United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB/A
(Amendment No.1)
{ X } Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Period Ended September 30, 1996. or
{ } 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 - 10,851,142 Shares as of October 31, 1996.
Transitional Small Business Format Yes X No
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Item 2.Item 2 contained in the Registrant's Form 10-QSB, dated November 19,
1996, for the quarter ended September 30, 1996 is replaced by Item 2 set forth
below:
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 and has been providing long distance
services, including SecureCard and traditional 1+ and 800 services since that
time.
In the six months period ended September 30, 1995 the Company booked revenues of
$ 14,450 for services, and the direct costs associated with generating sales was
$ 93,851. During the six months ended September 30, 1996, the Company booked
revenues of $ 478,910. Of this amount, 19% was attributed to the SecureCard
product. The remainder of the Company's revenue was derived from 1+ and 800
service. Direct cost of sales for the six month period ending September 30, 1996
was $583,896 or 121.9% of sales. Of that amount, $ 127,500 related to
contractual minimums, very little of which represented payment for actual
services. 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.
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 six months ended September 30,
1996, sales and marketing expenses were 113% of sales, and general and
administrative expenses were 147% 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.
The Company has reevaluated its marketing efforts and product strategies as
expenses continue to exceed revenues. The Company now recognizes that the
services it pioneered are applicable not only in the long distance markets but
also in the newly-competitive local calling arena and the realm of wireless
communications. The Company plans on divesting itself of its long distance
business. The strategic focus will be on providing its technology to domestic
and international interexchange carriers and other telecommunications service
providers who wish to offer speech recognition-enhanced services as a
value-added product to their customers, and to corporations who wish to make the
convenience of speech recognition available to its employees.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 1996 were $ 18,250.
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, $ 15,000 of
those debentures were converted to stock. By terms of the debenture , when the
debenture came due on September 27, 1996 the holder was due principal, interest
and penalties for a sum due of $ 125,000. Of this amount $60,000 was converted
to 40,000 shares of the Company's common stock (the "Common Stock"), $0.001 par
value per share, and $65,000 of the debenture was replaced by a convertible note
due March 27, 1997 bearing interest at a rate of 8.5% per annum and convertible
into shares of Common Stock at a rate of $1.50 per share. 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
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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 Common 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.
In April 1996 the Company commenced a private offering of notes and warrants
("Units") with maximum proceeds to the Company of $800,000 with each Unit
consisting 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, at
$1.50 per share at any time within two (2) years after issuance of the warrants.
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
contemplated raising capital in an underwritten public offering and after
payment of expenses of the underwriting would apply proceeds of such offering to
repayment of the notes issued in the private offering. The funds being sought in
the offering were only intended to permit the Company to continue operations and
meet its material operating obligations while it sought additional funding
sufficient for long term implementation of its business plan. The offering was
closed on September 30, 1996, after the Company had raised $ 875,000 in the
private placement.
The Company entered into 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 was
subject to numerous conditions upon which ultimately the Company and the
investment banking firm were unable to agree. Therefore, the Company has
terminated its plans to conduct a public offering at this time. Although the
provisions of the letter of intent relating to the public offering have
terminated, the letter of intent grants to the investment banking firm a right
of first refusal to act as the Company's investment banker with regard to future
offerings, and certain acquisition/disposition transactions and provides for the
payment of a substantial fee to the investment banking firm for a breach of
these provisions. The Company requested a general termination and mutual release
in order to move forward with other means of financing. To date, the investment
banking firm has agreed to waive compensation on the near term financing
requirements of the Company but has not provided a release with respect to other
transactions.
The Company has acquired short term funding which will allow it to continue
operations through December 31, 1996. In October, 1996, a greater than 5%
shareholder lent the Company $ 60,000 at 10% per annum and is secured by office
furniture and equipment. Principal and interest is due on this note on January
10, 1997. Additional funding of $150,000. has been negotiated with another
shareholder which bears interest at 12% and is due February 10, 1997. This note
is secured by a media barter credit under its media purchase agreement. See Note
H to the Financial Statements. In addition, the shareholder received warrants to
purchase 600,000 shares of Common Stock, at a purchase price of $0.50 per share.
The Company has been forced to significantly curtail its operations and has made
drastic cuts in its overhead. The Company's operations consist principally of
servicing existing customers. It has suspended its marketing operations and is
not acquiring additional platforms until additional financing is in place. The
Company intends to offer a combination of Common Stock and warrants in a
Regulation D offering for maximum proceeds of $ 1,800,000. If all such proceeds
are raised, the Company will have sufficient funds to operate while it continues
to develop a long term financial structure. The timing of the proposed offering
is subject to a number of factors, certain of which are beyond the Company's
control; however, the Company intends to commence this offering in early
December 1996.
Future Obligations. During the next twelve months, the Company plans, subject to
raising adequate capital, to sell platforms which provide the technology
necessary to utilize its Preferred SecureCard, VIP800 and Preferred Collect
Service technology, to introduce new products, and to continue refining this
technology. Subject to the Company's ability to fund the cost, Management
expects the Company to hire or contract with approximately 20 additional persons
during the next 12 months, primarily to support its expanded marketing
activities.
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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 renegotiate or obtain extensions of its current debt or raise
additional funds of approximately $ 1,300,000 to retire its debt. There is no
assurance however, that the Company will be able to secure any such
renegotiations, financing or extensions of its current debt. In addition, the
Company will continue to seek a general termination and mutual release of the
provisions of the letter of intent with its investment banking firm relating to
future offerings.
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. Throughout 1996, negotiations for a mutually
beneficial revised agreement took place, but no final revised contract was
executed. With the Company's new focus on sales of technology, the need for a
carrier agreement is no longer necessary. The Company is currently negotiating
with MCI to eliminate its agreement completely and provide its services through
traditional long distance service agreements which would be based upon much
lower traffic volume requirements. The Company may be obligated to make a
substantial payment of previously submitted invoices to terminate its agreement
with MCI.
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 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 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 was
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. At
this time, the Company is in default of this 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.
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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.
December 6, 1996 /s/Dennis L. Gundy
----------------- ------------------
Date Dennis L. Gundy, President
(Principal Executive Officer)
December 6, 1996 /s/Mary G. Merritt
----------------- ------------------
Date Mary G. Merritt, Secretary/Treasurer
(Principal Financial Officer)
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