<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, 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.
11,089,010 SHARES of Common Stock, $.01 par value outstanding
at March 31, 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
VOICE CONTROL SYSTEMS, INC.
BALANCE SHEET
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
ASSETS
March 31,
1997
CURRENT ASSETS: ------------
<S> <C>
Cash and cash equivalents $ 14,648,348
Accounts receivable (net of $113,000 allowance
for doubtful accounts) (Note 7) 3,259,062
Inventory 574,459
Prepaid expenses 106,339
------------
TOTAL CURRENT ASSETS 18,588,208
NET PROPERTY AND EQUIPMENT 1,416,046
OTHER ASSETS 51,428
------------
$ 20,055,682
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 5) $ 1,106,819
Deferred revenue 878,584
------------
TOTAL CURRENT LIABILITIES 1,985,403
------------
LONG TERM DEBT --
------------
TOTAL LIABILITIES 1,985,403
------------
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; 11,089,010 issued and outstanding 110,890
Paid-in capital 37,090,514
Receivable from shareholders (70,010)
Deficit (19,061,115)
------------
TOTAL STOCKHOLDERS' EQUITY 18,070,279
$ 20,055,682
============
</TABLE>
3
<PAGE> 4
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1997 1996
------------ -----------
<S> <C> <C>
Sales (Note 7) $ 4,002,701 3,699,713
Cost of Sales 650,920 939,495
------------ -----------
Gross Profit 3,351,781 2,760,218
COSTS AND EXPENSES:
Selling, general and administrative 1,790,087 1,529,568
Research and development 1,258,176 1,603,848
Interest expense (Income), net (195,989) (84,048)
Interest, to affiliates -- 29,936
------------ -----------
TOTAL COSTS AND EXPENSES 2,852,274 3,079,304
------------ -----------
NET INCOME (LOSS) BEFORE TAXES 499,507 (319,086)
Income Taxes (Note 6) 3,500 --
------------ -----------
NET INCOME (LOSS) $ 496,007 $ (319,086)
============ ===========
Earnings (loss) per Common and Common
Equivalent Share $ 0.04 $ (0.05)
============ ===========
Weighted Average Shares and Share
Equivalents Outstanding 12,808,185 6,870,327
============ ===========
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
VOICE CONTROL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
Three months Ended March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 496,007 $ (319,086)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 120,882 105,379
Changes in operating assets and liabilities:
Accounts receivable (751,299) (736,408)
Inventory (121,781) (4,929)
Prepaid expenses (8,749) 28,061
Other assets 422 83,592
Accounts payable and accrued expenses 126,394 351,448
Deferred revenue (547,179) 55,715
------------ ------------
Net cash used in operating activities (685,303) (436,228)
------------ ------------
Net Cash Used in Investing Activities:
Capital expenditures (69,165) (262,879)
------------ ------------
Cash Flows from Financing Activities:
Repayment of principal on notes payable -- (601)
Proceeds from note receivable 48,745 35,627
Proceeds from note payable -- 150,000
Net proceeds from common stock issuance (Note 4) -- 13,446,261
Proceeds from exercise of stock options 127,247 1,028,680
------------ ------------
Net cash provided by financing activities 175,992 14,659,967
------------ ------------
Net increase (decrease) in cash and cash equivalents 578,476 13,960,860
Cash and cash equivalents at beginning of year 15,226,824 2,556,717
------------ ------------
Cash and cash equivalents at March 31 $ 14,648,348 $ 16,517,577
============ ============
Supplemental cash flow information
Interest paid $ 141 $ 1,752
Conversion of debt and interest by an affiliate
to 1,300,694 shares of stock 1,195,078 --
</TABLE>
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 three months
ending March 31, 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 operations for the periods presented
herein and prior to the date of the merger with VPC are provided below.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996
---------------
<S> <C>
REVENUES:
VCS 2,325,759
VPC 1,373,954
-----------
COMBINED 3,699,713
NET INCOME (LOSS):
VCS 223,493
VPC (542,579)
-----------
COMBINED $ (319,086)
===========
</TABLE>
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
exercised 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
March 31, 1997:
<TABLE>
<S> <C>
Accounts payable $ 412,632
Accrued expenses 694,187
-----------
$ 1,106,819
</TABLE>
6
<PAGE> 7
VOICE CONTROL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
6. INCOME TAXES
Net operating loss ("NOL") carryforwards expiring from 1997 to 2011
totaling approximately $24,249,000 are available at March 31, 1997 to offset
future periods taxable income. Effective August 11, 1994, the Company had an
ownership change, as defined by the Internal Revenue Code Section 382 (IRC
382). In connection with the merger with VPC, VPC had an ownership change, as
defined by IRC 382. As a result of the changes, the NOL of the Company is
limited in its use against future earnings, if any, to approximately $2,205,000
annually.
The following reconciles income tax expense at the federal statutory
rate to the actual tax expense for the three months ended March 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Income taxes at the statutory rate $ 172,000 $ --
State taxes based on income 23,000 --
Effect on taxes resulting from:
Utilization of NOL carry forwards (195,000) --
Federal alternative minimum taxes 3,500 --
--------- ---------
$ 3,500 $ --
========= =========
</TABLE>
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. MAJOR CUSTOMERS
One customer accounted for 36% of revenue for the three months ended
March 31, 1997 and accounted for 29% of total sales for the three months ended
March 31, 1996. Two customers accounted for 12% and 10% of total sales for the
three months ended March 31, 1997. Two different customers accounted for 13%
and 10% of total sales for the three months ended March 31, 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 largest customer was 9% of the total receivable balance at March 31, 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 three month periods ended March 31, 1997 and 1996, the earnings per share
would be as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
----- -------
<S> <C> <C>
Basic earnings per common share $ .04 $ (.05)
Diluted earnings per common share $ .04 $ (.05)
</TABLE>
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, 1997 vs. March 31, 1996
Sales increased 8% from $3,700,000 during the three months ending March 31,
1996 to $4,003,000 during the three months ending March 31, 1997. Three
customers, Dialogic Corporation, Creative Labs and Glenayre, accounted for 36%,
12% and 10%, respectively, of total sales for the three months ending March 31,
1997. Dialogic Corporation, Entex and Periphonics accounted for 29%, 13% and
10%, respectively, of total sales for the three months ending March 31, 1996.
Royalty, development and license fees, which increased 72% over the three
months ending March 31, 1996, were 36% of total revenues for the three months
ending March 31, 1997. Hardware sales, which decreased 12% over the three
months ending March 31, 1996, were 59% of revenues in the three months ending
March 31, 1997. This decrease in hardware sales 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
75% in the three months ending March 31, 1996 to 84% in the comparable 1997
period as a result of the decrease in hardware sales and the increase in
royalty, development and license fees.
Research and development expenses decreased 22% from $1,604,000 in the three
months ending March 31, 1996 to $1,258,000 in the three months ending March 31,
1997. This decrease reflects cost reductions realized by eliminating duplicate
functions resulting from the merger with VPC.
Selling, general, and administrative expenses increased 17% from $1,530,000 in
the three months ending March 31, 1996 to $1,790,000 in the three months ending
March 31, 1997. Additional sales staff has been added to help support a growing
customer base of companies integrating speech recognition technology into their
products.
The combined net operating loss ("NOL") carryforwards of the merged Company
expire from 1997 to 2011 and total approximately $24,249,000 as of March 31,
1997. The Company has provided an allowance against its entire deferred tax
asset relating primarily to NOL carry forward of approximately $8,245,000.
Effective August 11, 1994, the Company had an ownership change, as defined by
the Internal Revenue Code Section 382 (IRC 382). In connection with the merger
with VPC, VPC had an ownership change, as defined by IRC 382. As a result of
the changes, 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.
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, 1997 was $16,493,000. 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
$14,432,000 to the Company from the offering and from the exercise of stock
options in conjunction with the offering.
At March 31, 1997, the Company held $14,645,000 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 72 days as of
March 31, 1997.
8
<PAGE> 9
The Company's inventory as of March 31, 1997 was $574,000 of which
non-telecom products were approximately 54% of the inventory.
The Company maintained no debt obligations as of March 31, 1997.
The Company's capital expenditures were $69,000 for the three months ended
March 31, 1997. The expenditures were primarily for computer equipment.
VCS believes that its existing sources of liquidity 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
10.1 Amendment #2 to Employment Agreement between the Company
and Dr. Thomas B. Schalk dated February 15, 1997.
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, 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
11
<PAGE> 12
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.01* Amendment #2 to Employment Agreement between the Company and
Dr. Thomas B. Schalk dated February 15, 1997.
27 Financial Data Schedule
*Filed herewith.
<PAGE> 1
EXHIBIT 10.1
AMENDMENT #2 TO
EMPLOYMENT AGREEMENT
Pursuant to a Resolution of the Board of Directors of Voice Control
Systems, Inc., a Delaware corporation ("Company"), the Employment Agreement
dated June 18, 1993 between Dr. Thomas B. Schalk ("Employee") and the Company,
which was modified by Amendment #1 on July 20, 1995, collectively referred to
as the "Agreement" is hereby amended effective the 15th day of February, 1997
as follows.
ARTICLE I of the Agreement shall be replaced in its entirety with the
following:
ARTICLE I
Term of Employment
Subject to the provisions hereof, the term of Employee's employment by
Company under this Agreement shall extend through June 18, 1998; provided,
however, that the term of employment shall be extended for an additional
one-year period unless, on or prior to the date thirty calendar days prior to
the end of such period either Company or Employee shall give notice to the
other of an intention to terminate this Agreement, in which case the term of
employment shall comprise only the original period.
Section 3.01.A and 3.02.A of the Agreement shall be replaced with the
following:
3.01.A In lieu of the provisions of 3.0.1, from and after May 1, 1996,
as compensation for services rendered under the Agreement, Company shall pay
Employee a salary of one hundred fifty-five thousand dollars ($155,000) per
year, payable, less applicable FICA and withholding taxes, in semi-monthly
installments. Such salary shall be reviewed annually by the CEO or COO and
approved by the Board of Directors, after which review the salary may be raised
but not lowered.
3.02.A In lieu of the provisions of 3.0.2, from and after May 1, 1996,
Employee shall be eligible to receive a bonus of up to five thousand dollars
($5,000) per calendar quarter, less applicable FICA and withholding taxes. The
dollar amount of the bonus shall be determined at the sole discretion of the
CEO or COO based upon exceptional achievements during the quarter.
EMPLOYEE: COMPANY:
/s/ THOMAS B. SCHALK /s/ PETER J. FOSTER
- ------------------------- --------------------------
By Its President & CEO, Pursuant to a
Resolution of the Board of Directors
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,648,348
<SECURITIES> 0
<RECEIVABLES> 3,372,062
<ALLOWANCES> 113,000
<INVENTORY> 574,459
<CURRENT-ASSETS> 18,588,208
<PP&E> 3,756,952
<DEPRECIATION> 2,340,906
<TOTAL-ASSETS> 20,055,682
<CURRENT-LIABILITIES> 1,985,403
<BONDS> 0
0
0
<COMMON> 110,890
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,055,682
<SALES> 4,002,701
<TOTAL-REVENUES> 4,002,701
<CGS> 650,920
<TOTAL-COSTS> 650,920
<OTHER-EXPENSES> 2,852,274
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 499,507
<INCOME-TAX> 3,500
<INCOME-CONTINUING> 496,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 496,007
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
