UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1996 Commission File Number 0-25480
------------------ -------
ADVANCED VOICE TECHNOLOGIES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1175379
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
369 Lexington Avenue
New York, New York 10017
------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 599-2062
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 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.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 13, 1996 was 3,721,497.
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
INDEX
Item 1. Financial Statements:
Balance Sheet as of September 30, 1996 [Unaudited]................ 3 - 4
Statements of Operations for the three and nine months ended
September 30, 1996 and 1995 [Unaudited]........................... 5
Statement of Stockholders' Equity for the nine months ended
September 30, 1996 [Unaudited].................................... 6
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 [Unaudited]........................... 7
Notes to Financial Statements..................................... 8 - 15
Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations........................... 16 - 20
Signature ............................................................. 21
..................
2
<PAGE>
Item 1.
ADVANCED VOICE TECHNOLOGIES, INC.
BALANCE SHEET AS OF SEPTEMBER 30, 1996.
[UNAUDITED]
Assets:
Current Assets:
Cash $ 636,182
Accounts Receivable - Net 5,300
Inventory 8,769
Prepaid and Other Current Assets 74,625
-----------
Total Current Assets 724,876
-----------
Equipment:
Furniture, Fixtures and Equipment 349,219
Less: Accumulated Depreciation (94,530)
-----------
Equipment - Net 254,689
-----------
Trademarks 2,931
Less: Accumulated Amortization (2,785)
-----------
Trademarks - Net 146
-----------
Other Assets:
Deposits 11,918
Capitalized Software and Development Costs - Net 1,245,432
Capitalized Promotional Items - Net 99,764
Other Assets 156,655
-----------
Total Other Assets 1,513,769
-----------
Total Assets $ 2,493,480
===========
The Accompanying Notes are an Integral Part of These Financial Statements.
3
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
BALANCE SHEET AS OF SEPTEMBER 30, 1996
[UNAUDITED]
Liabilities and Stockholders' Equity:
Current Liabilities:
Deferred Income $ 7,375
Accounts Payable 578,725
Accrued Payroll Taxes 225,413
Accrued Expenses 23,572
Accrued Consulting Fees 110,000
------------
Total Current Liabilities 945,085
------------
Commitments and Contingencies --
------------
Stockholders' Equity:
Common Stock - $.0001 Par Value, 25,000,000 Shares
Authorized; 3,721,497 Shares Issued and Outstanding 372
Additional Paid-in Capital 18,814,044
Retained Earnings [Deficit] (12,288,243)
------------
Total 6,526,173
Less: Deferred Marketing Cost (4,977,778)
------------
Total Stockholders' Equity 1,548,395
------------
Total Liabilities and Stockholders' Equity $ 2,493,480
============
The Accompanying Notes are an Integral Part of These Financial Statements.
4
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
[UNAUDITED]
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales - Net $ 1,847,477 $ 76,785 $ 2,092,325 $ 143,390
Cost of Sales 24,066 22,953 94,142 51,575
----------- ----------- ----------- -----------
Gross Profit 1,823,411 53,832 1,998,183 93,815
----------- ----------- ----------- -----------
Operating Expenses:
Selling Expenses 219,852 288,478 671,901 746,959
General and Administrative Expense 544,815 475,190 1,272,101 1,246,117
Depreciation and Amortization 15,350 10,286 45,918 19,665
Compensation Expense - Issuance of
Stock and Options -- -- 3,445 --
Consulting Expense - Issuance of
Stock and Options 138,889 -- 138,889 396,000
Rent and Other Expenses - Related
Party 65,845 -- 170,691 --
Research and Development Expense 3,990 12,741 6,965 53,488
Marketing Cost - Issuance of Common
Stock Purchase Warrant 183,333 -- 183,333 --
----------- ----------- ----------- -----------
Total Operating Expenses 1,172,074 786,695 2,493,248 2,462,229
----------- ----------- ----------- -----------
Operating Income [Loss] 651,337 (732,863) (495,065) (2,368,414)
----------- ----------- ----------- -----------
Other Income [Expenses]:
Interest Expense (12,800) (650) (18,387) (8,272)
Interest Expense - Related Party (1,252) -- (1,252) --
Interest Income 4,332 33,755 5,457 101,666
Interest Income - Related Party 3,411 -- 8,257 --
Miscellaneous Income [Expense] 470 3,009 1,666 29,913
----------- ----------- ----------- -----------
Other [Expense] Income - Net (5,839) 36,114 (4,259) 123,307
----------- ----------- ----------- -----------
Net Income [Loss] $ 645,498 $ (696,749) $ (499,324) $(2,245,107)
=========== =========== =========== ===========
Net Income [Loss] Per Share $ .17 $ (.19) $ (.13) $ (.64)
=========== =========== =========== ===========
Average Number of Shares
Outstanding 3,724,497 3,721,497 3,724,497 3,525,571
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
5
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996.
[UNAUDITED]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred
Common Stock Marketing & Total
------------------------ Consulting Additional Retained Earnings Stockholders'
Shares Amount Expense Paid-in Capital [Deficit] Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1996 3,721,497 $ 372 -- $ 13,510,594 $(11,788,919) $ 1,722,047
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of Options -
Employee Compensation -- -- -- 3,450 -- 3,450
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock $ (3,300,000) 3,300,000
Purchase Warrant -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Stock Option Issued (2,000,000) 2,000,000 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred Marketing Expense 183,333 -- -- 183,333
- ----------------------------------------------------------------------------------------------------------------------------------
Consulting Expense -- -- 138,889 -- -- 138,889
- ----------------------------------------------------------------------------------------------------------------------------------
Net [Loss] for the nine
months ended September 30,
1996 -- -- -- -- (499,324) (499,324)
==================================================================================================================================
Balance - September 30, 1996
[Unaudited] 3,721,497 $ 372 $ (4,977,778) $ 18,814,044 $(12,288,243) $ 1,548,395
==================================================================================================================================
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
6
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
[UNAUDITED]
Nine months ended
September 30,
--------------------------
1996 1995
---- ----
Net Cash - Operating Activities $ 743,897 $(2,336,538)
----------- -----------
Investing Activities:
Capital Expenditures (5,727) (276,878)
Software and Development Costs (616,786) (463,754)
Other (1,462) (1,309)
----------- -----------
Net Cash - Investing Activities (623,975) (950,213)
----------- -----------
Financing Activities:
Cash Proceeds from Initial Public Offering -- 5,087,609
Repayment of Related Party Payables -- (61,963)
Proceeds of a Related Party Loan 342,000 --
Repayment of a Related Party Loan (342,000) --
Advances to a Related Party Receivable (435,000) --
Proceeds from a Related Party Receivable 595,000 --
Repayment of Bridge Loan -- (500,000)
----------- -----------
Net Cash - Financing Activities 160,000 4,525,646
----------- -----------
Net [Decrease] Increase in Cash and Cash
Equivalents 279,922 1,238,895
Cash and Cash Equivalents - Beginning of Periods 356,260 78,732
----------- -----------
Cash and Cash Equivalents - End of Periods $ 636,182 $ 1,317,627
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during periods for:
Interest $ -- $ --
State and Federal Income Taxes -- --
Supplemental Schedule of Non-Cash Investing and Financing Activities:
The Company incurred a non-cash compensation charge of approximately $990,000
from the issuance of 300,000 shares of common stock in connection with the
bridge financing. $594,000 was expensed in 1994 and the balance of $396,000 was
expensed in the first quarter of 1995
The Company incurred a non-cash compensation expense of approximately $3,500
from the issuance of 3,000 options to an employee for the purchase of restricted
common stock at a price of $.50 per share.
The Company incurred a non-cash compensation expense of approximately
$139,000 from the issuance of 800,000 options to consultants for the purchase of
restricted common stock at a price of $4.43.
The Company incurred a non-cash marketing expense of approximately $183,000
from the issuance of common stock purchase warrants in connection with the
signing of the AT&T co-marketing agreement on August 6, 1996.
The Accompanying Notes are an Integral Part of These Financial Statements.
7
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
[1] Organization and Business
Advanced Voice Technologies, Inc., a Tennessee corporation (the "Company" or
"AVT") was formed in October, 1983 under the name Tech Source, Inc. The Company
was founded to develop custom hardware and software applications that would
support the then early stage voice processing industry. In September 1994, the
Company was merged with and into Advanced Voice Technologies, Inc., a Delaware
corporation. At that time, the Company decided to focus its sales efforts around
a single product, the Homework Hotline(R) Communication System, a voice
messaging system designed to support parent involvement in primary and secondary
education. In September 1995, the Company began marketing a newly enhanced
Homework Hotline(R) Communications Program.
[2] Summary of Significant Accounting Policies
[A] Equipment and Depreciation - Equipment consists primarily of furniture,
fixtures, telephones and computers and are stated at cost. Depreciation is
provided over the estimated useful asset lives using the straight-line method
over 5 years for computer and telephone equipment and 7 years for furniture.
[B] Revenue Recognition - The Company's policy is to record revenue upon
installation of software. The Company recognizes hardware sales when the related
system is completely installed. The Company recognizes revenue on services when
the services are performed. The Company estimates unearned income and this is
recognized over the time period that the related services are performed.
Non-refundable license fees are recognized in the period in which they are
earned.
[C] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
[D] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
[E] Inventory - Inventory is comprised of computer hardware and accessories
necessary for the installation of the Company's software. The hardware is stated
at the lower of cost (using the first-in, first-out (FIFO)) or market method.
[F] Net Loss Per Share - Net loss per share was calculated based on the weighted
average number of shares outstanding during the periods presented. Shares
equivalents are included if dilutive.
8
<PAGE>
All share data has been adjusted to reflect the 5 for 1 stock split in September
of 1994.
[G] Business Concentrations - The Company provides educational services and
products for parents and teachers in order to help improve student achievement
and increase parental involvement in communities throughout the United States.
The Company utilizes communications and computer technology to deliver its
services and products.
The Company utilizes standard PC-related hardware for its products. Voiceboards
are available in quantity only from a few domestic suppliers. If the Company
were to experience significant delays, interruptions or reductions in its supply
of voiceboards, the Company's revenues and profits could be adversely affected.
For the nine months ended September 30, 1996, the Company had revenue from two
customers each of which accounted for over 10% of the Company's net sales.
Approximately 10.7% of the Company's net sales were derived from sales to
Work/Family Directions, Inc. ("Work/Family") and approximately 86.0% of the
Company's net sales were derived from sales to AT&T Corp. ("AT&T"). For the nine
months ended September 30, 1995, the Company did not have a customer which
accounted for over 10% of net sales. To the extent the Company is unsuccessful
in attracting new customers for its products, the loss of any one significant
customer, or group of customers, will have a severe negative impact to the
Company in the near term.
Deferred income of $7,375 is presented net of a receivable of $50,000. Accounts
receivable is presented net of an allowance for doubtful accounts of $12,810.
The Company normally requires deposits as a condition of sales.
[H] Capitalized Software and Development Costs - In accordance with the
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" the Company began to
capitalize software development costs. This statement specifies that costs
incurred internally in creating a computer software product shall be charged to
expense when incurred as research and development until technological
feasibility has been established for the product. The Company capitalizes
software development costs when technological feasibility is established.
Technological feasibility is established upon completion of a detailed program
design or, in its absence, completion of a working model. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future revenues, estimated economic life and changes in software
and hardware technologies that are significant and are susceptible to change in
the near term. Capitalization of software costs ceases when the product is
available for general release to customers. Amortization of capitalized software
development costs is based upon the straight-line method over three years (the
remaining estimated economic life) or the ratio that current gross revenues bear
to projected future revenues, whichever is less. At each balance sheet date, the
unamortized capitalized costs of a computer software product is compared to the
net realizable value of that product. The amount by which the unamortized
capitalized costs of a computer software product exceed the net realizable value
9
<PAGE>
of that asset is written off. Research and development costs incurred before
technological feasibility has been established are charged to operations.
[I] Capitalized Promotional Items - Capitalized promotional items consist of the
cost of the production of promotional videos and booklets. These items are being
amortized over an 18 month period. Amortization expense for the nine months
ended September 30, 1996 was $147,948 and is included in general and
administrative expenses.
[J] Advertising Costs - The Company expenses advertising costs as incurred.
Advertising expense was approximately $71,800 for the nine months ended
September 30, 1996.
[K] Basis of Reporting - The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310(b)of Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such statements include all
adjustments which are considered necessary in order to make the interim
financial statements not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements and notes for
the year ended December 31, 1995 included in the Advanced Voice Technologies,
Inc. Form 10-KSB.
[L] Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize cost in accordance with APB
25 (Accounting for Stock Issued to Employees).
[M] Reclassification - Certain items from prior years' financial statements have
been reclassified to conform to current period's presentation.
[N] Cash Concentration - On September 30, 1996, the Company had $490,652 in
financial institutions that are subject to normal credit risk beyond insured
amounts.
[3] Related Party Transactions
[A] Consulting Agreements - (i) On June 30, 1988, the Company entered into a
three year consulting agreement with a partnership for general management
services for a minimum of $100,000 per year beginning July 1, 1988 and ending
June 30, 1991. As of June 30, 1994, $131,692 on this obligation was classified
as a bridge note payable and $168,308 was converted into 49,143 shares of the
Company's common stock. This partnership was terminated as of June 30, 1991 and
its assets were transferred to the three individual partners. In October of
1994, the Company entered into a new two year consulting and non-compete
agreement with a corporation, a shareholder of which was also a former partner
in the partnership terminated in June of 1991. As of September 30, 1996, $18,750
was due this corporation. (ii) On June 1, 1995, the Company entered into a five
year consulting agreement with a stockholder for $190,000. The terms of the
agreement call for a $100,000 payment at signing and two payments of $45,000 due
on December 1, 1995 and June 1, 1996. The two payments totaling $90,000 due on
December 1, 1995 and June 1, 1996 were not paid and are still outstanding as of
September 30, 1996. The accumulated
10
<PAGE>
amortization on this agreement as of September 30, 1996 was $38,750.
[B] Leases - In January 1995, the Company entered into month-to-month leases for
New York office space with an entity in which the Chairman of the Company is a
partner. The partnership is currently charging $16,100 per month for the use of
this full-service office space and attendant office services. As of November
1996, the Company entered into a 10-year lease in midtown Manhattan with an
unaffiliated third party. Pursuant to this lease, the Company will pay rent of
$8,617.50 per month for the first three years, $9,096.25 per month for the next
four years and $9,814.38 per month for the balance of the lease term. On January
15,1995, the Company entered into a 13-month lease for space at a monthly rental
of $2,200 for the benefit of the Company's president. In February 1996, this
lease was renewed on a month-to-month basis. Rent expense for the aforementioned
leases as of September 30, 1996 was $156,495.
[C] Demand Note - In July 1995, the Company, in exchange for a demand note,
advanced $160,000 to a partnership in which the Company's Chairman has an
interest. The demand note accrues interest quarterly at a rate of 2% above
prime. Interest of $7,883 was accrued and due at December 31, 1995. On April 1,
1996, $45,000 of this note was repaid and on April 12, 1996, the balance of
$115,000 was repaid with interest. During the quarter ended September 30, 1996
the Company, in exchange for demand notes, advanced an aggregate of $435,000 to
the aforementioned entity. The demand notes accrued interest at the rate of 2%
above prime, or 10.25%. The demand notes, plus applicable interest, were repaid
on September 30, 1996.
[D] Loan Payable - From June 1996 through July 1996, the Company, in exchange
for demand notes, was advanced an aggregate amount of $342,000 from a
partnership in which the Company's Chairman has an interest. The notes accrued
interest at a rate of 2% above prime, or 10.25%. The demand notes, plus
applicable interest, were repaid on August 9, 1996.
[4] Commitments and Contingencies
[A] Facility and Equipment Lease - In September 1996, the Company renewed its
lease for office and warehouse space in Nashville, Tennessee for three
additional years. The lease calls for payment of approximately $3,600 per month
plus taxes and insurance premiums. In addition, the Company has an annual lease
of approximately $4,900 for a copier. Expenses for the aforementioned leases as
of September 30, 1996 were $39,422 (See Note 3B).
[B] License Agreement - On June 15, 1986, the Company signed a license agreement
with the owner of certain patents to pay royalties to the licensor for voice
messaging products sold by the Company. As of September 30, 1996, $106,025 is
reflected as a liability from 1992 for this agreement. However, management
believes that it will not be liable for this entire amount. As there can be no
assurances that management will be successful in contacting the licensor and
resolving this liability, the entire amount has been accrued in these financial
statements.
[C] Royalties - The Company entered into a royalty agreement with a licensor on
November 8, 1984 to pay royalties on computer software that was developed by the
licensor. The royalty is $35.00 per unit sold by the Company. In August of 1995,
this agreement was terminated. The liability at September 30, 1996 is $4,725.
11
<PAGE>
[D] Consulting and Employment Agreements - As of September 30, 1996, the Company
has 5 outstanding agreements for a monthly compensation of approximately
$28,000. The following are the annual consulting and employment commitments for
the twelve months ended September 30:
1997 $ 333,753
1998 12,500
----------
Total $ 346,253
----- ==========
In addition, in 1994, the Company issued a total of 567,284 options to
consultants and employees to enable them to purchase restricted shares of the
Company's common stock, exercisable at a price of $3.30 per share through June
30, 1998. During 1995, the Company issued additional options to consultants and
employees to enable them to purchase restricted shares of the Company's common
stock: a total of 50,000 options exercisable at a price of $3.40 per share
through June 12, 2002 and a total of 30,000 options exercisable at a price of
$3.50 per share, 20,000 of which are exercisable through June 12, 2002, 5,000 of
which are exercisable through August 16, 2002, and 5,000 of which are
exercisable through August 20, 2002 . All options are exercisable regardless of
conclusion or termination of contract.
[5] Income Taxes
The Company has net operating loss carryovers of approximately $6,500,000 as of
December 31, 1995, expiring in the year 2003. For the nine months ended
September 30, 1996, the Company has incurred an additional tax loss of
approximately $170,000 and, therefore, no provision for income taxes was made.
However, based upon present Internal Revenue regulations governing the
utilization of net operating loss carryovers where the corporation has issued
substantial additional stock, most of this loss carryover may not be available
to the Company.
Generally Accepted Accounting Principles ("GAAP") require the establishment of a
deferred tax asset for all deductible temporary differences and operating loss
carryforwards. However, because of the uncertainty of realization of the
operating loss carryforward, any deferred tax asset established for utilization
of the Company's tax loss carryforwards would correspondingly require a
valuation allowance of the same amount. Accordingly, no deferred tax asset is
reflected in these financial statements.
[6] New Authoritative Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March of 1995.
SFAS No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 is effective for financial
statements issued for fiscal years beginning after December 15, 1995. SFAS No.
121 may have a material impact on the Company's financial statements.
12
<PAGE>
The FASB has also issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
in October 1995. SFAS No. 123 uses a fair value based method of recognition for
stock options and similar equity instruments issued to employees as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles board ("APB")Opinion No. 25, "Accounting for Stock Issued to
Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company adopted the disclosure requirements on January 1, 1996. SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounting for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995. The FASB has also issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." which is
effective for transactions occurring after December 31, 1996. SFAS No. 125 is
not expected to have a material impact on the Company's financial statements.
[7] Litigation
The Company is not involved in any legal proceeding which management believes
would have a material effect on the Company's financial position, operating
results, or cash flows.
[8] Capital Stock
In September and October of 1994, the Company received $500,000 in bridge notes
with 8% interest per annum which were repaid with proceeds from the closing of
the public offering in February 1995. The bridge loans had 300,000 units as
additional consideration with each unit having one share of the Company's common
stock, two Class A Warrants exercisable at $6.00 per share and one Class B
Warrant exercisable at $10.00 per share. The total 300,000 shares of the
Company's common stock represent a financing cost of approximately $990,000 that
was amortized through the completion of the public offering, which was February
16, 1995. Compensation expense of $594,000 was recorded for the year ended
December 31, 1994 and the balance of $396,000 was recorded as compensation
expense in the quarter ending March 31, 1995.
The Company filed a registration statement covering 1,000,000 units at $5.50 per
unit, which was declared effective in February of 1995. Each unit consisted of
one share of common stock and one Class A redeemable common warrant exercisable
at $6.00 per share during the three-year period commencing two years from the
effective date of the registration statement. In February of 1995, the Company
successfully closed this public offering with an over allotment of 150,000 units
exercised and received net proceeds of $4,605,650. Bridge notes of $515,000
including accrued interest, underwriting costs of $1,104,350 and a prepaid
consulting fee of $100,000 were paid at the closing. Additional underwriting
costs amounting to $133,041 were paid after the closing date.
To date, the Company has issued a total of 1,533,466 options to employees and
consultants
13
<PAGE>
pursuant to the Company's non-qualified stock option plan. These options allow
those employees and consultants to purchase restricted shares of the Company's
common stock. The options have been granted at various exercise prices, as
determined at the time of each grant after giving consideration to market price
on the date of grant and the restricted nature of the underlying stock, among
other things. All options granted to date remain exercisable until expiration,
regardless of the conclusion or termination of any employment or consulting
agreement.
In 1994, the Company issued a total of 585,466 options exercisable at a price of
$3.30 per share through June 30, 1998. During 1995, the Company issued a total
of 50,000 options exercisable at a price of $3.40 per share through June 12,
2002, and a total of 30,000 options exercisable at a price of $3.50 per share,
20,000 of which are exercisable through June 12, 2002, 5,000 of which are
exercisable through August 16, 2002, and 5,000 of which are exercisable through
August 20, 2002 . On January 1, 1996, the Company issued 3,000 options to an
employee exercisable at a price of $0.50 per share through December 31, 1999.
The Company recorded compensation expense of $3,450, which represents the
difference between the option exercise price and the estimated fair market value
at issuance. On May 6, 1996, the Company issued a total of 60,000 options
exercisable at a price of $3.975 per share through May 6, 2000. On July 15,
1996, the Company issued a total of 800,000 options exercisable at a price of
$4.43 per share through July 14, 1999. The Company recorded a deferred
consulting expense of $2,000,000 which represents the difference between the
option exercise price and the estimated fair market value of the 800,000 shares
at the time of the options' issuance. The deferred consulting expense will be
amortized over the exercise period of the options. On July 15, 1996, the Company
also issued 5,000 options exercisable at a price of $8.13 per share through July
14, 1999.
On August 6, 1996, the Company, as part of its co-marketing agreement with AT&T,
issued AT&T a warrant representing the right to purchase, for $.10 per share,
that number of shares in the Company that would give AT&T ownership of 40% of
the sum of the outstanding shares, including the shares that underlie the
warrant. On the first anniversary of the agreement, a portion of the warrant
representing a 10% ownership share in the Company, or currently 413,500 shares,
will vest and become exercisable. The remainder of the warrant will vest in
increments as certain business hurdles are met, with full vesting contingent on
the Company's realizing $20,000,000 in revenue from this agreement. The Company
recorded a deferred marketing cost of $3,300,000 which represents the difference
between the warrant exercise price and the estimated fair market value of the
413,500 shares at the time of the warrant's issuance. The deferred marketing
cost will be amortized over the life of the AT&T agreement.
[9] Going Concern
The Company's financial statements as of December 31, 1995, were prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. As
shown in the audited December 31, 1995 financial statements, as filed under Form
10-KSB and Form 10-KSB/A(1), the Company suffered a loss from operations of
approximately $3,000,000, utilized approximately $3,100,000 in cash for
operations and had insufficient revenues and gross profit to meet its operating
expenses. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management recognizes that the Company must
generate additional resources and generate cash
14
<PAGE>
from operations. Management's plans in this regard include consideration of
additional equity or debt financing, as well as the continuation of its efforts
to maximize and accelerate the realization of meaningful revenues from both new
and existing clients. Management believes that the Company will meet its
long-term liquidity needs through additional installations of its Homework
Hotline(R) Communications System as a result of one or more of (i) a renewal of
the Work/Family program, (ii)the co-marketing agreement with AT&T, and/or (iii)
the execution of initiatives in the states of California and New York. However,
no assurances can be given that the Company will be successful regarding these
plans. Further, there can be no assurance, assuming the Company successfully
raises additional funds, that the Company will achieve profitability or attain
positive cash flows from operations.
[10] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments" which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company used a variety
of methods and assumptions, which were based on estimates of market conditions
and risks existing at that time. For certain instruments, including cash and
cash equivalents, trade receivables, related party and note receivable, and
trade payables, it was concluded that the carrying amount approximated fair
value for these instruments because of their short maturities.
[11] Co-Marketing Agreement
On August 6, 1996, the Company signed a co-marketing agreement with AT&T to help
implement and support AT&T's program to offer voice messaging services to
primary and secondary schools across the United States. As part of the
agreement, the Company issued AT&T a warrant representing the right to purchase,
for $.10 per share, that number of shares in the Company that would give AT&T
ownership of 40% of the sum of the outstanding shares, including the shares that
underlie the warrant. On the first anniversary of the agreement, a portion of
the warrant representing a 10% ownership share in the Company, or currently
413,500 shares, will vest and become exercisable. The remainder of the warrant
will vest in increments as certain business hurdles are met, with full vesting
contingent n the Company's realizing $20,000,000 in revenue from this agreement.
. . . . . . . . . .
15
<PAGE>
Item 2.
ADVANCED VOICE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of the Company and notes thereto included elsewhere herein:
Overview
During the 1980's and early 1990's, the Company invested significant resources
in the design and testing of voice messaging products that serve the specific
needs of certain markets, including education, healthcare, real estate, and
automobile sales. In 1989, through the initiation of Dr. Jerold Bauch, a
renowned educator at Vanderbilt University, the Company developed the Homework
Hotline(R), a voice-based communications system designed to specifically and
uniquely meet the needs of the education community. Since that time, over five
hundred Homework Hotline(R) installations in primary and secondary schools in 32
states have proven the product's value and have helped build the Company's
presence in the educational market.
In the schools in which it was installed, the Homework Hotline(R) Communications
System has proven to be a vital product. Results showed not only increases in
homework completion rates, higher attendance rates, higher school achievement,
but also, and perhaps most importantly, greater parent involvement. With that
specific advantage in the educational market, and greater competition in the
generic business voice messaging market, the Company, in September, 1994, made
the strategic decision to focus its financial and other resources exclusively on
the education market. Since that time, the Company has transformed itself from a
voice technology company to an educational services company, The Company is
focused on providing programs and resources for parents, teachers and
communities that improve parental involvement in children's education. The
Company is utilizing communications and computer technology as a medium for
delivering its educational services and products. The Company is continuing to
enhance its original and core product, the Homework Hotline(R) Communication
System, with proprietary training and parent/teacher support materials designed
to broaden its appeal, reduce its competitive vulnerability, and increase the
efficiency and effectiveness of its school district implementation.
Using the Homework Hotline(R) Communications System as the cornerstone of a
comprehensive parent involvement program, the Company is continuing to develop
such additional services as teacher staff development modules, parent and
community involvement assessment tools, parenting education, support materials
and helplines, and other services which are all focused on enabling parents to
be more actively and productively involved in their child's education. An
advisory board of leading educators and school administrators has been
established to provide ongoing supervision of existing program content, to help
in the development and enhancement of new products and services and to insure
and promote the Company's reputation as the leading
16
<PAGE>
provider of educational services. The Company plans to make its services and
resources accessible via multiple communication systems, including the
telephone, video, print, personal computer and interactive cable television.
The Company believes that demand for its products and services will continue to
increase due to demographic trends, increasing discontent among families and
corporations with the public education system in this country, and the recent
enactment of federal legislation to address the need for educational reform. In
the Spring of 1994, federal legislation, entitled "Goals 2000: Educate America
Act", was enacted that mandates schools improve their performance along eight
key dimensions, among which is parental involvement.
This legislation has increased awareness in the value of parental involvement in
the education process, the need for improvement in its implementation in most
school communities, and has broadened funding sources for products and services
such as those being developed by the Company. Additionally, funding is available
not only from the educational community, but also from corporations, state and
local governments, and not-for-profit organizations, which have earmarked funds
to improve the educational system through investment in parent involvement
programs.
The Company has been selected as a provider of its service for several large
flagship projects in the State of California, with the New York State Department
of Education and the Southern Westchester Board of Cooperative Educational
Services ("BOCES") which involve working with corporations, school districts,
and community organizations to implement the Company's parent involvement
program on a community-wide scale.
In October 1995, the Company entered into a contract with Work/Family
Directions, Inc. to implement its parent involvement program in 100 schools in
10 communities around the country during the 1995/96 school year. Work/Family
Directions is a service organization which creates and manages programs on
behalf of the American Business Collaboration, a consortium of Fortune 500
companies, including such corporations as IBM, NYNEX and Aetna Insurance (a few
of the Homework Hotline program's "Champions"), that have decided to work
together to develop and implement certain support services that can help their
employees better manage the juggling act between work and home responsibilities.
Typically, Work/Family Directions will create and pilot a new program, compile
and report the results of such a pilot, and then, if successful, work on behalf
of the Champions to expand the program to a number of additional markets. This
ten community implementation is just such a pilot. The pilot was completed
during the second quarter of 1996. As of September 30, 1996, Work/Family
Directions and the Company have deemed the pilot successful, and are working on
plans to significantly expand the progrm during the 1996/97 and 1997/98 school
years.
In August 1996, the Company signed a co-marketing agreement with AT&T to help
implement and support AT&T's program to offer voice messaging services to
primary and secondary schools across the United States. As part of this
agreement, which has an initial term of 3 years, AT&T has purchased rights to a
non-exclusive license to use the Company's software and certain intellectual
property rights.
17
<PAGE>
Not surprisingly, the change of corporate strategy from a voice technology
company to an educational services company generated additional costs in
software and program development and new marketing efforts. To date, these costs
have not been fully recouped by incremental sales. However, the software and
programs developed have been responsible for the contracts realized with
Work/Family Directions and AT&T, as well as for the opportunities the Company is
currently pursuing with the State of California, the New York State Department
of Education and the Southern Westchester BOCES.
Nine months ended September 30, 1996 Compared to September 30, 1995
Results of Operations
The Company's net losses for the nine months ended September 30, 1996 and 1995
were $499,324 and $2,245,107 respectively. This decrease in net loss of
$1,745,783 is primarily attributable to the $1,800,000 non-refundable licensing
fee associated with the AT&T co-marketing agreement signed in August 1996.
The Company spent significant time and money enhancing its hardware and software
offering and supplementing its Homework Hotline(R) Communication System with
proprietary training and parent/teacher support materials. The enhancements were
designed to open the Company up to larger, more profitable sales opportunities
as evidenced by the Work/Family Directions and the AT&T agreement.
Net sales for the nine months ended September 30, 1996 and 1995 were $2,092,325
and $143,390 respectively. This increase of approximately $1,949,000 in net
sales is attributable primarily to the contract obtained from Work/Family
Directions to install the Homework Hotline(R) Communications Program in 100
schools and the $1,800,000 non-refundable licensing fee associated with the AT&T
co-marketing agreement signed in August, 1996. It should be noted that the
Company recognizes revenue for a given system or program only when such system
is installed.
For the nine months ended September 30, 1996, the Company had revenue from two
customers each of which accounted for over 10% of its net sales. Approximately
10.7% of the Company's net sales were derived from sales to Work/Family and
approximately 86.0% of the Company's net sales were derived from sales to AT&T.
For the nine months ended September 30, 1995, the Company did not have a
customer which accounted for over 10% of net sales. To the extent, the Company
is unsuccessful in attracting new customers for its products, the loss of any
one significant customer, or group of customers, will have a severe negative
impact to the Company in the near term.
Gross margin for the nine months ended September 30, 1996 and 1995 was 95.5% and
65.5% respectively. The non-refundable AT&T licensing fee associated with the
co-marketing agreement was primarily responsible for this increase.
18
<PAGE>
Selling expenses for the nine months ended September 30, 1996 were $671,901
versus $746,959 for the same period a year ago.
General and administrative expenses for the nine months ended September 30, 1996
were $1,272,101 versus $1,246,117 for the same period a year ago. The increase
in general and administrative expenses was primarily attributable to additional
legal and professional expenses incurred in connection with the co-marketing
agreement with AT&T.
Research and development expenses for the nine months ended September 30, 1996
were $6,965 versus $53,488 for the same period a year ago. During the year ended
December 31, 1995, the Company had created a prototype for versions 1.2 and 2.0
of the Homework Hotline(R) software. As of September 30, 1996, capitalized
Software and Development costs were $1,245,432. This included Software and
Development costs of $113,326 for version 1.2 of the Homework Hotline(R)
software that was completed in October 1995. As of September 30, 1996
accumulated amortization of these costs was $37,774. As of September 30, 1996,
version 2.0 of the Homework Hotline(R) software was ready for beta-testing. The
software will be beta-tested during the fourth quarter of 1996.
Interest expense for the nine months ended September 30, 1996 and 1995 was
$18,387 and $8,272, respectively.
Liquidity and Capital Resources
At September 30, 1996, the Company had a working capital deficit of $220,209 and
cash and cash equivalents of $636,182. The Company generated cash from
operations of $743,897 for the nine months ended September 30, 1996, as compared
to a cash flow deficit of $2,336,538 for the nine months ended September 30,
1995. The Company used $623,975 and $950,213 in investing activities for the
nine months ended September 30, 1996 and 1995, respectively. The Company
generated $160,000 and $4,525,646 from financing activities for the quarter
ending September 30, 1996 and 1995. Historically, the Company has utilized cash
for operations and investing activities and funds cash shortages by financing
activities, primarily by a stock offering in 1995 with net proceeds of
$5,087,609.
Management believes the Company will meet its long-term liquidity need by
additional installations via a renewal of the Work/Family Directions program,
the AT&T agreement, and/or the execution of initiatives previously noted in
California, with the New York State Department of Education and the Southern
Westchester BOCES.
Should the Company require additional equity funding, it must first obtain prior
written consent from the underwriter of the public offering. This restriction is
for a period of 24 months after the effective date of the registration
statement, which occurred on February 6, 1995. Consequently, the Company could
be restricted by this underwriting agreement from meeting its liquidity needs.
New Authoritative Pronouncements
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting
19
<PAGE>
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, in March of 1995. SFAS No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles to
be disposed of. SFAS No. 121 is effective for financial statements issued for
fiscal years beginning after December 15, 1995. Adoption of SFAS No. 121 may
have a material impact on the Company's financial statements.
The FASB has also issued SFAS No. 123 "Accounting for Stock-Based Compensation,"
in October 1995. SFAS No. 123 uses a fair value based method of recognition for
stock options and similar equity instruments issued to employees as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." The recognition requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company will adopt the disclosure requirements on December 1, 1996. SFAS 123
also applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounting for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 31,
1995.
Impact of Inflation
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past periods. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
Cautionary Statements
When used anywhere in the Form 10-QSB and in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the word or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions made by a third party with respect to the Company are intended to
identify "forward-looking statements", which speak only as of the date made.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. Such risks and uncertainties are set forth in the
Company's Annual Report on Form 10-KSB/A(1) for the year ended December 31,
1995. The Company specifically declines any obligation to release publicly the
result of any revisions which may be made to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.
20
<PAGE>
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.
ADVANCED VOICE TECHNOLOGIES, INC.
Date: November 18, 1996 By: /s/ Nancy Shalek
-----------------------------------
Nancy Shalek,
Chairman of the Board and Chief
Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 636,182
<SECURITIES> 0
<RECEIVABLES> 5,300
<ALLOWANCES> 0
<INVENTORY> 8,769
<CURRENT-ASSETS> 724,876
<PP&E> 349,219
<DEPRECIATION> 94,530
<TOTAL-ASSETS> 2,493,480
<CURRENT-LIABILITIES> 945,085
<BONDS> 0
0
0
<COMMON> 372
<OTHER-SE> 1,548,023
<TOTAL-LIABILITY-AND-EQUITY> 2,493,480
<SALES> 2,092,325
<TOTAL-REVENUES> 2,092,395
<CGS> 94,142
<TOTAL-COSTS> 94,142
<OTHER-EXPENSES> 2,493,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,639
<INCOME-PRETAX> (499,324)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (499,324)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.13)
</TABLE>
