<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 June 30, 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.
X Yes No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,031,184 SHARES of Common Stock, $.01 par value
outstanding at June 30, 1996.
<PAGE> 2
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
<PAGE> 3
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30,
1996
------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 16,364,547
Accounts receivable (net of $1800 allowance
for doubtful accounts) (Note 6) 1,804,561
Inventory 493,284
Prepaid expenses 79,027
------------
TOTAL CURRENT ASSETS 18,741,419
NET PROPERTY AND EQUIPMENT 720,217
OTHER ASSETS 57,211
------------
$ 19,518,847
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 4) $ 261,418
Deferred revenue 169,115
Convertible note 1,166,584
------------
TOTAL CURRENT LIABILITIES 1,597,117
LONG TERM DEBT --
------------
TOTAL LIABILITIES 1,597,117
------------
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; 7,031,184 issued and outstanding 70,312
Paid-in capital 25,484,877
Receivable from shareholders (44,068)
Deficit (7,589,391)
------------
TOTAL STOCKHOLDERS' EQUITY 17,921,730
------------
$ 19,518,847
============
</TABLE>
F-3
<PAGE> 4
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
SALES (NOTE 6) $ 1,718,577 2,781,210 4,044,336 4,921,903
COST OF SALES 256,289 954,381 791,526 1,609,560
----------- ------------ ------------- ------------
GROSS PROFIT 1,462,288 1,826,829 3,252,810 3,312,343
COSTS AND EXPENSES:
Research and development 713,759 615,317 1,458,887 1,234,023
Selling, general and administrative 886,762 871,552 1,761,952 1,629,147
Other interest expense (Income), net (191,997) (8,240) (275,226) (15,546)
Interest, to affiliates 29,690 37,345 59,629 75,689
----------- ------------ ------------- ------------
TOTAL COSTS AND EXPENSES 1,438,214 1,532,454 3,005,242 2,954,405
----------- ------------ ------------- ------------
NET INCOME BEFORE TAXES 24,074 302,615 247,568 373,484
INCOME TAXES (NOTE 5) - - - -
----------- ------------ ------------- ------------
NET INCOME $ 24,074 $ 302,615 $ 247,568 $ 373,484
=========== ============ ============= ============
NET INCOME PER SHARE:
Primary $ 0.00 $ 0.05 $ 0.03 $ 0.06
=========== ============ ============= ============
Fully diluted $ 0.00 $ 0.05 $ 0.03 $ 0.06
=========== ============ ============= ============
WEIGHTED AVERAGE OUTSTANDING SHARES:
Primary 9,360,502 6,590,348 8,605,486 6,564,274
=========== ============ ============= ============
Fully diluted 9,360,502 6,590,348 8,610,980 6,564,274
=========== ============ ============= ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 5
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 247,568 $ 373,484
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 91,459 114,206
Changes in operating assets and liabilities:
Accounts receivable (760,263) (63,712)
Inventory 319,884 (349,179)
Prepaid expenses 22,298 (41,154)
Other assets 46,932 5,769
Accounts payable and accrued expenses (46,188) 92,073
Deferred revenue (97,956) 100,240
----------- -----------
Net cash provider by operating activities (176,266) 231,727
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES:
Capital expenditures (294,331) (90,941)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of principal on notes payable (1,277) (112,795)
Proceeds from sale of assets -- 150,200
Proceeds from note receivable 35,627 --
Net proceeds from common stock issuance (Note 3) 14,429,947 --
Proceeds from exercise of stock options 111,947 29,013
----------- -----------
Net cash provided by financing activities 14,576,244 66,418
----------- -----------
Net increase in cash and cash equivalents 14,105,647 207,204
Cash and cash equivalents at beginning of year 2,258,900 1,075,527
----------- -----------
Cash and cash equivalents at June 30 $16,364,547 $ 1,282,731
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 2,001 $ 16,002
=========== ===========
</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 six months ending
June 30, 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 $14,430,000.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at June
30, 1996:
<TABLE>
<S> <C>
Accounts payable $ 118,334
Accrued expenses 143,084
---------
$ 261,418
=========
</TABLE>
5. INCOME TAXES
Net operating loss ("NOL") carry forwards expiring from 1996 to 2009
totaling approximately $14,799,000 are available at June 30, 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. As a
result of the change, the use of the Company's NOL in future years is limited
to approximately $1,355,000 annually.
The following reconciles income tax expense at the federal statutory
rate to the actual tax expense at June 30:
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C> <C>
Income taxes at the statutory rate $ 84,000 $ 127,000
State taxes based on income 11,000 17,000
Effect on taxes resulting from:
Utilization of NOL carry forwards (95,000) (144,000)
------------- ----------
$ -- $ --
============= ==========
</TABLE>
F-6
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VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The Company has provided an allowance for its entire deferred tax
asset, relating primarily to NOL carry forwards of approximately $5,032,000, 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
Three customers accounted for 42%, 17% and 17% of total sales revenue
for the six months ended June 30, 1996. One customer accounted for 61% of
total sales revenue for the six months ended June 30, 1995.
The Company's largest customer is also the holder of its short term
convertible debt. Accounts receivable from the largest customer was 7% of the
total receivable balance at June 30, 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
Six Months Ended June 30, 1996 vs. June 30, 1995
Sales decreased 18% from $4,922,000 during the six months ending June 30, 1995
to $4,044,000 during the six months ending June 30, 1996. Three customers,
Dialogic, Brite Voice Systems and Periphonics, accounted for 42%, 17% and 17%,
respectively, of total sales for the six months ending June 30, 1996. Dialogic
accounted for 61% of total sales for the six months ending June 30, 1995.
Royalty, development and license fees, which increased 43% over the six months
ending June 30, 1995, were 38% of total revenues for the six months ending June
30, 1996. A one-time non-refundable fee charged to Brite Voice Systems for a
license to use one of the Company's application patents accounted for
approximately 21% of royalty, development and license fee revenues. Hardware
sales, which decreased 38% over the six months ending June 30, 1995, were 56%
of revenues in the six months ending June 30, 1996. This decrease is a result
of the company's continued conversion from primarily a hardware/software
supplier to become primarily a software supplier.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased
from 67% in the six months ending June 30, 1995 to 80% 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 18% from $1,234,000 in the six
months ending June 30, 1995 to $1,459,000 in the six months ending June 30,
1996. This increase reflects costs associated with the retention and
recruitment of highly qualified employees in research and product development.
Selling, general, and administrative expenses increased 8% from $1,629,000 in
the six months ending June 30, 1995 to $1,764,000 in the six months ending June
30, 1996.
Net operating loss ("NOL") carryforwards expiring from 1996 to 2009 totaling
approximately $14,799,000 were available as of June 30, 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 $5,032,000. Effective August 11, 1994, an ownership change as
defined by the Internal Revenue Code Section 382 occurred. As a result of the
change, 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 have been offset by net operating loss carryforwards thus far in 1996.
Three Months Ended June 30, 1996 vs. June 30, 1995
Sales decreased 38% from $2,781,000 during the second three months of 1995 to
$1,719,000 during the second three months of 1996. Three customers, Dialogic,
Brite Voice Systems and Periphonics, accounted for 38%, 32% and 20%,
respectively, of total sales for the second three months of 1996. Dialogic
accounted for 64% of total sales for the second three months of 1995. Royalty,
development and license fees, which increased 40% over the second three months
of 1995, were 44% of total revenues for the second three months of 1996. A
one-time non-refundable fee charged to Brite Voice Systems for a license to use
the Company's U.S. Patent No. 5,297,183
8
<PAGE> 9
accounted for approximately 43% of royalty, development and license fee
revenues. Hardware sales, which decreased 60% over the second three months of
1995, were 50% of revenues in the second three months of 1996. This decrease
is a result of the company's continued conversion from primarily a hardware
company to become primarily a software company.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased
from 66% in the second three months of 1995 to 85% 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 16% from $615,000 in the second
three months of 1995 to $714,000 in the second three months of 1996. This
increase reflects costs associated with the retention and recruitment of highly
qualified employees in research and product development.
Selling, general, and administrative expenses increased 2% from $872,000 in the
second three months of 1995 to $887,000 in the second three months of 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 June 30, 1996 was $17,144,000. 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 provided net proceeds of
$14,430,000 to the Company.
At June 30, 1996, the Company held $16,365,000 in cash and cash equivalents.
Cash and cash equivalents are invested in institutional cash investment
accounts with preservation of capital being the primary consideration. All
investments currently have overnight liquidity. Historically, the Company's
primary source of liquidity has been the timely collection of its accounts
receivable. The average days sales in accounts receivable was 81 days as of
June 30, 1996.
The Company's inventory as of June 30, 1996 was $493,000 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 June 30, 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 $294,000 for the six months ended June
30, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The annual meeting of stockholders was held May 6, 1996.
(b) The directors of the Company were re-elected to serve until
the next annual meeting of stockholders.
(c) The stockholders approved an amendment to the Company's 1992
Stock Option Plan which increased the number of shares reserved for issuance
under the plan from 600,000 to 900,000. 5,464,043 votes were cast for the
amendment, 493,244 were cast against the amendment and 43,442 abstained. The
stockholders also approved the appointment of BDO Seidman to serve as
independent auditors of the Company for 1996. 6,075,565 votes were cast for,
9,714 votes were cast against with 48,401 abstaining.
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: August 12, 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
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,364,547
<SECURITIES> 0
<RECEIVABLES> 1,804,561
<ALLOWANCES> 1,800
<INVENTORY> 493,284
<CURRENT-ASSETS> 18,741,419
<PP&E> 1,841,588
<DEPRECIATION> 1,121,371
<TOTAL-ASSETS> 19,518,847
<CURRENT-LIABILITIES> 1,597,117
<BONDS> 0
<COMMON> 70,312
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,518,847
<SALES> 1,718,577
<TOTAL-REVENUES> 1,718,577
<CGS> 256,289
<TOTAL-COSTS> 256,289
<OTHER-EXPENSES> 1,408,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,690
<INCOME-PRETAX> 24,074
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,074
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
