Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
-------------------------------------------------
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
For Quarter Ended 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 Identification No.)
incorporation or organization)
369 Lexington Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 599-2062
----------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 May 14, 1996 3,721,497.
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
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INDEX
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Item 1. Financial Statements:
Balance Sheet as of March 31, 1996 [Unaudited].................... 1.....2
Statements of Operations for the three months ended
March 31, 1996 and 1995 [Unaudited]................................ 3
Statement of Stockholders' Equity for the three months ended
March 31, 1996 [Unaudited]......................................... 4
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 [Unaudited]................................ 5
Notes to Financial Statements...................................... 6.....11
Item 2. Managements' Discussion and Analysis of the Financial Condition
and Results of Operations...................................... 12....15
Signature............................................................. 16
. . . . . . . . . . . . . . . . . .
<PAGE>
Item 1.
ADVANCED VOICE TECHNOLOGIES, INC.
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BALANCE SHEET AS OF MARCH 31, 1996.
[UNAUDITED]
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Assets:
Current Assets:
Cash and Cash Equivalents $ 2,388
Accounts Receivable - Net 124,335
Inventory 27,212
Prepaid and Other Current Assets 118,106
Note Receivable - Related Party 160,000
Miscellaneous Receivables - Related Party 15,163
----------
Total Current Assets 447,204
Equipment:
Furniture, Fixtures and Equipment 348,746
Less: Accumulated Depreciation (64,256)
Equipment - Net 284,490
----------
Trademarks 2,931
Less: Accumulated Amortization (2,492)
Trademarks - Net 439
----------
Other Assets:
Deposits 10,457
Capitalized Software and Development Costs - Net 915,244
Capitalized Promotional Items - Net 199,209
Other Assets 152,667
----------
Total Other Assets 1,277,577
Total Assets $2,009,710
The Accompanying Notes are an Integral Part of These Financial Statements.
1
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ADVANCED VOICE TECHNOLOGIES, INC.
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BALANCE SHEET AS OF MARCH 31, 1996.
[UNAUDITED]
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Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 660,076
Accrued Payroll Taxes 56,863
Accrued Expenses 68,223
Accrued Consulting Fees 45,000
----------
Total Current Liabilities 830,162
Commitments and Contingencies [4] --
Stockholders' Equity:
Common Stock - $.0001 Par Value, 25,000,000 Shares
Authorized; 3,721,497 Shares Issued and Outstanding 371
Additional Paid-in Capital 13,514,045
Retained Earnings [Deficit] (12,334,868)
Total Stockholders' Equity 1,179,548
Total Liabilities and Stockholders' Equity $2,009,710
The Accompanying Notes are an Integral Part of These Financial Statements.
2
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ADVANCED VOICE TECHNOLOGIES, INC.
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STATEMENTS OF OPERATIONS
[UNAUDITED]
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<TABLE>
Three months ended
March 31,
1 9 9 6 1 9 9 5
------- -------
<S> <C> <C>
Sales - Net $ 85,085 $ 34,220
Cost of Goods Sold 28,243 11,339
---------- ----------
Gross Profit 56,842 22,881
---------- ----------
Operating Expenses:
Selling Expenses 219,202 183,946
General and Administrative Expense 317,994 382,923
Depreciation and Amortization 15,350 25,277
Compensation Expense - Issuance of Stock and Options 3,450 396,000
Rent and Other Expenses - Related Party 49,707 15,068
Research and Development Expense 2,975 31,711
---------- ----------
Total Operating Expenses 608,678 1,034,925
---------- ----------
Operating [Loss] (551,836) (1,012,044)
---------- ----------
Other Income [Expenses]:
Interest Expense (650) (6,972)
Interest Income 1,105 23,691
Interest Income - Related Party 4,486 --
Miscellaneous Income [Expense] 946 9,406
---------- ----------
Other Income - Net 5,887 26,125
---------- ----------
Net [Loss] $ (545,949) $ (985,919)
========== ==========
Net [Loss] Per Share $ (.15) $ (.30)
========== ==========
Average Number of Shares Outstanding 3,724,497 3,341,164
========== ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
3
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ADVANCED VOICE TECHNOLOGIES, INC.
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STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED
MARCH 31, 1996.
[UNAUDITED]
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Additional Retained Total
Common Stock Paid-in Earnings Stockholders'
Shares Amount Capital [Deficit] Equity
Balance - January 1, 1996
3,721,497 $ 371 $13,510,595$(11,788,919)$1,722,047
Issuance of Options -
Employee Compensation -- -- 3,450 -- 3,450
Net [Loss] for the three
months ended March 31,
1996 -- -- -- (545,949) (545,949)
--------- ---------- ---------- ----------- ----------
Balance - March 31, 1996
[Unaudited] 3,721,497 $ 371 $13,514,045$(12,334,868)$1,179,548
========= ========== ======================= ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
4
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ADVANCED VOICE TECHNOLOGIES, INC.
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STATEMENTS OF CASH FLOWS
[UNAUDITED]
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<TABLE>
Three months ended
March 31,
1 9 9 6 1 9 9 5
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<S> <C> <C>
Net Cash - Operating Activities $ (88,431) $ (700,835)
---------- ----------
Investing Activities:
Capital Expenditures (5,254) (90,429)
Research and Development Costs (258,267) (70,667)
Other (1,920) (3,225)
---------- ----------
Net Cash - Investing Activities (265,441) (164,321)
---------- ----------
Financing Activities:
Cash Proceeds from Initial Public Offering -- 4,605,650
Repayment of Related Party Payables -- (46,266)
---------- ----------
Net Cash - Financing Activities -- 4,559,384
---------- ----------
Net [Decrease] Increase in Cash and Cash Equivalents (353,872) 3,694,228
Cash and Cash Equivalents - Beginning of Periods 356,260 78,732
---------- ----------
Cash and Cash Equivalents - End of Periods $ 2,388 $3,772,960
========== ==========
</TABLE>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ --
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 to an employee of
approximately $3,500 from the issuance of 3,000 options for the purchase of
restricted common stock at a price of $.50 per share.
The Accompanying Notes are an Integral Part of These Financial Statements.
5
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Organization and Business
Advanced Voice Technologies, Inc. [the "Company"] a Delaware Corporation was
incorporated in the State of Tennessee on October 17, 1983, originally under the
name of Tech-Source, Inc. In September of 1994, the Company reincorporated in
the State of Delaware. The Company was originally organized to develop and
manufacture voice messaging technology. In June 1995, the Company began its new
marketing efforts for educational services and products to communities and
school districts. The Company uses communications technology to deliver its
services and products.
[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 estimates a cost for future servicing and
adjusts revenues accordingly.
[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 or market using the first-in, first-out [FIFO] 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 or
equivalents issued at below the IPO price are included for all periods
presented.. 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 to help improve student achievement and
parental involvement in communities throughout the United States. The Company
utilizes communications and computer technology to deliver its services and
products.
The Company utilized 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 three months ended March 31, 1996, the Company had net sales to one
customer that generated approximately 97% of net sales. The loss of this
significant customer could have a material adverse effect on the Company. In
addition, the Company is primarily an installer of proprietary software. As
such, most of the Company's business is of a nonrecurring nature. The Company
must continually market its products to new customers. Unless the Company is
successful 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.
6
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[2] Summary of Significant Accounting Policies [Continued]
[G] Business Concentrations - [Continued] - Most of the Company's business
activity is with educational facilities or their representatives. The receivable
balance is presented net of unearned income of approximately $83,000 and an
allowance of approximately $13,000.
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. Technological feasibility is
established upon completion of a detail 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. Amortization of
capitalized software development costs is based upon the straight-line method
over three years or projected future revenues whichever is less. Research and
development costs incurred before technological feasibility has been established
are charged to operations and for the three months ended March 31, 1996 and 1995
were $2,975 and $31,711, respectively.
[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 three months
ended March 31, 1996 was approximately $50,500.
[J] Advertising Costs - The Company expenses advertising costs as incurred.
Advertising expense was approximately $26,100 for the three months ended March
31, 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 [consisting only of normal recurring items] which are considered
necessary 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-K.
[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].
[3] Related Party Transactions
[A] Consulting Agreements
(i) On June 30, 1988, the Company entered into a consulting agreement for a
minimum of $100,000 per year beginning July 1, 1988 and ending June 30, 1991.
During the quarter ended September 30, 1994, $168,308 of the debt to this
consultant was converted into 49,143 shares of the Company's common stock. This
agreement was terminated as of June 30, 1991. In October 1994, the Company
entered into a two year consulting agreement with the same consultant for an
aggregate amount of $75,000 payable in two annual installments. At March 31,
1996, $37,500 remains unpaid.
7
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[3] Related Party Transactions [Continued]
[A] Consulting Agreements [Continued]
(ii) On June 1, 1995, the Company entered into a 5 year consulting agreement
contract with a stockholder for $190,000. The terms of the contract call for
$100,000 payment at signing and two payments of $45,000 due on December 1, 1995
and June 1, 1996. The $45,000 payment due on December 1, 1995 was not paid and
is still outstanding as of March 31, 1996. The accumulated amortization on this
agreement as of March 31, 1996 was $20,000.
[B] Leases - In January of 1995, the Company entered into a month-to-month lease
for New York office space for approximately $13,500 per month with an entity in
which one of the partners is also the Chairman of the Company. 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 a related party. In February 1996, this lease was
renewed on a month-to-month basis. Rent expense as of March 31, 1996 was
$44,318.
[C] Demand Note - In July 1995, the Company in exchange for a demand note,
advanced $160,000 to a partnership, 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 [See Note
11].
[D] Stock Options - On January 1,1 996, the Company issued options to a related
party for 3,000 shares of restricted common stock at $.50 per share. These
options can be exercised through December 31,1999. The Company recorded
compensation expense of $3,450 which represents the difference between the
option price and the fair market value at issuance.
[4] Commitments
[A] Facility and Equipment Lease - The Company leases office and warehouse space
in Nashville, Tennessee for approximately $3,600 per month plus taxes and
insurance premiums. This lease expires on September 30, 1996. In addition, the
Company has an annual lease of approximately $3,900 for a copier. Rent expense
as of March 31, 1996 was $11,514 [See Note 3B].
[B] License Agreement - On June 15, 1986, the Company signed a license agreement
under patents with a licensor to pay royalties to the licensor for voice
messaging products sold by the Company. As of December 31, 1995, $106,025 is
reflected as a liability 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 March 31, 1996 is $4,305.
[E] Consulting and Employment Agreements - As of March 31, 1996, the Company has
11 outstanding agreements for a monthly compensation of approximately $60,000.
In addition, the Company in 1994 had issued 585,466 options to purchase
restricted shares of common stock of the Company exercisable at $3.30 per share.
During 1995, the Company issued an additional 50,000 options to purchase
restricted shares of the Company's common stock at an option price of $3.40 per
share, and 30,000 options to purchase restricted shares at an option price of
$3.50. All options are exercisable regardless of conclusion or termination of
contract.
8
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[4] Commitments [Continued]
[E] Consulting and Employment Agreements [Continued] - The following are the
annual consulting and employment commitments for the twelve months ended March
31:
1997 $ 464,592
1998 162,502
---------
Total $ 627,094
----- =========
[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. 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.
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 31,
1995.
[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.
9
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
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[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 close of the
public offering in February 1995. The bridge loans have 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
will be 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 of 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.
On January 1, 1996, the Company issued options to a related party for 3,000
shares of restricted common stock at $.50 per share. These options can be
exercised through December 31,1999. The Company recorded compensation expense of
$3,450 which represents the difference between the option price and the fair
market value at issuance.
[9] Going Concern
The Company's financial statements for the three months ended March 31, 1996,
have been 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, 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
from operations. Management plans in this regard include consideration of the
sale of additional equity, debt financing, and obtaining additional contracts to
improve profitability and generate cash from operations. However, no assurances
can be given that the Company will be successful regarding their 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.
10
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ADVANCED VOICE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
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[11] Subsequent Events
[A] On April 1, 1996, $45,000 of the note receivable related party was repaid
and on April 12, 1996 the balance of $115,000 was repaid with interest.
. . . . . . . . . .
11
<PAGE>
Item 2.
ADVANCED VOICE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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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) 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 it's
educational services and products.
Using the Homework Hotline(R) as the cornerstone of a comprehensive parent
involvement program, the Company is developing 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 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.
12
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Overview [Continued]
In October 1995, the Company entered into a definitive contract with Work/Family
Directions, Inc. to implement its parent involvement program in ten communities
through out the country during the school year 1995/1996. The contract price for
this project is approximately $1.2 million. This amount is offset by
approximately $500,000 which was placed into an escrow account to cover the
equipment costs required for this contract. This project, is being sponsored by
a group of Fortune 500 corporations. The agreement provides for the installation
of 100 schools, 90 of which were completed. The balance will be complete in the
second quarter of 1996.
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"] for the 1996-1997 school year which involve working with
corporations, school districts, and community organizations to implement the
Company's parent involvement program on a community-wide scale.
Not surprisingly, the change of corporate strategy from a voice technology
company to an educational services company generated additional costs in
software development and program development and new marketing efforts.
Currently, these costs were not recouped by incremental sales. However, the
software and programs developed were responsible for the contract realized with
Work/Family Directions, Inc. as well as, for the opportunities the Company is
currently in line with the State of California, the New York State Department of
Education and the Southern Westchester BOCES.
Three months ended March 31, 1996 Compared to March 31, 1995
Results of Operations
The Company's net losses for the three months ended March 31, 1996 and 1995 were
$545,949 and $985,919, respectively. This decrease in net loss of $439,970 is
primarily the non-cash compensation expense of $396,000 recorded in 1995.
The Company spent significant time and moneys enhancing its hardware and
software offering and supplementing it with proprietary training and
parent/teacher support materials. The enhancements were designed to open the
Company up to larger, more profitable sales opportunities by broadening the
product's marketing appeal, reducing its competitive vulnerability, and
increasing the efficiency and effectiveness of its school district
implementation.
The Company began executing its new marketing efforts in June 1995. These
efforts, which focused on communities and school district installations rather
than one school at a time, in themselves generated a longer selling cycle.
However, the fruits of the change in corporate strategy began to be realized in
the fourth quarter of 1995 as the Company increased sales over the same period a
year ago by 627%. Further, as of March 31, 1996, the Company has been in
negotiations for several large flagship projects. These projects involve working
with the largest states and cities in the country, corporations, and community
organizations to implement the Company's parent involvement program on all
impactful community-wide scale.
Sales for the three months ended March 31, 1996 and 1995 were $85,085 and
$34,220, respectively. This increase of approximately $50,000 in net sales is
attributable primarily to the contract obtained from Work/Family Directions,
Inc. to install Homework Hotline(R) in 100 schools. At March 31, 1996, the
Company completed installation in 90 schools. It should be noted that the
Company recognizes revenue for a given system or program only when such system
is installed.
13
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three months ended March 31, 1996 Compared to March 31, 1995
Results of Operations [Continued]
For the quarter ended March 31, 1996, the Company had net sales to one customer
that generated approximately 97% of net sales. The loss of this significant
customer could have a material adverse effect on the Company. In addition, the
Company is primarily an installer of proprietary software. As such, most of the
Company's business is of a nonrecurring nature. The Company must continually
market its products to new customers. Unless the Company is successful 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 three months ended March 31, 1996 and 1995 was 66.8% and
66.9%, respectively.
Selling expenses for the three months ended March 31, 1996 were $219,202 versus
$183,946 for the same period a year ago. This increase was mainly caused by an
increase in promotional expenditures of approximately $53,000 and increase in
sales salary of approximately $71,000. This increase was offset by a decrease of
$75,000 for travel expense and $17,000 in consulting expense.
General and administrative expenses for the three months ended
March 31, 1996 were $317,994 versus $382,923 for the same period a year ago.
Research and development expenses for the three months ended March 31, 1996 were
$2,975 versus $31,711 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). As of March 31, 1996, capitalized Software and
Development costs were $951,244. This included Software and Development costs of
$113,326 for version 1.2 of Homework Hotline(R) that was completed in October
1995. As of March 31, 1996 accumulated amortization of these costs was $18,887.
The Company anticipates that version 2.0 of Homework Hotline(R) will be
completed in May 1996.
Interest expense for the three months ended March 31, 1996 and 1995 was $650 and
$6,972, respectively.
Liquidity and Capital Resources
At March 31, 1996, the Company had a working capital of $328,958 and cash and
cash equivalents of $2,388. The Company utilized $88,431 and $700,835 for
operations for the three months ended March 31, 1996 and 1995, respectively. The
Company used $265,441 and $164,321 in investing activities for the three months
ended March 31, 1996 and 1995, respectively. The Company generated $-0- and
$4,605,650 from financing activities for the quarter ending March 31, 1996 and
1995.
The Company's cash balance at May 9, 1996 was $126,229. Management believes that
it will continue to meet its short-term liquidity need by the completion and
collection of the Work/Family Directions, Inc. contract. Management believes the
Company will meet its long-term liquidity need by additional installations via a
renewal of the Work/Family Directions, Inc. program, and/or the execution of
initiatives previously noted in California, with the New York State Department
of Education and the Southern Westchester Board of Cooperative Educational
Services.
14
<PAGE>
ADVANCED VOICE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Three months ended March 31, 1996 Compared to March 31, 1995
Liquidity and Capital Resources [Continued]
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 16, 1995. Consequently, the Company could
be restricted by this underwriting agreement from meeting its liquidity needs.
The Company believes that it will derive additional cash flow from its projected
increased sales, as experienced in the fourth quarter of 1995, resulting from
new and expanded services and products.
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. 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.
15
<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: May 15, 1996 By:/s/ Nancy Shalek
Nancy Shalek,
Chairman of the Board and Chief Financial
Officer
16
<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: May 15, 1996 By:
Nancy Shalek,
Chairman of the Board and Chief Financial
Officer
16
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