<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, 1999 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.
13,724,864 shares of Common Stock, $.01 par value outstanding at March 31, 1999.
<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. The interim financial statements should be read in
conjunction with the audited financial statements for the two years ending
December 31, 1998.
2
<PAGE> 3
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
ASSETS
March 31,
1999
------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,999,681
Accounts receivable (net of $349,000 allowance
for doubtful accounts) (Note 5) 3,315,680
Inventory 342,884
Prepaid expenses 371,116
------------
TOTAL CURRENT ASSETS 8,029,361
NET PROPERTY AND EQUIPMENT 1,528,383
OTHER ASSETS 1,177,372
------------
$ 10,735,116
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses (Note 3) $ 1,379,058
Deferred revenue 385,255
------------
TOTAL CURRENT LIABILITIES 1,764,313
------------
LONG TERM DEBT 18,283
------------
TOTAL LIABILITIES 1,782,596
------------
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; 13,935,264 issued and 13,724,864 outstanding 137,249
Paid-in capital 46,725,727
Treasury Stock (341,114)
Receivable from stockholders (70,010)
Accumulated Deficit (37,499,332)
------------
TOTAL STOCKHOLDERS' EQUITY 8,952,520
------------
$ 10,735,116
============
</TABLE>
See accompanying notes to financial statements
3
<PAGE> 4
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
SALES (NOTE 5) $ 2,768,043 $ 3,772,067
COST OF SALES 278,091 732,337
------------ ------------
GROSS PROFIT 2,489,952 3,039,730
COSTS AND EXPENSES:
Research and development 1,309,772 1,280,805
Selling, general and administrative 2,518,975 2,376,669
Other interest expense (Income), net (52,634) (161,441)
------------ ------------
TOTAL COSTS AND EXPENSES 3,776,113 3,496,033
------------ ------------
NET LOSS BEFORE TAXES (1,286,161) (456,303)
NET INCOME TAXES (NOTE 4) -0- -0-
------------ ------------
NET LOSS $ (1,286,161) $ (456,303)
============ ============
NET LOSS PER SHARE:
BASIC (NOTE 2) $ (0.09) $ (0.04)
============ ============
DILUTED (NOTE 2) $ (0.09) $ (0.04)
============ ============
WEIGHTED AVERAGE OUTSTANDING SHARES:
BASIC (NOTE 2) 13,667,534 11,275,361
============ ============
DILUTED (NOTE 2) 13,667,534 11,275,361
============ ============
</TABLE>
See accompanying notes to financial statements
4
<PAGE> 5
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three months Ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,286,161) $ (456,303)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 250,158 149,245
Changes in operating assets and liabilities:
Accounts receivable (358,966) 393,947
Inventory (1,176) (74,163)
Prepaid expenses (96,233) (25,152)
Other assets 104,932 (2,725)
Accounts payable and accrued expenses 65,049 67,479
Deferred revenue (20,266) (30,493)
------------ ------------
Net cash provided by (used in) operating activities (1,342,663) 21,835
NET CASH USED IN INVESTING ACTIVITIES:
Treasury Stock purchased -0- (250,233)
Capital expenditures (108,837) (133,219)
------------ ------------
Net cash used in investing activities (108,837) (383,452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable -- --
Proceeds from exercise of stock options 148,112 143,860
------------ ------------
Net cash provided by financing activities 148,112 143,860
Net decrease in cash and cash equivalents (1,303,388) (217,757)
Cash and cash equivalents at beginning of year 5,303,069 12,667,979
------------ ------------
Cash and cash equivalents at March 31, $ 3,999,681 $ 12,450,222
============ ============
Supplemental disclosures of cash flow information
Interest paid $ -- $ --
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED 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, 1999 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. The accompanying financial statements
include the accounts of VCS and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.
2. PER SHARE INFORMATION
Net income (loss) per share is computed based upon the weighted average
number of outstanding shares of common stock. The Financial Accounting Standards
Board recently adopted, SFAS No. 128, Earnings Per Share (SFAS 128). SFAS 128
requires a calculation of book "Basic" and "Diluted" earnings per share. Basic
earnings per share includes no dilution. The current options and warrants
outstanding are not included in the calculation as their effect would be
anti-dilutive and accordingly, Basic and Diluted earnings per share are the
same.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at March
31, 1999:
<TABLE>
<S> <C>
Accounts payable $ 530,120
Accrued expenses 848,938
----------
$1,397,058
==========
</TABLE>
4. INCOME TAXES
The net operating loss (NOL) carryforwards of the Company expire from
1999 to 2013 and total approximately $40,132,000 as of March 31, 1999. The
Company has provided an allowance against its entire deferred tax asset relating
primarily to NOL carryforwards of approximately $13,665,000 since management
cannot determine that it is more likely than not that the deferred tax asset
will be realized. Approximately $29,800 in NOL carryforwards expired for the
year ended December 31, 1998. In connection with its merger and acquisition
activity the company and its predecessors have experienced ownership change as
defined by Internal Revenue Code 382 the effect of such changes limits the use
of the Company's NOL in future years to approximately $1,405,000 annually. Any
portion of an NOL limited by IRC 382 not used in a given year can be carried
forward to subsequent years.
6
<PAGE> 7
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
4. INCOME TAXES (CONTINUED)
The Company has provided an allowance for its entire deferred tax asset
as its realization is dependent upon future generation of taxable income since
management can not determine that it is more likely than not that the deferred
tax asset will be realized. 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.
The following reconciles income tax expense at the federal statutory
rate to the actual tax expense for the three months ended March 31:
5. MAJOR CUSTOMERS
Three customers accounted for 15%, 15% and 13% of total sales revenue
for the three months ended March 31, 1999. Three customers accounted for 23%,
18% and 13% of total sales revenue for the three months ended March 31, 1998.
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 13%, 21% and 10% of the total receivable
balance at March 31, 1999.
7
<PAGE> 8
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
6. NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for the Company's financial
statements for the year ended December 31, 2000 and the adoption of this
standard is not expected to have a material effect on the Company's financial
statements.
In May 1998, the American Institute of Certified Public Accountants
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities". This SOP established standards for reporting start-up activities of
an enterprise and requires that the start-up activities of an enterprise and
requires that the start-up activities, including organizational costs, be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, and the Company does not expect this statement to have an
effect on its financial statements.
7. SEGMENT INFORMATION
For the period ended March 31, 1999, the Company operated in two
industry segments: speech recognition engines and services (Engines) and speech
recognition enabled auto attendants (Systems). Segment information consists of
the following:
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
SALES:
Engines $ 2,222,689 $ 3,759,381
Systems 545,354 12,686
----------- -----------
$ 2,768,043 $ 3,772,067
=========== ===========
EXPENSES:
Engines $ 2,689,133 $ 3,337,176
Systems 1,139,614 320,298
----------- -----------
$ 3,828,747 $ 3,657,474
=========== ===========
IDENTIFIABLE ASSETS:
Engines $ 154,888 $ 433,238
Systems $ 187,996 $ 98,777
----------- -----------
$ 342,884 $ 532,015
=========== ===========
</TABLE>
8
<PAGE> 9
VOICE CONTROL SYSTEMS, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
8. BUSINESS ACQUISITION
On April 14, 1998 Voice Control Systems, Inc acquired 100% of the
common and preferred stock of PureSpeech, Inc. in exchange for 1,639,433 shares
of common stock, the assumption of liabilities in the amount of $2,569,000, and
cash of $2,140,000, including transaction costs. In addition, the PureSpeech
options and warrants were exchanged for options and warrants to purchase 301,953
and 317,608, respectively, shares of common stock of the Company. The
transaction was accounted for using the purchase method of accounting and all
operations of PureSpeech are included in operations of the Company subsequent to
April 14, 1998. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Goodwill $ 1,329,000
Net value of remaining assets 403,000
Acquired in-process R&D 11,298,000
------------
$ 13,030,000
============
</TABLE>
The purchase price was determined by the market price of the Company
stock to be issued, less an applicable discount rate plus the options and
warrants which were valued using a Black-Scholes model. The fair value of the
common stock was approximately $8,321,000. The acquired research and development
was charged to expense as in-process research and development during 1998.
9. SUBSEQUENT EVENT
On May 10, 1999, the Company and Royal Philips Electronics of the
Netherlands ("Philips") issued a joint press release in which the Company
announced the proposed acquisition of the Company by a subsidiary of Philips.
The transaction will be structured as a cash tender offer followed by a cash
merger. The Company has signed a definitive merger agreement for Philips to
acquire all of the outstanding shares and share equivalents of VCS for $4.00
cash per share, for a total transaction value of approximately $59 million.
9
<PAGE> 10
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, 1999 vs. March 31, 1998
Sales decreased 27% from $3,772,000 during the three months ending March 31,
1998 to $2,768,000 during the three months ending March 31, 1999. Three
customers, Dialogic Corporation, Intervoice and Periphonics, accounted for 15%,
15% and 13%, respectively, of total sales for the three months ending March 31,
1999. Dialogic Corporation, Intervoice and OKI Telecom, Inc. accounted for 23%,
18% and 13%, respectively, of total sales for the three months ending March 31,
1998. Royalty, development and license fees, which decreased 6% over the three
months ending March 31, 1998, were 53% of total revenues for the three months
ending March 31, 1999. Hardware sales, which decreased 27% over the three months
ending March 31, 1998, were 42% of revenues in the three months ending March 31,
1999. Lower royalty, development and license fees were responsible for the sales
decrease for the period ending March 31, 1999.
Cost of sales includes the cost of components and subcontracted manufacturing
related to hardware products. Gross profit as a percent of sales increased from
81% for the three months ending March 31, 1998 to 90% for the three months
ending March 31, 1999 as a result of the decrease in hardware sales.
Research and development expenses increased 2% from $1,281,000 for the three
months ending March 31, 1998 to $1,310,000 for the three months ending March 31,
1999. This increase reflects the increase in payroll related expense for the
period.
Selling, general, and administrative expenses increased 6% from $2,377,000 for
the three months ending March 31, 1998 to $2,519,000 for the three months ending
March 31, 1999. Additional sales personnel, operations and administrative staff
have been added to help support a growing customer base of firms utilizing
speech recognition technology with the addition of the PureSpeech product line
to VCS.
10
<PAGE> 11
\
On April 14, 1998 Voice Control Systems, Inc acquired 100% of the common and
preferred stock of PureSpeech, Inc. in exchange for 1,639,433 shares of common
stock, the assumption of liabilities in the amount of $2,569,000, and cash of
$2,140,000, including transaction costs. In addition, the PureSpeech options and
warrants were exchanged for options and warrants to purchase 301,953 and
317,608, respectively, shares of common stock of the Company. The transaction
was accounted for using the purchase method of accounting and all operations of
PureSpeech are included in operations of the Company subsequent to April 14,
1998.
The net operating loss (NOL) carryforwards of the Company expires from 1999 to
2013 and total approximately $40,132,000 as of March 31, 1999. The Company has
provided an allowance against its entire deferred tax asset relating primarily
to NOL carryforwards of approximately $13,665,000 since management cannot
determine that it is more likely than not that the deferred tax asset will be
realized. Approximately $29,800 in NOL carryforwards expired for the year ended
December 31, 1998. In connection with its merger and acquisition activity the
company and its predecessors have experienced ownership change as defined by
Internal Revenue Code 382 the effect of such changes limits the use of the
Company's NOL in future years to approximately $1,405,000 annually. Any portion
of an NOL limited by IRC 382 not used in a given year can be carried forward to
subsequent years.
YEAR 2000 ISSUES
The Company's internal business information systems are primarily comprised of
commercial application software products offered for license by recognized
providers. Because these provider's products are widely distributed,
commercially developed applications, the Company anticipates these applications
have been or will be brought into compliance by the manufacturers. The Company
considers the cost to become year 2000 compliant to be a normal operating cost
necessary to periodically upgrade system software. As a result, the Company
believes that neither the cost of addressing the Year 2000 issue nor the costs
or consequences of its incomplete or untimely resolution of such issue will
result in any material adverse impact on the Company's future financial or
business condition or results.
The Company does not anticipate any Year 2000 compliance issues to arise
related to its primary internal business information systems. The Company is not
aware of any further material operational issues or costs associated with
preparing internal systems for the Year 2000. However, the Company utilizes
other third party network equipment, telecommunications products, and other
third party software products that may or not be Year 2000 compliant. Although
the Company is currently taking steps to address the impact, if any of Year 2000
issue surrounding such third party products, failure of any critical technology
to operate properly in the Year 2000 may have an adverse impact on business
operations of financial results.
The Company can not anticipate the impact of Year 2000 compliance on its
clients at this time. The Company is unaware of any client who may be impacted
by the Year 2000 issue. A failure of a client to appropriately handle issues
related to the Year 2000 might have an adverse impact on the financial results
of the Company.
Currently, there is significant uncertainty in the software industry and among
software users regarding the impact of the year 2000 on installed software.
Software database modification, and/or implementation modifications, will be
required to enable such software to distinguish between 21st and 20th century
dates. The Company is in the process of determining the extent to which its
licensed and proprietary software is Year 2000 compliant and the cost of
obtaining such compliance.
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, 1999 was $6,265,000. 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.
At March 31, 1999, the Company held $4,000,000 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 108 days as of March 31, 1999.
The Company's inventory as of March 31, 1999 was approximately $343,000.
Reserves of approximately $149,000 have been established for obsolescence.
The Company maintained $18,000 of Long-term debt obligations as of March 31,
1999.
The Company's capital expenditures were $109,000 for the three months ended
March 31, 1999. 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
A report on Form 8-K was filed May 12, 1999 reporting the
Company and Royal Philips Electronics of the Netherlands ("Philips") issued a
joint press release in which the Company announced the proposed acquisition of
the Company by a subsidiary of Philips. The transaction will be structured as a
cash tender offer followed by a cash merger.
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: May 14, 1999 By: /s/ Ronald Larkin
-----------------------------------------
Ronald Larkin
Chief Executive Officer and President
/s/ Kim S. Terry
-----------------------------------------
Kim S. Terry
Principal Financial and Accounting Officer
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,999,681
<SECURITIES> 0
<RECEIVABLES> 3,315,680
<ALLOWANCES> 349,000
<INVENTORY> 342,884
<CURRENT-ASSETS> 8,029,361
<PP&E> 5,540,369
<DEPRECIATION> 4,011,986
<TOTAL-ASSETS> 10,735,116
<CURRENT-LIABILITIES> 1,764,313
<BONDS> 0
0
0
<COMMON> 137,249
<OTHER-SE> 8,815,271
<TOTAL-LIABILITY-AND-EQUITY> 10,735,116
<SALES> 2,768,043
<TOTAL-REVENUES> 2,768,043
<CGS> 278,091
<TOTAL-COSTS> 3,776,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,286,161)
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,768,043
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,286,161)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
