item 7. Major Shareholders and Related Party Transactions."
The interest payable on the debentures is payable semi-annually on the
last day of February and August of each year, with the first interest payment
made on August 31, 1999. The debentures provide that, for so long as the
debentures are not in default, the Company may, at its option, satisfy its
obligation to pay interest on any interest payment date by the issuance of the
number of its Shares, obtained by dividing the amount of interest payable by 95%
of the Weighted Average Price of the Shares on the Canadian Dealers Exchange for
20 consecutive trading days, ending five days preceding the applicable interest
date. All interest payable to date has been paid by issuance of Shares of the
Company under this formula.
The Debentures are redeemable at any time by the Company, in whole or
in part, in the minimum principal amount of $100,000 U.S. provided that the
Weighted Average Trading price of Shares during the period of 20 consecutive
trading days ending the five trading days preceding the date on which notice of
redemption is given exceed:
(i) 120% of the Conversion Price if redeemed on or before February 28, 2000;
(ii) 144% of the Conversion Price if redeemed after February 28, 2000 and on
or before February 28, 2001;
(iii) 173% of the Conversion Price if redeemed after February 28, 2001 and
on or before February 28, 2002;
(iv) 207% of the Conversion Price if redeemed after February 28, 2002 and on
or before February 28, 2003;
(v) 249% of the Conversion Price if redeemed after February 28, 2003; and
36
during each of such 20 consecutive trading days, for each $100,000 U.S.
principal amount of Debentures to be redeemed, at least 10,000 Shares traded on
such stock exchanges or public market on which the Shares are then quoted or
traded.
**************************************
Following is a glossary of terms used throughout this Annual Report.
GLOSSARY
ADAPTIVE DIFFERENTIAL PULSE CODE MODULATION (ADPCM) is an algorithm
used by telephony-based companies to compress human voice to approximately
14.4MB per hour.
APPLICATION SERVICE PROVIDERS (ASPs) are businesses which provide (for
profit) software programs as services to clients or businesses over the
Internet.
ARTIFICIAL INTELLIGENCE (AI) is a term used to define a computer
software program that has been designed to learn from, and adapt to, changing
input.
COURTABLE is a software application used for recording and managing
voice files in a courtroom setting.
CSMA/CD is Carrier Sent Multiple Access/Collision Detect.
DATA MINING is a form used to define the process of computer software
searching digital data for a pre-defined data element. Data can be text, image
or voice.
ELECTRONIC MEDICAL RECORD (EMR) is a generic term used to encompass all
patient information gathered by a service provider (i.e., hospital) and stored
electronically.
ETHERNET means a popular local area network (LAN) technology invented
by Xerox Corporation Palo Alto Research Center (Xerox PARC) and later adopted as
a standard known as IEEE 802.3. Ethernet is a best-effort, shared access
technology for coaxial cable, twisted-pair, and fiber-optic links using CSMA/CD
technology. Collisions are an intrinsic part of the operation of CSMA/CD since
multiple stations may simultaneously access an idle medium.
INTRANET means a private corporate network, usually a LAN.
INTERNET is the world wide computer network based on internet protocol.
The Internet was originally developed by the United States Advanced Research
Projects
37
Agency of the Department of Defense. It is now administered through the
autonomous organization called the Internet Architecture Board. The World Wide
Web runs over the Internet.
IP means Internet Protocol.
IT means information technology.
KILOBYTE is 1024 bytes, which are the units of measurement for digital
memory storage capacities of PCs.
LAN means Local Area Network - a computer network designed to span a
short distance, usually up to a few thousand metres.
MODEM means a device that utilizes the telephone system to transfer
digital data between computers.
MURF stands for "Multiple Unit Recording Facility" being the digital
recording system developed by The Company for legislative assemblies.
NETWORK is an interconnection of multiple links forming a
communications system.
OEMs means original equipment manufacturers.
PACKET is a block of data encapsulated for transmission comprising a
header that includes address or routing information and data. Different
protocols may have different packet formats and packets may be encapsulated
within packets of other protocols.
PACKET SWITCHING is a method of data communication in which messages
are divided into packets that contain the information necessary for routing the
packet to its destination. This contrasts with circuit switching wherein the
route is determined by a dedicated circuit connection set up prior to data
transmission and maintained for the duration of a transmission session .
PC is a personal computer.
PC DART is a registered trade mark of the Corporation which identifies
the Corporation's line of digital dictation products.
PC DART COURTFLOW is the digital court recording system developed by
The Company.
38
PC DART VOICEFLOW is the digital dictation and recording system
developed for the media community by The Company.
PROTOCOL means the set of rules or conventions governing the exchange
of information between computer systems.
REPEATER is a network device that retransmits all incoming data from
any single incoming link to all outgoing links.
SPEECH-TO-TEXT is a term used to identify computer software that takes
human voice input and converts it to digital data (text).
SPEECH PORTAL means a site on the World Wide Web that aggregates
products and/or services to allow the consumer to find/transact based upon the
theme of speech.
SUBNET means a network formed by using a subset or portion of the links
of a larger network.
SWITCH is a network device that can be configured to transfer all data
coming into a particular link to a given outgoing link. Unlike a router, a
switch forms a single set of cross connections at a time.
TEXT-TO-SPEECH is a term used to identify computer software that takes
text (data) and converts it to synthesized human voice.
TRUESPEECH(R) is an algorithm developed by DSP Group Inc. which
compresses speech at kilobyte per second.
TRAFFIC is the stream of packets of data flowing across a network.
VOICE AUTHENTICATION is a security process which verifies that a
human's spoken voice matches a stored profile.
VOICE PROCESSORS are personal computer based, and hold PC cards used in
the conversion of telephony-based analog voice input to digital compressed true
speech voice-files.
VOICE SERVER is a personal computer based server that hosts the
Company's software, utilities and third party database engines.
WINDOWS(R) is a PC based operating system developed by Microsoft Corp.
39
WORLD WIDE WEB means a vast collection of data which is stored on many
independent servers and is accessible via the Internet.
C. ORGANIZATIONAL STRUCTURE.
At July 9, 2000, the Company had two wholly-owned subsidiaries, (i) BCB
Voice Systems, Inc., a corporation incorporated under the laws of Arizona, and
(ii) International Neural Machines Incorporated, a corporation incorporated
under the laws of the Province of Ontario, Canada. In addition, the Company owns
50% of B2G Legal Pty Limited, an Australian corporation.
D. PROPERTY, PLANTS AND EQUIPMENT.
FACILITIES
The Company's principal executive offices are located at 240 Riviera
Drive, Markham, Ontario, consisting of 13,400 square feet, of which 5,000 square
feet are devoted to warehousing, product assembly and testing. The remainder of
the space is utilized as office space for development, sales, marketing and
administration. The annual rent for its office and manufacturing facilities is
$122,000 per year.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
A. OPERATING RESULTS.
The following discussion of the financial condition, changes in
financial condition and results of operations of the Company for the three years
ended September 30, 2000 and the six months ended March 31, 2001 should be read
in conjunction with the consolidated financial statements of the Company and
related notes. See "Item 18. Financial Statements." The financial statements
have been prepared in accordance with Canadian generally accepted accounting
principles. Reference is made to Note 18 of the consolidated financial
statements for a discussion of the material differences between Canadian and
United States generally accepted accounting principles, and their effect on the
Company's financial statements. In addition to historical information, the
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ significantly from
those anticipated in these forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors" and elsewhere in this
Annual Report.
OVERVIEW
40
Throughout the fiscal year ending September 30, 2000, the Company
continued its migration from a hardware/software integration model to a 100%
software-based product model. This switch continues with a planned completion in
2002 and is expected to result in higher margins, as well as less
inventory-intensive software-only solutions. This is being accomplished through
continued research and development spending on product enhancements. Write-downs
taken on obsolete hardware resulting from this switch were taken in fiscal 1999
and 2000.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2001 VERSUS SIX MONTHS ENDED MARCH 31, 2000
For the six months ended March 31, 2001, the Company recorded a net
loss of $4,247,224 or $0.25 per common share. These results compare with a net
loss of $758,298 ($0.09 per share) for the six months ended March 31, 2000.
Sales for the six months ended March 31, 2001 were $2,541,848, including sales
of B2G Legal Pty Limited, compared to $2,759,661 for the corresponding period in
2000. Compared to the same period in the previous year, gross margin for the six
months ended March 31, 2001 dropped to 41% from 63%.
For The Fiscal Year Ending September 30, 2000
The following discussion and analysis of the Company's results of
operations and financial condition should be read in conjunction with the
audited financial statements for the years ended September 30, 2000, 1999, and
1998, together with the notes thereto.
GENERAL OVERVIEW
The Company is a worldwide provider of software solutions for digitally
capturing and managing voice data. The Company's April 2000 investment of
$2,270,000 (consisting of cash and shares) in International Neural Machines
("INM") of Waterloo, Ontario, gave us a significant stake (37%) in the company
and enabled the Company to offer significant, high-value associated capabilities
such as speaker identification, speech/text conversion, keyword spotting and
intelligent data mining. In May 2001 the Company acquired the remainder of INM
for a purchase price of $4,316,000. Through such investment and continuous
research and development, VoiceIQ is adding innovation to our existing products
and opening many promising market, including but not limited to financial
services, healthcare, telecommunications and e-business. The Company also
focused on strengthening the Balance Sheet throughout fiscal 2000 which included
a $2.0 million reduction in total debt as well as a $5.1 million increase in
shareholders' equity.
41
RESULTS OF OPERATIONS
Several key financial goals were achieved, including a substantial
growth in revenues. Revenues increased by 148% over 1999, to $7.2 million in
fiscal year 2000 from $2.9 million in fiscal 1999, which itself was a
significant increase of 64% over revenue in 1998. Gross margin, as a result of
the continued focus to software, increased from 32% to 67%. Negative shareholder
equity of $2.2 million was raised to positive shareholder equity of $2.9
million, a $5.1 million turnaround. After a $527,000 write down of L&H shares,
the recognition of a $190,000 equity-based accounting loss on the Company's
equity investment in INM and an allowance for prepaid royalties of $1,482,000,
the Company's total loss was still reduced 20%, from $5.8 million to $4.6
million and its loss before these items was reduced by 53% from $5.1 million to
$2.4 million. Loss per common share was reduced from $1.02 to $0.53. Total debt
was reduced by 34% from $5.9 million to $3.9 million.
REVENUE MIX
The majority of revenues, approximately 70%, involve exports. Export
revenue increased 138%, from $2.1 million in fiscal year 1999 to $5.0 million in
fiscal 2000. The Company continues to export predominantly to the United States,
but also to South Africa, Denmark, Australia and the United Kingdom. Management
belives that a comparable ratio of exports will continue for the core products.
The revenue mix by product line for fiscal 2000 was composed of medical
(VoiceFLOW) 40%, legislative applications (MURF) 9%, Court (CourtFLOW) 33% and
Licensing/Royalties 18%.
CUSTOMER BASE
The Company benefits from the security of a broad customer base and
management projects this will continue. The Company's growth has been achieved
with no single client accounting for more than 19% of revenues. Related credit
risk is mitigated through the broad client base and careful monitoring of
accounts. Normal credit terms may require a deposit as credit relationships are
established, but are not usually required with government agencies, hospitals,
courts and other major customers.
SELLING, RESEARCH AND DEVELOPMENT AND ADMINISTRATIVE EXPENSES
Selling, research and development and administrative expenses were
$7,325,423 for the year up $1,346,769 over the previous year. This is a result
of a continuing commitment to allocate resources to research and development for
the Company's core products. The Company is investing in research and
development, administrative, marketing and sales infrastructure that management
believesl develop, bring to market and promote the Company's platform products
being developed in association with INM.
42
OUTLOOK
VoiceIQ has continued throughout the year to apply resources to develop
and enhance its core products, namely VoiceFLOW, CourtFLOW, MURF and voice
compression technology. These products are at a stage where they are becoming
well known and relied upon in their markets. Management believes current
distribution channels will provide a solid base for continuing revenue growth in
this area.
The Company is also active in extending its global reach and expanding
its service capabilities. On May 7, 2001, VoiceIQ announced that it had acquired
50% of B2G Legal Pty Limited in Australia. In turn, B2G Legal owns 100% of
Auscript Pty Limited, which management believes is Australia's largest court
reporting services firm.
This agreement gives the Company an important international foothold
and another avenue for sale of VoiceIQ technology. Management believes the
opportunity of integrating VoiceIQ's advanced technology with the reporting,
transcription, monitoring and electronic publishing services offered by Auscript
will trigger significant revenue growth for VoiceIQ in two ways. The first is
through growth opportunities within the Australian market, while the second is
through offshore transcription that the Australian organization would be
eminently well suited to process given their 15 hour time difference from
Eastern Standard time.
In addition to serving more than 400 courtrooms in Australia, Auscript
also has contracts with Federal and State law enforcement agencies, the Defense
Department, the Australian Taxation Office, the Australian Securities and
Investment Commission, the Australian Industrial Relations Tribunal, the
Australian Competition and Consumer Commission, the Federal Parliament Hansard
and the New South Wales Parliament Hansard. Auscript services these clients
through 300 staff (180 full time equivalents) spread across 10 offices in
Australia, one in each state capital, plus the National Capital (Canberra) as
well as Townsville in the Northern Territories and Dandelong, which is near
Melbourne. For the fiscal year ending June 30, 2000, Auscript had revenues of
AUS$14.4 million (CAN$12.1 million).
Also, the Company and INM, now a wholly-owned subsidiary, are working
together to integrate their technologies, products and systems in related fields
including voice recognition, case management, document management, medical
workflow software, speech-to-text and text-to-speech, data mining and voice
authentication. This will result in an "Intelligent Voice Operating Platform"
that VoiceIQ anticipates bringing to market and selling in fiscal 2001. The
potential markets for this integrated technology include Telecommunication
Vendors (Telcos), Original Equipment Manufacturers (OEM's), Application Service
Providers (ASP's, Internet Service Providers (ISP's), and Financial
43
Service Entities. These represent potential substantive new revenue sources for
VoiceIQ outside of the core products mentioned above.
YEAR ENDED SEPTEMBER 30, 1999 VERSUS YEAR ENDED SEPTEMBER 30, 1998
RESULTS OF OPERATIONS
In 1999, sales totaled $2.9 million, an increase of over 64% from the
comparable period last year. The majority of the sales activity, approximately
73%, continued to be exported, predominantly to the United States, but also to
Denmark, South Africa and the United Kingdom.
REVENUE MIX
The sales mix by product line for fiscal 1999 was comprised of Hospital
(VoiceFLOW) 73%, Legislative Applications (MURF) 20% and Court (CourtFLOW) 7%.
There was no significant concentration of sales with any one end user of the
Company's products as there is a very broad base of customers. Management
believes this broad range will continue as the Company grows.
GROSS PROFIT AND EXPENSES
Gross profit was 32% of sales in fiscal 1999 compared to 37% in fiscal
1998. The decline was a result of writing down inventory for obsolescence and
the fact there was still low margin hardware in the product mix.
SELLING, RESEARCH AND DEVELOPMENT AND ADMINISTRATIVE EXPENSES
Selling, research and development, and administrative expenses of
$5,978,654 were up $2,148,598 over the previous year. This was a result of a
continuing commitment to allocating resources to research and development as
well as developing a sales infrastructure to prepare for planned growth in the
future. The main components of the selling, research and development, and
administrative expenses were:
1999 1998
Research and Development $1,094,625 $ 998,116
44
Selling and Administrative 4,763,088 2,751,558
Depreciation and Amortization 120,941 80,382
----------- -----------
Total Expenses $5,978,654 $3,830,056
----------- -----------
The Company continued throughout fiscal 1999 to apply resources to
develop and enhance VoiceFLOW, CourtFLOW, MURF and voice compression technology.
Throughout fiscal 1999 the Company continued its participation in
numerous industry trade shows as well as in conducting product knowledge and
training seminars for distributors and qualified sales prospects throughout
North America. This, along with continued, planned administrative and sales
expenses to maintain and build infrastructure to promote and support planned
future growth accounted for the expenditure increase over the previous year.
B. LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the Company had cash on hand of approximately $2.7
million. The current ratio as at March 31, 2001 was 3.7:1. The outstanding
long-term debt was $1,025,896, of which $1,014,568 represented a convertible
debenture held primarily by management. Total shareholders equity was
$8,022,139.
The Company in the past has been able to raise capital through share
purchase warrants being exercised by shareholders. In October 2000, the Company
sold 3,000,000 Shares at a price of $3.00 per Share, receiving net proceeds
after payment of all commissions of $8,280,000.
Over the next 12 months, the Company anticipates it will require
approximately an additional $3,000,000 in funds to achieve its expansion plans
as currently structured. This amount includes the funds to further develop INM's
businesses described elsewhere. The Company anticipates that it will raise the
necessary funds from the sale of securities and from its operations. However,
there can be no assurance that the Company will be able to raise any funds, and
that the Company will be able to fund its expansion plans.
The September 30, 2000 financial statements were prepared on the basis
of accounting principles applicable to a "going concern". For further details,
see Note 1 to the financial statements of the Company for the years ended
September 30, 2000 and 1999. No amounts were outstanding under the operating
line of credit as of March 31, 2001, and as of the date hereof. The Company
believes that the actions taken by it will confirm and support the "going
concern" assumption used in preparing the Financial Statements of the Company.
45
The Company faces a number of risks in its business that is identified
under "Risk Factors". The occurrence of one or more of the events described
therein may have a materially adverse effect upon the corporation's results of
operations, financial condition and future prospects.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
The Company has invested heavily in research and development over many
years. Given the nature of the technology and perceived longer term market
demand, the Company's focus has been on product development and marketing of its
voice enabled technology. For the three years ended September 30, 2000, 1999,
and 1998 the Company has spent a total of approximately $828,000, $1,100,000,
and $998,000, respectively, on research and development.
In order to deliver a true voice operating platform, the Company has
identified four major development stages for its products as follows:
(1) Current - Voice as a Data Object (independent applications)
(2) Near-term (6 - 12 months) - Voice Data Manipulation and
Customization Tools (interconnected applications)
(3) Mid-term (12 - 24 months) - Artificial Intelligence and Application
Generation Tools (interactive voice forms and interactive voice response)
(4) Long-term (24 - 48 months) - Automated Voice/Data Exchange System
(voice operating platform)
Management of the Company believes its acquisition of INM will enable
the Company to incorporate speaker verification and identification,
speech-to-text and text-to-speech conversion, keyword spotting, advanced
concept-base search and retrieval on transcribed text and data mining activated
through natural query language in its Intelligent Voice Operating Platform. The
Company and INM's near-term objectives are to integrate and test INM's existing
technologies to add the following capabilities to the CourtFLOW and VoiceFLOW
products:
1. Voice print identification;
2. Keyword spotting;
3. Image enabling;
46
4. Command and control speech recognition;
5. Automated voice mail and email response;
6. Concept-based searches;
7. Natural language queries;
8. Data mining;
9. Text-to-speech; and
10. Speech-to-text.
However, there can be no assurance that the Company's and INM's
products will be able to be successfully integrated and that if the Company will
be able to add the above capabilities to its products.
D. TREND INFORMATION
The trends since the latest financial year ended September 30, 2000
that relate to production are to continue towards a software only solution but
necessary installation of hardware in court sales still continues and has had a
short term effect of lowering margins. Court related sales have been the major
portion of sales in the six month period ended March 31, 2001, but it is
anticipated that medical related sales will increase in the near future. This
would result in returning the margins to the levels of the last fiscal period.
Selling prices and costs have remained constant as compared to the previous
fiscal period. Inventory levels are remaining constant in this period as it is
replenished on an as needed basis.
Sales volumes for the six month period ended March 31, 2001 are
currently behind last year's results. This is mainly due to the delay in a major
government court project that the Company anticipated partially completing by
this date. The delay in this project has had a material negative effect on the
Company's cash flow, revenues, and profitability and could affect its liquidity.
Although the Company anticipates that this project will commence in the future
no assurances or guarantees can be given that it will. In the meantime the
Company has moved to eliminate costs associated with this project and has
directed these resources towards its other ongoing operations. The Company
currently has responded to and submitted several government requests for
proposals ("RFP'S") in Canada, USA, Great Britain and Australia relating to
court and legislative installations of its software. It is anticipated that the
majority of these RFP's will be successful and that
47
their granting is anticipated later this period, although there can be no
assurance that the RFP's will result in the granting of any contracts.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
A. Directors and Senior Management.
DIRECTORS AND OFFICERS. The names, municipalities of residence and
principal occupations of the directors and officers of the Company are as
follows:
NAME & MUNICIPALITY POSITION WITH
OF RESIDENCE COMPANY PRINCIPAL OCCUPATION
Terry Graham(1) CEO, President Officer of the Company
Unionville, Ontario
Robert E. Bellamy(1)(2) Director Business Consultant and Investor
Lindsay, Ontario Digital Antheneum Corp (listed on CDNX)
Public Storage Canadian Properties Ltd (listed on
TSE)
C. Wallis King(2) Chairman of the Board, President, Fideliter Holdings Inc., financial and
Toronto, Ontario Director investment counsel
William Sharpe(2) Director President, Sharpe Blackmore Inc., advertising
Toronto, Ontario agency
Oleg Feldgajer Director CTO VOICEIQ, Officer of the Company
Waterloo, Ontario
Henri Charles Rothschild(3) Director President, Canada-Israel Industrial R&D Foundation
John C. Buckingham(4) Director Associate Dean and Director of the MBA Program at
the Eller Graduate School of Management at
University of Arizona
Dr. Robert K. Creasy(5) Director Professor Emeritus, Department of Obstetrics,
Gynecology & Reproductive Sciences, University of
Texas-Houston Medical School
Dale M. Beeston Vice President - Global Officer of the Company
Oakville, Ontario Sales
Larry A. Beard Chief Financial Officer, Officer of the Company
Mississauga, Ontario Treasurer and Secretary
Leo Halpern Vice President, Sales - Officer of the Company
Beeton, Ontario Legislative Assembly and
Courtroom Markets
Daryl R. Duda Vice President, Sales - Officer of the Company
48
NAME & MUNICIPALITY POSITION WITH
OF RESIDENCE COMPANY PRINCIPAL OCCUPATION
Mississauga, Ontario Business Markets
Brent Oliver Vice President, Research & Officer of the Company
Development
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Prior to 1994, Mr. Rothschild had a 25-year career with the Government
of Canada which included the position of Chief Scientist (from
September 1993 to June 1994) and Assistant Deputy Minister, Science and
Technology Sector, Industry, Science and Technology Canada (from
February 1992 to September 1993).
(4) Prior to April 1999, Mr. Buckingham was President of PrimeTech Inc.
(5) Prior to April 1996, Dr. Creasy was Emma Sue High tower professor and
Chairman, Department of Obstetrics, Gynecology and Reproductive
Sciences, University of Texas Health Science Center at Houston, Texas.
During the last five years, all of the above directors and officers of
the Company have held the occupation or have been associated with the companies
or firms listed opposite their names except as described below under
"Management" and except for C. Wallis King who, prior to November 1997, was
Chairman and CEO of Hughes, King & Co. Limited, a financial and investment
counsel firm.
MANAGEMENT
TERRY GRAHAM, CEO. Prior to October, 1999, Mr. Graham was Chairman and
CEO of Image Processing Systems Inc. ("IPS"). He has built several successful
companies in the high-technology field and over the past 24 years has
established a record of recognizing opportunities for applied technology,
creating business alliances, developing growth strategies and selling Canadian
technology in the international arena. Under his leadership, IPS, based in
Markham, Ontario, grew from sales of $117,000 in 1992 to $30 million in 1997,
with sales to major companies in 13 foreign countries.
LARRY BEARD, CGA, BA Administration, Chief Financial Officer, Treasurer
and Secretary. Prior to September 1998, Mr. Beard was Chief Financial Officer
for Canada of Ocular Sciences/American Hydron. He brings over 25 years of
financial and entrepreneurial experience, including business start-ups as well
as banking and senior financial management positions with established companies.
LEO HALPERN, Vice President Sales, Legislative Assembly and Courtroom
Markets. Mr. Halpern has directed VIQ's major projects such as those in the
Canadian House of
49
Commons and the Tampa, Florida Courthouse. Previously, he was officer of company
in the field of voice recognition and voice processing.
DARYL DUDA, Vice President Sales, Business Markets. Prior to 1992, Mr.
Duda was National Sales Manager and Market Development Manager for Sony Canada,
with particular emphasis on dictation systems.
There are no arrangements or understandings among any of the directors
regarding their election as director. There are no family relationships between
any of the directors and officers.
The Company has acquired all of the Shares of INM which it had not
already owned as of May 17, 2001. The Management of INM is as follows:
NAME & MUNICIPALITY OF PRINCIPAL
RESIDENCE POSITION INM OCCUPATION
Oleg Feldgajer Chairman, President & Chief Executive Officer of INM
Waterloo, Ontario Officer and Director
Terry Graham Director Officer of the Company
Unionville, Ontario
Marg Feldgajer Vice President Operations Officer of INM
Waterloo, Ontario
OLEG FELDGAJER, Chairman, President and Chief Executive Officer. INM's
senior management team is lead by Oleg Feldgajer, founder and President, with 27
years in technology development at major industrial companies. Until 1991, Mr.
Feldgajer held the position of senior project leader at NCR Company in Waterloo,
Ontario, applying advanced neural network based character recognition techniques
to various applications in the banking industry. He was also responsible for R&D
coordination and liaison between NCR and Microelectronics and Computer
Technology Company's neural network group at Austin, Texas. He is the husband of
Marg Feldgajer.
As a member of NCR's Technical Advisory Board, Mr. Feldgajer assisted
NCR's Corporate R&D department in assessing advances in the field of artificial
intelligence and was a frequent presenter at the NCR's Neural Nets Technical
Information Exchange Sessions. Mr. Feldgajer obtained a BSCEE in 1980 from
Tel-Aviv University and a MASCEE from the University of Waterloo in 1988.
MARG FELDGAJER, Vice President Operations - HR/Group Benefits/
Procurement, is involved in the administration of human resources, company
benefits, procurement and project management activities. She is actively
involved in a variety of operations at INM including recruiting and hiring,
management of the group benefits plan, procurement of
50
R&D and scientific equipment and purchase of dedicated software and hardware
products. In addition, she is instrumental in creating project estimates,
assistance in conducting annual reviews and monthly project tracking. Ms.
Feldgajer is a graduate from the University of Waterloo. She is the wife of Oleg
Feldgajer.
B. COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table shows the aggregate
remuneration paid by the Company for the year ended September 30, 2000 to its
executive officers and directors:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------------------------------------------------------------------------
AWARDS PAYOUTS
---------------------------------------------
SECURITIES RESTRICTED
OTHER UNDER SHARES OR ALL OTHER
NAME AND SALARY($) ANNUAL OPTIONS/SARS RESTRICTED LTIP COMPENSATION
PRINCIPAL POSITION YEAR (1) BONUS($) COMPENSATION($) GRANTED# SHARE UNITS($) PAYOUTS($) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Terry Graham 2000 $220,000 $55,000 nil $424,000 nil nil $260,155(3)
Chairman(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Kenneth G. Murton 2000 $110,000 $15,000 nil 20,000 nil nil nil
Vice-Chairman(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Robert Armstrong 2000 $118,750 $50,000 nil 100,000 nil nil nil
Chief Risk Officer
- -----------------------------------------------------------------------------------------------------------------------------------
Leo Halpern 2000 $115,000 $60,000 nil 85,000 nil nil nil
Vice President,
Sales - Legislative
Assembly and
Courtroom Markets
- -----------------------------------------------------------------------------------------------------------------------------------
Daryl Duda 2000 $115,000 $32,500 nil 85,000 nil nil nil
Vice President,
Sales - Business
Markets
- -----------------------------------------------------------------------------------------------------------------------------------
John Tsakalakis 2000 $106,328 nil nil 200,000 nil nil nil
President
- -----------------------------------------------------------------------------------------------------------------------------------
1. Mr. Graham was Chief Executive Officer of the Company
subsequent to October 15, 1999. Mr. Murton was Chief Executive Officer of
the Company prior to October 15, 1999.
2. See "Management Contracts".
3. Because the debenture is denominated in United States funds and
the conversion rate is in Canadian funds, the number of Shares that the
debenture may be converted into depends upon the rate of exchange. For
purposes of this table, the exchange rate used was $1.00 Can. equals $0.68
U.S.
51
DIRECTORS. Directors who are not employees of the Company receive $200
for each meeting of the Board of Directors or committee of the Board of
Directors attended plus $500 for attending the annual meeting of shareholders.
Directors are entitled to be reimbursed for their out-of-pocket
expenses incurred in connection with their duties as directors and are entitled
to participate from time to time in the Stock Option Plan of the Company.
SHARE APPRECIATION RIGHTS PLAN. Prior to March 31, 2000, the Company
had a Share Appreciation Rights Plan pursuant to which the Board of Directors
could issue share appreciation rights ("SARs") to directors, officers and
employees of the Company and its subsidiaries. The board of directors designated
the recipients of SARs and determined the number of SARs covered by each grant,
its base price (which could not be less than closing market price of the Shares
on the trading day prior to the grant), its expiry date and any other questions
relating thereto.
Each SAR represented the increase, if any, between its base price and
the weighted average price of the Shares over 20 trading days immediately prior
to its expiry date which could be satisfied in either in cash or through the
issue of Shares.
All plan participants have cancelled their interests in outstanding
SARs and the plan has been cancelled.
OPTIONS/SARS GRANTED DURING MOST RECENT FINANCIAL YEAR. The following
table sets out certain information relating to options and SARs granted during
the most recent financial year to the Named Executive Officers.
- ---------------------------------------------------------------------------------------------------------------------------------
% OF TOTAL MARKET VALUE OF
OPTIONS/SARs EXERCISE OR SECURITIES UNDERLYING
SECURITIES UNDER GRANTED TO BASE PRICE FOR OPTIONS/SARS ON THE
OPTIONS/SARS EMPLOYEES IN SECURITY DATE OF THE
NAME GRANTED(#) FINANCIAL YEAR ($/SECURITY) GRANT($/SECURITY) EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------------------------
Terry Graham 294,000 16.5% $1.04 $1.04 October 14, 2004
Chairman 130,000 6.5% $0.90 $0.90 December 8, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Kenneth G. Murton
Vice-Chairman 20,000 1% $0.90 $0.90 December 8, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Robert Armstrong
Chief Risk Officer 100,000 5.5% $0.90 $0.90 December 8, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Leo Halpern
Vice President, Sales
- - Legislative
Assembly and
Courtroom Markets 85,000 5% $0.90 $0.90 December 8, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Daryl Duda
Vice President, Sales
- - Business Markets 85,000 5% $0.90 $0.90 December 8, 2004
- ---------------------------------------------------------------------------------------------------------------------------------
52
- ---------------------------------------------------------------------------------------------------------------------------------
% OF TOTAL MARKET VALUE OF
OPTIONS/SARs EXERCISE OR SECURITIES UNDERLYING
SECURITIES UNDER GRANTED TO BASE PRICE FOR OPTIONS/SARS ON THE
OPTIONS/SARS EMPLOYEES IN SECURITY DATE OF THE
NAME GRANTED(#) FINANCIAL YEAR ($/SECURITY) GRANT($/SECURITY) EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------------------------
John Tsakalakis
President 200,000 11% $1.80 $1.80 March 25, 2005
- -----------------------------------------------------------------------------------------------------------------------------------
(1) SARs granted under the Share Appreciation Rights Plan of the
Company.
AGGREGATE OPTIONS EXERCISED DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES. The following table sets
out certain information relating to options exercised by the Named Executive
Officers during the most recent financial year and the value of unexercised
in-the-money options held by the Named Executive Officers at the end of the most
recent financial year:
SECURITIES AGGREGATE UNEXERCISED OPTIONS/SARS VALUE OF UNEXERCISED
ACQUIRED ON VALUE AT FY-END(#)EXERCISABLE/ IN-THE-MONEY OPTIONS/SARS AT
NAME EXERCISE (#) REALIZED($) UNEXERCISABLE FY-END($)EXERCISABLE/UNEXERCISABLE
Terry Graham Chairman nil nil 259,333/184,667 723,587/531,053
Kenneth G. Murton Vice-Chairman nil nil 67,083/21,667 122,875/61,250
Robert Armstrong Chief Risk Officer nil nil 83,334/nil 227,704/nil
Leo Halpern Vice President, Sales
- - Legislative Assembly and
Courtroom Markets nil nil 52,830/61,670 143,350/180,325
Daryl Duda Vice President, Sales
- - Business Markets nil nil 56,663/63,338 149,763/184,712
John Tsakalakis President nil nil 100,000/100,000 205,000/205,000
MANAGEMENT CONTRACTS
Terry Graham's services are provided pursuant to a contract for
professional services dated October 14, 1999, as amended, between the Company
and Dungor Holding Company Ltd. ("DHC"), a company controlled by Terry Graham.
Under this agreement, DHC is entitled to an annual fee of $270,000 together with
additional compensation which is to be based upon cash proceeds received by the
Company from (i) the sale of a substantial part of the business or assets of the
Company, and (ii) the issuance under a private placement or public offering of
Shares. DHC has received additional compensation totaling $260,155 in respect of
certain transactions concluded in Fiscal 2000. Further compensation of $240,000
has been received for transactions occurring in the six month period ending
March 31, 2001. The parties have agreed that DHC and Mr. Graham should maintain
such number of shares and options as is equal to at least 2.5% of the issued and
outstanding Shares at all times during the term that DHC or Mr. Graham provides
services to the
53
Company. In accordance with this arrangement, on July 24, 2000, the Company
issued to Mr. Graham 167,794 Shares at a price of $1.90 per share for a purchase
price of $318,809. On the same day, the Company made a loan to Mr. Graham in the
amount of $318,809, which bore interest at 8% per annum. Unless extended, the
contract terminates on February 28, 2002.
STOCK OPTION PLAN. The Company has established a Stock Option Plan (the
"Plan") for the purpose of providing incentives to directors, officers,
employees and consultants of the Company. The maximum number of Shares reserved
for issue under the Plan is limited to 3,455,000 Shares. The board of directors
may designate the recipient of options and determine the number of Shares
covered by each option, its exercise price (which may not be less than closing
market price of the Shares on the trading day prior to the grant), its expiry
date and any other questions relating thereto. All options will be
non-transferrable except in the event of an optionee's death.
The issue of options under the Plan, together with any other stock
options issued by the Company, may not result, at any time, in:
(a) the number of Shares reserved for issuance under stock options
granted to related persons exceeding 10% of the issued and outstanding Shares;
(b) the issuance to related persons, within a 12-month period, of a
number of Shares exceeding 10% of the issued and outstanding Shares;
(c) the number of Shares reserved for issuance under stock options
granted to any one related person and the related person's associates exceeding
5% of the issued and outstanding Shares; or
(d) the issuance to any one related person and the related persons
associates, within a 12 month period, of a number of Shares exceeding 5% of the
issued and outstanding Shares.
A related person is defined to mean (i) a director or senior officer of
the Company, or (ii) an associate of a director or senior officer of the
Company. The board of directors of the Company may from time to time amend or
revise the terms of the Plan.
The following table sets out certain information with respect to
options to purchase Shares which were issued under the Stock Option Plan were
outstanding at June 30, 2001.
54
MARKET VALUE
PURCHASE PRICE OF SECURITIES
NUMBER OF NUMBER OF SHARES OF SECURITIES EXPIRATION DATE UNDER OPTION ON
OPTIONEES OPTIONEES UNDER OPTION UNDER OPTION OF OPTION DATE OF GRANT
EXECUTIVE 1 10,000 $4.20 March 18, 2002 $4.20
Officers 2 17,500 $2.00 August 26, 2002 $2.00
1 12,500 $2.70 May 5, 2003 $2.70
4 80,000 $1.22 October 18, 2003 $1.22
1 10,000 $1.20 October 20, 2003 $1.20
3 25,750 $1.05 March 14, 2004 $1.05
1 294,000 $1.04 October 14, 2004 $1.04
6 410,000 $0.90 December 8, 2004 $0.90
2 350,000 $2.01 June 15, 2005 $2.01
2 100,000 $1.78 June 27, 2005 $1.78
6 585,000 $1.06 March 9, 2006 $1.06
Directors who are 1 5,000 $2.10 March 24, 2003 $2.10
not Executive 3 30,000 $1.20 October 20, 2003 $1.20
Officers 1 10,000 $1.35 October 27, 2003 $1.35
2 12,000 $1.05 March 14, 2004 $1.05
4 30,000 $0.90 December 8, 2004 $0.90
1 5,000 $1.40 January 8, 2006 $1.40
6 132,500 $1.06 March 9, 2006 $1.06
Employees
2 5,000 $3.10 February 24, 2002 $3.10
1 17,500 $4.50 March 6, 2002 $4.50
2 6,000 $3.50 May 14, 2002 $3.50
1 15,000 $2.00 August 26, 2002 $2.00
3 55,000 $1.22 October 18, 2003 $1.22
1 20,000 $1.20 October 20, 2003 $1.20
1 25,000 $1.25 November 15, 2003 $1.25
2 14,500 $1.05 March 14, 2004 $1.05
1 1,500 $1.25 August 10, 2004 $1.25
6 147,000 $0.90 December 8, 2004 $0.90
24 207,000 $2.01 June 15, 2005 $2.01
2 16,500 $2.65 July 12, 2005 $2.65
6 18,000 $3.95 September 25,2005 $3.95
5 30,000 $1.40 January 8, 2006 $1.40
6 137,500 $1.06 March 9, 2006 $1.06
On July 5, 2001 the closing price of the Shares as quoted on the CDNX
was $0.44.
No amount has been set aside or accrued by the Company and its
subsidiaries during the last fiscal year of the Company to provide pension,
retirement or similar benefits for directors and officers of the Company,
pursuant to any existing plan provided or contributed to by the Company and its
subsidiaries.
C. BOARD PRACTICES.
The directors of the Company are as follows:
55
FIRST
AFFILIATION
NAME POSITION WITH COMPANY
Robert Bellamy Director 1994
C. Wallis King Chairman of the Board 1994
Terry Graham Chief Executive Officer, Director 1997
Larry A. Beard Chief Financial Officer, Treasurer,
Secretary 1998
Leo Halpern Vice President, Sales: Legislative
Assembly and Courtroom Markets 1998
William Sharpe Director 1998
Henri Charles Rothschild Director 2001
John C. Buckingham Director 2001
Dr. Robert K. Creasy Director 2001
Oleg Feldgajer Director 2001
Directors were elected at the last Annual and Special Meeting of
Shareholders held on March 27, 2001, and are expected to hold these positions
until the next Annual and Special Meeting of Shareholders, scheduled for March
2002.
Terry Graham's services are provided pursuant to a contract for
professional services dated October 14, 1999, as amended, between the Company
and Dungor Holding Company Ltd. ("DHC"), a company controlled by Terry Graham.
Under this agreement, DHC is entitled to an annual fee of $270,000 together with
additional compensation which is to be based upon cash proceeds received by the
Company from (i) the sale of a substantial part of the business or assets of the
Company, and (ii) the issuance under a private placement or public offering of
Shares.
All officers have an employment agreement that provides them with one
month of remuneration for every year employed with a minimum of three months
payable. They must exercise all vested options within 30 days of termination.
The Board of Directors has an audit committee comprised of Robert
Bellamy (Director), C. Wallis King (Chairman of the Board), and William Sharpe
(Director). The committee meets quarterly to review the Company's results before
they publicly released, and meets annually to review the yearly results. The
committee then presents the board of directors with its recommendations for the
board's approval. The committee will also discuss the Company's internal
controls and procedures and any other concerns its auditors may have.
The Board of Directors has a compensation committee comprised of C.
Wallis King (Chairman of the Board), Terry Graham (Director and Chief Executive
Officer) and
56
William Sharpe (Director). The committee meets a minimum of once a year to
approve the salaries of the Company's officers and the compensation for the
directors. They also meet to address specific items when required. A member of
the committee will be asked to excuse himself if he has a conflict of interest.
The committee presents their recommendations to the Board of Directors for its
approval.
The Board of Directors has an executive committee comprised of C.
Wallis King (Chairman of the Board) and Terry Graham (Director and Chief
Executive Officer). The committee meets when directed by the Board of Directors
or when they feel a need arises.
D. EMPLOYEES.
At September 30, 2000, 1999, and 1998 the Company employed 40, 35, and
32 persons, respectively. At July 1, 2001, the Company had 35 full time
employees, of which 11 are involved in product development, 3 are involved in
manufacturing, 9 are sales personnel, 1 is in marketing, 6 are in technical
support, and 5 are in finance and administration personnel.
The Company has entered into employment agreements with all of its key
management which contain non-disclosure and confidentiality agreements.
E. SHAREM OWNERSHIP.
NUMBER OF PERCENTAGE OF
SHARES OUTSTANDING
NAME POSITION OWNED SHARES
Terry Graham Chairman of the Board of Directors and Chief Executive
Officer 369,224 2.1%
Larry A. Beard Chief Financial Officer, Treasurer, Secretary *
Leo Halpern Vice President, Sales: Legislative Assembly and *
Courtroom Markets
Daryl R. Duda Vice President, Sales: Business Markets *
Robert E. Bellamy Director 183,785 1.1%
C. Wallis King Director *
William Sharpe Director *
* Less than 1%
The following table sets out information relating to outstanding
options to purchase Shares granted by the Company to its executive offices and
directors that are outstanding:
57
- --------------------------------------------------------------------------------------------
NUMBER OF
COMMON EXERCISE PURCHASE
SHARES PRICE PRICE OF EXPIRATION
NAME OPTIONED PER SHARE OPTION DATE
- --------------------------------------------------------------------------------------------
Terry Graham 10,000 2.00 Nil 8/26/02
10,000 1.20 10/20/03
- --------------------------------------------------------------------------------------------
Dungor Holding(4) 294,000 1.04 Nil 10/14/04
130,000 0.90 12/8/04
335.000 1.06 3/9/06
- --------------------------------------------------------------------------------------------
William Sharp 5,000 2.10 Nil 3/24/03
10,000 1.20 10/20/03
7,500 0.90 12/8/04
12,500 1.06 3/9/06
- --------------------------------------------------------------------------------------------
Robert E. Bellamy 10,000 1.20 Nil 10/20/03
6,000 1.05 3/14/04
7,500 0.90 12/8/04
5,000 1.40 1/8/06
6,500 1.06 3/9/06
- --------------------------------------------------------------------------------------------
C. Wallis King 10,000 1.20 Nil 10/20/03
6,000 1.05 3/14/04
7,500 0.90 12/8/04
21,500 1.06 3/9/06
- --------------------------------------------------------------------------------------------
Henri Rothschild 42,000 1.06 Nil 3/9/06
- --------------------------------------------------------------------------------------------
Dale M. Beeston 50,000 1.78 Nil 6/27/05
85,000 1.06 3/9/08
- --------------------------------------------------------------------------------------------
J. Brent Oliver 2,500 3.50 Nil 5/14/02
15,000 1.22 10/18/03
7,000 1.05 3/14/04
30,000 0.90 12/8/04
25,000 2.01 6/15/05
7,500 1.40 1/8/06
25,000 1.06 3/9/06
- --------------------------------------------------------------------------------------------
Larry A. Beard 20,000 1.22 Nil 10/18/03
70,000 0.90 12/8/04
85,000 1.06 3/9/06
- --------------------------------------------------------------------------------------------
- -------------------
(4) Dungor Holding Company Ltd. is the personal holding and consulting company
of Terry Graham.
58
- --------------------------------------------------------------------------------------------
NUMBER OF
COMMON EXERCISE PURCHASE
SHARES PRICE PRICE OF EXPIRATION
NAME OPTIONED PER SHARE OPTION DATE
- --------------------------------------------------------------------------------------------
Leo Halpern 15,000 1.22 Nil 10/18/03
7,500 2.00 8/26/02
7,000 1.05 3/14/04
85,000 0.90 12/8/04
55,000 1.06 3/9/06
- --------------------------------------------------------------------------------------------
Daryl R. Duda 20,000 1.22 Nil 10/18/03
7,500 1.05 3/14/04
85,000 0.90 12/8/04
7,500 1.40 1/8/06
55,000 1.06 3/9/06
- --------------------------------------------------------------------------------------------
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. MAJOR SHAREHOLDERS.
At June 28, 2001, the Company had 21,622,058 Shares outstanding with an
authorized capital of an unlimited number of Shares. The following are the only
persons known to own 5% or more of the Company's outstanding Shares as of June
28, 2001.
NUMBER OF SHARES PERCENTAGE OF
NAME OWNED OUTSTANDING SHARES
Flanders Language Valley 2,959,275 13.69%
Fund C.V.A.
Oleg Feldgajer 2,956,000 13.68%
Alexander Szlam 1,360,000 6.29%
Lernout & Hauspie Speech
Products, N.V. 1,559,090 7.21%
The major shareholders listed above have the identical voting rights to
all other shareholders.
At June 30, 2001, the Company had 2,811 shareholders of record. At June
30, 2001, there were 108 United States shareholders of record, holding 1,471,263
Shares, which represents 6.8% of the outstanding class.
59
To the best of the Company's knowledge, the Company is not directly or
indirectly owned or controlled by another Company or foreign government.
There are no arrangements, known to the Company, the operation of which
may at a subsequent date result in a change in control of the Company.
RELATED PARTY TRANSACTIONS.
(a) No director, senior officer or other insider of the Company, or any
associate or affiliate of any thereof, has or had any material interest in any
transaction during the year ended September 30, 2000 or in any proposed
transaction that has materially affected or will materially affect the Company,
except as described below.
(1) On February 5, 1999, FLV purchased 10% Convertible Debentures in
the aggregate principal amount of $750,000 U.S. accompanied by 1,054,852 share
purchase warrants. The 10% convertible debentures were subsequently converted
into 1,581,595 Shares. Each of the share purchase warrants entitled the holder
to purchase one Share at a price of $0.711 U.S. at any time on or before
February 5, 2001. In February 2001, FLV sold the warrants to an unaffiliated
third party. The warrants were exercised, resulting in the issuance of 1,054,852
Shares and net proceeds to the Company of approximately $1.1 million. Philip
Vermeulen, formerly a director of the Company, is the Managing Director of FLV
Management, N.V., the investment manager of FLV. FLV owns 2,959,275 Shares,
representing 17.13 % of the outstanding Shares.
(2) On February 5, 1999, L&H guaranteed a $750,000 U.S. 7% Convertible
Debenture issued by the Company and a $750,000 U.S. operating line of credit of
the Company. As consideration for the guaranty, L&H received an aggregate of
750,000 share purchase warrants. Each of the share purchase warrants entitled
the holder to purchase one Share at a price of $0.711 U.S. at any time on or
before February 5, 2001. These warrants were exercised in 2000.
(3) In March 2000, a group of investors consisting primarily of senior
management of the Company purchased the $750,000 U.S. debenture and a $400,000
8% Convertible Debenture of the Company from a Belgian venture capital fund.
Concurrent with the completion of these transactions, the $400,000 8%
Convertible Debenture was converted into 357,989 Shares.
(4) In August, 1999, the Company issued $450,000 10% Convertible
Promissory Notes to four investors, of which Kenneth G. Murton, formerly a
director and officer of the Company, and Robert E. Bellamy, a director of the
Company, each purchased a promissory note in the principal amount of $50,000.
These promissory notes were redeemed on November 1, 1999 out of the proceeds of
a rights offering. Upon redemption, the holders
60
of the notes received share purchase warrants permitting the purchase, on or
before August 31, 2001, of Shares at $0.92 per share, being the trading prices
of the Shares at the time of issue of the warrants. Each of Mr. Murton and Mr.
Bellamy received 34,483 of these share purchase warrants.
(5) On June 30, 2000, the Company issued to L&H a non-exclusive,
non-assignable, perpetual and worldwide license for the use of features of the
Company's PC-DART(TM) VoiceFLOW product and received an initial license fee of
$680,000 U.S. and an initial royalty payment of $220,000 U.S. Additional royalty
payments of $220,000 U.S. are due on July 15, 2001 and July 15, 2002. The
Company is owed $440,000 U.S. in licensing fees from L&H and is seeking recovery
for these fees. However, because L&H has filed for protection under Chapter 11
of the U.S. Bankruptcy Act it is uncertain whether the Company will be able to
recover any fees. L&H owns 1,559,090 Shares of the Company, representing 9.02%
of the outstanding Shares.
(6) On May 9, 2000, the Company received shares certificates
representing 8,170 shares of L&H, in partial payment of the $462,150 U.S.
exercise price of 650,000 share purchase warrants of the Company. In view of the
failure of L&H to make full payment ofthe exercise price, and because Management
believes the entire transaction was based upon publicly available financial
information of L&H which Management believes was materially inaccurate, the
Company has notified L&H that it plans to reverse this transaction. The Company
has notified L&H that it is reserving any rights to seek damages from L&H.
(7) On July 24, 2000, the Company issued 167,794 Shares to Mr. Terry
Graham, a director and senior officer of the Company in consideration for a
promissory note in the amount of $318,809. Reference is made to "Item 6.
Directors, Senior Management and Employees - Management Contracts."
(b) The aggregate amount outstanding as of September 30, 2000 for
indebtedness entered into in connection with the purchase of securities of the
Company or its subsidiaries by all officers, directors, employees, former
officers, directors and employees, of the Company or its subsidiaries to the
Company or its subsidiaries was $30,000.
The following table sets out particulars of indebtedness for directors,
executive officers and senior officers in respect of securities purchases:
61
LARGEST AMOUNT FINANCIALLY ASSISTED
INVOLVEMENT OF OUTSTANDING DURING AMOUNT SECURITIES PURCHASED
ISSUER OR YEAR ENDED SEPT. OUTSTANDING AT DURING LAST COMPLETED SECURITY FOR
NAME AND PRINCIPAL POSITION SUBSIDIARY 30, 2000 MAY 24, 2001 FINANCIAL YEAR INDEBTEDNESS
Peter Vanderlee
Corporate Development &
Communications Lender $60,000 $30,000 nil 20,000 shs(1)
Terry Graham
Chairman & CEO Lender $318,809 $318,809 $318,809 N/A
The loan to Mr. Vanderlee was to be repaid on November 3, 2000, bears
interest at the rate equal to the prime lending rate of the Company's principal
Canadian banker plus 2.0% per annum, payable quarterly, and is secured by 20,000
Shares purchased with the proceeds of the loan. The term of the loan was
extended to November 3, 2001.
The aggregate amount outstanding as of September 30, 2000 for
indebtedness not entered into in connection with the purchase of securities of
the Company or its subsidiaries by all officers, directors, employees, former
officers, directors and employees, of the Company or its subsidiaries to the
Company or its subsidiaries was $65,000.
The following table sets out particulars of indebtedness for directors,
executive officers and senior officers in respect of indebtedness not entered
into in connection with the purchase of securities:
LARGEST AMOUNT
INVOLVEMENT OF OUTSTANDING DURING
ISSUER OF YEAR ENDED SEPT. 30, AMOUNT OUTSTANDING
NAME AND PRINCIPAL POSITION SUBSIDIARY 2000 AS AT MARCH 31, 2001
Larry Beard
Chief Financial Officer, Treasurer
and Secretary Lender $65,000 $65,000
The loan to Mr. Beard is to be repaid in September 2001, bears interest
at the rate equal to 5% per annum, payable monthly, and is secured by 2,500
Shares and options to purchase 90,000 Shares at prices ranging from $0.90 to
$1.22.
INTERESTS OF EXPERTS AND COUNSEL.
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
Reference is made to "Item 18. Financial Statements" for the financial
statements included in this Annual Report.
62
For the period six month period ending March 31, 2001, the Company had
export sales of $1,448,728, which represents approximately 66% of the Company's
total sales for this period.
Other than the transactions with INM and B2B, described elsewhere in
this Annual Report, there have been no significant changes in the Company's
business since the date of the audited financial statements for the year ended
September 30, 2000 and the unaudited financial statements as at March 31, 2001.
There are no legal proceedings of a material nature pending against the
Company, or its subsidiaries. The Company is unaware of any legal proceedings
known to be contemplated by any governmental authorities.
To date, the Company has not paid a dividend. The declaration, amount
and date of distribution of any dividends in the future will be decided by the
Board of Directors from time to time based upon and subject to the Company's
earnings, financial requirements and other conditions prevailing at the time.
ITEM 9. THE OFFER AND LISTING.
A. OFFER AND LISTING DETAILS.
The Company's Shares commenced trading on the Alberta Stock Exchange in
1994. The Company's Shares are currently listed on the Canadian Venture Exchange
("CDNX"). Trading on the CDNX commenced on November 29, 1999. The following is a
summary of trading in the Shares on the CDNX and prior to November 29, 1999, the
Alberta Stock Exchange, for the periods indicated:
--------------------------------------------------
YEAR LOW HIGH
--------------------------------------------------
1996 0.20 0.34
--------------------------------------------------
1997 0.14 0.52
--------------------------------------------------
1998 0.125 0.32
--------------------------------------------------
1999 0.75 3.1
--------------------------------------------------
2000 0.82 4.95
--------------------------------------------------
The following is a summary of trading, on a quarterly basis, of the
Shares on the Alberta Stock Exchange and CDNX for 1999 and 2000, expressed in
Canadian dollars:
63
-----------------------------------------------------------
LOW HIGH
-----------------------------------------------------------
1999
1st Quarter $0.83 $1.60
2nd Quarter $1.06 $3.10
3rd Quarter $0.95 $1.90
4th Quarter $0.75 $1.09
-----------------------------------------------------------
2000
1st Quarter 0.82 4.00
2nd Quarter 1.55 3.23
3rd Quarter 1.92 4.95
4th Quarter 1.18 4.20
-----------------------------------------------------------
The low and high market prices for the Shares for the past six months
are as follows:
-----------------------------------------------------------
MONTH AND YEAR LOW HIGH
-----------------------------------------------------------
January 2001 1.25 1.95
-----------------------------------------------------------
February 2001 1.00 1.55
-----------------------------------------------------------
March 2001 0.85 1.20
-----------------------------------------------------------
April 2001 0.80 1.15
-----------------------------------------------------------
May 2001 0.50 0.90
-----------------------------------------------------------
June 2001 0.37 0.57
-----------------------------------------------------------
The closing price of the Shares on the CDNX on July 5, 2001 was $0.44.
B. PLAN OF DISTRIBUTION.
Not applicable.
C. MARKETS
(see A. above)
D. SELLING SHAREHOLDERS.
Not applicable.
E. DILUTION.
64
Not applicable.
F. EXPENSES OF THE ISSUE.
Not applicable.
10. ADDITIONAL INFORMATION.
A. SHARE CAPITAL.
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
COMMON SHARES
The Company is authorized to issue an unlimited number of Common Shares
("Shares") and an unlimited number of Preferred Shares, each without nominal or
par value. As at July 5, 2001, there were 21,622,058 Shares issued and
outstanding and an additional 6,601,999 Shares reserved for issuance pursuant to
exercise of stock options, warrants, and conversion of debentures. No Preferred
Shares are issued. All issued and outstanding Shares are fully paid and
non-assessable.
The holders of Shares are entitled to such dividends as and when
declared by our board of directors, to one vote per share at meetings of
shareholders and upon liquidation, to receive such of our assets as are
distributable to holders of Shares, subject to the rights of holders, if any, of
the Preferred Shares. All Shares presently outstanding are duly authorized,
validly issued, fully paid and non-assessable. Shares have no preference,
conversion, exchange, preemptive or cumulative voting rights.
All Shares are entitled to one vote per share at all meetings of
shareholders, rank equally as to dividends and as to the distribution of the
Company's assets available for distribution in the event of a liquidation,
dissolution or winding up of the Company. There are no preemptive or conversion
rights and no provision for redemption, purchase for cancellation, surrender or
sinking or purchase funds.
Provisions as to the modification, amendment or variation of such
rights and provisions are contained in the Business Companies Act (Ontario) (the
"Act") and the regulations promulgated thereunder. Certain fundamental changes
to the articles of the Company will require the approval of two-thirds of the
votes cast on a resolution submitted to a special meeting of the Company's
shareholders called for the purpose of considering the resolution. These items
include (i) an amendment to the provisions relating to the
65
outstanding capital of the Company, (ii) a sale of all or substantially all of
the assets of the Company, (iii) an amalgamation of the Company with another
company, other than a subsidiary, (iv) a winding-up of the Company, (v) a
continuance of the Company into another jurisdiction, (vi) a statutory court
approved arrangement under the Act (essentially a corporate reorganization such
as an amalgamation, sale of assets, winding-up, etc.), (vii) a change of name.
Although the Act does not specifically impose any restrictions on the
repurchase or redemption of shares, under the Act a corporation cannot
repurchase its shares or declare dividends if there are reasonable grounds for
believing that (a) the corporation is, or after payment would be, unable to pay
its liabilities as they become due, or (b) after the payment, the realizable
value of the corporation's assets would be less than the aggregate of (i) its
liabilities and (ii) its stated capital of all classes of its securities.
Generally, stated capital is the amount paid on the issuance of a share.
PREFERRED SHARES
The Preferred Shares are issuable in one or more series with such
rights, restrictions, conditions and limitations as the directors may specify by
resolution at the time of designation of the series. The holders of Preferred
Shares are entitled, upon liquidation, to receive such of our assets as are
distributable to the holders of the Preferred Shares in preference to the
holders of Common Shares.
ARTICLES AND BY-LAWS
The following presents a description of certain terms and provisions of
the Company's articles and by-laws.
GENERAL
The Company was incorporated in the Province of Alberta, Canada on July
12, 1993 and was continued to the Province of Ontario, Canada pursuant to the
Business Company Act (Ontario) pursuant to articles of continuance dated October
1, 1996.
The Company's corporate objectives and purpose are unrestricted.
DIRECTORS
The Company's by-laws provide that a director who is a party to, or who
is a director or officer of or has a material interest in any person who is a
party to, a material contract or transaction or proposed material contract or
transaction with us shall disclose
66
to us the nature and extent of that interest and shall not vote on any
resolution to approve such contract or transaction.
The Company's by-laws provide that the directors shall be paid such
remuneration for their services as the board of directors may from time to time
determine.
The Company's by-laws provide that the board may from time to time on
our behalf, without authorization of shareholders:
borrow money upon Company credit;
issue, reissue, sell or pledge bonds, debentures, notes or
other evidences of indebtedness or guarantee of the Company, whether
secured or unsecured;
to the extent permitted by the Business Companies Act
(Ontario), give directly or indirectly financial assistance to any
person by means of a loan, a guarantee or otherwise on our behalf to
secure performance of any present or future indebtedness, liability or
obligation of any person; and
mortgage, hypothecate, pledge or otherwise create a security
interest in all or any or our currently owned or subsequently acquired
real or personal, movable or immovable, property including book debts,
rights, powers, franchises and undertakings, to secure any Company
bonds, debentures, notes or other evidences of indebtedness or
guarantee or any other present or future indebtedness, liability or
obligation.
The Company's by-laws provide that no person shall be qualified for
election as a director if such person is less than 18 years of age. There is no
provision in the Company's by-laws relating to retirement or non-retirement of
directors under an age limit requirement. A director need not be a shareholder.
A majority of directors must be resident Canadians and at least one-third of the
directors must not be officers or employees of the Company or of any of the
Company's affiliates.
ANNUAL AND SPECIAL MEETINGS
The annual meeting and special meetings of shareholders are held at
such time and place as the board of directors, the chairman of the board, the
managing director or the president shall determine. Notice of meetings are sent
out to shareholders not less than 21 nor more than 50 days before the date of
such meeting. All shareholders at the record date are entitled to notice of the
meeting and have the right to attend the meeting. The directors do not stand for
reelection at staggered intervals.
67
There are no provisions in either the Company's Articles of
Incorporation or By-laws that would have the effect of delaying, deferring or
preventing a change in control of the Company and that would operate only with
respect to a merger, acquisition or corporate restructuring involving the
Company or its subsidiary.
There are no by-law provisions governing the ownership threshold above
which shareholder ownership must be disclosed.
C. MATERIAL CONTRACTS
Except for contracts entered into in the ordinary course of business,
the only material contracts which have been entered into by the Company in the
two years prior to the date hereof are the following:
(1) AGENCY AGREEMENT DATED OCTOBER 16, 2000 BETWEEN THE COMPANY,
THOMSON KERNAGHAN & CO. LTD., AND HAYWOOD SECURITIES INC. RELATING TO OCTOBER
2000 PUBLIC OFFERING.
Pursuant to an agreement dated October 16, 2000 (the "Agency
Agreement") made between the Company and Thomson Kernaghan & Co. Ltd. and
Haywood Securities Inc. (collectively, the "Agents"), the Agents acted as
exclusive agent of the Company in a public offering of the 3,000,000 of the
Company's Shares at a price of $3.00 per Share, on a best efforts basis. The fee
payable to the Agents was $0.24 per Share, resulting in an aggregate fee of
$720,000. As additional consideration for the services of the Agents in
connection with the offering, the Company issued a total of 300,000 compensation
options (the "Compensation Options") to the Agents at a price of $3.46 per
Share, to purchase during the period of two years following the closing of the
offering, which occurred during October 2000.
(2) AGREEMENTS RELATING TO ACQUISITION OF INTERESTS IN INTERNATIONAL
NEURAL MACHINES INC.
On April 12, 2000, the Company purchased 36.5% of the issued common
shares of INM, and a $625,000 10% debenture ("Debenture"), of INM for a purchase
price of $2,270,000 which was satisfied by the payment of $1,250,000 and the
issue of 400,000 Shares of the Company at a price of $2.55 per Share. Pursuant
to the terms of the agreement, the Company funded a 10-month development program
with INM relating to building an intelligent voice platform for the Company, for
which the Company paid INM $100,000 per month.
68
Pursuant to two Share Purchase Agreements with Oleg Feldgajer and
Aleksander Szlam in March 2001, the Company acquired the remainder of INM's
outstanding shares. The Company purchased 12,700 shares of INM from Oleg
Feldgajer and Aleksander Szlam for a price of $4,316,000 which the Company
satisfied by the issuance of 4,316,000 of its Shares to Messrs. Feldgajer and
Szlam in May 2001.
3. AGREEMENTS RELATING TO ACQUISITION OF INTEREST IN B2G LEGAL PARTY
Limited.
In March 2001 the Company acquired 50% of B2G Legal Pty Limited
("B2GL"), an Australian company. B2GL owns 100% of Auscript Pty Limited
("Auscript"), which Management of the Company believes is the largest court
reporting services firm in Australia.
B2G.com Limited ("B2G.com") currently owns 100 ordinary shares of B2GL,
which represents 50% of B2GL's outstanding ordinary shares. In 2000 the Company
made a loan of $450,000 AUS to B2G.com, the proceeds of which were used by B2GL
to acquire all of the issued and outstanding shares of Auscript.
Auscript had owed Lost Ark Nominees Pty Limited ("Lost Ark") $1,000,000
AUS. B2GL asked the Company for an additional loan of $1,000,000 AUS to be used
to repay the loan to Lost Ark and the Company made this loan. In March 2001 the
Company converted the two loans into 100 ordinary shares of B2GL, representing
50% of its outstanding shares.
(4) AGREEMENTS WITH FLANDERS LANGUAGE VALLEY C.V.A,
Beginning in 1998 the Company engaged in a series of transactions with
Flanders Language Valley Fund, C.V.A. ("FLV") These transactions resulted in FLV
becoming a major shareholder of the Company. Reference is made to "Item 4.
Information on the Company, Business Overview - Transactions with Flanders
Language Valley C.V.A" for a description of the Company's dealings with FLV.
(5) AGREEMENTS WITH LERNOUT & HAUSPIE SPEECH PRODUCTS, N.V.
Beginning in 1998 the Company engaged in a series of transactions with
Lernout & Hauspie Speech Products, N.V. ("L&H"). These transactions resulted in
L&H becoming a major shareholder of the Company. In November 2000 L&H filed for
protection under Chapter 11 of the U.S. Bankruptcy Act. The Company believes
that it was induced to enter the agreements with L&H based upon publicly
available information which Management of the Company now believes was
materially inaccurate at the time. Management is seeking to unwind certain of
its transactions with L&H and has demanded damages from L&H. Reference is made
to "Item 4. Information on the Company, Business
69
Overview - Agreements with Lernout & Hauspie Speech Products N.V."and "Related
Party Transactions" for a description of the Company's various dealings with
L&H.
D. EXCHANGE CONTROLS.
There are no laws, governmental decrees or regulations in Canada that
restrict the export or import of capital or which affect the remittance of
dividends, interest or other payments to non-resident holders of our shares,
other than withholding tax requirements. Reference is made to "Item E.
Taxation."
There are no limitations under the laws of Canada or the Province of
Ontario, or in our constating documents, with respect to the right of
non-resident or foreign owners to hold or vote Shares other than those imposed
by the Investment Canada Act .
The Investment Canada Act is a federal Canadian statute which regulates
the acquisition of control of existing Canadian businesses and the establishment
of new Canadian businesses by an individual, a government or entity that is a
"non-Canadian" as that term is defined in the Investment Canada Act.
Management of the Company believes that it is not currently a
"non-Canadian" for purposes of the Investment Canada Act. If the Company were to
become a "non-Canadian" in the future, acquisitions of control of Canadian
businesses by the Company would become subject to the Investment Canada Act.
Generally, the direct acquisition by a "non-Canadian" of an existing Canadian
business with gross assets of $5,000,000 or more is reviewable under the
Investment Canada Act, with a threshold of $184 million for transactions closing
in 1999 for "WTO investors" as defined under the Investment Canada Act. If the
Company were to become a "non-Canadian" in the future, Management believes the
Company would likely become a "non-Canadian" which is a "WTO investor."
Generally, indirect acquisitions of existing Canadian businesses (with gross
assets over certain threshold levels) are reviewable under the Investment Canada
Act, except in situations involving "WTO investors" where indirect acquisitions
are generally not reviewable. In transactions involving Canadian businesses
engaged in the production of uranium, providing financial services, providing
transportation services or which are cultural businesses, the benefit of the
higher "WTO investor" thresholds do not apply.
Acquisitions of businesses related to Canada's cultural heritage or
national identity (regardless of the value of assets involved) may also be
reviewable under the Investment Canada Act. In addition, investments to
establish new, unrelated businesses are not generally reviewable. An investment
to establish a new business that is related to the non-Canadian's existing
business in Canada is not notifiable under the Investment Canada Act unless such
investment relates to Canada's cultural heritage or national identity.
70
Investments which are reviewable under the Investment Canada Act are
reviewed by the Minister, designated as being responsible for the administration
of the Investment Canada Act. Reviewable investments, generally, may not be
implemented prior to the Minister's determining that the investment is likely to
be of "net benefit to Canada" based on the criteria set out in the Investment
Canada Act. Generally investments by non-Canadians consisting of the acquisition
of control of Canadian businesses which acquisitions are otherwise
non-reviewable or the establishment of new Canadian businesses require that a
notice be given under the Investment Canada Act in the prescribed form and
manner.
Any proposed take-over of the Company by a "non-Canadian" would likely
be subject only to the simple "notification" requirements of the Investment
Canada Act as in all likelihood that non-Canadian would be a "WTO investor" for
purposes of the Investment Canada Act. Generally, a "WTO investor" is an
individual, other than a Canadian, who is a national of a country which is a
member of the World Trade Organization. In the case of a person which is not an
individual, a WTO investor is a person which, generally, is ultimately
controlled by individuals, other than Canadians, who are nationals of a WTO
member. Currently there are 134 countries which are members of the WTO,
including virtually all countries of the Western world. The Company would have
to have an asset base of at least $184 million Can. before the "reviewable"
transaction provisions of the Investment Canada Act became relevant for
consideration by a third party non-Canadian acquirer, which is not a WTO
investor.
E. TAXATION.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the principal Canadian federal
income tax considerations generally applicable to a person who holds the
Company's Shares and who, at all relevant times, for the purposes of the Income
Tax Act (Canada) (the "Act") is not and has never been resident or deemed to be
resident in Canada, deals at arm's length and is not affiliated with the
Company, holds his/her Shares as capital property, does not use or hold (and
will not use or hold) and is not deemed to use or hold his/her Shares in, or in
the course of, carrying on a business in Canada and does not carry on an
insurance business in Canada and elsewhere (a "Non-Resident Holder").
The summary is based on the current provisions of the Act and the
regulations thereunder and the Company's understanding of the current published
administrative practices, and assessing policies of the Canada Customs and
Revenue Agency (the "CCRA"). This summary takes into account all specific
proposals to amend the Act and the regulations publicly announced by the
Minister of Finance (Canada) prior to the date hereof (the "Proposed
Amendments") although no assurances can be given that such
71
Proposed Amendments will be enacted in the form proposed or at all. This summary
does not otherwise take into account or anticipate any other changes in law,
whether by judicial, governmental or legislative action or decision or other
changes in administrative practices or assessing policies of the CCRA nor does
it take into account any provincial, territorial, local or foreign tax
considerations. The provisions of provincial income tax legislation may vary
from province to province in Canada and, in some cases, differ from federal tax
legislation.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER.
ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF SHARES SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES, INCLUDING THE
APPLICATION AND EFFECT OF THE INCOME AND OTHER TAX LAWS OF ANY COUNTRY,
PROVINCE, STATE OR LOCAL TAX AUTHORITY. ANY NON-RESIDENT HOLDER WHO ACQUIRES
SHARES OTHER THAN FROM THE COMPANY MAY BE REQUIRED TO OBTAIN FROM THE VENDOR A
CERTIFICATE PURSUANT TO SECTION 116 OF THE ACT (DESCRIBED BELOW) UNLESS THE
SHARES IS LISTED ON A PRESCRIBED STOCK EXCHANGE (AS DESCRIBED BELOW) OR, AFTER
REASONABLE INQUIRY, THE PURCHASER HAD NO REASON TO BELIEVE THE VENDOR WAS A
NON-RESIDENT OF CANADA WITHIN THE MEANING OF THE ACT.
DIVIDENDS ON SHARES
Dividends paid or credited or deemed under the Act to be paid or
credited on the Shares held by a Non-Resident Holder will be subject to Canadian
non-resident withholding tax at a general rate of 25%. This rate may be reduced
pursuant to the terms of an applicable tax treaty between Canada and the country
of residence of the Non-Resident Holder. Dividends paid or credited or deemed
under the Act to be paid or credited on the Shares held by a Non-Resident Holder
who is resident in the United States for purposes of the Canada- United States
Income Tax Convention will generally be subject to Canadian non-resident
withholding tax at a rate of 15%.
DISPOSITION OF SHARES
A Non-Resident Holder will not be subject to tax under the Act in
respect of any capital gain realized on a disposition of Shares unless at the
time of such a disposition such shares constitute taxable Canadian property of
the Non-Resident Holder for purposes of the Act and such Non-Resident Holder is
not entitled to relief under an applicable tax treaty between Canada and the
country of residence of the Non-Resident Holder.
Shares purchased in the open market will generally not constitute
taxable Canadian property of a Non-Resident Holder at a particular time provided
that such Shares are listed on a prescribed stock exchange (which, pursuant to
proposed amendments, includes the Canadian Venture Exchange ) at that time
unless at any time during the sixty month period
72
immediately preceding the disposition of such Shares, the Non-Resident Holder,
persons with whom the Non-Resident Holder did not deal at arm's length, or the
Non-Resident Holder together will all such persons, owned 25% or more of the
Shares of any class or series of the capital stock of the Company. For this
purpose, a Non-Resident Holder will be considered to own any share in respect of
which such holder or a person not dealing at arm's length with such holder has
an interest or option or other right to acquire. Under certain circumstances,
Shares of the Company may be deemed to be taxable Canadian property. In the
event that Shares constitute taxable Canadian property to a particular
Non-Resident Holder, capital gains realized on the disposition of the Shares
held by a Non-Resident Holder who is resident in the United States for purposes
of the Canada-United States Income Tax Convention will generally not be subject
to Canadian tax unless the value of the Shares is derived principally from real
property situated in Canada or the Shares form part of the business property of
a permanent establishment or fixed base which such holder has or had in Canada
within the 12 month period preceding the disposition.
A purchase of Shares (other than a purchase of Shares in the open
market in the manner in which Shares would normally be purchase by any member of
the public in the open market) will give rise to a deemed dividend under the Act
equal to the amount, if any, by which the amount paid by the Company on the
purchase exceeds the paid-up capital of such Shares determined in accordance
with the Act. The paid-up capital may be less than the Non-Resident Holder's
adjusted cost base of such Shares. Any such dividend deemed to have been
received by a Non-Resident Holder will be subject to non-resident withholding
tax as described above. The amount of such deemed dividend will reduce the
proceeds of disposition of the Shares to the Non-Resident Holder for purposes of
computing the Non-Resident Holder's capital gain or loss under the Act.
F. DIVIDENDS AND PAYING AGENTS.
Not applicable.
G. STATEMENTS BY EXPERTS.
Not applicable.
H. DOCUMENTS ON DISPLAY.
Copies of the documents referred to in this documents may be inspected
during normal business hours, at the Company's headquarters located at 240
Riviera Drive, Markham, Ontario, L3R 5M1 Canada.
I. SUBSIDIARY INFORMATION.
73
At July 9, 2001, the Company had two wholly-owned subsidiaries, (i) BCB
Voice Systems, Inc., a corporation incorporated under the laws of Arizona, and
(ii) International Neural Machines Incorporated, a corporation incorporated
under the laws of the Province of Ontario, Canada. In addition, the Company owns
50% of B2G Legal Pty Limited, an Australian corporation.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposures are related to foreign
currency risks.
The Company's reporting currency is the Canadian Dollar. The company is
exposed to foreign exchange risk associated with its sales to U.S. customers as
well as a result of its dealings with its Australian subsidiary. This risk is
partially offset by purchases made in U.S. dollars. The Company does not hedge
its exposure to foreign exchange risk. Gains and losses resulting from the
effects of changes in the U.S. dollar or any other currency to Canadian dollar
exchange rate are recorded in income.
The Company does not utilize derivative financial instruments to hedge
its foreign currency rate risks.
The Company is currently not borrowing and its long-term debt
instrument is at a fixed rate so there is currently no interest rate risk
exposure.
The above discussion includes only those exposures that exist as at
June 30, 2001 and as a result does not consider exposures or positions that
could arise after that date. The Company's ultimate realized gain or loss with
respect to exchange rate fluctuations will depend on the exposures that arise
during the period, the Company's hedging strategies at the time and foreign
exchange rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES, AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
None.
74
ITEM. 15 AND 16.
Not applicable.
ITEM 17. FINANCIAL STATEMENTS.
SEE "ITEM 18. FINANCIAL STATEMENTS."
ITEM 18. FINANCIAL STATEMENTS.
(1) Consolidated Balance Sheets of VoiceIQ Inc. as at September 30,
2000 and 1999 and Consolidated Statements of Operations and Deficit and Cash
Flows for each of the three years ended September 30, 2000, 1999 and 1998,
reported on by Grant Thornton LLP, Chartered Accountants. These statements are
prepared in accordance with Canadian generally accepted accounting principles,
which differ in certain respects from United States generally accepted
accounting principles. See Note 18 to the consolidated financial statements.
(2) Unaudited financial statements of VoiceIQ Inc. for the six months
ended March 31, 2001.
(3) Balance Sheets of International Neural Machines Inc. as at
September 30, 2000 and April 30, 2000 and 1999 and Statements of Operations and
Deficit and Cash Flows for the five month period ended September 30, 2000 and
for the years ended April 30, 2000 and 1999, reported by Ernst & Young LLP,
Chartered Accountants. These statements are prepared in accordance with Canadian
generally accepted accounting principles, which differ in certain respects from
United States generally accepted accounting principles. See Note 12 to the
financial statements.
(4) Unaudited pro-forma consolidated financial statements of VoiceIQ
Inc. for the year ended September 30, 2000.
ITEM 19. EXHIBITS.
2) Exhibits. (Reference is made to Registration Statement on Form 20-F,
dated March 31, 1999, filed with the SEC on April 6, 1999, for Exhibits 2,3, and
4(a)-(r).)
2. Articles of Incorporation and Amendments thereto.
3. By-Laws.
4. List of Agreements.
75
a. Agreement dated July 15, 1998 between BCB Holdings Inc. and Lernout
& Hause Speech Products N.V.;
b. Value Added Reseller Computer Software License Agreement dated March
26, 1998 between Lernout & Hauspie Speech Products N.V. and BCB Holdings Inc.;
c. Amendment 1 to License Agreement between Lernout & Hauspie Speech
Products N.V. and BCB Holdings Inc. dated June 30, 1998;
d. 10% Note and Warrants Purchase Agreement between BCB Voice Systems
Inc. and Flanders Language Valley C.V.A., dated December 11, 1998;
e. BCB Voice Systems Inc. Share Purchase Warrant dated December 11,
1998;
f. BCB Voice Systems Inc. 10% Promissory Note for $400,000 U.S., dated
December 11, 1998;
g. Purchase Agreement among and between BCB Voice Systems Inc.,
Flanders Language Valley C.V.A., Trust Capital Partners, and Brown Rudnick Freed
& Gesmer, P.C., dated as of February 5, 1999;
h. Share Purchase Warrant Certificate No. W-1 for 250,000 Warrants of
BCB Voice Systems Inc., issued to Lernout & Hauspie Speech Products N.V., dated
February 5, 1999;
i. Share Purchase Warrant Certificate No. W-2 for 500,000 Warrants of
BCB Voice Systems Inc., issued to Lernout & Hauspie Speech Products N.V., dated
February 5, 1999;
j. Share Purchase Warrant Certificate No. C-3 for 527,426 Warrants of
BCB Voice Systems Inc., issued to Flanders Language Valley C.V.A., dated
February 5, 1999;
k. Share Purchase Warrant Certificate No. C-4 for 527,426 Warrants of
BCB Voice Systems Inc., issued to Flanders Language Valley C.V.A., dated
February 5, 1999;
l. 7% Convertible Secured Debentures in the Principal Amount of
$750,000 U.S., issued by the Company to Trust Capital Partners, dated February
5, 1999;
m. 10% Convertible Debentures in the Principal Amount of $375,000 U.S.,
issued by the Company to Flanders Language Valley C.V.A., dated February 5,
1999;
n. 10% Convertible Debentures in the Principal Amount of $375,000 U.S.,
issued by the Company to Flanders Language Valley C.V.A., dated February 5,
1999;
76
o. PC DOCS ISV Partner Program Agreement dated August 31, 1998 between
BCB Voice Systems Inc. and PC DOCS, Inc.;
p. BCB Holdings Inc. Distributor Agreement for PC-Dart and PC Talk
Systems, dated August 15, 1997, between BCB Holdings Inc. and CLM Sales, Inc.;
q. TrueSpeech 8.5 Object Code License Agreement dated July 22, 1998
between DSP Group, Inc. and BCB Holdings, Inc.;
r. Share Purchase Agreement made as of September 30, 1998 between BCB
Voice Systems Inc. and Ivor G. Kaye.
s. Purchase Agreement dated April 4, 2000 between Working Ventures
Canadian Fund Inc. and BCB Voice Systems Inc.
t. Memorandum of Agreement dated April 17, 2000 among and between BCB
Voice Systems Inc., International Neural Machines Inc., Aleksanda SZ Lam and
Oleg Feldgajer.
u. Agency Agreement dated October 16, 2000 between Thomas Kernaghen &
Co. Limited and the Company.
v. Agreement for professional services dated October 14, 1999, as
amended, between the Company and Dungor Holding Company Ltd.
w. License Agreement dated June 29, 2000 between the BCB Voice Systems
Inc. and Lernout & Hauspie Speech Products N.V.
x. Facility Agreement dated January 2, 2001 between the Company and B2G
Legal Pty Act 094 750 679.
y. Shareholders Agreement dated January 2, 2001 among the Company,
B2G.com Limited, and B2G Legal Pty Ltd.
z. Share Purchase Agreement made as of March 26, 2001 between Oleg
Feldgajer, and the Company.
aa. Share Purchase Agreement made as of March 26, 2001 between
Aleksander Szlam and the Company.
bb. Stock Option Plan (as amended as of March 27, 2001).
77
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VOICEIQ INC.
By: /s/ Larry Beard
---------------------
By: Larry Beard
Title: Chief Financial Officer
Date: July 12, 2001
78
GRANT THORNTON LLP
CHARTERED ACCOUNTANTS
MANAGEMENT CONSULTANTS [GRANT THORNTON LOGO]
Canadian Member Firm of
Grant Thornton International
VOICEIQ INC.
(FORMERLY BCB VOICE SYSTEMS INC.)
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
CONTENTS
PAGE
----
Auditors' Report 1
Consolidated Statements of Operations and Deficit 2
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 4
Notes to the Consolidated Financial Statements 5 - 31
[GRANT THORNTON LOGO]
GRANT THORNTON LLP
CHARTERED ACCOUNTANTS
MANAGEMENT CONSULTANTS [GRANT THORNTON LOGO]
Canadian Member Firm of
Grant Thornton International
AUDITORS' REPORT
To the Shareholders of
VoiceIQ Inc. (formerly BCB Voice Systems Inc.)
We have audited the consolidated balance sheets of VoiceIQ Inc. (formerly BCB
Voice Systems Inc.) as at September 30, 2000 and 1999 and the consolidated
statements of operations and deficit and cash flows for each of the three years
ended September 30, 2000, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada and the United States. Those standards require that we plan and
perform an audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
2000 and 1999 and the results of its operations and its cash flows for each of
the three years ended September 30, 2000, 1999 and 1998 in accordance with
generally accepted accounting principles in Canada.
Generally accepted accounting principles in Canada differ in some respects from
those applicable in the United States (see Note 18).
"Grant Thornton LLP"
Markham, Canada
November 3, 2000 (except as to Note 21(d) which is as of Chartered Accountants
November 30, 2000 and Notes 21(e) and (f) which are as of May 18, 2001)
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 1 to the financial statements. Our report to the shareholders dated
November 3, 2000 (except as to Note 21(d) which is as of November 30, 2000) is
expressed in accordance with Canadian reporting standards which do not permit a
reference to such events and conditions in the auditors' report when these are
adequately disclosed in the financial statements.
"Grant Thornton LLP"
Markham, Canada
November 3, 2000 (except as to Note 21(d) which is as of Chartered Accountants
November 30, 2000 and Notes 21(e) and (f) which are as of May 18, 2001)
15 Allstate Parkway
Suite 200
Markham
Ontario
L3R 5B4
Tel: (905) 475-1100
Fax: (905) 475-8906
1
- -----------------------------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Year Ended September 30
(in Canadian dollars) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Sales
Exports $ 3,693,544 $ 2,121,244 $ 1,452,661
Domestic 2,154,120 768,000 310,684
------------ ------------ -----------
5,847,664 2,889,244 1,763,345
5,847,664 2,889,244 1,763,345
Licenses and royalties 1,319,850 - -
------------ ------------ -----------
7,167,514 2,889,244 1,763,345
Cost of sales 2,353,783 1,956,965 1,118,712
------------ ------------ -----------
Gross profit 4,813,731 932,279 644,633
Interest Income 104,642 6,763 9,553
------------ ------------ -----------
4,918,373 939,042 654,186
------------ ------------ -----------
Selling and administrative expenses 6,497,596 4,884,029 2,831,940
Research and development 827,827 1,094,625 998,116
Write off of deferred development - 95,334 267,510
------------ ------------ -----------
7,325,423 6,073,988 4,097,566
------------ ------------ -----------
Loss before the following items (2,407,050) (5,134,946) (3,443,380)
Provision for loss on prepaid royalties (Note 7) (1,481,775) - -
Loss from equity investment (190,933) - -
Write down of investments, net of
gain on sale of call options (527,778) - (555,378)
Loss on disposal of investments - (332,522)
Provision for loss on notes receivable - (300,000) -
------------ ------------ -----------
Net loss before discontinued operations (4,607,536) (5,767,468) (3,998,758)
Discontinued operations (Note 15) - - (52,153)
------------ ------------ -----------
Net loss $ (4,607,536) $ (5,767,468) $(4,050,911)
============ ============ ===========
- -----------------------------------------------------------------------------------------------------
Deficit, beginning of year
As previously reported $(14,239,475) $ (8,472,007) $(5,037,806)
Adjustment for share issue costs (Note 16) - - 616,710
------------ ------------ -----------
As restated (14,239,475) (8,472,007) (4,421,096)
Net loss (4,607,536) (5,767,468) (4,050,911)
------------ ------------ -----------
Deficit, end of year $(18,847,011) $(14,239,475) $(8,472,007)
============ ============ ===========
- -----------------------------------------------------------------------------------------------------
Net loss per common share before
discontinued operations $(0.53) $(1.02) $(1.04)
Discontinued operations - - (0.01)
------------ ------------ -----------
Net loss per common share $(0.53) $(1.02) $(1.05)
============ ============ ===========
- -----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
[GRANT THORNTON LOGO] 2
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
CONSOLIDATED BALANCE SHEETS
September 30
(in Canadian dollars) 2000 1999
- -------------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 804,755 $ 23,862
Short term investments (Note 3) 161,222 -
Receivables 1,709,478 1,006,709
Current portion of notes receivable 98,990 -
Inventories (Note 4) 539,939 561,019
Prepaids 65,451 30,678
------------ ------------
3,379,835 1,622,268
Notes receivable (Note 5) 318,809 80,616
Investment in INM (Note 6) 2,108,602 -
Prepaid royalties (Note 7) - 1,481,775
Capital assets (Note 8) 387,176 482,580
Intangibles (Note 9) 655,957 66,456
------------ ------------
$ 6,850,379 $ 3,733,695
============ ============
- -------------------------------------------------------------------------------
LIABILITIES
Current
Short term debt (Note 10) $ - $ 1,142,731
Payables and accruals 2,337,778 1,525,634
Deferred revenue 20,230 24,543
Current portion of long term debt 601,400 394,462
------------ ------------
2,959,408 3,087,370
Long term debt (Note 11) 945,706 2,770,327
Deferred foreign exchange gain - 43,900
------------ ------------
3,905,114 5,901,597
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Capital stock (Note 12) 21,792,276 12,071,573
Deficit (18,847,011) (14,239,475)
2,945,265 (2,167,902)
------------ ------------
$ 6,850,379 $ 3,733,695
============ ============
Ongoing operations and commitments (Notes 1 and 13)
On behalf of the Board
"Terry Graham" Director "C. Wallis King" Director
- -------------------------------- -----------------------------
See accompanying notes to the consolidated financial statements.
[GRANT THORNTON LOGO] 3
- -----------------------------------------------------------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30
(in Canadian dollars) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
OPERATING
Net loss before discontinued operations $(4,607,536) $(5,767,468) $(3,998,758)
Depreciation and amortization
Deferred development - 347,068 451,341
Capital assets and patents, net of
foreign exchange gain 93,346 120,941 80,382
Write down of short term investments, capital
assets and deferred development 596,859 95,335 914,210
Loss from equity investment 190,933 - -
Loss on disposal of investments - 332,522 -
Provision for loss on note receivable - 300,000
Provision for loss on prepaid royalties 1,481,775 - -
Net accrued interest on debentures payable and
receivable added to book values 118,867 127,087 77,947
Other non-cash interest expense 190,017 140,422 -
----------- ----------- -----------
(1,935,739) (4,304,093) (2,474,878)
Change in non-cash operating working capital
related to continuing operations (Note 17) 91,369 (141,618) (23,782)
----------- ----------- -----------
Cash used before discontinued operations (1,844,370) (4,445,711) (2,498,660)
Cash used in discontinued operations - - (154,472)
----------- ----------- -----------
(1,844,370) (4,445,711) (2,653,132)
----------- ----------- -----------
FINANCING
Proceeds from debentures and promissory notes - 3,302,650 498,000
Increase (decrease) in short term debt (1,142,731) 232,948 857,725
Small business loans - (87,513) (37,464)
Capital lease obligation payments (10,162) (20,133) (15,600)
Shareholder advances - - (43,832)
12% convertible debenture payments - - (178,500)
10% convertible promissory note payments (200,000) - -
12% convertible promissory note payments (184,300) - -
Proceeds from shares issued for cash 1,779,620 110,639 3,473,150
Proceeds from special warrants issue 4,850,000 - -
Share issue costs (791,424) - (65,344)
----------- ----------- -----------
Cash provided before discontinued operations 4,301,003 3,538,591 4,488,135
Cash provided from discontinued
operations - - 52,352
----------- ----------- -----------
4,301,003 3,538,591 4,540,487
----------- ----------- -----------
INVESTING
Proceeds from disposal of investments - 1,308,414
Prepaid royalty payments - (76,560) (1,405,215)
Notes receivable 274,684 (39,039) (135,277)
Investment in INM (1,250,000) - -
Purchase of capital assets (100,424) (294,593) (116,006)
Purchase of patents - - (4,602)
Deferred development costs (600,000) - (200,067)
----------- ----------- -----------
Cash provided (used) before discontinued
operations (1,675,740) 898,222 (1,861,167)
Cash used in discontinued operations - - (19,371)
----------- ----------- -----------
(1,675,740) 898,222 (1,880,538)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 780,893 (8,898) 6,817
Cash and cash equivalents
Beginning of year 23,862 32,760 25,943
----------- ----------- -----------
End of year $ 804,755 $ 23,862 $ 32,760
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
[GRANT THORNTON LOGO] 4
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
1. ONGOING OPERATIONS
These financial statements have been prepared on the basis of accounting
principles applicable to a "going concern", which assume that the Company will
continue in operation for the foreseeable future and will be able to realize its
assets and discharge its liabilities in the normal course of operations.
Although the Company has incurred significant operating losses and has
experienced recurring cash flow problems over the past several years, management
believes it has stabilized this situation through financing, significant debt
reductions and increased revenue volumes. Management continues to actively
pursue additional financing and strives to obtain and thereafter maintain
profitable operations to support the validity of the "going concern" assumption.
As disclosed in Note 11, the Company has raised significant funds during the
year through a rights offering, a special warrants offering and the exercise of
warrants. In addition, the Company raised over $8,000,000 through a common share
offering subsequent to year end as disclosed in Note 21(b).
Management believes that the actions already taken or planned will confirm and
support the "going concern" assumption used in preparing these financial
statements. If the "going concern" assumption were not appropriate for these
financial statements, then adjustments would be necessary to the carrying values
of assets and liabilities, the reported revenues and expenses, and the balance
sheet classifications used.
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company develops, manufactures, distributes and licenses computer based
voice processing products and systems based on its proprietary technology. The
Company's products are marketed internationally, with most sales occurring in
Canada and U.S.A.
ACCOUNTING PRINCIPLES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in Canada.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of VoiceIQ Inc.
(formerly BCB Voice Systems Inc.) and its wholly owned subsidiary, BCB Voice
Systems, Inc. The comparative figures also include the accounts of Granville
Research Inc. ("Granville" - see Note 15).
[GRANT THORNTON LOGO] 5
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and reported
amounts of revenue and expenses. Actual amounts could differ from these
estimates.
CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, cash and cash equivalents
include cash on hand, balances with banks and highly liquid temporary money
market instruments with original maturities of three months or less. Bank
borrowings are considered to be financing activities.
INVESTMENTS
Short term investments are valued, on an aggregate basis, at the lower of cost
and market at the balance sheet date. In the event that short term investments
are adjusted to market value, subsequent recoveries in value are recorded to the
extent of original cost.
Investments in companies in which the Company does not have a controlling
interest, but over which it can exercise significant influence, are accounted
for by the equity method.
INVENTORIES
Inventories of work in process and finished goods are valued at the lower of
cost and net realizable value. Raw materials and supplies are valued at the
lower of cost and replacement cost. Cost includes material, labour and
manufacturing overhead. Cost is determined on a first-in, first-out basis.
CAPITAL ASSETS
Rates and bases of depreciation and amortization applied to write-off the cost
of capital assets over their estimated lives are as follows:
Equipment - 20%, declining balance
Computers - 30%, declining balance
Leasehold improvements - 20%, straight line
In the year of acquisition, half rates are applied.
[GRANT THORNTON LOGO] 6
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES
Patents are being amortized on a straight line basis over their estimated lives
of seventeen years.
Development costs that meet specific criteria related to technical, market and
financial feasibility are deferred and amortized on a straight line basis over
the estimated product life, not to exceed three years. Where there is
uncertainty regarding the period of benefit, the costs are expensed as incurred.
The carrying values of intangibles are assessed annually to determine if
permanent impairments in value exist. The Company assesses impairment by
determining whether the unamortized balances can be recovered through future
operating cash flows of the businesses to which the balances relate. Future
operating cash flows are not discounted in making this assessment.
Costs related to advertising are expensed as incurred.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products when the goods are
shipped. Contract revenue from discontinued operations (Note 15) was recognized
on a completed contract basis.
The Company recognizes revenue from licenses and royalties as they accrue in
accordance with the terms of the license or royalty agreement, provided
reasonable assurance exists regarding measurement and collectibility.
STOCK-BASED COMPENSATION PLANS
The Company has stock-based compensation plans as described in Note 12. No
compensation expense is recognized for these plans when stock or stock options
are issued to employees. Any consideration paid by employees on exercise of
stock options or purchase of stock is credited to share capital.
[GRANT THORNTON LOGO] 7
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Company is the Canadian dollar. With regard to
Canadian legal entities and integrated foreign subsidiaries, monetary assets and
liabilities denominated in foreign currencies are translated at the year-end
rate of exchange. Revenue and expenses are translated at average rates of
exchange, except for the cost of inventories and for depreciation, which are
translated at rates prevailing when the related assets were acquired.
Translation gains and losses are included in earnings, except for unrealized
gains and losses arising from translation of long-term monetary assets and
liabilities, which are deferred and amortized over the remaining lives of the
related items. The Company has no self-sustaining subsidiaries.
NET LOSS PER COMMON SHARE
The net loss per common share calculations are based on the weighted average
number of common shares outstanding: 8,764,132 in 2000, 5,673,592 in 1999 and
3,864,589 in 1998.
FINANCIAL LIABILITIES
Where a convertible financial liability is issued with a stated interest rate
that is significantly lower than the prevailing market interest rate for similar
financial liabilities without a conversion feature, for purposes of balance
sheet presentation, a portion of the face value of the financial liability is
allocated to equity.
- --------------------------------------------------------------------------------
3. SHORT TERM INVESTMENTS 2000 1999
---- ----
Investment in Lernout & Hauspie Speech
Products N.V. - shares at cost $ 689,000 $ -
Provision for decline in market value (527,778) -
--------- ---------
At lower of cost and market $ 161,222 $ -
========= =========
- --------------------------------------------------------------------------------
4. INVENTORIES 2000 1999
---- ----
Raw materials and supplies $ 181,585 $ 253,999
Finished goods 358,354 307,020
--------- ---------
$ 539,939 $ 561,019
========= =========
During the year, obsolete inventory with a carrying value of $45,113 (1999 -
$287,174) was written off and charged to selling and administrative expenses.
[GRANT THORNTON LOGO] 8
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
5. NOTES RECEIVABLE 2000 1999
---- ----
Notes receivable from Granville and purchaser of Granville (see Note 15),
non-interest bearing, repayable in monthly instalments equal to greater of
$8,000 and 5% of Granville gross sales, secured by Granville shares. The notes
are in default and have been fully provided for (see provision for loss below)
Subsequent to the year end, the Company took possession of the shares as a means
to recover the amount
(See Note 21(c)) $ 300,000 $ 300,000
Note receivable from company controlled by member of management, due in July
2002, bearing interest at 8% per annum, payable semi-annually, secured by
167,794 common shares of the Company with a fair market value of $646,007
at September 30, 2000 318,809 -
Note receivable from member of management, due in September 2001, bearing
interest at 5% per annum, payable monthly, secured by 2,500 common shares of the
Company and 90,000 options to acquire common shares of
the Company at prices ranging from $0.90 to $1.22 65,000 -
Share purchase loans to officers and directors of the Company, due in November
2000, interest payable quarterly at prime plus 2% per annum, secured by 20,000
common shares of the Company with a fair market value of $77,000 at
September 30, 2000 33,990 80,616
----------- -----------
717,799 380,616
Provision for loss (300,000) (300,000)
----------- -----------
417,799 80,616
Less: Current portion (98,990) -
----------- -----------
$ 318,809 $ 80,616
=========== ===========
- --------------------------------------------------------------------------------
6. INVESTMENT IN INM 2000 1999
---- ----
Debenture receivable $ 625,000 $ -
Accrued interest on debenture receivable 29,535 -
7,300 common shares 1,454,067 -
----------- -----------
$ 2,108,602 $ -
=========== ===========
[GRANT THORNTON LOGO] 9
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
6. INVESTMENT IN INM (CONTINUED)
In April 2000, the Company acquired a debenture receivable from International
Neural Machines Incorporated ("INM") and 7,300 of the company's 20,000
outstanding common shares. Under the terms of a Memorandum of Agreement on the
date of acquisition, a shareholder of INM has the option to acquire 1,800 of the
shares back from the Company for an aggregate purchase price of $1 upon
repayment of the debenture receivable. Given that management of the Company
invested in INM on the assumption that the debenture would be repaid and the
option would be exercised, the investment is being accounted for using the
equity method assuming an equity interest of 27.5%. At the date of acquisition,
the cost of the investment exceeded the Company's equity interest in the
carrying value of INM's net assets by $1,843,000. This difference was accounted
for as goodwill and is being amortized on a straight line basis over seven
years. The unamortized balance of goodwill at September 30, 2000 is
approximately $1,719,000. The net book value of the investment in common shares
is allocated as follows:
Assets acquired $ 108,000
Liabilities acquired (306,000)
-----------
Net assets acquired (198,000)
Goodwill 1,843,000
-----------
Acquisition price 1,645,000
Cumulative loss from equity investment (190,933)
-----------
Net book value $ 1,454,067
===========
The debenture receivable bears interest at 10%, calculated and payable
quarterly, and is due on the earlier of March 19, 2002 and the date on which INM
completes an initial public offering. In accordance with the Memorandum of
Agreement on the date of acquisition, INM has been permitted to defer paying
interest until the due date, and interest will accrue instead.
The acquisition price of the shares and the debenture totalled $2,270,000 and
was settled by issuing 400,000 common shares of the Company and paying cash of
$1,250,000.
The Company and INM have agreed to begin merger negotiations in an attempt to
combine their two companies; however, there can be no assurance that any merger
will take place.
- --------------------------------------------------------------------------------
7. PREPAID ROYALTIES 2000 1999
---- ----
Cost $ 1,481,775 $ 1,481,775
Provision for loss (1,481,775) -
----------- -----------
$ - $ 1,481,775
=========== ===========
[GRANT THORNTON LOGO] 10
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
7. PREPAID ROYALTIES (CONTINUED)
In 1998, the Company entered into a license agreement with Lernout & Hauspie
Speech Products N.V. to use and distribute their software. In consideration for
the rights granted, the Company paid deposits from which future royalties were
to be deducted. Since entering into the agreement, the effective operating date
has been deferred due to product development issues. To date, no software has
been used or distributed so no amounts have been deducted from the deposits.
Management is working to resolve this issue and is confident that the amounts
will be fully recovered. However, given the uncertainty surrounding the
successful resolution of this matter, the amount was fully provided for in
September 2000.
- --------------------------------------------------------------------------------
8. CAPITAL ASSETS 2000 1999
---- ----
Cost
Equipment $ 269,092 $ 268,487
Computers 503,007 434,272
Leasehold improvements 108,413 141,204
--------- ---------
880,512 843,963
--------- ---------
Accumulated depreciation
Equipment 142,879 103,825
Computers 285,506 206,817
Leasehold improvements 64,951 50,741
--------- ---------
493,336 361,383
--------- ---------
Net book value
Equipment 126,213 164,662
Computers 217,501 227,455
Leasehold improvements 43,462 90,463
--------- ---------
$ 387,176 $ 482,580
========= =========
Included in capital assets at September 30, 1999 are assets under capital leases
with a cost of $71,313 and accumulated amortization of $50,522. Amortization of
$8,911 related to these assets was charged to income during the year ended
September 30, 1999 (1998 - $21,730).
[GRANT THORNTON LOGO] 11
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
9. INTANGIBLES 2000 1999
---- ----
Cost
Patents $ 92,545 $ 92,545
Deferred product development 600,000 402,675
-------- --------
692,545 495,220
-------- --------
Accumulated amortization
Patents 36,588 26,089
Deferred product development - 402,675
-------- --------
36,588 428,764
-------- --------
Net book value
Patents 55,957 66,456
Deferred product development 600,000 -
-------- --------
$655,957 $ 66,456
======== ========
During 1999, deferred product development with a cost of $286,005, accumulated
amortization of $190,670 and net book value of $95,335 was written off. During
1998, deferred product development with a cost of $594,120, accumulated
amortization of $326,610 and a net book value of $267,510 was written off.
ACCOUNTING CHANGE
During 1999, management reassessed the period of benefit for purposes of
amortizing deferred product development costs. This was brought about by the
change in Company strategy to focus on software versus hardware, which results
in greater uncertainty regarding the periods of benefit associated with
development costs. Management determined that a maximum period of three years is
appropriate for hardware and core technology software development, but a shorter
period is more appropriate for certain application software development. In
addition, where there is significant uncertainty regarding the period of
benefit, the costs should be expensed as incurred. Accordingly, 1999
amortization of deferred product development costs was provided on a
straight-line basis using these revised estimates. For 1999, this change in
estimate resulted in an increase in depreciation and amortization charges
resulting in an increase in net loss for the year of $117,148.
[GRANT THORNTON LOGO] 12
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
10. SHORT TERM DEBT 2000 1999
---- ----
Bank operating line of credit, secured by a general
security agreement covering all assets of the Company,
a guarantee from Lernout & Hauspie Speech Products
N.V. ("L&H") and a postponement of claim from the
holder of the 8% convertible debenture (see Note 11),
bearing interest at prime plus 2%. $ - $1,142,731
========== ==========
As consideration for the guarantee of the bank operating line, the Company
issued share purchase warrants entitling L&H to acquire 250,000 common shares of
the Company at a price of US $0.711 per share at any time prior to February 5,
2001. See Note 12 for warrants outstanding.
During 2000, the operating line of credit was repaid in full. In addition, the
guarantee from L&H expired and the 8% convertible debenture was converted to
common shares. The Company intends to reactivate an operating line of credit
under new terms in the near future.
- --------------------------------------------------------------------------------
11. LONG TERM DEBT 2000 1999
---- ----
7% convertible debenture, net of $241,000 allocated
to equity, denominated in US dollars, guaranteed by
Lernout & Hauspie Speech Products N.V. (see below). $ 945,706 $ 890,455
10% promissory note, net of $124,000 allocated to
equity, denominated in US dollars, payable to Flanders
Language Valley C.V.A. (see below). 601,400 481,340
10% convertible debentures, net of $225,000 allocated
to equity, denominated in US dollars, payable to
Flanders Language Valley C.V.A. (see below). - 902,820
8% convertible debenture, including accrued interest,
net of $100,000 allocated to equity (see below). - 495,712
10% convertible promissory notes, net of $250,000
allocated to equity (see below). - 200,000
12% convertible promissory notes, unsecured, interest
payable quarterly, due May 2000, convertible at option
of holder to common shares at $2.30 per share. - 184,300
[GRANT THORNTON LOGO] 13
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
11. LONG TERM DEBT (CONTINUED) 2000 1999
--- ----
Obligations under capital leases. $ - $ 10,162
---------- ----------
1,547,106 3,164,789
Less: Current portion 601,400 394,462
---------- ----------
$ 945,706 $2,770,327
========== ==========
Principal payments on long term debt due over the next four years are as
follows:
2001 $ 601,400
2002 -
2003 -
2004 945,706
----------
$1,547,106
==========
Interest on long term debt of $320,000 (1999 - $345,000; 1998 - $117,000) was
charged to selling and administrative expenses during the year.
The 10% and 12% convertible promissory notes at September 30, 1999 included
$150,000 and $100,000 respectively owing to officers and directors of the
Company.
7% CONVERTIBLE DEBENTURE
The 7% convertible debenture has a face value of US $750,000. The interest is
payable semi-annually, but the Company has the option of satisfying its
obligations to pay interest by issuing common shares based on a weighted average
share price calculation. The principal balance is convertible at the option of
the holder to common shares of the Company at a conversion price of US $1.25 per
share. In November 1999, the conversion price was reduced to U.S. $0.61 in
accordance with the terms of the convertible debenture. The debenture matures in
February 2004 and is unsecured.
The debenture is guaranteed by Lernout & Hauspie Speech Products N.V. As
consideration for this guarantee, the Company issued share purchase warrants
when the debenture was issued entitling Lernout & Hauspie Speech Products N.V.
to acquire 500,000 common shares of the Company at a price of US $0.711 per
share at any time prior to February 5, 2001. See Note 12 for warrants
outstanding.
[GRANT THORNTON LOGO] 14
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
11. LONG TERM DEBT (CONTINUED)
The legal form of the convertible debentures is debt; however, because of the
conversion feature, the Company secured an interest rate that was significantly
lower than the prevailing market rates for similar debentures without such a
feature. For this reason, the face value of the debenture was originally
allocated between debt and equity. The value attributed to the debt component
was determined using discounted cash flow analysis based on an effective
interest rate of 13%. The effective rate is the estimated market rate at the
time of issue for similar debentures without a conversion feature.
During 2000, 83% of the debenture was acquired by members of management.
10% PROMISSORY NOTE
The 10% promissory note has a face value of US $400,000 and was issued along
with share purchase warrants entitling the holder to acquire 505,082 common
shares of the Company at a price of US $0.791 per share at any time prior to
December 11, 2000.
The legal form of the note is debt; however, because of the inclusion of share
purchase warrants, the Company secured an interest rate that was significantly
lower than the prevailing market rate for similar notes issued without warrants.
For this reason, the face value of the note was originally allocated between
debt and equity. The value attributed to the debt component was determined using
discounted cash flow analysis based on a 16% effective rate of interest. The
effective rate is the estimated market rate at the time of issue for similar
debentures without the inclusion of share purchase warrants.
On September 29, 2000, the holder exercised the share purchase warrants,
resulting in proceeds of U.S. $400,000. On the same date, the Company agreed
that the promissory note would become due and payable immediately; however, the
holder agreed to postpone payment until the earlier of December 11, 2000 or the
completion of and receipt of proceeds from the common share offering as
disclosed in Note 21(b). To reflect the substance of the transactions, the book
value of the liability component has been adjusted to the full face amount with
an offsetting charge to equity.
10% CONVERTIBLE DEBENTURES
During the year, the principal balance was converted by the holder to common
shares of the Company at a conversion price of US $0.90 per share.
The convertible debentures were issued along with share purchase warrants
entitling the holders to acquire 1,054,852 common shares of the Company at a
price of US $0.711 per share at any time prior to February 5, 2001. See Note 12
for warrants outstanding.
[GRANT THORNTON LOGO] 15
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
11. LONG TERM DEBT (CONTINUED)
The legal form of the convertible debentures was debt; however, because of the
conversion feature and inclusion of share purchase warrants, the Company secured
an interest rate that was significantly lower than the prevailing market rates
for similar debentures without such features. For this reason, the face value of
the debentures was originally allocated between debt and equity. The value
attributed to the debt component was determined using discounted cash flow
analysis based on an effective interest rate of 16%. The effective rate was the
estimated market rate at the time of issue for similar debentures without a
conversion feature or the inclusion of share purchase warrants.
8% CONVERTIBLE DEBENTURE
During the year, the debenture was acquired by members of management and the
principal and accrued interest balances were converted by the holders to common
shares of the Company.
10% CONVERTIBLE PROMISSORY NOTES
During the year, $250,000 of principal plus accrued interest was tendered by the
holders in consideration of common shares of the Company at $0.90 per share
under the terms of a rights offering. The remaining $200,000 of principal plus
accrued interest was redeemed out of proceeds of the rights offering.
Under the terms of the promissory notes, upon repayment the Company issued the
holders thereof share purchase warrants entitling them to acquire 310,345 common
shares of the Company at $0.92 per share on or before August 31, 2001. See Note
12 for warrants outstanding.
The legal form of the convertible promissory notes was debt; however, because of
the conversion and share purchase warrants features, the Company secured an
interest rate lower than the prevailing market rate for similar notes without
such features. For this reason, the face value of the notes was originally
allocated between debt and equity at $200,000 and $250,000 respectively. Since
the notes were all tendered in consideration of common shares or redeemed, the
value attributed to debt and equity was based on the ratio of notes redeemed to
those tendered for shares.
[GRANT THORNTON LOGO] 16
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
12. CAPITAL STOCK
The Company's authorized capital consists of an unlimited number of common and
non-voting preference shares. In 1998, the Company consolidated its stock by
issuing one common share in exchange for each 10 shares outstanding at the time
of the stock consolidation. The comparative figures have been adjusted to
reflect this exchange.
Common shares issued: Number Amount
- -------------------- ------ ------
Balance, September 30, 1997 3,008,056 $ 5,079,880
Issued for cash on exercise of options 5,000 10,000
Issued for cash under private placements 912,271 2,351,700
Issued for short term investments under private placement 909,091 2,272,523
Issued for cash on rights offering 740,979 1,111,450
Share issue costs (Note 16) - (65,344)
------------- -------------
Balance, September 30, 1998 5,575,397 10,760,209
Issued on conversion of debt to equity 108,696 220,000
Issued to settle interest payable 106,923 140,422
Issued for cash on exercise of options 73,759 110,639
Equity component of long term debt - 840,303
------------- -------------
Balance, September 30, 1999 5,864,775 12,071,573
Issued for note receivable from member of management under
private placement (Note 5) 167,794 318,809
Issued on conversion of long term debt 1,581,595 1,455,056
Issued to settle interest payable 110,241 190,017
Issued for cash on exercise of options 23,472 40,321
Issued for cash on rights offering 856,981 771,283
Issued for notes receivable on rights offering
(collected before year end) 325,620 293,058
Issued in exchange for long term debt on rights offering 283,593 255,234
Amount of long term debt previously included in equity - (250,000)
Issued for cash on exercise of soliciting dealer options 146,619 131,957
Issued in conjunction with special warrants issue and
conversion 1,979,348 4,850,000
Issued pursuant to investment in INM (Note 6) 400,000 1,020,000
Issued for cash on exercise of warrants 755,858 836,061
Equity adjustment related to 10% promissory note
(see Note 11) - (88,669)
Issued for short term investments on exercise of warrants 650,000 689,000
Share issue costs (Note 16) - (791,424)
------------- -------------
Balance, September 30, 2000 13,145,896 $ 21,792,276
============= =============
[GRANT THORNTON LOGO] 17
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
12. CAPITAL STOCK (CONTINUED)
Common shares reserved:
- ----------------------
As at September 30, 2000, common shares of the Company were reserved as follows:
Price Range Expiry Dates Number
----------- ------------ ------
7% convertible debenture (Note 11) US $0.61 Feb, 2004 1,222,833
------------
Options $0.90 - $2.50 Oct, 2000-Sept, 2001 157,401
$2.00 - $4.50 Oct, 2001-Sept, 2002 71,000
$2.10 - $2.70 Oct, 2002-Sept, 2003 17,500
$1.05 - $1.35 Oct, 2003-Sept, 2004 283,750
$1.04 - $3.95 Oct, 2004-Sept, 2005 1,805,000
------------
2,334,651
------------
Warrants US $0.711 Feb, 2001 1,054,852
US $0.711 Feb, 2001 100,000
$0.92 Aug, 2001 68,966
$2.95 Oct, 2001 1,979,348
$2.55 Apr, 2002 190,196
------------
3,393,362
------------
6,950,846
============
The Company's stock option plan allows for the granting of options up to an
aggregate amount equal to 20% of the issued and outstanding common shares. The
options, which have a term not exceeding five years when issued, generally vest
immediately. The exercise price of each option equals the market price of the
Company's stock on the date of grant.
A summary of the status of the Company's stock option plan as of the fiscal year
ends of 1998, 1999 and 2000 and changes during each fiscal year is presented
below.
[GRANT THORNTON LOGO] 18
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
12. CAPITAL STOCK (CONTINUED)
Year Ended September 30
-----------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- -------------------------
Shares Weighted Avg. Shares Weighted Avg. Shares Weighted Avg.
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----- -------------- ----- -------------- ----- --------------
Outstanding and
exercisable,
beginning
of year 514,650 $ 1.71 319,409 $ 2.79 361,337 $ 3.30
Granted 2,013,000 $ 1.49 363,750 $ 1.21 123,759 $ 1.79
Exercised (23,472) $ 1.72 (73,759) $ 1.50 (5,000) $ 2.00
Cancelled (159,527) $ 1.59 (41,000) $ 1.83 (82,500) $ 3.59
Expired (10,000) $ 1.70 (53,750) $ 4.99 (78,187) $ 2.74
--------- --------- --------
Outstanding and
exercisable, end
of year 2,334,651 $ 1.52 514,650 $ 1.71 319,409 $ 2.79
========= ========= ========
Weighted-average
fair value of
options granted
during the year $ 1.34 $ 0.97 $ 0.95
The following information applies to options outstanding and exercisable at
September 30, 2000:
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Range of Weighted Avg.
Exercise Number Remaining Weighted Avg. Number Weighted Avg.
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------ ----------- ---------------- -------------- ----------- --------------
$0.90 to $1.35 1,241,417 3.7 years $ 1.00 575,542 $ 1.05
$1.36 to $2.04 938,834 4.5 years $ 1.94 273,083 $ 1.97
$2.05 to $3.06 97,900 1.8 years $ 2.54 82,567 $ 2.52
$3.07 to $4.49 39,000 3.1 years $ 3.84 27,000 $ 3.79
$4.50 17,500 1.4 years $ 4.50 17,500 $ 4.50
---------- ---------
$0.90 to $4.50 2,334,651 975,692
========== =========
- --------------------------------------------------------------------------------
13. COMMITMENTS
a) The Company has entered into agreements to lease office and manufacturing
premises until March 2002. The annual rents consist of minimum rent plus
realty taxes, insurance and common area maintenance costs. Minimum
payments in aggregate and for each of the next two years are as follows:
2001 $ 129,000
2002 65,000
----------
$ 194,000
==========
[GRANT THORNTON LOGO] 19
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
13. COMMITMENTS (CONTINUED)
b) The Company has entered into an agreement with INM (see Note 6) leading
to the 10 month development of an intelligent voice platform for the
Company. In accordance with this agreement, the Company has agreed to pay
$100,000 per month for 10 months starting in April 2000.
- --------------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
CREDIT RISK
Concentration of credit risk may arise from exposures to a single debtor or to a
group of debtors having similar characteristics such that their ability to meet
their obligations is expected to be affected similarly by changes in economic or
other conditions. To alleviate the potential for risk concentration, credit
limits are established and monitored in light of changing industry and market
conditions.
The Company's most significant industry and customer concentrations are
summarized in Note 20. The concentrations arise in the normal course of the
Company's business. At September 30, 2000, approximately 45% (1999 - 0%) of
receivables is from one customer. This amount arises due to the timing of a
significant contract and is not necessarily reflective of ongoing relative
volumes.
FOREIGN CURRENCY RISK
The following factors create significant exposure with regard to fluctuations in
exchange rates:
o The Company operates internationally and has receivables denominated in
foreign currencies. This exposure is reduced since some degree of hedging
is achieved by holding payables denominated in foreign currencies.
o All long term debt is denominated in U.S. dollars (see Note 11).
FAIR VALUES
The estimated fair value of cash and cash equivalents, receivables, notes
receivable and payables and accruals approximates carrying value due to the
relatively short term nature of the instruments and/or floating interest rates
on the instruments. The short term investments are carried at market. The
estimated fair value of long term debt also approximates carrying value due to
the relatively short term nature of the instruments and/or effective interest
rates that are not significantly different from market rates. The estimated fair
value of the debenture receivable (see Note 6) approximates carrying value due
to the relatively short term nature of the investment and an interest rate that
is not significantly different from market rates.
[GRANT THORNTON LOGO] 20
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
15. DISCONTINUED OPERATIONS
On September 29, 1998, the Company disposed of its investment in Granville,
being the telecommunications design and integration business segment. Sales
applicable to and net loss from discontinued operations are as follows:
2000 1999 1998
---- ---- ----
Sales - domestic $ - $ - $ 169,646
=========== =========== =========
Loss from operations $ - $ - (170,220)
Gain on disposal (i) - - 118,067
----------- ----------- ---------
Net loss from discontinued operations $ - $ - $ (52,153)
=========== =========== ==========
(i) The gain on disposal is calculated as follows:
Proceeds - Notes receivable (see Note 5) $ 300,000
-----------
Assets sold 358,045
Liabilities assumed by purchaser (176,112)
-----------
181,933
Gain on disposal $ 118,067
===========
- --------------------------------------------------------------------------------
16. CHANGE IN METHOD OF ACCOUNTING FOR SHARE ISSUE COSTS
During 1998, the Company adopted the policy of deducting share issue costs from
capital stock rather than adding them to the deficit. The statements of deficit
and the comparatives have been restated to reflect this retroactive change,
which has no effect on the net loss for any period.
- --------------------------------------------------------------------------------
17. SUPPLEMENTAL CASH FLOW INFORMATION 2000 1999 1998
---- ---- ----
Change in non-cash operating working capital:
Receivables $ (702,769) $ (722,346) $ (83,860)
Inventories 21,080 155,168 (260,449)
Prepaids (34,773) 89,617 (111,473)
Payables and accruals 812,144 340,243 437,143
Deferred revenue (4,313) (4,300) (5,143)
----------- ----------- ---------
$ 91,369 $ (141,618) $ (23,782)
=========== =========== =========
Interest paid $ 107,210 $ 117,070 $ 117,783
=========== =========== =========
[GRANT THORNTON LOGO] 21
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
17. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
During the year ended 2000, the following non-cash investing and financing
activities were transacted:
o The 8% convertible debenture and accrued interest totalling $531,468 were
converted to 357,989 common shares.
o The 10% convertible debentures and accrued interest totalling $923,588 were
converted to 1,223,606 common shares.
o The Company settled interest payable on long term debt of $190,017 through
the issuance of 110,241 common shares.
o The Company financed $1,020,000 of the acquisition of INM (see Note 6)
through the issuance of 400,000 common shares.
o In exchange for 283,593 common shares of the Company issued under the terms
of a rights offering, the 10% convertible promissory notes and accrued
interest totalling $255,234 were tendered by the holders.
o Also in accordance with a rights offering, 325,620 common shares of the
Company were issued in exchange for notes receivable of $293,058. The notes
receivable were collected by the Company prior to year end.
o The Company issued 650,000 common shares for $689,000 upon exercise of
warrants in exchange for short term investments.
o The Company issued 167,794 common shares for $318,809 in exchange for a
note receivable.
During 1999, the Company settled $93,700 of the 12% promissory notes owing to
directors and officers by offsetting them against notes receivable from the
same. The Company also issued 108,696 common shares upon conversion of $220,000
of the 12% promissory notes. In addition, the Company settled interest payable
on long term debt of $140,422 through the issuance of 106,923 common shares to
creditors.
During 1998, the Company exchanged 909,091 of its common shares for 26,667
shares of Lernout & Hauspie Speech Products N.V. The transaction was recorded at
$2,272,523, being the approximate fair value of the Company shares issued.
[GRANT THORNTON LOGO] 22
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
18. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA
In certain respects, Canadian generally accepted accounting principles
("Canadian GAAP") differ from United States generally accepted accounting
principles ("U.S. GAAP").
Consolidated statements of operations and deficit
2000 1999 1998
---- ---- ----
(restated-iii) (restated-iii)
Net loss before discontinued operations
according to Canadian GAAP $ (4,607,536) $ (5,767,468) $ (3,998,758)
Deferred development costs, net of related
amortization and write-offs (i) (600,000) 442,403 546,975
Deferred foreign exchange gain (ii) (43,900) 43,900 -
Unrealized (additional realized) losses
on available for sale securities (iii) 527,778 (631,587) 631,587
------------- ------------ ------------
Net loss before discontinued operations
according to U.S. GAAP (4,723,658) (5,912,752) (2,820,196)
Discontinued operations (Note 14) - - (52,153)
------------- ------------ ------------
Net loss according to U.S. GAAP (4,723,658) (5,912,752) (2,872,349)
Deficit, beginning of year (14,195,575) (8,282,823) (5,410,474)
------------- ------------ ------------
Deficit, end of year $ (18,919,233) $ (14,195,575) $ (8,282,823)
============= ============ =============
Net loss per common share before
discontinued operations, basic and
diluted $ (0.54) $ (1.04) $ (0.73)
Discontinued operations - - (0.01)
------------- ------------ -----------
Net loss per common share, basic and
diluted $ (0.54) $ (1.04) $ (0.74)
============= =========== ===========
Net loss according to U.S. GAAP $ (4,723,658) $ (5,912,752) $ (2,872,349)
(Unrealized) additional realized losses
on available for sale securities (527,778) 631,587 (631,587)
------------- ------------ ------------
Comprehensive loss according to
U.S. GAAP $ (5,251,436) $ (5,281,165) $ (3,503,936)
============= ============ ============
(i) Under Canadian GAAP, development costs that meet specific criteria related
to technical, market and financial feasibility are deferred and amortized
on a straight line basis over the estimated product life, not to exceed
three years. Under U.S. GAAP, these expenditures must be expensed as
incurred.
[GRANT THORNTON LOGO] 23
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
18. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (CONTINUED)
(ii) Under Canadian GAAP, unrealized gains and losses arising from the
translation of long-term monetary assets and liabilities denominated in
foreign currencies are deferred and amortized over the remaining lives of
the related items. Under U.S. GAAP, such gains and losses are included in
earnings.
(iii)Under Canadian GAAP, unrealized losses on available for sale securities
(short term investments) are included in earnings as are subsequent
unrealized recoveries, to the extent of original cost. Under U.S. GAAP,
unrealized gains and losses on available for sale securities are included
in a separate component of shareholders' equity and only realized gains and
losses are included in earnings. The comparative consolidated statements of
operations and deficit and net loss per common share figures for the years
ended 1999 and 1998 have been restated to reflect this GAAP difference.
Consolidated balance sheets
- ---------------------------
September 30, 2000
--------------------------------------------------
Canadian GAAP Adjustment U.S. GAAP
--------------- ---------- ---------
Current assets (i) $ 3,379,835 $ (33,990) $ 3,345,845
Notes receivable (i) 318,809 (318,809) -
Investment in INM 2,108,602 - 2,108,602
Capital assets 387,176 - 387,176
Intangibles (ii) 655,957 (600,000) 55,957
------------- ----------- -------------
$ 6,850,379 $ (952,799) $ 5,897,580
============= =========== =============
Current liabilities $ 2,959,408 $ - $ 2,959,408
Long term debt 945,706 - 945,706
Capital stock (i) 21,792,276 (352,799) 21,439,477
Unrealized losses on available for
sale securities (iv) - (527,778) (527,778)
Deficit (v) (18,847,011) (72,222) (18,919,233)
------------- ----------- -------------
$ 6,850,379 $ (952,799) $ 5,897,580
============= =========== ==============
[GRANT THORNTON LOGO] 24
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
18. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (CONTINUED)
September 30, 1999
--------------------------------------------------
Canadian GAAP Adjustment U.S. GAAP
--------------- ---------- ---------
Current assets $ 1,622,268 $ - $ 1,622,268
Notes receivable (i) 80,616 (80,616) -
Prepaid royalties 1,481,775 - 1,481,775
Capital assets 482,580 - 482,580
Intangibles (ii) 66,456 - 66,456
------------- ----------- -------------
$ 3,733,695 $ (80,616) $ 3,653,079
============= =========== =============
Current liabilities $ 3,087,370 $ - $ 3,087,370
Long term debt 2,770,327 - 2,770,327
Deferred foreign exchange gain (iii) 43,900 (43,900) -
Capital stock (i) 12,071,573 (80,616) 11,990,957
Deficit (v) (14,239,475) 43,900 (14,195,575)
------------- ----------- -------------
$ 3,733,695 $ (80,616) $ 3,653,079
============= =========== =============
(i) Under U.S. GAAP, share purchase loans must be netted against capital
stock. Under Canadian GAAP, share purchase loans that meet specific
criteria regarding recoverability are recorded as assets on the balance
sheet. Notes receivable, current assets and capital stock have been
adjusted at each balance sheet date for the effect of these loans.
(ii) Intangibles have been adjusted at each balance sheet date for the
effect, if any, of deferred development costs as disclosed in footnote
(i) to the consolidated statements of operations and deficit.
(iii) The deferred foreign exchange gain or loss, if any, has been adjusted
at each balance sheet date as disclosed in footnote (ii) to the
consolidated statements of operations and deficit.
(iv) The unrealized losses on available for sale securities, if any, have
been adjusted at each balance sheet date as disclosed in footnote (iii)
to the consolidated statements of operations and deficit.
(v) The deficit adjustment reflects the cumulative effect of the
adjustments outlined in (ii), (iii) and (iv) above.
[GRANT THORNTON LOGO] 25
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
18. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (CONTINUED)
Stock options
- -------------
As disclosed in Note 12, the Company has a stock option plan, which is accounted
for under Accounting Principal Board Opinion 25 and related interpretations.
Since the exercise price of each option equals the market price of the Company's
stock on the date of grant, no compensation cost has been recognized for the
plan. Had compensation costs for the plan been determined based on the fair
value of the options as of the grant dates, consistent with the method in
Statement of Financial Accounting Standards 123, Accounting for Stock-Based
Compensation ("SFAS 123"), the Company's net loss and net loss per share would
have been reduced to the pro forma amounts indicated below. The effects of
applying SFAS 123 are not likely to be representative of the effects on reported
net income for future years because additional awards may be made each year.
2000 1999 1998
---- ---- ----
Net loss before discontinued
operations according to
U.S. GAAP As reported $ (4,723,658) $ (5,912,752) $ (2,820,196)
Pro forma $ (4,938,518) $ (6,099,742) $ (2,937,915)
Net loss according to U.S.
GAAP As reported $ (4,723,658) $ (5,912,752) $ (2,872,349)
Pro forma $ (4,938,518) $ (6,099,742) $ (2,990,068)
Net loss per common
share before discontinued
operations As reported $ (0.54) $ (1.04) $ (0.73)
Pro forma $ (0.56) $ (1.08) $ (0.76)
Net loss per common
share As reported $ (0.54) $ (1.04) $ (0.74)
Pro forma $ (0.56) $ (1.08) $ (0.77)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998 respectively: expected
volatility of 102.0%, 91.0% and 89.6%; risk-free interest rates of 6.09%, 5.43%
and 4.86%; and expected lives of three years and expected dividend yields of 0%
in all cases.
[GRANT THORNTON LOGO] 26
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
18. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (CONTINUED)
Financial Accounting Standards Board Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Subsequent to the issuance of the statement, the Financial
Accounting Standards Board issued SFAS 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133" that deferred the
effective date of SFAS 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company does not have derivative instruments so the
Company believes this statement will have no impact on them.
Statements of cash flows
The Company does not believe that differences in presentation are of material
significance so as to require further disclosure.
- --------------------------------------------------------------------------------
19. INCOME TAXES
The Company has not recorded in its financial statements the income tax benefits
of current and prior years' federal losses of $11,478,000, provincial/state
losses of $13,021,000 and investment tax credits of $832,000. These losses and
credits are available to reduce taxable income and taxes payable in future years
and, if not utilized, will expire as follows:
[GRANT THORNTON LOGO] 27
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
19. INCOME TAXES (CONTINUED)
Federal Provincial/State Federal
Income Tax Income Tax Investment
Losses Losses Tax Credits
----------- ---------------- ------------
2001 $ 227,000 $ 265,000 $ -
2002 326,000 404,000 -
2003 1,179,000 1,297,000 -
2004 1,732,000 1,932,000 20,000
2005 2,510,000 2,680,000 50,000
2006 3,773,000 4,131,000 76,000
2007 1,352,000 1,933,000 123,000
2008 - - 109,000
2009 - - 220,000
2010 - - 234,000
2012 136,000 136,000 -
2013 45,000 45,000 -
2014 41,000 41,000 -
2015 157,000 157,000 -
----------- -------------- ------------
$11,478,000 $ 13,021,000 $ 832,000
=========== ============== ============
In addition, the Company has deductions of $4,981,000 available and capital
losses and related provisions of $1,844,000 available to offset future taxable
capital gains, both of which do not expire. The income tax benefit of these
amounts has also not been recorded.
- --------------------------------------------------------------------------------
20. SEGMENTED INFORMATION
Management has determined that the Company operates within one business segment:
the computer products segment, which develops, manufactures, distributes and
licenses computer based voice processing products and systems based on its
proprietary technology. Prior to the disposition of Granville (see Note 15), the
Company operated within another business segment: the computer contracts
segment, which provided telecommunications design and integration services. The
operating results of this segment have been netted and are disclosed separately
on the statements of operations.
[GRANT THORNTON LOGO] 28
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
20. SEGMENTED INFORMATION (CONTINUED)
Revenue from major customers is summarized as follows:
2000 1999 1998
---- ---- ----
Sales
Unisys Canada Inc. $ 1,197,399 $ 209,080 $ -
Mercedes Datakor 837,281 24,572 -
Other 3,812,984 2,655,592 1,763,345
----------- ----------- -----------
5,847,664 2,889,244 1,763,345
Licenses and Royalties
Lernout & Hauspie Speech Products N.V. 1,319,850 - -
----------- ----------- -----------
$ 7,167,514 $ 2,889,244 $ 1,763,345
========= =========== ===========
Sales by industry are summarized as follows:
2000 1999 1998
---- ---- ----
Sales
Hospitals $ 2,837,293 $ 1,155,697 $ 882,903
Courts 2,386,791 1,311,235 706,322
Legislatures 623,580 422,312 174,120
----------- ----------- -----------
5,847,664 2,889,244 1,763,345
Licenses and Royalties
Lernout & Hauspie Speech Products N.V. 1,319,850 - -
----------- ----------- -----------
$ 7,167,514 $ 2,889,244 $ 1,763,345
=========== =========== ===========
It is not practical to disclose sales by product line.
Export sales of the Company are disclosed separately on the statements of
operations.
- --------------------------------------------------------------------------------
21. SUBSEQUENT EVENTS
(a) In October 2000, the Company changed its name from BCB Voice Systems Inc.
to VoiceIQ Inc.
(b) Also in October 2000, the Company issued 3,000,000 common shares at a
price of $3.00 each for net proceeds of $8,280,000 after deducting Agents'
commissions of $720,000 but before deducting other issue costs. As
additional consideration for the services of the Agents, the Company
issued 300,000 compensation options to purchase common shares at a price
of $3.46 per share. The options expire in October 2002.
[GRANT THORNTON LOGO] 29
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
21. SUBSEQUENT EVENTS (CONTINUED)
(c) Also in October 2000, the Company took possession of the shares of
Granville (see Notes 5 and 15) as a means to realize the $300,000 in notes
receivable related to its sale in fiscal 1998. Although the Company will
have the ability to exercise control of Granville, it has no intention of
doing so. The Company intends to hold the shares until the $300,000 in
notes receivable is recovered or until the shares are sold.
(d) On November 29, 2000, Lernout & Hauspie Speech Products N.V. ("L&H")
voluntarily filed a Chapter 11 petition for reorganization protection
under U.S. bankruptcy code and announced that it would file a request for
a concordant reorganization under Belgian law. This announcement may
impact the following financial statement items or disclosures:
o The value of short term investments (see Note 3) since trading was
halted earlier in November.
o The value of prepaid royalties (see Note 7), although these have
already been fully provided for.
o L&H's ability to pay the remaining royalty amounts due under the
licensing agreement (see Note 22). These royalty amounts have not been
recognized by the Company.
(e) In January 2001, the Company acquired the right to purchase 50% of the
common shares of B2G Legal Pty Limited in Australia for AUS $1,450,000 by
way of a convertible note. In turn, B2G Legal Pty Limited owns 100% of
Auscript Pty Limited, a court reporting services firm in Australia. On
March 7, 2001, the Company exercised its right to purchase the shares by
converting the note.
(f) In March 2001, the Company entered into share purchase agreements to
acquire the remaining outstanding shares of INM (see Note 6) to bring its
holdings to 100% of the issued and outstanding shares. The transaction was
completed in May 2001. The shares of INM were acquired by issuing
4,316,000 common shares of the Company. Upon completion of the
transaction, INM's unanimous shareholders' agreement terminated and became
void, including, without limitation, the INM shareholder option to acquire
1,800 shares as disclosed in Note 6.
- --------------------------------------------------------------------------------
22. RELATED PARTIES
Flanders Language Valley C.V.A. ("FLV")
- ---------------------------------------
FLV holds over 18% of the issued common shares of the Company and holds
promissory notes as disclosed in Note 11. In addition, FLV holds warrants to
acquire 1,054,852 additional common shares at a price of U.S. $0.711 each that
expire in February 2001.
[GRANT THORNTON LOGO] 30
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(in Canadian dollars)
- --------------------------------------------------------------------------------
22. RELATED PARTIES (CONTINUED)
Lernout & Hauspie Speech Products N.V. ("L&H")
- ----------------------------------------------
L&H holds over 11% of the issued common shares of the Company. In addition, the
Company has entered into a license agreement with L&H as disclosed in Note 7.
During the year, L&H exercised 650,000 of its 750,000 warrants to acquire common
shares in exchange for L&H common shares that continue to be held at year end
(see Note 3). At year end, L&H holds 100,000 of the original 750,000 warrants to
acquire common shares of the Company at a price of U.S. $0.711 that expire in
February 2001. In June 2000, the Company and L&H entered into a license
agreement whereby L&H paid an initial license fee of U.S. $680,000 and the first
of three royalty payments of U.S. $220,000. The remaining two payments are due
in July 2001 and 2002 respectively. The license agreement grants L&H
non-exclusive, perpetual and worldwide license to use and sublicense the use of
Voice Flow, a VoiceIQ Inc. product. The Company has included $1,319,850 (U.S.
$900,000) in its income for the year with respect to this agreement.
International Neural Machines Incorporated (INM) - see Note 6
- -------------------------------------------------------------
During the year, the Company entered into an agreement with INM as disclosed
in Note 13(b). Payments totalling $600,000 in relation to this agreement have
been added to deferred product development costs during the period. In addition,
the Company paid $46,828 to INM for contract work that was charged to cost of
sales and accrued $29,535 of interest on the debenture receivable.
Other
- -----
During the year, members of management acquired all of the 8% and 83% of the 7%
convertible debentures (see Note 11). The 8% convertible debentures were
immediately converted to common shares. Interest expense for the period includes
$65,642 to members of management.
[GRANT THORNTON LOGO] 31
- --------------------------------------------------------------------------------
VOICEIQ INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Six Months Ending March 31 2001 and 2000
- --------------------------------------------------------------------------------
-2001- -2000-
Revenue $ 2,541,848 $ 2,759,661
Cost of Sales 1,499,410 1,005,020
------------ ------------
Gross Profit 1,042,438 1,754,641
------------ ------------
Margin 41.01% 63.58%
Operational Expenses:
Selling, marketing & administration expenses 4,563,093 2,079,760
Software & product development 477,869 436,115
------------ ------------
Total operational expenses 5,040,962 2,515,875
------------ ------------
------------ ------------
Loss from operations (3,998,524) (761,234)
------------ ------------
Interest income 114,556 2,536
Loss on investment disposal 161,222
Loss from Equity Investment 202,034
------------ ------------
Net Loss For the Period ($ 4,247,224) ($ 758,698)
============ ============
Net Loss Per Common Share Issued & Outstanding ($0.25) ($0.09)
Common Shares Issued & Outstanding 17,306,058 8,060,313
- --------------------------------------------------------------------------------
[GRANT THORNTON LOGO] 32
- --------------------------------------------------------------------------------
VOICEIQ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
CASH PROVIDED (USED)
Six Months Ending March 31 2001 and 2000
- --------------------------------------------------------------------------------
-2001- -2000-
Cash Derived From (Applied to)
Operating
Net Loss ($ 4,247,224) ($ 758,698)
Depreciation & Amortization 83,760 36,000
Investment Write Down 161,222
Loss from equity investment 202,034
Net Accrued Interest on debentures payable 35,911
and receivable added to book values
Other non-cash interest expense 40,331 121,498
------------ -------------
(3,723,966) (601,200)
------------ -------------
Change In Non Cash Working Capital (954,817) (607,123)
------------ -------------
(4,678,783) (1,208,323)
------------ -------------
Financing
10% Convertible debenture payments (601,400)
Proceeds from shares issued for cash 10,205,133 265,104
Loan Repayments (450,000)
Other payments on long term debt (3,447)
Share Issue Costs (913,266)
Conversion of Note to Equity 553,368
Private Placement (net) 4,067,000
Rights Issue (Net) 1,319,575
------------ -------------
8,687,020 5,755,047
------------ -------------
Investing
Investment in B2G Australia (1,322,480) (51,039)
Purchase of Capital Assets (98,538)
Deferred development costs (400,000)
Advances to INM (300,000)
Notes Receivable ( 20,305)
------------ -------------
(2,141,323) (51,039)
Foreign Exchange loss on cash held in foreign
currencies (462)
Net Increase (Decrease in Cash) 1,866,452 4,495,685
Opening Cash (Loans) 804,755 (1,118,869)
------------ -------------
Closing Cash (Loans) $ 2,671,207 $ 3,376,816
============ =============
[GRANT THORNTON LOGO] 33
Financial Statements
INTERNATIONAL NEURAL
MACHINES INCORPORATED
[Expressed in Canadian dollars]
September 30, 2000
AUDITORS' REPORT
To the Directors of
INTERNATIONAL NEURAL MACHINES INCORPORATED
We have audited the balance sheets of INTERNATIONAL NEURAL MACHINES INCORPORATED
as at September 30, 2000 and April 30, 2000 and 1999 and the statements of
operations and deficit and cash flows for the five month period and the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at September 30, 2000 and
April 30, 2000 and 1999 and the results of its operations and its cash flows for
the five month period and the years then ended in accordance with Canadian
generally accepted accounting principles.
/s/ Ernst & Young LLP
Kitchener, Canada,
November 22, 2000 [except as to note 15 which Chartered Accountants
is as of May 17, 2001].
Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Differences
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph, following the opinion paragraph, when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the financial statements. Our report to the shareholders dated
November 22, 2000, except as to note 15 which is as of May 17, 2001, is
expressed in accordance with Canadian reporting standards which do not permit a
reference to such events and conditions in the auditors' report when these are
adequately disclosed in the financial statements.
/s/ Ernst & Young LLP
Kitchener, Canada,
May 17, 2001. Chartered Accountants
1
INTERNATIONAL NEURAL MACHINES INCORPORATED
[Incorporated under the laws of Ontario]
BALANCE SHEETS
[see Going Concern - note 1]
As at [expressed in Canadian dollars]
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
ASSETS [notes 5, 6 and 7]
CURRENT
Cash and cash equivalents 43,940 2,775 6,625
Accounts receivable [note 3] 188,559 38,105 167,106
Unbilled revenue -- 105,000 162,751
Prepaid expenses 3,193 3,193 3,774
Investment tax credits receivable [note 9] 99,811 171,230 603,025
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 335,503 320,303 943,281
- ----------------------------------------------------------------------------------------------------
Capital assets - net [note 4] 77,995 61,538 60,078
Deferred financing costs, net of accumulated
amortization of $17,643 [April 30, 2000 -
$15,492, April 30, 1999 - $10,328] 8,176 10,327 15,491
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS 421,674 392,168 1,018,850
====================================================================================================
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT
Bank indebtedness [note 5] -- 53,000 30,000
Accounts payable and accrued liabilities 137,247 101,909 56,138
Deferred revenue 50,000 -- --
Due to related party [note 6] -- 62,005 --
Current portion of long-term liabilities [note 7] 92,400 92,400 77,000
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 279,647 309,314 163,138
- ----------------------------------------------------------------------------------------------------
Long-term liabilities [note 7] 93,615 124,415 841,815
Related party long-term liabilities [note 6] 716,783 714,858 88,958
- ----------------------------------------------------------------------------------------------------
1,090,045 1,148,587 1,093,911
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies [notes 13 and 14]
SHAREHOLDERS' (DEFICIT)
Share capital [note 8] 936,257 936,257 936,257
(Deficit) (1,604,628) (1,692,676) (1,011,318)
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' (DEFICIT) (668,371) (756,419) (75,061)
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) 421,674 392,168 1,018,850
====================================================================================================
See accompanying notes
On behalf of the Board:
Director Director
2
INTERNATIONAL NEURAL MACHINES INCORPORATED
STATEMENTS OF OPERATIONS AND DEFICIT
[see Going Concern - note 1]
[expressed in Canadian dollars]
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
REVENUE [notes 10 and 11] 642,863 634,355 941,969
- ----------------------------------------------------------------------------------------------------
EXPENSES
Cost of product sales -- 24 780
Research and development 316,344 829,807 789,361
Investment tax credits [note 9] -- (126,902) (296,581)
Sales and marketing 57,853 159,099 117,055
General and administration 124,869 333,316 296,584
Amortization 11,613 25,564 21,564
- ----------------------------------------------------------------------------------------------------
510,679 1,220,908 928,763
- ----------------------------------------------------------------------------------------------------
Income (loss) from operations 132,184 (586,553) 13,206
- ----------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 2,307 13,887 16,842
Interest expense (46,443) (108,692) (101,120)
- ----------------------------------------------------------------------------------------------------
(44,136) (94,805) (84,278)
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 88,048 (681,358) (71,072)
(Deficit), beginning of period (1,692,676) (1,011,318) (940,246)
- ----------------------------------------------------------------------------------------------------
(DEFICIT), END OF PERIOD (1,604,628) (1,692,676) (1,011,318)
====================================================================================================
See accompanying notes
3
INTERNATIONAL NEURAL MACHINES INCORPORATED
STATEMENTS OF CASH FLOWS
[see Going Concern - note 1]
[expressed in Canadian dollaras]
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ---------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) 88,048 (681,358) (71,072)
Add items not involving cash:
Amortization 11,613 25,564 21,564
Amortization of deferred financing costs 2,151 5,164 5,164
Revaluation of foreign denominated shareholder
debenture 1,925 900 1,950
- ---------------------------------------------------------------------------------------------------
103,737 (649,730) (42,394)
CHANGE IN NON-CASH WORKING CAPITAL COMPONENTS:
(Increase) decrease in accounts receivable (150,454) 129,001 69,090
Decrease (increase) in unbilled revenue 105,000 57,751 (162,751)
Decrease (increase) in investment tax credits
receivable 71,419 431,795 (128,206)
Decrease in prepaid expenses -- 581 1,007
Increase (decrease) in accounts payable and
accrued liabilities 35,338 45,771 (40,251)
Increase in deferred revenue 50,000 -- --
- ---------------------------------------------------------------------------------------------------
CASH PROVIDED BY (APPLIED TO) OPERATING ACTIVITIES 215,040 15,169 (303,505)
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (28,070) (27,024) (8,630)
- ---------------------------------------------------------------------------------------------------
CASH (APPLIED TO) INVESTING ACTIVITIES (28,070) (27,024) (8,630)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from bank loan -- 23,000 30,000
Repayments of bank loan (53,000) -- --
Advance from related party -- 62,005 --
Issue of shares -- -- 3
Proceeds from issuance of long-term liabilities -- -- 9,815
Repayment of due to related party (62,005) -- --
Repayment of long-term liabilities (30,800) (77,000) (53,056)
Increase in capitalized interest -- -- 3,341
- ---------------------------------------------------------------------------------------------------
CASH (APPLIED TO) PROVIDED BY FINANCING ACTIVITIES (145,805) 8,005 (9,897)
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED (APPLIED) DURING PERIOD 41,165 (3,850) (332,032)
Cash and cash equivalents, beginning of period 2,775 6,625 328,657
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 43,940 2,775 6,625
====================================================================================================
CASH PAID FOR:
Interest 20,402 113,658 101,120
Income taxes -- -- --
====================================================================================================
See accompanying notes
4
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
1. GOING CONCERN
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada on a going concern basis, which presumes
the realization of assets and discharge of liabilities in the normal course of
business for the foreseeable future.
For the period ended September 30, 2000, the Company had a net income of $88,048
and the accumulated deficit at September 30, 2000 is $1,604,628. The net income
of $88,048 for the period ended September 30, 2000 was primarily due to $500,000
from a development contract with a related party.
The Company's ability to continue as a going concern is dependent upon continued
support from its lenders [see note 5] and obtaining additional financing to
engage in development contracts with third parties, to generate product or
licensing revenues or combinations of these activities. The outcome of these
activities cannot be predicted at this time. These financial statements do not
include any adjustments to the amounts and classification of assets and
liabilities that might be necessary should the Company be unable to continue
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues are derived from various sources including license fees for software
products, service fees for customer support and product enhancements, support
arrangements for research and development and contract revenue.
Contract revenues include collaborative support in research and development and
specific contracts for customer applications. Contract revenue for customer
applications is recognized on the percentage of completion basis, utilizing a
measurement of efforts incurred compared to total estimated efforts after
providing for any anticipated losses under the contract. Research and
development support is recognized in the year in which the related research and
development expenditures are incurred. Funds received in advance of meeting the
criteria for revenue recognition are deferred and recorded as revenue as they
are earned and earnings in excess of amounts billed are disclosed as unbilled
revenues.
Revenue from the sale of product licenses is recognized upon delivery to the end
user when collection is probable and remaining vendor obligations are
insignificant. Service fees associated with product enhancements and customer
support are sold separately from product licenses and are recognized ratably
over the life of the service contracts.
5
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
FOREIGN CURRENCY
Foreign currency transactions are translated into Canadian dollars at the rate
of exchange in effect at the date of the transaction. Foreign currency balances
of monetary assets and liabilities are translated using the rate of exchange in
effect at the end of the period. Translation gains or losses are included in the
statements of operations and deficit.
DEFERRED FINANCING COSTS
Expenses incurred in connection with arranging long-term borrowings are
amortized over the term of the borrowing.
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost, net of related government assistance and
investment tax credits, and amortized over their estimated useful lives as
follows:
Office equipment 20% declining balance
Computer hardware 30% declining balance
Computer software - system software 30% declining balance
- application software 100%
Leasehold improvements straight-line over the term of the lease
RESEARCH AND DEVELOPMENT
Research expenditures are expensed as incurred. Development expenditures are
capitalized to the extent they meet required accounting criteria. To date, these
expenditures have not met accounting criteria required for capitalization and
have been expensed as incurred. Research and development expenditures are
reduced by investment tax credits.
INCOME TAXES
The Company follows the deferral method of income tax allocation, such that
timing differences occurring in the calculation of taxable income and accounting
income give rise to deferred income taxes.
6
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT'D
USE OF ESTIMATES
The preparation of financial statements, in conformity with Canadian generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, revenues, expenses
and disclosure of contingencies 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.
GOVERNMENT ASSISTANCE
The Company makes periodic applications for financial assistance under available
government incentive programs. Grants relating to capital expenditures are
recorded as a reduction of the cost of such assets. Grants relating to current
expenses are recognized as revenue in the period earned.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
90 days or less to be cash equivalents. Cash equivalents are carried at cost
which approximates market value.
3. ACCOUNTS RECEIVABLE
As at September 30, 2000, two customers accounted for 85% [one customer at April
30, 2000 - 70%, three customers at April 30, 1999 - 68%] of the accounts
receivable balance.
Credit limits, credit evaluation and account monitoring procedures are utilized
to minimize risk of loss on collection.
7
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
4. CAPITAL ASSETS
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
SEPTEMBER 30, 2000 $ $ $
- --------------------------------------------------------------------------------
Office equipment 39,696 23,790 15,906
Computer hardware 148,376 97,456 50,920
Computer software 24,281 18,420 5,861
Leasehold improvements 10,713 5,405 5,308
- --------------------------------------------------------------------------------
223,066 145,071 77,995
================================================================================
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
APRIL 30, 2000 $ $ $
- --------------------------------------------------------------------------------
Office equipment 35,343 22,734 12,609
Computer hardware 130,163 92,743 37,420
Computer software 19,642 13,468 6,174
Leasehold improvements 9,848 4,513 5,335
- --------------------------------------------------------------------------------
194,996 133,458 61,538
================================================================================
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
APRIL 30, 1999 $ $ $
- --------------------------------------------------------------------------------
Office equipment 32,946 19,494 13,452
Computer hardware 115,530 79,543 35,987
Computer software 9,648 6,108 3,540
Leasehold improvements 9,848 2,749 7,099
- --------------------------------------------------------------------------------
167,972 107,894 60,078
================================================================================
8
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
5. BANK LINE OF CREDIT
The Company has a $100,000 line of credit, subject to margining limits on
accounts receivable and certain investment tax credits, available at prime plus
1 1/2% [prime being 7.5% at September 30, 2000]. This line of credit is
repayable on demand and is collateralized by a general security agreement
covering all assets other than real property, guarantee and postponement in the
amount of $100,000 signed by a shareholder and business loan insurance in the
amount of $100,000 signed by a shareholder. At September 30, 2000, no amount
[April 30, 2000 - $53,000, April 30, 1999 - $30,000] was drawn on this facility.
At September 30, 2000, the Company was in violation of a bank covenant
concerning its debt to tangible net worth ratio.
6. RELATED PARTIES
RELATED PARTY TRANSACTIONS THROUGHOUT THE PERIODS:
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
VOICE IQ INC. [formerly BCB Voice Systems Inc.]
Contract revenue 550,000 100,000 --
Interest expense 26,042 2,055 --
DIRECTOR
Interest expense -- 2,005 --
9
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
6. RELATED PARTIES CONT'D
PERIOD-END BALANCES:
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Due to director, interest at 10% -- 62,005 --
Due to shareholder, non-interest bearing and
no terms of repayment 15,537 5,469 --
Interest accrued to Voice IQ Inc. 28,096 -- --
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Due to shareholder, unsecured, non-interest
bearing and no specific terms of repayment. 16,608 16,608 16,608
Debenture for $50,000 U.S. owing to
shareholder, unsecured, non-interest
bearing. Repayment of debenture is
postponed until such time as the Company
becomes profitable. 75,175 73,250 72,350
Debenture of $625,000 due to Voice IQ Inc.,
accruing interest at 10% per annum,
payable at maturity, maturing the earlier
of March 19, 2002 or the date which the
Company completes an Initial Public
Offering. The debenture is collateralized
by all current and long-term assets. 625,000 625,000 --
- ----------------------------------------------------------------------------------------------------
716,783 714,858 88,958
====================================================================================================
Voice IQ Inc. is a related party as they have an investment in the Company,
which is accounted for by the equity method.
10
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
6. RELATED PARTIES CONT'D
Since the Company has no history of profitability, the principal repayments over
the term of the $50,000 U.S. debenture owing to shareholder cannot be reasonably
estimated. Accordingly, the entire amount of the loan, as well as the amount due
to shareholder, have been classified as long-term, as it is not the
shareholder's intention to demand repayment within the next twelve months and
are reflected as thereafter in the principal repayment schedule in note 7.
7. LONG-TERM LIABILITIES
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
Term loan accruing interest at 9.5% to April
24, 2001 on unpaid capital balance. The rate
will be adjusted on April 24, 2001 to a
prevailing rate at that time. The loan is
repayable in one payment of $500 on May 23,
1997, followed by 30 monthly principal
payments of $1,500, commencing June 1997 and
followed by 35 consecutive monthly payments
of $3,700. The maturity date is October 23,
2002. Additional interest of 0.63% of gross
sales, commencing May 23, 1997 is payable
monthly. The loan is collateralized by a
second charge on all current and long-term
assets; personal property security agreement
providing first security interest in all
other personal property including source
code and an assignment of $175,000 life
insurance on the life of a shareholder. 96,200 111,000 140,000
- ----------------------------------------------------------------------------------------------------
SUB-TOTAL 96,200 111,000 140,000
- ----------------------------------------------------------------------------------------------------
11
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
7. LONG-TERM LIABILITIES CONT'D
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
BALANCE FORWARD 96,200 111,000 140,000
Term loan accruing interest at 8.4% to December
24, 1999 and 9.3%, commencing December 25,
1999 on unpaid capital balance. The rate is
to be adjusted on December 24, 2000 to a
prevailing rate at that time. The loan is
repayable in eight principal payments of
$1,000 commencing June 1998, followed by 29
consecutive monthly instalments of $4,000
and followed by 15 consecutive monthly
payments of $5,000. The maturity date is
September 23, 2002. Additional interest is
0.6473% of gross sales, commencing May 23,
1998 is payable monthly. The loan is
collateralized by second charge on all
current and long-term assets, assignment of
shareholder loans other than the $625,000
debenture, $100,000 guarantee by a
shareholder of the Company and an assignment
of $200,000 life insurance on the life of a
shareholder. 89,815 105,815 153,815
Debenture of $625,000, accruing interest at
10% per annum, payable in quarterly interest
payments, commencing June 20, 1997, maturing
the earlier of March 19, 2002 or the date
which the Company completes an Initial
Public Offering. Debenture is collateralized
by all current and long-term assets -- -- 625,000
- ----------------------------------------------------------------------------------------------------
186,015 216,815 918,815
Less current portion 92,400 92,400 77,000
- ----------------------------------------------------------------------------------------------------
93,615 124,415 841,815
====================================================================================================
12
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
7. LONG-TERM LIABILITIES CONT'D
Interest on long-term liabilities and related party long-term liabilities was
$45,093 [April 30, 2000 - $104,873, April 30, 1999 - $101,013].
The repayments of long-term liabilities and related party long-term liabilities
[note 6], required within each of the next five years and thereafter, are as
follows:
$
- --------------------------------------------------------------------------------------------------
2001 92,400
2002 711,215
2003 7,400
2004 --
2005 --
Thereafter 91,783
- --------------------------------------------------------------------------------------------------
902,798
==================================================================================================
8. SHARE CAPITAL
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ----------------------------------------------------------------------------------------------------
AUTHORIZED
Unlimited common shares
Unlimited special shares
ISSUED
20,000 common shares 936,257 936,257 936,257
13
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
8. SHARE CAPITAL CONT'D
[a] ISSUE OF SHARES
During fiscal 1997, the Company entered into a share purchase agreement
involving the issuance of shares to a new investor and existing
shareholders. During fiscal 1999, 10,000 shares were issued for $3 pursuant
to this agreement.
[b] OPTION TO PURCHASE SHARES
Under the terms of a Memorandum of Agreement, a shareholder has the option,
exercisable one time only after the principal and accrued interest, if any,
on the debenture has been repaid in full to purchase from Voice IQ Inc.,
1,800 shares at an aggregate option price of $1.
[c] COMMITMENTS TO REDEEM SHARES
Under the terms of the unanimous shareholders' agreement, a shareholder has
a "put option" that can be exercised after March 20, 2002. Under the "put
option", this shareholder has the right to require the Company to redeem
its shares at fair value at the option exercise date. The applicable
shareholder held 7,300 shares at September 30, 2000 [7,300 shares at April
30, 2000, 7,300 shares at April 30, 1999].
Subsequent to September 30, 2000, the shareholders of the Company entered into
an agreement that would terminate and void the unanimous shareholders'
agreement, including the management option and the put option noted above, as
disclosed in note 15.
9. INCOME TAXES
Investment tax credits are accrued when qualifying expenditures are incurred and
there is reasonable assurance that the credits will be realized. Investment tax
credits earned with respect to current expenditures for qualified research and
development activities are included in the statement of income as a reduction of
expenses. Investment tax credits associated with capital expenditures are
reflected as reductions in the carrying amounts of capital assets. The
investment tax credits related to the year ended April 30, 2000 are subject to
review and audit by Canada Customs and Revenue Agency ["CCRA"]. Although the
Company has used its best judgment and understanding of the related income tax
legislation in determining these amounts, it is possible that the amounts could
change by a material amount in the near term dependent on the review and audit
by CCRA.
14
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
9. INCOME TAXES CONT'D
As at September 30, 2000, the Company has the following loss carryforwards and
unclaimed scientific research and experimental development expenditures which
are deductible in determining income for income tax purposes of future years as
follows:
FEDERAL PROVINCIAL
$ $
- ---------------------------------------------------------------------------------------------------
Non-capital losses 315,000 1,293,000
Scientific research and experimental development expenditures 1,060,000 1,060,000
- ---------------------------------------------------------------------------------------------------
1,375,000 2,353,000
===================================================================================================
The non-capital losses expire in the following years:
FEDERAL PROVINCIAL
$ $
- ---------------------------------------------------------------------------------------------------
2003 -- 16,000
2004 84,000 519,000
2005 156,000 392,000
2006 75,000 214,000
2007 -- 152,000
- ---------------------------------------------------------------------------------------------------
315,000 1,293,000
===================================================================================================
Approximately $10,000 of these losses have been recognized in the financial
statements as reductions of deferred tax credits.
The scientific research and experimental development expenditures can be carried
forward indefinitely. The benefit of these non-capital losses and scientific
research and experimental development expenditures have not been recognized in
the financial statements, other than the $10,000 mentioned previously. The
scientific research and experimental development expenditure carryforwards
reflect a valuation allowance provided against the refundable investment tax
credits.
As at September 30, 2000, the Company has unused non-refundable investment tax
credits, expiring in the years 2001 through 2010, in the amount of $260,000
available to reduce federal income taxes payable in future years. The benefit of
these non-refundable investment tax credits has not been recognized in the
financial statements.
15
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
9. INCOME TAXES CONT'D
Income taxes expense (recovery) varies from the amounts that would be computed
by applying the statutory income tax rates to income before provision for income
taxes as shown in the following table.
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ---------------------------------------------------------------------------------------------------
Combined Federal and Provincial income tax rate 43.95% 44.6% 44.6%
===================================================================================================
Income tax expense (recovery) computed
at statutory rates 39,000 (304,000) (32,000)
Benefit of losses and deductions (recognized)
not recognized (39,000) 350,000 53,000
Ontario superallowance deduction -- (46,000) (21,000)
- ---------------------------------------------------------------------------------------------------
-- -- --
===================================================================================================
10. REVENUE
Revenue consists of:
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, APRIL 30, APRIL 30,
2000 2000 1999
$ $ $
- ---------------------------------------------------------------------------------------------------
Contract revenues 617,881 515,497 605,875
Licensing agreements 24,982 104,000 330,331
Product sales -- 14,858 5,763
- ---------------------------------------------------------------------------------------------------
642,863 634,355 941,969
===================================================================================================
11. GOVERNMENT AND SIMILAR GRANTS
For the five month period ended September 30, 2000, the Company earned
government and similar grants of approximately $42,600 [April 30, 2000 -
$18,200, April 30, 1999 - $341,800], which were included in contract revenue.
16
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
12. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
In certain respects, Canadian generally accepted accounting principles
["Canadian GAAP"] differs from United States generally accepted accounting
principles ["U.S. GAAP"]. The impact of any significant differences on the
Company's financial statements are summarized below:
BALANCE SHEETS
CANADIAN U.S.
GAAP ADJUSTMENT GAAP
SEPTEMBER 30, 2000 $ $ $
- ---------------------------------------------------------------------------------------------------
Current assets 335,503 -- 335,503
Capital assets 77,995 -- 77,995
Deferred financing costs 8,176 -- 8,176
- ---------------------------------------------------------------------------------------------------
421,674 -- 421,674
===================================================================================================
Current liabilities 279,647 -- 279,647
Long-term liabilities 93,615 -- 93,615
Related party long-term liabilities 716,783 -- 716,783
Redeemable common shares [i] -- 625,000 625,000
Share capital [i] 936,257 (625,000) 311,257
(Deficit) (1,604,628) -- (1,604,628)
- ---------------------------------------------------------------------------------------------------
421,674 -- 421,674
===================================================================================================
17
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
12. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES CONT'D
CANADIAN U.S.
GAAP ADJUSTMENT GAAP
APRIL 30, 2000 $ $ $
- ---------------------------------------------------------------------------------------------------
Current assets 320,303 -- 320,303
Capital assets 61,538 -- 61,538
Deferred financing costs 10,327 -- 10,327
- ---------------------------------------------------------------------------------------------------
392,168 -- 392,168
===================================================================================================
Current liabilities 309,314 -- 309,314
Long-term liabilities 124,415 -- 124,415
Related party long-term liabilities 714,858 -- 714,858
Redeemable common shares [i] -- 625,000 625,000
Share capital [i] 936,257 (625,000) 311,257
(Deficit) (1,692,676) -- (1,692,676)
- ---------------------------------------------------------------------------------------------------
392,168 -- 392,168
===================================================================================================
CANADIAN U.S.
GAAP ADJUSTMENT GAAP
APRIL 30, 1999 $ $ $
- ---------------------------------------------------------------------------------------------------
Current assets 943,281 -- 943,281
Capital assets 60,078 -- 60,078
Deferred financing costs 15,491 -- 15,491
- ---------------------------------------------------------------------------------------------------
1,018,850 -- 1,018,850
===================================================================================================
Current liabilities 163,138 -- 163,138
Long-term liabilities 841,815 -- 841,815
Related party long-term liabilities 88,958 -- 88,958
Redeemable common shares [i] -- 625,000 625,000
Share capital [I] 936,257 (625,000) 311,257
(Deficit) (1,011,318) -- (1,011,318)
- ---------------------------------------------------------------------------------------------------
1,018,850 -- 1,018,850
===================================================================================================
18
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
12. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES CONT'D
[i] Under U.S. GAAP, a Company's share capital subject to mandatory redemption
requirements or share capital whose redemption is outside the control of
the issuer, is required to be presented separately in the balance sheet and
excluded from the caption 'shareholders' equity'. Under Canadian GAAP, for
other than public enterprises, disclosure of this redemption feature is
required, but segregation from share capital is not required [see note
8[c]].
13. COMMITMENTS
The Company has entered into leases for office premises and certain computer
equipment. Payments required to 2002 and in the aggregate, are as follows:
$
- -----------------------------------------------------------------------------
2001 36,209
2002 38,309
- -----------------------------------------------------------------------------
74,518
=============================================================================
The Company and Voice IQ Inc. have agreed to begin merger negotiations in an
attempt to combine their companies. There can be no assurance that any merger of
the two companies will take place [see note 15].
14. CONTINGENCIES
During the year ended April 30, 2000, the Company was contracted to provide
certain research activities and prepare a report of the results. The contract
provided for billings to be issued on a monthly basis as expenditures were
incurred and not to exceed $138,500 US [$208,710 Cdn.] in total. Subsequent to
April 30, 2000, the Company has received a notice from the customer to terminate
the contract under termination of default and has been advised that there will
be no further payments made under the contract. The Company has issued invoices
under the contract for $135,130 US [$200,643 Cdn.], of which $62,360 US [$90,984
Cdn.] has been paid and recognized as revenue in the accounts for the year ended
April 30, 2000 and $72,770 US [$109,659 Cdn.] remains outstanding as at April 30
and September 30, 2000. The $72,770 US [$109,659 Cdn.] unpaid portion has not
been included in these financial statements since ultimate collection is not
reasonably assured.
19
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
14. CONTINGENCIES CONT'D
The Company is vigorously contesting that payment is due for all amounts billed
to date and believes that the arbitration process, stipulated in the contract,
will result in full payment of the outstanding amount. The outcome cannot be
determined at this time and as a result the unpaid portion of $72,770 US
[$104,416 Cdn.] has not been recognized in these financial statements. The final
amount to be received, if any, will be recognized in the accounts in the period
that the dispute is resolved.
This contract also includes a provision that allows, in the event of a
termination of default, the customer to procure similar services from other
parties to complete the contract and to seek reimbursement from the Company for
costs incurred in excess of the maximum contract fee of $138,500 US [$205,132
Cdn.]. As a result, it is possible that the customer may be able to claim
reimbursement from the Company. Management disagrees with this termination for
default and intends to seek arbitration resolution or legal action, if
necessary, against the customer for full payment on amounts outstanding and to
dismiss the notice. The outcome of this dispute can not be determined at this
time and as a result no amount has been accrued in these financial statements.
Any amounts resulting from settlement of this dispute will be recognized in the
period it is resolved.
In 1996, the Company entered into a separate research contract with the
Canadian-Israel Research and Development Foundation. The contract stipulates
revenues of $375,000, of which $375,000 has been recognized to date. Under the
terms of the contract, the Company is required to make repayments of 2.5% of
gross sales to a maximum of $375,000 if the resulting product[s] are sold
commercially. If the rights to the technology are sold outright to a third
party, one half of all proceeds of the sale are repayable to a maximum of
$375,000. In the case of a breach of the agreement, all contributions provided
become due if the default is not rectified within thirty days after the date of
receipt of notice of the breach. If upon termination of the research contract
for any other reason and the entire budgeted expenditures have not been
expended, the Company is required to return its pro rata share of such
unexpended portion.
20
INTERNATIONAL NEURAL MACHINES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
September 30, 2000 [expressed in Canadian dollars]
15. SUBSEQUENT EVENT
On March 26, 2001, the shareholders of the Company entered into share purchase
agreements whereby VoiceIQ Inc. will acquire the remaining outstanding shares of
the Company. This will result in VoiceIQ Inc. owning 100% of the issued and
outstanding common shares of the Company. The transaction was completed on May
17, 2001.
Upon completion of the transaction, the Company's unanimous shareholders'
agreement terminated and became void, including, without limitation, the
management option and the put option disclosed in notes 8[b] and 8[c],
respectively.
21
GRANT THORNTON LLP
CHARTERED ACCOUNTANTS
MANAGEMENT CONSULTANTS
Canadian Member Firm of
Grant Thornton International [GRANT THORNTON LOGO]
VOICEIQ INC.
(FORMERLY BCB VOICE SYSTEMS INC.)
PRO-FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
September 30, 2000
CONTENTS
PAGE
Compilation Report 1
Pro-forma Consolidated Statement of Operations 2
Pro-forma Consolidated Balance Sheet 3
Notes to the Pro-forma Consolidated Financial Statements 4 - 7
[GRANT THORNTON LOGO]
GRANT THORNTON LLP
CHARTERED ACCOUNTANTS
MANAGEMENT CONSULTANTS
Canadian Member Firm of
Grant Thornton International [GRANT THORNTON LOGO]
COMPILATION REPORT
To the Board of Directors of
VoiceIQ Inc.
We have reviewed, as to compilation only, the accompanying pro-forma
consolidated balance sheet of VoiceIQ Inc. (formerly BCB Voice Systems Inc.) as
at September 30, 2000 and the pro-forma consolidated statement of operations for
the year then ended, which have both been prepared for inclusion in their 20-F
filing. In our opinion, the pro-forma consolidated financial statements have
been properly compiled to give effect to the transactions and the assumptions
described in the notes thereto.
"Grant Thornton LLP"
Markham, Canada
April 4, 2001 Chartered Accountants
15 Allstate Parkway
Suite 200
Markham
Ontario
L3R 5B4
Tel: (905) 475-1100
Fax: (905) 475-8906
[GRANT THORTON LOGO] 1
- --------------------------------------------------------------------------------
VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - See Compilation Report)
Year Ended September 30, 2000
(in Canadian dollars)
- --------------------------------------------------------------------------------
VIQ INM Adjustments Pro-forma
(Audited) (Unaudited) (Unaudited) (Unaudited)
Sales
Exports $ 3,693,544 $ 295,100 $ - $ 3,988,644
Domestic 2,154,120 703,466 (646,827) 2,210,759
----------- ------------ ------------ -----------
5,847,664 998,566 (646,827) 6,199,403
Licenses and royalties 1,319,850 - - 1,319,850
----------- ------------ ------------ -----------
7,167,514 998,566 (646,827) 7,519,253
Cost of sales 2,353,783 24 (46,827) 2,306,980
----------- ------------ ------------ -----------
Gross profit 4,813,731 998,542 (600,000) 5,212,273
Interest income 104,642 8,443 (29,535) 83,550
----------- ------------ ------------ -----------
4,918,373 1,006,985 (629,535) 5,295,823
----------- ------------ ------------ -----------
Selling and administrative expenses 6,497,596 629,107 920,177 8,046,880
Research and development 827,827 728,351 (305,000) 1,251,178
----------- ------------ ------------ -----------
7,325,423 1,357,458 615,177 9,298,058
----------- ------------ ------------ -----------
Loss before the following items (2,407,050) (350,473) (1,244,712) (4,002,235)
Provision for loss on prepaid royalties (1,481,775) - - (1,481,775)
Loss from equity investment (190,933) - 190,933 -
Write down of investments (527,778) - - (527,778)
----------- ------------ ------------ -----------
Net loss $(4,607,536) $ (350,473) $ (1,053,779) $(6,011,788)
=========== ============ ============ ===========
- --------------------------------------------------------------------------------------------------
Net loss per common share $ (0.53) $ (0.45)
=========== ===========
- --------------------------------------------------------------------------------------------------
See accompanying notes to the pro-forma consolidated financial statements.
[GRANT THORTON LOGO] 2
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VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
PRO-FORMA CONSOLIDATED BALANCE SHEET
(Unaudited - See Compilation Report)
September 30, 2000
(in Canadian dollars)
- --------------------------------------------------------------------------------
VIQ INM Adjustments Pro-forma
(Audited) (Audited) (Unaudited) (Unaudited)
ASSETS
Current
Cash and cash equivalents $ 804,755 $ 43,940 $ - $ 848,695
Short term investments 161,222 - - 161,222
Receivables 1,709,478 288,370 - 1,997,848
Current portion of notes receivable 98,990 - - 98,990
Inventories 539,939 - - 539,939
Prepaids 65,451 3,193 (50,000) 18,644
------------ ----------- ------------ ------------
3,379,835 335,503 (50,000) 3,665,338
Notes receivable 318,809 - - 318,809
Investment in INM 2,108,602 - (2,108,602) -
Capital assets 387,176 77,995 - 465,171
Intangibles 655,957 8,176 6,438,438 7,102,571
------------ ----------- ------------ ------------
$ 6,850,379 $ 421,674 $ 4,279,836 $ 11,551,889
============ =========== ============ ============
- ------------------------------------------------------------------------------------------------
LIABILITIES
Current
Payables and accruals $ 2,337,778 $ 137,247 $ (29,535) $ 2,445,490
Deferred revenue 20,230 50,000 (50,000) 20,230
Current portion of long term debt 601,400 92,400 - 693,800
------------ ----------- ------------ ------------
2,959,408 279,647 (79,535) 3,159,520
Long term debt 945,706 93,615 - 1,039,321
Due to related parties - 716,783 (625,000) 91,783
------------ ----------- ------------ ------------
3,905,114 1,090,045 (704,535) 4,290,624
------------ ----------- ------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Capital stock 21,792,276 936,257 3,379,743 26,108,276
Deficit (18,847,011) (1,604,628) 1,604,628 (18,847,011)
------------ ----------- ------------ ------------
2,945,265 (668,371) 4,984,371 7,261,265
------------ ----------- ------------ ------------
$ 6,850,379 $ 421,674 $ 4,279,836 $ 11,551,889
============ =========== ============ ============
- ------------------------------------------------------------------------------------------------
On behalf of the Board
"Terry Graham" Director "C. Wallis King" Director
- ---------------------------------------- ---------------------------------------
See accompanying notes to the pro-forma consolidated financial statements.
[GRANT THORTON LOGO] 3
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VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
September 30, 2000
(in Canadian dollars)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The pro-forma consolidated financial statements have been prepared by management
in accordance with Canadian generally accepted accounting principles and the
pro-forma assumptions and adjustments described in these notes.
The pro-forma consolidated financial statements are based upon the audited
consolidated financial statements of VoiceIQ Inc. (VIQ) for the year ended
September 30, 2000 and the audited balance sheet of International Neural
Machines Inc. (INM) at September 30, 2000 and the unaudited statement of
operations for the year then ended.
The operating results presented in the pro-forma consolidated financial
statements are not necessarily indicative of the future combined operating
results nor of operating results that would have been reported had the
businesses previously been combined.
The pro-forma consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto of VIQ and
the audited financial statements and notes thereto of INM included in the 20-F
filing.
- --------------------------------------------------------------------------------
2. PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS ASSUMPTIONS
The pro-forma consolidated financial statements have been prepared to give
effect to the following:
(a) For balance sheet purposes, it is assumed that the acquisition of the
remaining equity interest in INM took place on September 30, 2000 rather
than subsequent to year end. This results in 100% ownership of INM and
requires full consolidation of the two companies as at September 30,
2000. The goodwill related to the acquisition was calculated on a stepped
basis based on the fair value of the net assets of INM on April 12, 2000
and September 30, 2000.
(b) For statement of operations purposes, it is assumed that the full 100%
acquisition of INM by VIQ occurred on October 1, 1999 rather than on a
stepped basis on April 12, 2000 and subsequent to September 30, 2000.
This requires full consolidation of the two companies for the year ended
September 30, 2000. The goodwill related to the acquisition was
calculated on the same basis as the pro-forma balance sheet.
(c) For statement of operations purposes, it was assumed that the initial
acquisition of the equity interest in INM was financed through the
issuance of 400,000 common shares of VIQ and the issuance of 245,098
special warrants on October 1, 1999 versus April 12, 2000. It is also
assumed that the special warrants were converted to common shares on
September 7, 2000. It is assumed that the acquisition of the remaining
equity interest in INM was financed through the issuance of 4,316,000
common shares of VIQ for proceeds of $4,316,000 on September 30, 2000 for
balance sheet purposes and October 1, 1999 for statement of operations
purposes, versus subsequent to September 30, 2000.
[GRANT THORTON LOGO] 4
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VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
September 30, 2000
(in Canadian dollars)
- --------------------------------------------------------------------------------
3. PROFORMA ADJUSTMENTS
(1) The purchase price has been allocated as follows:
Fair value of net assets (deficit) acquired $ (681,900)
===========
Acquisition price
April 12, 2000 1,645,000
Subsequent to September 30, 2000 4,316,000
-----------
$ 5,961,000
===========
Allocation
Net liabilities $ (681,900)
Goodwill, to be amortized on a straight line
basis over seven years 6,642,900
-----------
$ 5,961,000
===========
(2) For balance sheet purposes:
o $50,000 of intercompany amounts have been eliminated from prepaids
and deferred revenue.
o The investment in INM of $2,108,602 has been eliminated.
o The net book value of goodwill totalling $6,519,563 has been
recorded as an intangible.
o Unrealized profit included in deferred product development
totalling $81,125 has been eliminated from intangibles.
o Accrued interest totalling $29,535 on the debenture payable by INM
to VIQ has been eliminated.
o The debenture payable totalling $625,000 by INM to VIQ has been
eliminated.
o The capital stock of INM totalling $936,257 has been eliminated.
o The capital stock of VIQ issued to acquire the remaining equity
interest in INM totalling $4,316,000 has been recorded.
o The deficit in INM totalling $1,604,628 has been eliminated.
(3) For statement of operations purposes:
o $600,000 of revenue recorded in INM that was recorded as deferred
product development in VIQ has been reversed. $295,000 of this
represents the unrealized profit included in deferred development
costs, so only $305,000 has been reversed from research and
development costs.
o $46,827 of intercompany revenue has been eliminated from sales and
cost of sales.
o $29,535 has been eliminated from interest income and selling and
administrative expenses related to interest on the intercompany
debenture.
o Amortization of $949,712 on the goodwill related to INM has been
recorded as a selling and administrative expense.
o The loss from equity investment related to INM has been
eliminated.
[GRANT THORTON LOGO] 5
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VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
September 30, 2000
(in Canadian dollars)
- --------------------------------------------------------------------------------
4. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA
In certain respects, Canadian generally accepted accounting principles
("Canadian GAAP") differ from United States generally accepted accounting
principles ("U.S. GAAP").
Pro-forma consolidated statement of operations
Net loss according to Canadian GAAP $(6,011,788)
Deferred development costs, net of related amortization (i) (305,000)
Deferred foreign exchange gain (ii) (43,900)
Unrealized losses on available for sale securities (iii) 527,778
-----------
Net loss according to U.S. GAAP $(5,832,910)
===========
Net loss per common share according to U.S. GAAP, basic and diluted $ (0.44)
===========
Net loss according to U.S. GAAP $(5,832,910)
Unrealized losses on available for sale securities (527,778)
-----------
Comprehensive loss according to U.S. GAAP $(6,360,688)
===========
(i) Under Canadian GAAP, development costs that meet specific criteria
related to technical, market and financial feasibility are deferred and
amortized on a straight line basis over the estimated product life, not
to exceed three years. Under U.S. GAAP, these expenditures must be
expensed as incurred.
(ii) Under Canadian GAAP, unrealized gains and losses arising from the
translation of long-term monetary assets and liabilities denominated in
foreign currencies are deferred and amortized over the remaining lives of
the related items. Under U.S. GAAP, such gains and losses are included in
earnings.
(iii) Under Canadian GAAP, unrealized losses on available for sale securities
(short term investments) are included in earnings as are subsequent
unrealized recoveries, to the extent of original cost. Under U.S. GAAP,
unrealized gains and losses on available for sale securities are included
in a separate component of shareholders' equity and only realized gains
and losses are included in earnings.
Pro-forma consolidated balance sheet
Canadian GAAP Adjustment U.S. GAAP
--------------- ------------- ---------------
Current assets (i) $ 3,665,338 $ (33,990) $ 3,631,348
Notes receivable (i) 318,809 (318,809) -
Capital assets 465,171 - 465,171
Intangibles (ii) 7,102,571 (518,875) 6,583,696
--------------- ------------- ---------------
$ 11,551,889 $ (871,674) $ 10,680,215
=============== ============= ===============
[GRANT THORTON LOGO] 6
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VOICEIQ INC. (FORMERLY BCB VOICE SYSTEMS INC.)
NOTES TO THE PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - See Compilation Report)
September 30, 2000
(in Canadian dollars)
- --------------------------------------------------------------------------------
4. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES OF AMERICA (CONTINUED)
Canadian GAAP Adjustment U.S. GAAP
--------------- ------------- ---------------
Current liabilities $ 3,159,520 $ - $ 3,159,520
Long term debt 1,039,321 - 1,039,321
Due to related parties 91,783 - 91,783
Capital stock (i) 26,108,276 (352,799) 25,755,477
Unrealized losses on available for
sale securities (iii) - (527,778) (527,778)
Deficit (iv) (18,847,011) 8,903 (18,838,108)
--------------- ------------- ---------------
$ 11,551,889 $ (871,674) $ 10,680,215
=============== ============= ===============
(i) Under U.S. GAAP, share purchase loans must be netted against capital
stock. Under Canadian GAAP, share purchase loans that meet specific
criteria regarding recoverability are recorded as assets on the balance
sheet. Notes receivable, current assets and capital stock have been
adjusted for the effect of these loans.
(ii) Intangibles have been adjusted for the effect of deferred development
costs as disclosed in footnote (i) to the consolidated statement of
operations.
(iii) The unrealized losses on available for sale securities have been adjusted
as disclosed in footnote (iii) to the consolidated statement of
operations.
(iv) The deficit adjustment reflects the cumulative effect of the adjustments
outlined in (ii) and (iii) above.
[GRANT THORTON LOGO] 7