<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, 1997 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.
11,298,959 SHARES of Common Stock, $.01 par value outstanding at September
30, 1997.
<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
<TABLE>
<CAPTION>
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
===================================================================================================================
ASSETS
<S> <C>
Sept 30,
1997
--------------
CURRENT ASSETS:
Cash and cash equivalents $ 13,848,343
Accounts receivable (net of $130,000 allowance
for doubtful accounts) (Note 7) 3,033,828
Inventory 492,673
Prepaid expenses 178,927
--------------
TOTAL CURRENT ASSETS 17,553,771
NET PROPERTY AND EQUIPMENT 1,367,864
OTHER ASSETS 155,023
--------------
$ 19,076,658
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 5) $ 1,016,106
Deferred revenue 705,570
TOTAL CURRENT LIABILITIES 1,721,676
--------------
LONG TERM DEBT --
--------------
TOTAL LIABILITIES 1,721,676
--------------
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; 11,298,959 issued and outstanding 112,990
Paid-in capital 37,318,505
Receivable from shareholders (70,010)
Deficit (20,006,503)
--------------
TOTAL STOCKHOLDERS' EQUITY 17,354,982
--------------
$ 19,076,658
==============
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
<TABLE>
<CAPTION>
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
===================================================================================================================
Three Months Nine Months
Ended Sept 30, Ended Sept 30,
1997 1996 1997 1996
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
SALES (NOTE 7) $ 2,021,095 4,078,731 10,285,977 10,866,277
COST OF SALES 450,197 764,126 2,146,296 2,216,511
------------ ------------ ------------ --------------
GROSS PROFIT 1,570,898 3,314,605 8,139,681 8,649,766
COSTS AND EXPENSES:
Research and development 1,323,401 1,559,806 3,918,516 4,856,662
Selling, general and administrative 1,737,193 1,684,254 5,230,499 4,814,886
Other interest expense (Income), net (189,045) (198,405) (570,703) (467,275)
Interest, to affiliates 0 30,016 0 89,645
------------ ------------ ------------ --------------
TOTAL COSTS AND EXPENSES 2,871,549 3,075,671 8,578,312 9,293,918
------------ ------------ ------------ --------------
NET INCOME (LOSS) BEFORE TAXES (1,300,651) 238,934 (438,631) (644,152)
INCOME TAXES (NOTE 6) 0 0 10,750 0
------------ ------------ ------------ --------------
NET INCOME (LOSS) $ (1,300,651) $ 238,934 $ (449,381) $ (644,152)
============ ============ ============ ==============
NET INCOME PER SHARE:
Primary $ (0.10) $ 0.02 $ (0.04) $ (0.06)
============ ============ ============ ==============
Fully diluted $ (0.10) $ 0.02 $ (0.04) $ (0.06)
============ ============ ============ ==============
WEIGHTED AVERAGE OUTSTANDING SHARES:
Primary 12,641,141 11,464,948 12,720,217 11,148,234
============ ============ ============ ==============
Fully diluted 12,641,141 11,464,948 12,720,217 11,144,980
============ ============ ============ ==============
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
<TABLE>
<CAPTION>
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
=========================================================================================
Nine months Ended Sept 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (449,381) $ (644,152)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 379,942 335,970
Changes in operating assets and liabilities:
Accounts receivable (526,065) (1,854,798)
Inventory (39,995) 159,654
Prepaid expenses (83,725) 1,031
Other assets (103,161) (56,582)
Accounts payable and accrued expenses 35,688 529,088
Deferred revenue (720,193) 39,788
------------ ------------
Net cash used in operating activities (1,506,890) (1,490,001)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (277,665) (489,017)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of principal on notes payable -- (1,982)
Proceeds from note receivable 48,745 35,627
Proceeds from note payable -- 500,000
Net proceeds from common stock issuance (Note 4) -- 13,446,261
Proceeds from exercise of stock options 357,329 1,268,813
------------ ------------
Net cash provided by financing activities 406,074 15,248,719
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,378,481) 13,269,701
Cash and cash equivalents at beginning of year 15,226,824 2,556,717
------------ ------------
Cash and cash equivalents at September 30 $ 13,848,343 $ 15,826,418
============ ============
Supplemental disclosures of cash flow information
Interest paid $ 302 $ 89,645
Conversion of debt and interest by an affiliate
to 1,300,694 shares of stock 1,195,078 --
</TABLE>
See accompanying notes to financial statements
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, 1997 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. BUSINESS ACQUISITION
The Company and Voice Processing Corporation ("VPC") entered into an
Agreement and Plan of Merger, approved on October 29, 1996 by each Company's
stockholders of record, pursuant to which VPC was merged into the Company.
Effective November 4, 1996, all of VPC's common stock was converted into and
exchanged for 0.87091 shares of VCS common stock in a transaction accounted for
using the pooling-of-interest method of accounting. In addition, all options and
warrants to purchase VPC shares were exchanged for options and warrants to
purchase VCS shares at the 0.87091 exchange rate. The stock conversion referred
to above has been retroactively reflected in the financial statements for all
periods presented.
Separate results of operation for the periods prior to the merger with
VPC are provided below.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPT 30,
1996
<S> <C>
REVENUES:
VCS 6,448,786
VPC 4,417,491
----------
COMBINED 10,866,277
NET INCOME (LOSS):
VCS 694,945
VPC (1,339,097)
----------
COMBINED ( 644,152)
</TABLE>
6
<PAGE> 7
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
3. 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.
4. 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 and from stock options excerised
in conjunction with the offering totaled $14,432,000.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
September 30, 1997:
<TABLE>
<S> <C>
Accounts payable $ 436,033
Accrued expenses 580,073
-----------
$ 1,016,106
===========
</TABLE>
6. INCOME TAXES
The combined net operating loss (NOL) carryforwards of the merged
Company expire from 1997 to 2011 and total approximately $24,256,000 as of
September 30, 1997. The Company has provided an allowance against its entire
deferred tax asset relating primarily to NOL carryforwards of approximately
$8,247,000. In connection with the acquisition of VCS Industries, Inc.,
effective as of August 11, 1994, the Company had an ownership change as defined
by Internal Revenue Code Section 382 (IRC 382). The effect of such change
limited the use of the Company's NOL in future years to approximately
$1,355,000 annually. In connection with the merger with VPC, VPC had an
ownership change as defined by IRC 382. The effect of such change limits the
use of VPC's NOL in future years to approximately $850,000 annually. On a
combined basis, the NOL of the Company is limited in its use against future
earnings, if any, to approximately $2,205,000 annually.
The Company has provided an allowance for its entire deferred tax asset
as its realization is dependent upon future generation of taxable income, which
is not assured. Until such realization can be reasonably determined based on
established sources of earnings sufficient to utilize the NOL carryforward,
management will continue to provide an allowance for the entire deferred tax
asset.
7
<PAGE> 8
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>
1997 1996
--------------- ---------------
<S> <C> <C>
Income taxes at the statutory rate $ - $ -
State taxes based on income - -
Effect on taxes resulting from:
Utilization of NOL carry forwards - -
Federal Alternative Minimum Taxes 10,750 -
-------------- ----------------
$ 10,750 $ -
============== ===============
</TABLE>
7. MAJOR CUSTOMERS
Three customers accounted for 29%, 15% and 10% of total sales revenue
for the nine months ended September 30, 1997. Two customers accounted for 22%
and 12% of total sales revenue for the nine months ended September 30, 1996.
The Company's largest customer was also the holder of its short-term
convertible debt. The promissory note and accrued interest was converted to
1,300,694 shares of common stock on January 1, 1997. Accounts receivable from
the three largest customers were 8%, 12% and 14% of the total receivable balance
at September 30, 1997.
8. NEW ACCOUNTING PRONOUNCEMENT
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". This statement simplifies the standards for computing and presenting
earnings per share ("EPS") and makes them comparable to international EPS
standards. SFAS 128 replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
While early adoption is not permitted, disclosure of the effect of the adoption
of the standard is required. If SFAS 128 was applied to the nine months ended
September 30, 1997 and 1996, the earnings per share would be as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
<S> <C> <C>
1997 1996
-------- --------
Basic earnings per common share $ (.04) $ (.06)
Diluted earnings per common share $ (.04) $ (.06)
</TABLE>
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, 1997 vs. September 30, 1996
Sales decreased 5% from $10,866,000 during the nine months ending September 30,
1996 to $10,286,000 during the nine months ending September 30, 1997. Three
customers, Dialogic Corporation, Glenayre and OKI Telecom, Inc., accounted for
29%, 15% and 10%, respectively, of total sales for the nine months ending
September 30, 1997. Dialogic Corporation and Periphonics Corporation accounted
for 22% and 12%, respectively, of total sales for the nine months ending
September 30, 1996. Royalty, development and license fees, which decreased 1%
over the nine months ending September 30, 1996, were 32% of total revenues for
the nine months ending September 30, 1997. Hardware sales, which decreased 8%
over the nine months ending September 30, 1996, were 63% of revenues in the
nine months ending September 30, 1997.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales was flat at 79%
for the nine months ending September 30, 1996 and 1997.
Research and development expenses decreased 19% from $4,857,000 for the nine
months ending September 30, 1996 to $3,918,000 for the nine months ending
September 30, 1997. This decrease reflects cost reductions as a result of the
merger with VPC.
Selling, general, and administrative expenses increased 9% from $4,815,000 for
the nine months ending September 30, 1996 to $5,231,000 for the nine months
ending September 30, 1997. The increase is due to the introduction of the new
Ready Receptionist product and additions to the selling and marketing areas to
support the growing customer base.
9
<PAGE> 10
The combined net operating loss ("NOL") carryforwards of the merged Company
expire from 1997 to 2011 and total approximately $24,256,000 as of September 30,
1997. The Company has provided an allowance against its entire deferred tax
asset relating primarily to NOL carry- forwards of approximately $8,247,000.
Effective August 11, 1994, the Company had an ownership change as defined by the
Internal Revenue Code Section 382 (IRC 382). The effect of the change limited
the use of the Company's NOL in future years to approximately $1,355,000
annually. In connection with the merger with VPC, VPC had an ownership change as
defined by IRC 382. The effect of such change limits the use of VPC's NOL in
future years to $850,000 annually. On a combined basis, the NOL of the Company
is limited in its use against future earnings, if any, to approximately
$2,205,000 annually. Federal income taxes and state franchise taxes based on
income have been offset by net operating loss carryforwards thus far in 1997.
The Company has incurred a tax based on the federal alternative minimum tax of
$10,750 for the nine months ended September 30, 1997.
Three Months Ended September 30, 1997 vs. September 30, 1996
Sales decreased 50% from $4,079,000 during the three months ending September
30, 1996 to $2,021,000 during the three months ending September 30, 1997. Three
customers, OKI Teclecom, Inc., Glenayre, and Dialogic Corporation, accounted
for 24% and 18%, and 14% respectively, of total sales for the three months
ending September 30, 1997. Dialogic Corporation, Periphonics Corporation and
Natural Micro Systems Corp. accounted for 17%, 16% and 15%, respectively, of
total sales for the three months ending September 30, 1996. Royalty,
development and license fees, which decreased 38% over the three months ending
September 30, 1996, were 38% of total revenues for the three months ending
September 30, 1997. Hardware sales, which decreased 52% over the three months
ending September 30, 1996, were 56% of revenues for the three months ending
September 30, 1997. The sales decrease was due to a significant decrease in
sales of older generation speech recognition hardware products. The decrease in
hardware sales has not yet been replaced by volume deployments of customer
applications using VCS software designed for open architecture platforms.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales decreased from
81% for the three months ending September 30, 1996 to 78% for the comparable
1997 period as a result of product mix.
Research and development expenses decreased 15% from $1,560,000 for the three
months ending September 30, 1996 to $1,323,000 for the three months ending
September 30, 1997. This decrease reflects cost reductions as a result of the
merger with VPC.
Selling, general, and administrative expenses increased 6% from $1,684,000 for
the three months ending September 30, 1996 to $1,737,000 for the three months
ending September 30, 1997. The increase is due to the introduction of the new
Ready Receptionist product.
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, 1997 was $15,653,000. In the past, the
Company's working capital needs were financed primarily through cash flow from
operations and proceeds from the exercise of warrants and stock options. A stock
offering was completed during the first quarter of 1996 that provided net
proceeds of $13,446,000 to the Company.
At September 30, 1997, the Company held $13,848,000 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 day's sales in accounts receivable was 80 days
as of September 30, 1997.
The Company's inventory as of September 30, 1997 was $493,000 of which
non-telecom products were approximately 48% of the inventory.
The Company maintained no debt obligations as of September 30, 1997.
The Company's capital expenditures were $278,000 for the nine months ended
September 30, 1997. The expenditures were primarily for 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, 1997 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>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 13,848,343
<SECURITIES> 0
<RECEIVABLES> 3,033,828
<ALLOWANCES> 130,000
<INVENTORY> 492,673
<CURRENT-ASSETS> 17,583,794
<PP&E> 3,965,423
<DEPRECIATION> 2,597,559
<TOTAL-ASSETS> 19,076,658
<CURRENT-LIABILITIES> 1,721,676
<BONDS> 0
0
0
<COMMON> 112,990
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,076,658
<SALES> 2,021,095
<TOTAL-REVENUES> 2,021,095
<CGS> 450,197
<TOTAL-COSTS> 450,197
<OTHER-EXPENSES> 2,871,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,300,651)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,300,651)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
