<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
-----------------------------------
Quarter Ended March 31, 1996 Commission File No. 0-10385
VOICE CONTROL SYSTEMS, INC.
(Name of small business issuer in its charter)
DELAWARE 75-1707970
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14140 MIDWAY ROAD
DALLAS, TEXAS 75244 (214) 726-1200
(Address of principal executive (Registrant's telephone
offices) number, including area code)
_________________________________________
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 twelve 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,999,623 shares of Common Stock, $.01 par value outstanding at March 31,
1996.
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VOICE CONTROL SYSTEMS, INC.
FORM 10-QSB QUARTERLY REPORT
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to S.E.C. rules and
regulations although the Company believes the disclosures made are adequate to
make the information presented not misleading, and in the opinion of
management, all adjustments have been reflected which are necessary for a fair
statement of the information shown.
2
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VOICE CONTROL SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31,
1996
-------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,295,475
Accounts receivable (net of $59,000 allowance
for doubtful accounts) (Note 6) 1,938,251
Inventory 660,808
Prepaid expenses 37,955
------------
TOTAL CURRENT ASSETS 18,932,489
NET PROPERTY AND EQUIPMENT 675,278
OTHER ASSETS 20,551
------------
$ 19,628,318
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 4) $ 445,836
Deferred revenue 192,268
Convertible note 1,167,260
------------
TOTAL CURRENT LIABILITIES 1,805,364
LONG TERM DEBT --
------------
TOTAL LIABILITIES 1,805,364
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; $1.00 par value; 300,000 shares authorized;
none issued and outstanding --
Common stock, $.01 par value: 20,000,000 shares
authorized; 6,999,623 issued and outstanding 69,996
Paid-in capital 25,410,490
Receivable from shareholders (44,067)
Deficit (7,613,465)
------------
TOTAL STOCKHOLDERS' EQUITY 17,822,954
------------
$ 19,628,318
============
</TABLE>
F-3
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VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended 31,
-----------------------------------
1996 1995
------------- --------------
<S> <C> <C>
SALES (NOTE 6) $ 2,410,740 $ 2,147,999
COST OF SALES 535,237 655,178
----------- -----------
GROSS PROFIT 1,875,503 1,492,821
COSTS AND EXPENSES:
Research and development 745,129 618,707
Selling, general and administrative 876,945 765,899
Interest, to affiliates 29,936 37,345
----------- -----------
TOTAL COSTS AND EXPENSES 1,652,010 1,421,951
----------- -----------
NET INCOME BEFORE TAXES 223,493 70,870
----------- -----------
INCOME TAXES (NOTE 5) -- --
----------- -----------
NET INCOME $ 223,493 $ 70,870
=========== ===========
NET INCOME PER SHARE:
Primary $ 0.03 $ 0.01
=========== ===========
Fully diluted $ 0.03 $ 0.01
=========== ===========
WEIGHTED AVERAGE OUTSTANDING SHARES:
Primary 7,897,173 5,177,922
=========== ===========
Fully diluted 7,997,150 6,719,603
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
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VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1996 1995
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 223,493 $ 70,870
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 41,651 54,160
Changes in operating assets and liabilities:
Accounts receivable (893,952) (246,554)
Inventory 152,361 87,652
Prepaid expenses 63,370 (82,604)
Other assets 83,592 591
Accounts payable and accrued expenses 138,230 15,390
Deferred revenue (74,802) 37,299
------------- ------------
Net cash used in operating activities (266,057) (63,196)
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES:
Capital expenditures (199,585) (48,119)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of principal on notes payable (601) (110,692)
Proceeds from sale of assets -- 150,200
Proceeds from note receivable 35,627 --
Net proceeds from common stock issuance (Note 3) 14,432,202 --
Proceeds from exercise of stock options 34,989 22,267
------------- ------------
Net cash provided by financing activities 14,502,217 61,775
------------- ------------
Net increase (decrease) in cash and cash equivalents 14,036,575 (49,540)
Cash and cash equivalents at beginning of year 2,258,900 1,075,527
------------- ------------
Cash and cash equivalents at end of quarter $ 16,295,475 $ 1,025,987
============= ============
Supplemental disclosures of cash flow information
Interest paid $ 1,752 $ 8,614
============= ============
</TABLE>
See accompanying notes to financial statements
F-5
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VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS
Voice Control Systems, Inc. (the "Company" or "VCS") engages in the
design of voice recognition systems that allow for the voice control of
electronic machines and/or devices. Operating results for the three months
ending March 31, 1996 are not necessarily indicative of the expected results
for the year. The unaudited financial statements include all adjustments,
consisting primarily of normal recurring accruals, which management considers
necessary for a fair presentation of such information.
2. PER SHARE INFORMATION
Earnings per common and common equivalent share are computed based
upon the weighted average number of outstanding shares of common stock and
common stock equivalents.
3. STOCK OFFERING
On February 14, 1996, the Company completed the sale of 1,269,402
shares of common stock. In March 1996, the underwriters exercised their
overallotment option for an additional 220,500 shares of common stock. Net
proceeds to the Company from the stock offering totaled $14,432,000.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
March 31, 1996:
Accounts payable $ 285,040
Accrued expenses 160,796
---------
$ 445,836
=========
5. INCOME TAXES
Net operating loss ("NOL") carry forwards expiring from 1996 to 2010
totaling approximately $14,824,000 are available at March 31, 1996 to offset
future periods taxable income. Effective as of August 11, 1994 an ownership
change as defined by the Internal Revenue Code Section 382 occurred. The
effect of such change will be to limit the use of the CompanyGs NOL in future
years to approximately $1,355,000 annually.
The following reconciles income tax expense at the federal statutory
rate to the actual tax expense at March 31:
<TABLE>
<CAPTION>
1996 1995
----------------- -------------
<S> <C> <C>
Income taxes at the statutory rate $ 76,000 $ 24,000
State taxes based on income 10,000 3,000
Effect on taxes resulting from:
Utilization on NOL carry forwards (86,000) (27,000)
Federal Alternative Minimum Taxes -- --
----------------- --------------
$ -- $ --
================= ==============
</TABLE>
F-6
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VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
5. INCOME TAXES (CONCLUDED)
The Company has provided an allowance for its entire deferred tax
asset, relating primarily to NOL carry forwards of approximately $5,040,000, as
its realization is dependent upon future generation of taxable income. Until
such realization can be reasonably determined, management will continue to
provide an allowance for the entire deferred tax asset.
6. MAJOR CUSTOMERS
Two customers accounted for 45% and 16% of total sales revenue for the
three months ended March 31, 1996. One customer accounted for 58% of total
sales revenue for the three months ended March 31, 1995.
The Company's largest customer is also the holder of its short term
convertible debt. Accounts receivable from the largest customer was 28% of the
total receivable balance at March 31, 1996.
F-7
<PAGE> 8
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 vs. March 31, 1995
Sales increased 12% from $2,148,000 during the first three months of 1995 to
$2,411,000 during the first three months of 1996. Two customers, Dialogic and
Periphonics, accounted for 45% and 16%, respectively, of total sales for the
first three months of 1996. Dialogic accounted for 58% of total sales for the
first three months of 1995. Royalty, development and license fees, which
increased 33% over the first three months of 1995, were 32% of total revenues
for the first three months of 1996 and were responsible for 61% of the increase
in sales in the first quarter of 1996. Hardware sales, which decreased 4% over
the first three months of 1995, were 58% of revenues in the first three months
of 1996.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased
from 69% in the first three months of 1995 to 78% in the comparable 1996 period
as a result of the decrease in hardware sales and the increase in royalty,
development and license fees.
Research and development expenses increased 20% from $619,000 in the first
three months of 1995 to $745,000 in the first three months of 1996. This
increase reflects costs associated with increased employee benefits, the
addition of three employees in research and product development, and consulting
fees incurred.
Selling, general, and administrative expenses increased 14% from $766,000 in
the first three months of 1995 to $877,000 in the first three months of 1996.
This increase was due primarily to costs associated with increased employee
benefits and the addition of three employees. Selling, general and
administrative expenses as a percent of sales remained constant when comparing
the first three months of 1995 to the first three months of 1996.
Net operating loss ("NOL") carryforwards expiring from 1996 to 2010 totaling
approximately $14,824,000 were available as of March 31,1996 to offset future
periods taxable income. The Company has provided an allowance against its
entire deferred tax asset relating primarily to NOL carry forward of
approximately $5,040,000. Effective August 11, 1994, an ownership change as
defined by the Internal Revenue Code Section 382 occurred. The effect of such
change limits the use of the Company's NOL in future years to approximately
$1,355,000 annually. Federal income taxes and state franchise taxes based on
income were offset by net operating loss carryforwards thus far in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements to date have been to fund working
capital and capital expenditures in order to support its sales growth. Net
working capital at March 31, 1996 was $17,127,000. In the past, the Company's
working capital needs were financed primarily through cash flow from operations
and proceeds from the exercise of stock options. A stock offering was
completed during the first quarter of 1996 that increased the net working
capital to $17,127,000.
8
<PAGE> 9
At March 31, 1996, the Company held $16,295,000 in cash and cash equivalents.
The stock offering completed in the first quarter provided net proceeds of
$14,432,000 to the Company. Generally, the Company's primary source of
liquidity is the timely collection of its accounts receivable. The average
days sales in accounts receivable was 73 days for the first quarter 1996.
The Company's inventory as of March 31, 1996 was $661,000 and primarily
consists of the Company's Personal Voice Dialer. The Personal Voice Dialer is
being sold through catalogues and other direct marketing avenues that require
the Company to carry sufficient inventory to fill orders in a relatively short
period of time.
The Company's debt at March 31, 1996 consisted of a convertible promissory note
due to Dialogic on January 1, 1997. Dialogic converted accrued interest on its
note to Common Stock during 1995 and 1996.
The Company's capital expenditures were $200,000 for the three months ended
March 31, 1996. The expenditures were primarily for a new telephone/voice mail
system, office furniture and computer equipment.
VCS believes that its existing sources of liquidity, funds generated by
operations and the funds received from the stock offering will be sufficient to
provide the capital resources necessary to support increased operating needs
and finance continued growth in the foreseeable future.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter covered by this report.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOICE CONTROL SYSTEMS, INC.
Dated: May 13, 1996 By: /s/ Peter J. Foster
----------------------
Peter J. Foster
Chief Executive Officer and President
/s/ Kim S. Terry
----------------------
Kim S. Terry
Principal Financial and Accounting Officer
11
<PAGE> 12
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 16,295,475
<SECURITIES> 0
<RECEIVABLES> 1,938,251
<ALLOWANCES> 59,000
<INVENTORY> 660,808
<CURRENT-ASSETS> 18,932,489
<PP&E> 1,745,406
<DEPRECIATION> 1,070,128
<TOTAL-ASSETS> 19,628,318
<CURRENT-LIABILITIES> 1,805,364
<BONDS> 0
<COMMON> 69,996
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,628,318
<SALES> 2,410,740
<TOTAL-REVENUES> 2,410,740
<CGS> 535,237
<TOTAL-COSTS> 535,237
<OTHER-EXPENSES> 1,622,074
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,936
<INCOME-PRETAX> 223,493
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223,493
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
