United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
{ X } Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Period Ended June 30, 1996.
0r
{ } Transition Report Pursuant to Section 13 or 15(d)of the Securities
Exchange Act of 1934 for the Transition
Period From _____________to_____________
Commission File Number 33-92894
Preferred/telecom, Inc.
Delaware 75-2440201
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12655 N. Central Expwy, Suite 800
Dallas, TX 75243
- ------------------------------------- ---------------------
(Address of Principal Executive (Zip Code)
Offices)
(214) 458-9950
(Registrant's Telephone Number, including area code.)
Not Applicable
(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 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the Court.
Yes No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, $ 0.001 Par Value - 10,766,142 Shares as of July 31, 1996.
Transitional Small Business Format Yes X No
<PAGE>
INDEX
Preferred/telecom, Inc.
PAGE
Part I. Financial Information F-1
Item 1. Financial Statements
Balance Sheets-June 30, 1996, June 30, 1995,
and March 31, 1996.
Statements of Operations-Three Months Ended June 30, 1996,
and 1995 and for the Year Ended March 31, 1996.
State of Shareholder's Deficit-Three Months Ended
June 30, 1996 and 1995 and for the Year Ended March 31, 1996.
Statements of Cash Flows-Three Months Ended June 30, 1996,
and 1995 and for the Year Ended March 31, 1996.
Notes to Financial Statements - June 30, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Part II. Other Information
Item 1. Legal Proceedings 3
Item 2. Changes in Securities 3
Item 3. Defaults upon Senior Securities 3
Item 4. Submission of Matters to a Vote of Security Holders 3
Item 5. Other Information 3
Item 6. Exhibits and Reports on Form 8-K 3
Signatures 5
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company and related notes thereto appearing
elsewhere in this filing.
Results of Operations
Preferred/telecom, Inc. (the Company) commenced business on May 13, 1994, and
was in the development stage through August 1, 1995. During the period from its
inception until March 31, 1995, the end of the fiscal year, the Company's
activities consisted entirely of developing and implementing its business plan,
including developing its product service offerings, formulating its marketing
strategies and operations, negotiation of agreements necessary to its proposed
operations and hiring personnel. The Company began its sales activities in April
1995 and had no revenues during the period of May 13, 1994 through March 31,
1995. The initial sales activity involved introducing the Company's proposed
services to prospective customers to gauge consumer response with respect to
pricing , features and viability of the services. The Company began enrolling
SecureCard customers in August 1995.
The Company is still in the early stages of its marketing efforts and
accordingly expenses continue to exceed revenues. In part, this is due to the
costs of the basic infrastructure that the Company has put in place and is
required regardless of the level of sales. In the three months ended June 30,
1995 there were sales of $ 1,184 for incidental services, and the direct costs
associated with generating sales was $ 140,424.During the three months ended
June 30, 1996, the Company booked revenues of $ 209,414. Of this 21% was
attributed to the SecureCard offering. The remainder of the Company's revenue
was derived from 1+ and 800 service. Direct cost of sales for the three month
period ending June 30, 1996 was $290,125 or 138.5%. Of that amount, $ 60,000
related to contractural minimums, very little of which represented payment for
actual services. As revenues increase, fees for services are expected to exceed
the contractural minimum, thus reducing the ratio of cost of sales to sales.
During the fiscal year ended March 31, 1996, the Company booked $ 159,004 in
revenue and $ 344,310 in direct expenses associated with the sale of SecureCard
and other telecommunication services. Of these direct expenses, $ 140,000
related to paying contractual minimums. For the three months ended June 30,
1996, sales and marketing expenses were 126% of sales, and general and
administrative expenses were 150% of sales. Each of these ratios are
considerably less than the equivalent ratios for the fiscal year ended March 31,
1996, down from 722.1% and 697.2% respectively, and can be expected to improve
as sales increase.
Liquidity and Capital Resources
The Company's cash and cash equivalents at June 30, 1996 were $ 65,161. During
the period from inception , May 1994 through September 30, 1995, the Company's
operations were funded primarily through loans of $ 1,255,000 of which an
aggregate of $ 822,500 was borrowed from the Company's officers, directors and a
greater than 5% beneficial owner. In March, 1995 the Company conducted a private
offering of convertible debentures in which debentures due in September 1996
with an aggregate principal amount of $ 122,500 were sold. In October, 1995 $
12,500 of those debentures were converted to stock. In July, 1996 an additional
$ 15,000 of those debentures were converted to stock. In October, 1995 the
Company conducted a Regulation S offering and sold 1,000,000 shares of Common
stock at $ 1.50 per share, generating $ 1,500,000 in capital. In addition, in
October and November, 1995, in accordance with Regulation D under the Securities
Act of 1933 (the "Securities Act"), the Company conducted an offering of eight
percent (8%) convertible debentures due March 31, 1997 with interest payable
quarterly commencing December 31, 1995. Under the terms of the debenture
offering the $ 375,000 generated was converted to stock in November, 1995. From
this $ 1,875,000 generated, notes due to non-affiliates in the amount of
$300,000. were repaid with associated interest. The remainder was available for
working capital and payment of vendor payables.
The Company requires additional capital to meet its current and future
obligations. In April 1996 the Company commenced a private offering of notes and
warrants ("Units") with maximum proceeds to the Company of $800,000. Each unit
consists of (i) a note in principal face amount of $10,000 bearing interest at a
rate of 7% per annum, with principal and interest payable two years from the
date of issue and (ii) warrants to purchase 5,000 shares of common stock, $.001
par value per share, at $1.50 per share at any time within two (2) years after
issuance of the warrants.
-1-
<PAGE>
On June 3, 1996, the terms of the offering were amended to increase the size of
the offering from 80 units to a maximum of 150 units or proceeds to the Company
of $1,500,000. Also in this amendment the Company altered the repayment terms to
the promissory note by means of an addendum to the note stating that the Company
contemplates raising capital in an underwritten public offering and after
payment of expenses of the underwriting will apply proceeds of such offering to
repayment of the notes issued by means in the private offering. The funds being
sought in this offering are only intended to permit the Company to continue
operations and meet its material operating obligations while it seeks additional
funding sufficient for long term implementation of its business plan. As of
August 15, 1996, the Company had raised $ 850,000 in the private placement. If
at least $ 200,000 additional funds are not raised in this private offering by
August 31, 1996, the Company will likely have to significantly curtail its
operations and would be forced to make drastic cuts in its overhead, to down
size its business operations, and to take other actions, including seeking
additional financing or considering strategic alternatives. There is no
assurance that such additional financing or strategic alternatives would be
viable or available on terms acceptable to the Company. The Company currently
has a letter of intent with an investment banking firm, to underwrite on a firm
commitment basis, a proposed Four Million Dollar ($4,000,000) public offering of
the Company's securities. The underwriting of the proposed public offering is
subject to a number of conditions, including the raising of at least an
additional $200,000 by means of the PPM. The public offering, if made will be
made only by means of a prospectus pursuant to a registration statement filed
with the SEC pursuant to the Securities Act. The timing of the proposed public
offering is subject to a number of factors, certain of which are beyond the
Company's control; however, the Company intends to complete the public offering
by November 1, 1996.
Future Obligations. During the next twelve months, the Company plans, subject to
raising adequate capital, to increase substantially the marketing of its
Preferred SecureCard, VIP800 and Preferred Collect Services, to introduce new
products, and to continue refining these services. Subject to the Company's
ability to fund the cost, Management expects the Company to hire or contract
with approximately 35 additional persons during the next 12 months, primarily to
support its expanded marketing activities.
The ability of the Company to raise capital is, in the opinion of Management,
the primary constraint on such business plan. Management estimates that, during
the next twelve (12) months, the Company will require approximately $ 3,500,000
of equity and/or long term debt to finance its costs of marketing and the
continued refinement of its services at anticipated levels, with most of these
funds being needed to support marketing efforts. In addition, the Company will
be required to obtain extensions of its current debt or raise additional funds
of approximately $ 1,100,000 to retire its debt. There is no assurance however,
that the Company will be able to secure any such financing or extensions of its
current debt.
The Company was obligated under its agreement with MCI Telecommunications
Corporation (MCI) to pay at least $ 1,000,000 per month for transmission
services beginning January, 1996. In June, 1996, the Company and MCI reached an
agreement more reflective of the Company's operations. This agreement adjusts
the monthly commitment to a $ 200,000 monthly minimum and grants concessions and
relief from previously agreed to minimums. The agreement is retroactive to April
1, 1996 and ramps to the $ 200,000 minimum in September, 1996 and then continues
for a period of twenty-four (24) months which expires on March 31, 1997. If the
Company does not meet these minimums, then it must pay MCI the difference
between actual usage and the minimum. The new agreement has been proposed to the
Company by MCI for ratification. As there were verbal agreements, confirmed in
correspondence, to the terms outlined above, the Company anticipates no material
changes in the above outlined carrier services agreements when executed.
The Company expects to fund this obligation through customer revenues. Sixty
percent of the customer revenue is paid through an escrow account to MCI. To the
extent the Company's revenues are not sufficient to meet this obligation, the
Company will be required to fund this obligation from other sources.
The Company's agreement with Brite Voice Systems, Inc. ("Brite") calls for
minimum monthly usage fees of at least $ 20,000 per month through August 15,
1996, $ 25,000 per month through August 15, 1997, and $ 30,000 per month through
August 15, 1998 in SecureCard charges. The Company's obligation to Brite is
based upon the Company's billable minutes through the Brite system and paid out
of revenues as they are received. To the extent that the monthly usage
obligation is less than the minimum amounts specified in the governing
agreements, the Company
-2-
<PAGE>
would be required to pay Brite the difference between the actual usage charges
and these minimums at those times specified in the agreements. At present, the
Company's monthly usage is less than the minimum amount. The Company expects
actual usage charges to equal or exceed these minimums in late 1996. If the
Company were to default in its payment to Brite, its ability to utilize the
Brite platform would terminate. The Company and Brite have executed an agreement
to convert monthly minimums of $216,500 which represent minimum payments from
January through October into a promissory note bearing interest at prime +2% per
annum which is due November 1, 1996 and warrants to purchase 60,000 shares of
common stock at a price of $2.44 per share exercisable three years from the date
of the note.
Certain of the information contained in Parts I and II of this Form 10-QSB
constitutes forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934. Although
the Company believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Important factors that could cause the actual
results to differ from the Company's expectations are set forth and herein under
the caption "Risk Factors" in the Company's prospectus dated August 15, 1995. In
addition, an important factor is the Company's ability to raise sufficient
capital to execute its business plan and meet its obligations. Therefore, the
actual results that are achieved may differ materially from any such forward
looking information.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 2. Changes in Securities.
There have been no material changes in securities during the period.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Subsequent Events. Mr. Dennis L. Gundy joined the Company as President and
Chief Operating Officer in July, 1996 bringing thirty-four years experience in
management, engineering, construction and operations of domestic and
international telecommunications companies. Mr. Gundy has served as an
independent consultant since 1993. During that time he was instrumental in the
technical planning and implementation of switched satellite services in Russia,
the Ukraine and Mexico. Prior to that, he served as Executive Vice President of
the St. Thomas and San Juan Telephone Company from 1990 through 1992. From 1986
to 1990, Mr. Gundy was Vice President, Operations and Engineering at
International Telecharge, Inc. in Dallas, TX. Mr. Gundy was a Vice President,
Operations-Western United States for U. S. Sprint from 1980 to 1986.
Item 6. Exhibits and Reports on Form 8-K.
EXHIBIT
NUMBER DESCRIPTION
10.1 Promissory Note to Pegasus Settlement Trust, in original principal amount
of $ 50,000, dated as of April 16, 1996 (Incorporated by reference to
Exhibit 10.40 to the Company's Annual Form 10-KSB for period ending March
31, 1996)
-3-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
10.2 Promissory Note to Lawrence E. Steinberg, in original principal amount of $
100,000, dated as of April 29, 1996 (Incorporated by reference to Exhibit
10.41 to the Company's Annual Form 10-KSB for period ending March 31, 1996)
10.3 Specimen Eight and One-Half Percent Convertible Subordinated Debenture of
Preferred/telecom, Inc. (Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
10.4 Media Purchase Agreement, dated effective June 3, 1996 by and among
Preferred/telecom, Inc., Source Corp., ADEX Corp., and GRO Enterprises.
(Incorporated by reference to Exhibit 10.43 to the Company's Annual Form
10-KSB for the period ending March 31, 1996)
10.5 Specimen of 2-Year, 7% $10,000 Note being issued in bridge financing.
(Incorporated by reference to Exhibit 10.44 to the Company's Annual Form
10-KSB for period ending March 31, 1996)
10.6 Specimen of Warrants to Purchase 5,000 shares of Common Stock being issued
in bridge financing. (Incorporated by reference to Exhibit 10.45 to the
Company's Annual Form 10-KSB for period ending March 31, 1996)
10.7 Promissory Note to Brite Voice Systems, Inc. in the original principal
amount of $ 216,500, dated as of July 31, 1996. (Incorporated by reference
to Exhibit 10.48 to the Company's Annual Form 10-KSB for period ending
March 31, 1996)
10.8 Warrant Certificate to purchase 60,000 shares of Common Stock issued to
Brite Voice Systems, Inc. . (Incorporated by reference to Exhibit 10.49 to
the Company's Annual Form 10-KSB for period ending March 31, 1996)
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1996.
-4-
<PAGE>
PREFERRED/TELECOM, INC.
FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
AND MARCH 31, 1996
C O N T E N T S
Page
Financial Statements:
Balance Sheets ......................................................... F-2
Statements of Operations ............................................... F-3
Statement of Stockholders' Deficit...................................... F-4
Statements of Cash Flows................................................ F-5
Notes to Financial Statements......................................... F6-12
F-1
<PAGE>
PREFERRED/TELECOM, INC.
BALANCE SHEETS
JUNE 30, 1996 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
(unaudited) (unaudited) (audited)
------------- ----------- -----------
Assets
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 17,505 $ 115,467 $ 42,574
Accounts receivable, net of allowance
for doubtful accounts of $2,474, $-0-,
and $2,474, respectively 168,548 1,184 57,475
Employee receivables 14,865 0 13,185
Prepaid expenses 196,062 25,191 30,917
Total current assets $396,980 $141,842 $144,151
------------- -------------- -------------
Property and equipment:
Computer equipment $100,759 $29,706 $99,979
Furniture and fixtures 25,143 18,225 24,550
Office equipment 6,082 0 6,082
Leasehold improvements 6,248 2,258 6,248
Call validation system 127,682 0 112,520
------------- -------------- -------------
$265,914 $50,189 $249,379
Less accumulated depreciation 36,734 3,637 23,419
------------- -------------- -------------
Net property and equipment $229,180 $46,552 $225,960
------------- -------------- -------------
Other assets:
Prepaid expenses $640,000 $0 $0
Deposits 95,352 3,195 14,852
Deferred contract costs 114,451 155,000 121,576
Deferred debt issue costs - net 1,726 15,454 4,333
Deferred offering costs 68,241 20,000 0
Certificate of deposit 50,445 0 50,445
Patents and trademarks - net 21,581 0 16,208
------------- -------------- -------------
Total other assets $991,796 $193,649 $207,414
------------- -------------- -------------
$1,617,956 $382,043 $577,525
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
(unaudited) (unaudited) (audited)
-------------- --------------- --------------
Liabilities and stockholders' deficit
Current liabilities:
<S> <C> <C> <C>
Accounts payable $ 796,628 $ 0 $ 526,162
Accrued payroll and payroll taxes 290,762 102,745 162,411
Accrued interest payable 48,934 14,564 20,866
Accrued operating expenses 22,766 59,580 29,538
Accrued vacation 28,412 0 27,029
Current maturities of long-term debt 110,000 0 110,000
Notes payable - related parties 1,033,446 732,500 932,500
-------------- --------------- --------------
Total current liabilities $2,330,948 $909,389 $1,808,506
-------------- --------------- --------------
Long-term debt $370,000 $122,500 $0
-------------- --------------- --------------
Commitments and contingencies (Note H)
Stockholders' deficit:
Common stock, $0.001 par value;
20,000,000 shares authorized; shares
issued 10,756,142, 7,080,000, and
8,949,942, respectively $ 10,756 $ 7,080 $ 8,950
Additional paid-in capital 2,823,879 24,170 1,916,632
Accumulated deficit (3,916,959) (681,096) (3,156,428)
-------------- --------------- --------------
$(1,082,324) $(649,846) $(1,230,846)
Treasury stock - at cost 668 0 135
-------------- --------------- --------------
Total stockholders' deficit $(1,082,992) $(649,846) $(1,230,981)
-------------- --------------- --------------
$1,617,956 $382,043 $577,525
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
PREFERRED/TELECOM, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
AND FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
(unaudited) (unaudited) (audited)
--------------- ---------------- --------------
<S> <C> <C> <C>
Sales $ 209,414 $ 1,184 $ 159,004
Cost of sales 290,125 770 344,310
--------------- ---------------- --------------
Gross profit (loss) $(80,711) $414 $(185,306)
--------------- ---------------- --------------
Costs and expenses:
Sales and marketing expenses $363,426 $80,017 $1,091,453
General and administrative expenses 288,291 164,735 1,360,693
Interest expense 28,103 4,251 86,469
--------------- ---------------- --------------
Total costs and expenses $679,820 $249,003 $2,538,615
--------------- ---------------- --------------
Loss before income taxes $(760,531) $(248,589) $(2,723,921)
Provision for income taxes 0 0 0
--------------- ---------------- --------------
Net loss $(760,531) $(248,589) $(2,723,921)
Net loss per share $ (0.08) $ (0.04) $ (0.35)
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PREFERRED/TELECOM, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995 AND
THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Shares of common stock
Authorized Issued Outstanding In treasury
-------------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance - April 1, 1995 15,000,000 6,480,000 6,480,000 0
Common stock subscriptions received - May 31, 0 0 0 0
1995
Issuance of common stock - June 1, 1995 0 600,000 600,000 0
Net loss for the period 0 0 0 0
------------- ------------- --------------- -------------
Balance - June 30, 1995 15,000,000 7,080,000 7,080,000 0
Increase in authorized shares - July 25, 1995 5,000,000 0 0 0
Common stock subscribed - September 1, 1995 0 240,000 240,000 0
Common stock subscribed - September 5, 1995 0 50,000 50,000 0
Exercise of stock warrants - October 13, 1995 0 200,000 200,000 0
Common stock subscriptions received - October 0 0 0 0
18, 1995
Issuance of common stock - October 26, 1995
(net of issuance costs of $42,610) 0 1,000,000 1,000,000 0
Exercise of stock warrants - November 1, 1995 0 15,300 15,300 0
Conversion of 8.5% debentures - November 3, 0 8,333 8,333 0
1995
Conversion of 8% debentures - November 21, 0 27,624 27,624 0
1995
Conversion of 8% debentures - November 23, 0 178,685 178,685 0
1995
Exercise of stock options - December 5, 1995 0 150,000 150,000 0
Purchase of treasury stock 0 0 (45,000) 45,000
Net loss for the period 0 0 0 0
------------- ------------- --------------- -------------
Balance - March 31, 1996 20,000,000 8,949,942 8,904,942 45,000
Exercise of stock warrants - June 30, 1996 0 1,406,200 1,406,200 0
Purchase of treasury stock 0 0 (160,000) 160,000
Issuance of common stock 0 400,000 400,000 0
Net loss for the period 0 0 0 0
------------- ------------- --------------- -------------
Balance - June 30, 1996 20,000,000 10,756,142 10,551,142 205,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Amounts
Common Additional Stock Total
stock $0.01 Treasury paid-in Accumulated subscriptions stockholders'
par value stock capital deficit receivable deficit
- ---------- ----------- ------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 6,480 $ 0 $ 770 $ (432,507) $ (1,100) $ (426,357)
0 0 0 0 1,100 1,100
600 0 23,400 0 0 24,000
0 0 0 (248,589) 0 (248,589)
- ---------- ----------- ------------- -------------- --------------- -----------------
$ 7,080 $0 $24,170 $(681,096) $0 $(649,846)
0 0 0 0 0 0
240 0 9,360 0 (9,600) 0
50 0 1,950 0 (2,000) 0
200 0 7,800 0 0 8,000
0 0 0 0 11,600 11,600
1,000 0 1,456,390 0 0 1,457,390
15 0 2,524 0 0 2,539
8 0 12,492 0 0 12,500
28 0 49,972 0 0 50,000
179 0 327,124 0 0 327,303
150 0 24,850 0 0 25,000
0 (135) 0 0 0 (135)
0 0 0 (2,475,332) 0 (2,475,332)
- ---------- ----------- ------------- -------------- --------------- -----------------
$8,950 $(135) $1,916,632 $(3,156,428) $0 $(1,230,981)
1,406 0 107,647 0 0 109,053
0 (533) 0 0 0 (533)
400 0 799,600 0 0 800,000
0 0 0 (760,531) 0 (760,531)
- ---------- ----------- ------------- -------------- --------------- -----------------
$10,756 $(668) $2,823,879 $(3,916,959) $0 $(1,082,992)
</TABLE>
F-4
<PAGE>
PREFERRED/TELECOM, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
AND FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
(unaudited) (unaudited) (audited)
-------------- ----------------- ---------------
Cash flows from operating activities:
<S> <C> <C> <C>
Cash received from customers $ 98,341 $ 0 $ 101,529
Cash paid to suppliers and employees (610,177) (428,897) (2,359,786)
Interest paid (35) 0 (75,916)
-------------- ----------------- ---------------
Net cash used by operating activities $(511,871) $(428,897) $(2,334,173)
-------------- ----------------- ---------------
Cash flows from investing activities:
Capital expenditures $(24,424) $(24,089) $(246,459)
Purchase of certificate of deposit 0 0 (50,000)
Proceeds from sale of fixed assets 0 0 3,056
-------------- ----------------- ---------------
Net cash used by investing activities $(24,424) $(24,089) $(293,403)
-------------- ----------------- ---------------
Cash flows from financing activities:
Proceeds from sale of stock $0 $25,100 $1,938,332
Proceeds from notes payable 580,000 500,000 687,500
Increase in deferred offering costs (68,241) 0 0
Purchase of treasury stock (533) 0 (135)
Decrease in stock subscriptions receivable 0 0 1,100
-------------- ----------------- ---------------
Net cash provided by financing activities $511,226 $525,100 $2,626,797
-------------- ----------------- ---------------
Net increase (decrease) in cash and cash equivalents $(25,069) $72,114 $(779)
Cash and cash equivalents:
Beginning of period 42,574 43,353 43,353
-------------- ----------------- ---------------
End of period $17,505 $115,467 $42,574
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
(unaudited) (unaudited) (audited)
--------------- -------------- ---------------
Reconciliation of net loss to net cash used
by operating activities:
<S> <C> <C> <C>
Net loss $(760,531) $(248,589) $(2,723,921)
--------------- -------------- ---------------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation $13,315 $1,241 $25,017
Amortization 12,041 0 29,604
(Gain) loss on sale of fixed assets 206 0 (636)
Changes in assets and liabilities:
Increase in accounts receivable (111,073) (1,184) (57,475)
Increase in employee receivables (1,680) 0 (13,185)
Increase in certificate of deposit 0 0 (445)
Increase in deposits (80,500) (350) (12,007)
Increase in prepaid expenses (5,145) (24,000) (29,726)
Increase in deferred contract costs 0 (130,000) (114,500)
Increase in accounts payable 270,466 0 526,162
Increase (decrease) in accrued expenses 151,030 (26,015) 36,939
--------------- -------------- ---------------
$248,660 $(180,308) $389,748
--------------- -------------- ---------------
Net cash used by operating activities $(511,871) $(428,897) $(2,334,173)
Supplemental schedule of non-cash investing
and financing activities:
Issuance of common stock in exchange for
bartering credits $ 800,000
</TABLE>
F-5
<PAGE>
PREFERRED/TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
See independent accountant's report.
Note A - General organization:
Preferred/telecom, Inc. (the "Company") is a Delaware corporation incorporated
in 1992. The Company commenced business on May 13, 1994, and was in the
development stage until August 1, 1995. The Company provides long distance
telecommunications services throughout the United States and maintains its
principal offices in Dallas, Texas. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Certain prior year amounts have been reclassified for comparison
purposes.
Note B - Summary of significant accounting policies:
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
amounts due from banks.
Accounts receivable
In the normal course of business, the Company extends unsecured credit to
its customers with payment terms generally 30 days. Because of the credit risk
involved, management has provided an allowance for doubtful accounts which
reflects its opinion of amounts which will eventually become uncollectible. In
the event of complete nonperformance by the Company's customers, the maximum
exposure to the Company is the outstanding accounts receivable balance at the
date of nonperformance.
Depreciation
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed on the straight-line
method for financial reporting purposes and the double declining method for
income tax purposes.
Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized.
The useful lives of property and equipment for purposes of computing
depreciation are as follows:
Computer equipment 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Leasehold improvements 6 years
Income taxes
Income taxes are accounted for using the liability method under the
provisions of SFAS 109 "Accounting for Income Taxes".
Loss per share
Loss per share is based on the weighted average number of shares
outstanding of 9,447,645, 6,677,802, and 7,769,708 for the periods ended June
30, 1996 and 1995, and March 31, 1996, respectively.
F-6
<PAGE>
Note B - Summary of significant accounting policies (continued):
Amortization
Fees and other expenses associated with the issuance of subordinated
convertible debentures are being amortized on the straight-line method over
the term of the debentures beginning in April, 1995. Amortization expense was
$2,606, $2,576, and $10,303 for the periods ended June 30, 1996 and 1995, and
March 31, 1996, respectively.
The cost of patents and trademarks are being amortized on the straight-line
method over a period of 15 years. Amortization expense charged to operations
as of June 30, 1996 and 1995, and March 31, 1996 was $2,309 and $559,
respectively.
Note C - Notes payable - related parties:
Notes payable to related parties consist of the following at June 30, 1996 and
1995, and March 31, 1996:
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
------------- ------------ ------------
Notes payable to a director and officer, dated September 1,
1994 and June 12, 1996, due on October 1, 1996 and June 12, 1998,
and unsecured, interest is payable semi-annually at the rate of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
prime +2 (8.25% at June 30, 1996 and March 31, 1996 and 7% per $ 67,500 $ 7,500 $ 7,500
annum).
Note payable to a director and officer, dated June 5, 1994,
due on October 1, 1996 and unsecured, interest is payable
semi-annually at the rate of prime + 2 (8.25% at June 30, 1996
and March 31, 1996). 50,000 50,000 50,000
Notes payable to a Pegasus Settlement Trust (PST) a stockholder
of the Company. The beneficiary and a trustee of PST are
officers of the Company. The notes are unsecured and bear
interest at rates ranging from prime rate (8.25% and 9% at
June 30, 1996 and March 31, 1996) with the principal and
accrued interest payable at maturity on various dates through
January 21, 1997. 590,946 575,000 650,000
Notes payable to a stockholder of the Company and several
affiliated trusts of which the stockholder is the trustee.
The notes are unsecured and bear interest at rates of 9% and
10% per annum and prime (8.25% at June 30, 1996 and March 31,
1996) with principal and accrued interest payable at various
dates through November 26, 1996. 325,000 100,000 225,000
------------- ------------ ------------
Total related party notes payable $1,033,446 $732,500 $932,500
</TABLE>
Interest expense charged to operations related to the related party
notes payable was $28,103, $8,782, and $76,943 for the periods ended
June 30, 1996 and 1995, and March 31, 1996, respectively.
F-7
<PAGE>
Note D - Long-term debt:
Long-term debt consisted of the following at June 30, 1996 and 1995, and March
31, 1996:
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
------------- ------------ ------------
8.5% convertible debentures due September 27, 1996,
convertible into shares of common stock at a conversion
price of $1.50 per share, interest is payable on
<S> <C> <C> <C> <C> <C>
December 27, 1995, and at maturity. $110,000 $122,500 $110,000
Notes payable dated May 20, 1996 and June 3, 1996,
secured by common stock with principal and accrued
interest due at maturity on May 20, 1998 and
June 3, 1998. 185,000 warrants to purchase shares
of common stock at $1.50 per share expiring
on May 20, 1998 and June 3, 1998 were issued to the note 370,000 0 0
holders.
------------- ------------ ------------
$480,000 $122,500 $110,000
Less current portion 110,000 0 110,000
------------- ------------ ------------
Total $370,000 $122,500 $0
</TABLE>
On November 3, 1995, $12,500 of 8.5% convertible debentures were converted into
8,333 shares of common stock.
The following are maturities of long-term debt for each of the next three
years:
<TABLE>
<CAPTION>
Year ending
March 31, Amount
------------- -------------
<S> <C> <C>
1997 $ 0
1998 0
1999 370,000
-------------
Total $370,000
</TABLE>
Note E - Common stock:
Stock purchase warrants
At June 30, 1996, the Company had outstanding warrants to purchase
1,567,900 shares of the Company's common stock at prices which ranged from
$0.04 per share to $1.50 per share. The warrants are exercisable at any time
and expire on dates ranging from January 27, 1998 to October 6, 1998. At June
30, 1996, 1,567,900 shares of common stock were reserved for that purpose.
F-8
<PAGE>
Note E - Common stock (continued):
Change in authorized shares
On March 15, 1995, the Company's stockholders approved an amendment to
increase the number of authorized shares of common stock from 10,000,000 to
15,000,000.
On July 25, 1995, the Company's stockholders approved an amendment to
increase the number of authorized shares of common stock from 15,000,000 to
20,000,000.
Common stock reserved
At June 30, 1996, shares of common stock were reserved for the following
purposes:
<TABLE>
<CAPTION>
<S> <C>
Exercise of stock warrants 1,567,900
Exercise of stock options 100,000
Conversion of convertible debentures 73,334
Exercise and future grants of stock
options and stock appreciation rights 450,000
-------------
2,191,234
</TABLE>
Note F - Income taxes:
The Company uses the liability method of accounting for income taxes under the
provisions of Statement of Financial Accounting Standards No. 109. Under the
liability method, a provision for income taxes is recorded based on taxes
currently payable on income as reported for federal income tax purposes, plus an
amount which represents the change in deferred income taxes for the year.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax reporting basis of the Company's assets
and liabilities. The major areas in which temporary differences give rise to
deferred taxes are accrued liabilities, start-up expenditures, and net operating
loss carryforwards. Deferred income taxes are classified as current or
noncurrent depending on the classification of the assets and liabilities to
which they relate. Deferred income taxes arising from temporary differences that
are not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Period ended Period ended Period ended
June 30, June 30, March 31, 1996
1996 1995
--------------- --------------- -----------------
<S> <C> <C> <C>
Current income taxes $0 $0 $0
Change in deferred income taxes
due to temporary differences 0 0 0
--------------- --------------- -----------------
$0 $0 $0
</TABLE>
F-9
<PAGE>
Note F - Income taxes (continued):
Deferred tax (liabilities) assets consist of the following:
<TABLE>
<CAPTION>
June 30, June 30, March 31,
1996 1995 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Accumulated depreciation $ (7,000) $ (1,000) $ (5,000)
-------------- ------------- --------------
Gross deferred tax liabilities $(7,000) $(1,000) $(5,000)
-------------- ------------- --------------
Accrued liabilities $(10,000) $(3,000) $(9,000)
Start-up expenditures 41,000 48,000 39,000
Net operating loss carryforward 1,188,000 177,000 1,017,000
-------------- ------------- --------------
Gross deferred tax assets $1,219,000 $222,000 $1,047,000
Valuation allowance (1,212,000) (221,000) (1,042,000)
-------------- ------------- --------------
Net deferred tax assets $7,000 $1,000 $5,000
-------------- ------------- --------------
$0 $0 $0
</TABLE>
The Company has available at June 30, 1996, a net operating loss carryforward
of approximately $3,727,000 which can be used to offset future taxable income
through the year 2009.
The net change in the valuation allowance for the periods ended June 30, 1996
and 1995, and March 31, 1996 was increases of $170,000, $75,000, and $896,000,
respectively.
Note G - Stock option plan:
On November 1, 1994, the Company adopted a stock award and incentive plan
which permits the issuance of options and stock appreciation rights to selected
employees and independent contractors of the Company. The plan reserves 450,000
shares of common stock for grant and provides that the term of each award be
determined by the committee of the Board of Directors (Committee) charged with
administering the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options, and the exercise price, determined by the Committee,
may not be less than the fair market value of a share on the date of grant.
Stock appreciation rights granted in tandem with an option shall be exercisable
only to the extent the underlying option is exercisable and the grant price
shall be equal to the exercise price of the underlying option. At June 30, 1996,
options to purchase 209,500 shares at an exercise prices of $0.003 to $1.50 per
share had been granted. No stock appreciation rights had been granted at June
30, 1996.
Note H - Commitments and contingencies:
Lease commitment
The company has entered into a non-cancelable operating lease for office
facilities under a lease arrangement commencing on February 1, 1996 and
expiring on August 31, 2002.
F-10
<PAGE>
Note H - Commitments and contingencies (continued):
Minimum future rentals to be paid on non-cancelable leases as of June 30,
1996 for each of the next five years and in the aggregate are:
<TABLE>
<CAPTION>
Year ending
March 31, Amount
------------- ------------
<S> <C> <C>
1997 $127,836
1998 127,836
1999 131,708
2000 151,608
2001 151,608
Thereafter 214,013
------------
$904,609
</TABLE>
Total rent expense charged to operations was $32,062, $8,839, and $49,661 for
the periods ended June 30, 1996 and 1995, and March 31, 1996, respectively.
Carrier agreement
The Company is obligated for minimum monthly service payments under the
terms of a carrier services agreement with MCI Telecommunications Corporation
(MCI) expiring in October 1998.
The minimum annual commitments under the MCI agreement are as follows:
<TABLE>
<CAPTION>
Year ending
March 31, Amount
------------- --------------
<S> <C> <C>
1997 $ 9,725,000
1998 12,000,000
1999 12,000,000
2000 7,000,000
--------------
$40,725,000
</TABLE>
The MCI agreement is for a period of 46 months. The Company has a liability
equal to fifteen (15) percent of the remaining minimum payments in the event
of termination prior to expiration by the Company or MCI under certain
conditions. The remaining liability amounts to a maximum of $6,000,000.
Initially, 60% of the Company's revenues will be paid to MCI, subject to
subsequent adjustments for over and underpayments.
Letter of credit
At June 30, 1996, the Company had a $50,000 outstanding letter of credit
expiring February 1, 1998. The letter of credit is for the benefit of the
lessor of office space facilities and may be drawn in the event of default.
The letter of credit is secured by a certificate of deposit in the amount of
$50,445.
F-11
<PAGE>
Note H - Commitments and contingencies (continued):
Other commitments
On April 19, 1995, the Company entered into an equipment and services
agreement with Brite Voice Systems, Inc. (BVS). Under the terms of the
agreement, the Company paid BVS an initial fee of $89,500 and minimum monthly
payments are due, starting at $20,000 per month, for a period of three years.
The total minimum monthly payment commitments amount to $900,000 over the term
of the agreement. In return, BVS will provide access to its technology used in
providing voice-activated calling card services.
Note I - Barter transaction:
On June 3, 1996, the Company entered into a media purchase agreement for the
promotion of its products and services with Proxhill Marketing, Ltd. (Proxhill).
Under the terms of the agreement, the Company committed to purchase $1,200,000
of media advertising time in exchange for 400,000 shares of common stock at a
value of $2.00 per share, and $400,000 in cash. The agreement is for a period of
five years. For each purchase of media advertising time, the Company will
receive a barter credit equal to 66.67% of the transaction value with the
remaining balance payable in cash. In connection with this agreement, the
Company issued to Proxhill 100,000 options to purchase the Company's common
stock at a price of $2.00 per share. The options expire June 3, 2001.
Note J - Going concern:
The Company has incurred substantial operating losses to date. In June 1995,
the Company issued 600,000 shares of its common stock to Star Resources, Inc.
(Star), a public company, for $24,000. The Company then filed a registration
statement with the Securities and Exchange Commission to allow Star to
distribute to its stockholders the 600,000 shares of common stock. Upon
completion of the Star distribution, the Company became a separate public
company. The Company has raised, and intends to continue to raise, additional
capital through subsequent offerings of its common stock in over-the-counter
securities markets.
The Company has received total proceeds of $845,000 in connection with a
private offering of $10,000 notes bearing interest at 7% and warrants to
purchase 5,000 shares of common stock at a price of $1.50. In addition, the
Company has retained investment banking counsel in contemplation of attempting
to complete a secondary public offering of the Company's common stock.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to meet the Company's financial
requirements will provide the Company the opportunity to continue as a going
concern.
F-12
<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.
PREFERRED/TELECOM, INC.
/s/ Dennis L. Gundy
- --------------------- -----------------------------
Date Dennis L. Gundy, President
(Principal Executive Officer)
/s/ Mary G. Merritt
- --------------------- -----------------------------
Date Mary G. Merritt, Secretary/Treasurer
(Principal Financial Officer)
-5-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000946822
<NAME> @dfsy5eu
<MULTIPLIER> 1
<CURRENCY> u.s.dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> mar-31-1996
<PERIOD-START> apr-01-1996
<PERIOD-END> jun-30-1996
<EXCHANGE-RATE> 1
<CASH> 17,505
<SECURITIES> 0
<RECEIVABLES> 171,022
<ALLOWANCES> 2,474
<INVENTORY> 0
<CURRENT-ASSETS> 396,980
<PP&E> 265,914
<DEPRECIATION> 36,734
<TOTAL-ASSETS> 1,617,956
<CURRENT-LIABILITIES> 2,330,948
<BONDS> 370,000
0
0
<COMMON> 10,756
<OTHER-SE> (1,093,748)
<TOTAL-LIABILITY-AND-EQUITY> 1,617,956
<SALES> 209,414
<TOTAL-REVENUES> 209,414
<CGS> 290,125
<TOTAL-COSTS> 648,981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,736
<INTEREST-EXPENSE> 28,103
<INCOME-PRETAX> (760,531)
<INCOME-TAX> 0
<INCOME-CONTINUING> (760,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (760,531)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
