<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 September 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 (972) 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.
7,187,120 SHARES of Common Stock, $.01 par value outstanding at
September 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
September 30,
1996
------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,618,952
Accounts receivable (net of $55,000 allowance
for doubtful accounts) (Note 6) 3,207,106
Inventory 518,858
Prepaid expenses 70,554
------------
TOTAL CURRENT ASSETS 19,415,470
NET PROPERTY AND EQUIPMENT 756,558
OTHER ASSETS 160,724
------------
$ 20,332,752
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 4) $ 359,451
Deferred revenue 250,228
Convertible note 1,165,878
------------
TOTAL CURRENT LIABILITIES 1,775,557
LONG TERM DEBT --
------------
TOTAL LIABILITIES 1,775,557
------------
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; 7,187,120 issued and outstanding 71,871
Paid-in capital 25,671,405
Receivable from shareholders (44,068)
Deficit (7,142,013)
------------
TOTAL STOCKHOLDERS' EQUITY 18,557,195
------------
$ 20,332,752
============
</TABLE>
F-3
<PAGE> 4
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
SALES (NOTE 6) $ 2,404,449 2,893,771 6,448,786 7,811,825
COST OF SALES 333,801 1,016,678 1,125,327 2,626,239
----------- ----------- ------------ -----------
GROSS PROFIT 2,070,648 1,877,093 5,323,459 5,185,586
COSTS AND EXPENSES:
Research and development 758,755 644,735 2,217,641 1,878,759
Selling, general and administrative 1,021,905 889,999 2,780,863 2,530,841
Other interest expense (Income), net (198,405) (8,422) (473,635) (24,279)
Interest, to affiliates 30,016 33,730 89,645 109,730
----------- ----------- ------------ -----------
TOTAL COSTS AND EXPENSES 1,612,271 1,560,042 4,614,514 4,495,051
----------- ----------- ------------ -----------
NET INCOME BEFORE TAXES 458,377 317,051 708,945 690,535
INCOME TAXES (NOTE 5) 11,000 10,000 14,000 10,000
----------- ----------- ------------ -----------
NET INCOME $ 447,377 $ 307,051 $ 694,945 $ 680,535
=========== =========== ============ ===========
NET INCOME PER SHARE:
Primary $ 0.05 $ 0.05 $ 0.08 $ 0.11
=========== =========== ============ ===========
Fully diluted $ 0.05 $ 0.05 $ 0.08 $ 0.10
=========== =========== ============ ===========
WEIGHTED AVERAGE OUTSTANDING SHARES:
Primary 9,178,674 6,693,083 8,917,972 6,492,903
=========== =========== ============ ===========
Fully diluted 9,178,674 6,803,800 8,917,972 6,754,263
=========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 5
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Nine months Ended September 30,
----------------------------------
1996 1995
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 694,945 $ 680,535
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 147,450 156,205
Changes in operating assets and liabilities:
Accounts receivable (2,162,806) (554,955)
Inventory 294,310 (358,304)
Prepaid expenses 30,771 (116,379)
Other assets (56,582) 2,408
Accounts payable and accrued expenses 138,223 41,216
Deferred revenue (16,844) 253,688
------------- -----------
Net cash provided by (used in) operating activities (930,531) 104,414
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES:
Capital expenditures (386,663) (137,206)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of principal on notes payable (1,982) (114,694)
Proceeds from sale of assets -- 150,200
Proceeds from note receivable 35,627 --
Net proceeds from common stock issuance (Note 3) 14,429,946 --
Proceeds from exercise of stock options 213,657 399,983
------------- -----------
Net cash provided by financing activities 14,677,248 435,489
------------- -----------
Net increase in cash and cash equivalents 13,360,052 402,497
Cash and cash equivalents at beginning of year 2,258,900 1,075,527
------------- -----------
Cash and cash equivalents at September 30 $15,618,952 $ 1,478,024
============= ===========
Supplemental disclosures of cash flow information
Interest paid $ 2,220 $ 19,092
============= ===========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 6
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 nine months
ending September 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
September 30, 1996:
<TABLE>
<S> <C>
Accounts payable $ 188,156
Accrued expenses 171,295
---------
$ 359,451
=========
</TABLE>
F-6
<PAGE> 7
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
5. INCOME TAXES
Net operating loss ("NOL") carry forwards expiring from 1996 to 2009
totaling approximately $14,352,000 are available at September 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 for the nine months ended September 30:
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Income taxes at the statutory rate $ 240,000 $ 235,000
State taxes based on income 32,000 31,000
Effect on taxes resulting from:
Utilization of NOL carry forwards (272,000) (266,000)
Federal Alternative Minimum Taxes 14,000 10,000
------------- -----------
$ 14,000 $ 10,000
============= ===========
</TABLE>
The Company has provided an allowance for its entire deferred tax
asset, relating primarily to NOL carry forwards of approximately $4,880,000 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
Four customers accounted for 36%, 21%, 11% and 11% of total sales
revenue for the nine months ended September 30, 1996. Two customers accounted
for 60% and 10% of total sales revenue for the nine months ended September 30,
1995.
The Company's largest customer is also the holder of its short term
convertible debt. During the nine months ended September 30, 1996, the Company
converted the interest on its convertible note to 131,903 shares of stock at a
conversion rate of $0.9188. Accounts receivable from the largest customer was
6% of the total receivable balance at September 30, 1996.
F-7
<PAGE> 8
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
7. MERGER
Voice Control Systems and Voice Processing Corporation, a private
company, entered into an agreement to merge in June of 1996. The merger was
approved by the shareholders in October of 1996. Each share of Voice Processing
Corporation's stock, on a fully diluted basis, will be exchanged for .87091
shares of Voice Control Systems' stock in a transaction accounted for as a
pooling of interest.
The following summarized unaudited pro forma results of operations for
the three and nine months ended September 30, 1995 and 1996 assume the merger
occurred as of the beginning of the respective periods. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations which actually would have resulted had
the combination been in effect on the dates indicated, or which may result in
the future. The pro forma data gives effect to the merger under the
pooling-of-interest method of accounting.
<TABLE>
<CAPTION>
Three Months Nine months
Ended September 30, Ended September 30,
1996 1995 1996 1995
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
SALES $ 4,078,730 4,797,932 10,854,414 11,498,557
NET INCOME (LOSS) $ 153,214 (288,162) (739,860) (1,647,265)
NET INCOME (LOSS) PER SHARE: $ 0.01 $ (0.05) $ (0.08) $ (0.28)
=========== ============= ============ =============
WEIGHTED AVERAGE OUTSTANDING SHARES: 12,757,760 6,074,110 8,887,322 5,887,665
=========== ============= ============ =============
</TABLE>
F-8
<PAGE> 9
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Nine months Ended September 30, 1996 vs. September 30, 1995
Sales decreased 17% from $7,812,000 during the nine months ending September 30,
1995 to $6,449,000 during the nine months ending September 30, 1996. Four
customers, Dialogic, Periphonics, Brite Voice Systems and Intervoice, accounted
for 36%, 21%, 11% and 11%, respectively, of total sales for the nine months
ending September 30, 1996. Dialogic and Periphonics accounted for 60% and 10%,
respectively, of total sales for the nine months ending September 30, 1995.
Royalty, development and license fees, which increased 53% over the nine months
ending September 30, 1995, were 38% of total revenues for the nine months
ending September 30, 1996. Hardware sales, which decreased 39% over the nine
months ending September 30, 1995, were 57% of revenues in the nine months
ending September 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 66% in the nine months ending September 30, 1995 to 83% 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 $1,879,000 in the nine
months ending September 30, 1995 to $2,218,000 in the nine months ending
September 30, 1996. This increase reflects costs associated with the retention
and recruitment of qualified employees in research and product development.
Selling, general, and administrative expenses increased 10% from $2,531,000 in
the nine months ending September 30, 1995 to $2,780,000 in the nine months
ending September 30, 1996.
Net operating loss ("NOL") carryforwards expiring from 1996 to 2009 totaling
approximately $14,352,000 were available as of September 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 $4,880,000. 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.
9
<PAGE> 10
Three Months Ended September 30, 1996 vs. September 30, 1995
Sales decreased 17% from $2,894,000 during the three months ending September
30, 1995 to $2,404,000 during the three months ending September 30, 1996.
Three customers, Periphonics, Dialogic and Brite Voice Systems, accounted for
28%, 27% and 19%, respectively, of total sales for the three months ending
September 30, 1996. Dialogic and Periphonics accounted for 58% and 15% of
total sales, respectively, for the three months ending September 30, 1995.
Royalty, development and license fees, which increased 87% over the three
months ending September 30, 1995, were 38% of total revenues for the three
months ending September 30, 1996. Hardware sales, which decreased 41% over the
three months ending September 30, 1995, were 58% of revenues in the three
months ending September 30, 1996. This decrease is a result of the company's
continued conversion from primarily a hardware company to 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 65% in the three months ending September 30, 1995 to 86% 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 $645,000 in the three
months ending September 30, 1995 to $759,000 in the three months ending
September 30, 1996. This increase reflects costs associated with the retention
and recruitment of qualified employees in research and product development.
Selling, general, and administrative expenses increased 15% from $890,000 in
the three months ending September 30, 1995 to $1,022,000 in the three months
ending September 30, 1996 primarily due to employee additions in the sales
force and expenses related to registering trademarks.
10
<PAGE> 11
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 September 30, 1996 was $17,640,000. 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 September 30, 1996, the Company held $15,619,000 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 136 days as of September 30, 1996.
The Company's inventory as of September 30, 1996 was $519,000 of which the
largest component is 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 September 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 $387,000 for the nine months ended
September 30, 1996. The expenditures were primarily for a new telephone/voice
mail system, leasehold improvements, 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.
11
<PAGE> 12
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.
12
<PAGE> 13
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: November 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
13
<PAGE> 14
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
- -------
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,618,952
<SECURITIES> 0
<RECEIVABLES> 3,207,106
<ALLOWANCES> 55,000
<INVENTORY> 518,858
<CURRENT-ASSETS> 19,415,470
<PP&E> 1,933,920
<DEPRECIATION> 1,177,362
<TOTAL-ASSETS> 20,332,752
<CURRENT-LIABILITIES> 1,775,557
<BONDS> 0
0
0
<COMMON> 71,871
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,332,752
<SALES> 2,404,449
<TOTAL-REVENUES> 2,404,449
<CGS> 333,801
<TOTAL-COSTS> 333,801
<OTHER-EXPENSES> 1,582,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,016
<INCOME-PRETAX> 458,377
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 447,377
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
