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, 1999.
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 VOICE, INC.
Delaware 75-2440201
------------------------------ --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Greenville Avenue
Suite 570
Dallas, TX 75206
- ------------------------------- ---------------------------
(Address of Principal Executive (Zip Code)
Offices)
(214) 265-9580
------------------------------
(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 No X
---- ----
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 - 13,103,879 shares as of December 31, 1999.
Transitional Small Business Format Yes No X
---- ----
<PAGE>
INDEX
Preferred Voice, Inc.
Part I. Financial Information 1
Item 1. Financial Statements 1
Balance Sheets-September 30, 1999, September 30, 1998
and March 31, 1999. 1
Statements of Operations-Three Months Ended September
30, 1999 and 1998, and Six Months Ended September 30,
1999 and 1998, and for the Year Ended March 31, 1999. 3
Statements of Cash Flows-Six Months Ended September 30,
1999 and 1998 and for the Year Ended March 31, 1999. 4
Notes to Financial Statements - September 30, 1999. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II. Other Information 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Preferred Voice, Inc.
Balance Sheets
September 30, 1999 and 1998 and March 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, September 30, March 31,
1999 1998 1999
Assets (Unaudited) (Unaudited) (Audited)
Current Assets:
Cash and Cash Equivalents $ 161,699 $ 494 $ 41,750
Accounts Receivable, net of allowance 284,721 -0- 860
for doubtful accounts of $ -0-, $-0-
and $-0- respectively
Employee Receivables 583 64 2,500
------------------- ------------------- ------------------
Total Current Assets $ 447,003 $ 558 $ 45,110
------------------- ------------------- ------------------
Property and Equipment:
Computer Equipment $ 274,129 $ 142,236 223,046
Furniture and Fixtures 24,495 16,934 16,934
Office Equipmentre 10,393 10,728 12,493
Computer Equipment 248,220 136,032 190,063
LESS: Accumulated Depreciation (217,557) (93,737) (161,049)
------------------- ------------------- ------------------
Net Property and Equipment $ 339,680 $ 212,192 $ 281,487
------------------- ------------------- ------------------
Other Assets:
Deposits $ 85,114 $ 81,012 $ 81,535
Prepaid Expenses 761,018 761,018 761,018
------------------- ------------------- ------------------
Total Other Assets $ 846,132 $ 842,030 $ 842,553
------------------- ------------------- ------------------
Total Assets $ 1,632,815 $ 1,054,780 $1,169,150
=================== =================== ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, September 30, March 31,
1999 1998 1999
Liabilities and Stockholder's Deficit (Unaudited) (Unaudited) (Audited)
Current Liabilities:
Accounts Payable $ 325,573 $ 351,556 $ 363,834
Accrued Operating & Vacation Expenses 25,237 51,301 19,611
Accrued Payroll and Related Tax 158,109 137,637 226,755
Accrued Interest Payable 261,034 289,289 248,967
Notes Payable 120,866 662,866 103,866
Notes Payable-Related Parties 100,000 50,000 100,000
------------------- ------------------- -------------------
Total Current Liabilities $ 990,819 $ 1,542,649 $ 1,063,033
------------------- ------------------- -------------------
Long Term Debt:
Notes Payable-Related Parties $ -0- $ 590,946 $ 590,946
Deferred Gain on Sale-Leaseback Transaction -0- 136,243 -0-
Long-Term Debt, Net Of Current Maturities -0- -0- 253,000
------------------- ------------------- -------------------
Total Long Term Debt $ -0- $ 727,189 $ 843,946
------------------- ------------------- -------------------
Commitments and Contingencies (Note H)
Stockholders Deficit:
Common Stock, $0.001 par value
20,000,000 shares authorized;
shares issued 11,440,990, 7,679,574
and 9,695,681 respectively $ 11,436 $ 7,679 $ 9,695
Additional Paid In Capital 6,464,620 4,365,586 5,192,033
Accumulated Deficit (5,832,192) (5,586,455) (5,937,689)
Treasury Stock - at cost (1,868) (1,868) (1,868)
------------------- ------------------- -------------------
Total Stockholder Deficit $ 641,996 $ (1,215,058) $ (737,829)
------------------- ------------------- -------------------
Total Liabilities and Stockholder Deficit $ 1,632,815 $ 1,054,780 $ 1,169,150
=================== =================== ===================
</TABLE>
<PAGE>
Preferred Voice, Inc.
Statements of Operations
For The Three Months Ended September 30, 1999 and 1998
And For the Six Months Ended September 30, 1999 and 1998
And For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30, March 31,
1999 1998 1999 1998 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
-------------- ---------------- ---------------- ----------------- ----------------
Sales $ 227,471 $ - $ 822,645 $ - $ 180,383
Cost of Sales 91,167 415 136,082 415 15,033
-------------- ---------------- ---------------- ----------------- ----------------
Gross Profit (loss) $ 136,304 $ (415) $ 686,563 $ (415) $ 165,350
-------------- ---------------- ---------------- ----------------- ----------------
Costs and Expenses:
General & Administrative 355,992 119,530 589,167 321,053 768,024
Interest Expense 5,450 55,896 21,890 106,724 176,752
-------------- ---------------- ---------------- ----------------- ----------------
Total Costs and Expenses $ 361,442 $ 175,426 $ 611,057 $ 427,777 $ 944,776
-------------- ---------------- ---------------- ----------------- ----------------
Gain/(Loss) Before Income Tax $(225,138) $(175,841) $ 75,506 $ (428,192) $ (779,426)
Provision for Income Tax -0- -0- -0- -0- -0-
-------------- ---------------- ---------------- ----------------- ----------------
Loss Before Extraordinary Item $(225,138) $(175,841) $ 75,506 $ (428,192) $ (779,426)
============== ================ ================ ================= ================
Extraordinary Item:
Gain from Extinguishment of
Debt (less applicable income
taxes of -0-)(Note K) 17,935 88,828 29,991 88,828 88,828
Net Loss $ (207,203) $ (87,013) $ 105,497 $ (339,364) $ (690,598)
============== ================ ================ ================= ================
Per Share Amounts:
Gain/(Loss) from Operations $ (0.02) $ (0.03) $ 0.01 $ (0.07) $ (0.11)
Gain from Extinguishment of Debt $ - $ 0.01 $ - $ 0.01 $ 0.01
Net Gain/Loss (Per Share) $ (0.02) $ (0.02) $ 0.01 $ (0.06) $ (0.10)
</TABLE>
<PAGE>
Preferred Voice, Inc.
Statement of Cash Flows
For the Six Months Ended September 30, 1999 and 1998
And For the Year Ended March 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
September 30, September 30, March 31,
1999 1998 1999
(Unaudited) (Unaudited) (Audited)
------------------- ------------------- -------------------
Cash Flows from Operating Activities:
Cash Received from customers $ 595,175 $ 5,247 $ 179,510
Cash Paid to suppliers and employees (796,233) (251,188) (500,572)
Interest Paid (4,442) -0- -0-
------------------- ------------------- -------------------
Net Cash used by Operating Activities $ (205,500) $ (245,941) $ (321,062)
------------------- ------------------- -------------------
Cash Flows from Investing Activities:
Capital Expenditures $ (116,801) $ (79,149) $ (151,772)
Proceeds from Sale of Fixed Assets 250 1,300 1,300
------------------- ------------------- -------------------
Net Cash used by Investing Activities $ (116,551) $ (77,849) $ (150,472)
------------------- ------------------- -------------------
Cash Flows from Financing Activities:
Proceeds from Sale of Stock $ 360,000 -0- -0-
Proceeds from Notes Payable 200,000 148,000 351,000
Note Principal Payments (118,000) (6,000) (20,000)
Proceeds from Sale -Leaseback Transaction -0- 100,000 100,000
------------------- ------------------- -------------------
Net Cash provided by Financing Activities $ 442,000 $ 242,000 $ 431,000
------------------- ------------------- -------------------
Net Increase (Decrease) in Cash and
Cash Equivalents $ 119,949 $ (81,790) $ (40,534)
Cash and Cash Equivalents:
Beginning of Period 41,750 82,285 82,284
------------------- ------------------- -------------------
End of Period $ 161,699 $ 495 $ 41,750
=================== =================== ===================
Supplemental Schedule of non-cash investing and
financing activities:
Issuance of Common Stock in
Exchange for Debt $ 1,173,928 $ 1,051,346 $ 1,879,809
------------------- ------------------- -------------------
Total Non-Cash Investing Activities $ 1,173,928 $ 1,051,346 $ 1,879,809
=================== =================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30, March 31,
1999 1998 1999
(Unaudited) (Unaudited) (Audited)
------------------- ------------------- -------------------
Reconciliation of Net Gain/(Loss) to Net
Cash used by Operating Activities:
Net Gain/(Loss) $ 105,497 $ (339,364) $ (690,598)
------------------- ------------------- -------------------
Adjustments to Reconcile Net Loss to Net Cash
used by Operating Activities:
Depreciation $ 58,083 $ 12,832 $ 80,113
Amortization - 2,869 2,869
(Gain) Loss on Sale of Fixed Assets 275 (216) (186)
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (283,860) - (860)
(Increase) Decrease in Employee Receivables 1,917 (64) (2,500)
(Increase) Decrease in Deposits (3,579) 3,398 2,875
(Increase) Decrease in Prepaid Expenses - 38,982 38,982
(Increase) Decrease in Deferred Debt Issue Costs - 2,869 -
Increase (Decrease) in Accounts Payable (18,629) 8,244 58,635
Increase (Decrease) in Accrued Expenses (65,204) 24,509 189,608
------------------- ------------------- -------------------
Total Adjustments $ (310,997) $ 93,423 $ 369,536
------------------- ------------------- -------------------
Net Cash used by Operating Activities $ (205,500) $ (245,941) $ (321,062)
=================== =================== ===================
</TABLE>
<PAGE>
Note A - General organization:
Preferred Voice, Inc. (the "Company") is a Delaware corporation
incorporated in 1992. On February 25, 1997, the Company's stockholders approved
changing the name of the Company to better reflect the nature of the Company's
business. The Company commenced business on May 13, 1994, and was in the
development stage until August 1, 1995. The Company provides products and
services to the telecommunications industry throughout the United States and
maintains its principal offices in Dallas, Texas. The Company has not presented
financial statements for the period from incorporation in 1992 through May 13,
1994, as the Company did not begin its planning and organizational activities
until May 13, 1994. 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
Software development 3 years
Income taxes
Income taxes are accounted for using the liability method under the
provisions of SFAS 109 "Accounting for Income Taxes".
Fair value of financial instruments
The Company defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. Financial instruments included in the Company's financial
statements include cash and cash equivalents, trade accounts receivable, other
receivables, other assets,
<PAGE>
notes payable and long-term debt. Unless otherwise disclosed in the notes
to the financial statements, the carrying value of financial instruments is
considered to approximate fair value due to the short maturity and
characteristics of those instruments. The carrying value of long-term debt
approximates fair value as terms approximate those currently available for
similar debt instruments.
Revenue recognition
The Company is engaged as a provider of telecommunication products and
services. Generally, the Company recognizes revenue under the accrual method
when its services and products are provided. During the six month period ended
September 30, 1999, a majority of the Company's revenue consisted of license
fees. A one-time only license fee is paid by customers who purchase the
Company's VIP system. This gives the customer the right to utilize the Company's
software applications on the customer's own equipment. The license fee income
was derived from one major customer and was recognized when the contract became
final. The license fee income was -0-, and $570,000 for the three month and the
six month period ended September 30, 1999, respectively; and $-0- and $-0-for
the three month and the six month period ended September 30, 1998, respectively
and -0- for the period ended March 31, 1999. A one-time only distributor fee is
paid by master distributors in order to obtain distribution rights to the
Company's products and services. The distributor fee income was recognized when
the contract became final. The distributor fee income was $-0- and $25,000 for
the three month and the six month period ended September 30, 1999, respectively;
and $-0- and $-0-for the three month and the six month period ended September
30, 1998, respectively and $170,000 for the period ended March 31, 1999.
Loss per share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share, during the year ended March 31,
1998. SFAS No. 128 reporting requirements replace primary and fully-diluted
earnings per share (EPS) with basic and diluted EPS. Basic EPS is calculated by
dividing net income (available to common stockholders) by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The adoption of SFAS
128 did not affect per share amounts for 1997 as previously reported.
Loss per share is based on the weighted average number of shares
outstanding of 10,691,809 and 10,007,257 for the three months and six months
ending September 30, 1999, respectively; 6,214,078 and 6,016,107 for the three
months and six months ending September 30, 1998, respectively and 7,205,065 for
the period ending March 31, 1999.
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
$-0-and $-0- for the three months and six months ended September 30, 1999,
respectively; and $200 and $2,869 for the six months and three months ended
September 30, 1998, respectively; and $2,869 for the fiscal year ended March 31,
1999.
Transfers and servicing of financial assets and extinguishment of liabilities
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996, and
is to be applied prospectively. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Adoption of this statement did
not have a material impact on the Company's financial position, results of
operations or liquidity.
<PAGE>
Impairment of long-lived assets and long-lived assets to be disposed of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
April 1, 1997. This statement requires that long-lived assets and certain
identified intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison on the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
Comprehensive income
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income on April 1, 1998. SFAS No. 130 requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations or cash flows,
as the Company did not have any changes in net assets resulting from nonowner
sources during the periods covered by the accompanying financial statements.
Segments of an enterprise and related information
The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information on April 1, 1998. SFAS No. 131
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. Adoption of this statement did not have a material impact
on the Company's financial position, results of operations or cash flows, as any
effects are limited to the form and content of its disclosures.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No.1-33
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Adoption of this statement is not expected to impact the
Company's financial position, results of operations or cash flows. This
statement is effective for fiscal years beginning after June 15, 1999.
Note C - Notes payable:
Notes payable consist of the following at September 30, 1999 and 1998, and March
31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sept. 30, Sept. 30, March 31,
1999 1998 1999
-------------- -------------- -------------
Outside interests $ 50,866 $ 50,866 $ 50,866
Related parties 0 640,946 690,946
-------------- -------------- -------------
$ 50,866 $ 691,812 $ 741,812
============== ============== =============
</TABLE>
Note payable to outside interests include:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sept. 30, Sept. 30, March 31,
1999 1998 1999
----------- ----------- ------------
Note payable, Brite Voice Systems, Inc., dated January 31,
1997. Note is unsecured and payable in monthly installments of
$8,112, including interest at the rate of prime + 2 (8.5% at
March 31, 1999 and 1998) through January 1, 1998. $50,866 $50,866 $50,866
=========== =========== ============
</TABLE>
<PAGE>
The note to Brite Voice Systems, Inc. is currently in dispute and beginning
April 1996, the Company has discontinued the accrual of interest expense.
Interest expense charged to operations related to the note payable to outside
parties was $-0- for each of the three month and six month periods ended
September 30, 1999 and 1998, and March 31, 1999 respectively.
Notes payable to related parties include:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sept. 30, Sept. 30, March 31,
1999 1998 1999
------------ ------------ -------------
Notes payable to 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
9% to 10% and prime rate (8.5% at March 31, 1999 and 1998) with the
principal and accrued interest payable at maturity on various dates
through December 31, 1998. Subsequent to the balance sheet date, the
notes were converted into 787,928 shares of common stock on April 6, 1999. 0 590,946 590,946
Notes payable to a stockholder of the Company. The notes are unsecured
and bear interest at 10% per annum with the principal and interest due
on various maturity dates through October 16, 1999. Subsequent to the
balance sheet date, the notes were paid in full on December 30, 1999. 100,000 50,000 100,000
------------ ------------ -------------
Total related party notes payable $ 100,000 $640,946 $ 690,946
Less current portion 100,000 640,946 100,000
------------ ------------ -------------
Long-term portion $ 0 $ 0 $ 590,946
============ ============ =============
</TABLE>
Related party notes payable that were converted into common stock
subsequent to the balance sheet date have been classified as long-term
liabilities in the accompanying 1999 balance sheet.
Interest expense charged to operations related to the related party notes
payable was $2,500 and $5,985 for the three months and the six months ended
September 30, 1999, respectively; and $15,093 and $29,867 for the three months
and the six months ended September 30, 1998, respectively; $64,199 for the
fiscal year ended March 31, 1999.
Note D - Long-term debt:
Long-term debt consisted of the following at September 30, 1999 and
1998, and March 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sept. 30, Sept. 30, March 31,
1999 1998 1999
----------- ------------ ------------
Notes payable dated various dates from May 20, 1996 through
September 9, 1996, secured by common stock with principal and
accrued interest due at maturity on various dates through
September 9, 1998. 216,250 warrants to purchase shares of common
stock at $3.00 per share expiring on various dates through
September 9, 1998 were issued to the note holders. These notes
were converted into 1,555,458 shares of common stock on various
dates through September 30, 1999. 60,000 514,000 60,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Notes payable to Bisbro Investments Co., Ltd. The notes are
unsecured and bear interest at 10% per annum with the
principal and interest due on various maturity dates through
January 5, 2000. These notes are convertible into shares of
common stock at a conversion price of $.50 per share.
The notes were converted into 120,000 shares of common stock on
June 18, 1999. 0 0 60,000
Notes payable to Universal Asset Fund, Ltd. The notes are
unsecured and bear interest at 10% per annum with the principal
and interest due on various maturity dates through November 25,
1999. These notes are convertible into shares of common stock at a
conversion price of $.50 per share. The notes were converted
into 80,000 shares of common stock on June 18, 1999. 0 0 40,000
Notes payable to Capital Growth Fund, Ltd. The notes are unsecured
and bear interest at 10% per annum with the principal and
interest due on various maturity dates through August 14, 1999.
These notes are convertible into shares of common stock at a
conversion price of $.50 per share. The notes were converted
into 186,000 shares of common stock on June 18, 1999. 0 98,000 93,000
Note payable to Equity Communication. This note is unsecured,
non-interest bearing, and due upon demand. 10,000 0 10,000
Note payable to an individual. This note is unsecured and bears
interest at 12% per annum with the principal and interest due on
March 30, 2000. This note is convertible into shares of common
stock at a conversion price of $1.00 per share. This note was
paid in full on June 16, 1999. 0 0 43,000
----------- ------------ --------------
$ 70,000 $ 612,000 $306,000
Less current portion 70,000 612,000 53,000
----------- ------------ --------------
Total $ 0 $ 0 $253,000
=========== ============ ==============
</TABLE>
Current maturities of long-term debt obligations that were converted into
common stock subsequent to the balance sheet date have been classified as
long-term liabilities in the accompanying 1999 balance sheet.
Interest expense charged to operations related to the long term debt was
$2,700 and $5,400 for the three months and the six months ended September 30,
1999, respectively; and $23,121 and $35,031 for the three months and the six
months ended September 30, 1998, respectively; $112,553 for the fiscal year
ended March 31, 1999
Note E - Common stock:
Stock purchase warrants
At September 30, 1999, the Company had outstanding warrants to purchase
2,355,500 shares of the Company's common stock at prices which ranged from $0.50
per share to $4.00 per share. The warrants are exercisable at any time and
expire on dates ranging from June 25, 2000 to March 31, 2004. At September 30,
1999, 2,355,500 shares of common stock were reserved for that purpose.
<PAGE>
Common stock reserved
At September 30, 1999, shares of common stock were reserved for the
following purposes:
Exercise of stock warrants 2,355,500
Exercise and future grants of stock
options and stock appreciation rights 423,000
--------------
2,778,500
==============
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 accounts receivable, accrued liabilities, start-up
expenditures, accumulated depreciation, 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 years in
which the temporary differences are expected to reverse.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sept. 30, Sept. 30, March 31,
1999 1998 1999
--------------- ---------------- ---------------
Current income taxes $ 0 $ 0 $ 0
Change in deferred income taxes due
to temporary differences $ 0 $ 0 $ 0
--------------- ---------------- ---------------
$ 0 $ 0 $ 0
=============== ================ ===============
</TABLE>
Deferred tax (liabilities) assets consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
--------------- ----------------
Accumulated depreciation $ (30,000) $ (22,000)
--------------- ----------------
Gross deferred tax liabilities $ (30,000) $ (22,000)
--------------- ----------------
Accounts receivable $ 0 $ 29,000
Accrued liabilities 2,000 2,000
Start-up expenditures 7,000 18,000
Net operating loss carryforward 2,010,000 1,727,000
--------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Gross deferred tax assets $ 2,019,000 $ 1,776,000
Valuation allowance (1,989,000) (1,754,000)
--------------- ----------------
Net deferred tax assets $ 30,000 $ 22,000
--------------- ----------------
$ 0 $ 0
=============== ================
1999 1998
--------------- ----------------
The increases in the deferred tax valuation
allowance are as follows: $ 235,000 $ 128,000
=============== ================
</TABLE>
The Company has recorded a valuation allowance amounting to the entire
deferred tax asset balance because of the Company's uncertainty as to whether
the deferred tax asset is realizable. However, if the Company is able to utilize
the deferred tax asset in the future, the valuation allowance will be reduced
through a credit to income.
The Company has available at March 31, 1999, a net operating loss
carryforward of approximately $5,910,000 which can be used to offset future
taxable income through the year 2019.
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 reserved 450,000
shares of common stock for grant, of which 27,000 shares have been purchased,
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 September 30,
1999, options to purchase 412,750 shares at exercise prices of $0.20 to $1.50
per share had been granted. No stock appreciation rights had been granted at
September 30, 1999.
Note H - Commitments and contingencies:
Lease commitments
The Company has entered into a non-cancelable operating lease for office
facilities under a lease arrangement commencing on February 3, 1998 and expiring
on December 31, 2003.
Minimum future rentals to be paid on non-cancelable leases as of September
30, 1999 for each of the next five years and in the aggregate are:
Year ending
March 31, Amount
---------------- -----------------
2000 $ 45,062
2001 101,060
2002 103,540
2003 104,856
2004 80,364
=================
$ 434,882
<PAGE>
Total rent expense charged to operations was $14,352 and $28,011 for the
three months and the six months ended September 30, 1999, respectively; and
$6,846 and $13,537 for the three months and the six months ended September 30,
1998, respectively; $27,416 for the fiscal year ended March 31, 1999.
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 200,000 shares of common
stock at a value of $4.00 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. A prepaid barter credit in the amount of
$761,018 is included in other assets in the accompanying balance sheet as of
September 30, 1999 and 1998 and March 31, 1999, respectively. In connection with
this agreement, the Company issued to Proxhill 50,000 warrants to purchase the
Company's common stock at a price of $4.00 per share. The options expire June 3,
2001.
Note J - Sale - leaseback transaction:
The Company entered into a sale-leaseback arrangement during each of the
years ended March 31, 1999 and 1998. Under these arrangements, the Company sold
telecommunications equipment and leased it back for a period of three years.
Both leases were originally accounted for as operating leases. The gain of
$66,119 and $70,124 realized in these transactions had originally been deferred
and amortized to income in proportion to rental expense over the term of the
lease. In November 1998, the Company agreed to issue 579,971 shares of common
stock to the lessor in exchange for the release of the liability for all future
and past due lease payments.
Note K - Extinguishment of debt:
During the periods ended September 30, 1999 and 1998 and March 31, 1999,
the Company negotiated settlements of amounts owed to certain of its vendors and
employees. The negotiated settlements resulted in a reduction of the Company's
accounts payable and accrued operating expenses in the amount of $17,935 and
$29,991 for the three months and the six months ended September 30, 1999,
respectively; and $88,828 and $88,828 for the three months and the six months
ended September 30, 1998, respectively; and $88,828 for the fiscal year ended
March 31, 1999 which has been reported as an extraordinary item in the
accompanying statements of operations.
Note L - 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.
On June 3, 1999, the Company entered into a software license agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company an initial license fee of $570,000. The agreement is for a period of 10
years and provides for a total of 39 installations and grants KMC the ability to
add up to 81 additional installations. The agreement also calls for KMC to pay
the Company a monthly license fee ranging from $1,000 to $3,500 per month for
each software and hardware installation beginning in the 25th month after each
installation. The Company anticipates having the initial 39 installations
completed by June 2000 which would obligate KMC to pay the Company monthly
license fees of $131,500, subject to certain adjustments, beginning July 2002
and continuing through July 2009.
On July 1, 1999 the Company closed a private offering of 320,000 shares of
the Company's $.001 par value common stock for total proceeds of $400,000.
<PAGE>
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.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in, or incorporated by reference into this report.
Overview
The Company integrates and markets speech recognition technologies to
be used by telecommunications providers, to enhance a provider's overall package
of voice services through voice dialing. The Company's key product, the Voice
Integrated Platform ("VIP System" or the "System"), successfully integrates the
Philips Speech Pearl Natural Dialog, Philips Speech Processing's speech
recognition technology, with the Company's proprietary software application. The
System is designed to utilize standard industrial grade hardware and a
rack-mountable microprocessor-based computing system, with a Windows NT
operating system. The System has been developed for collocation at the
telecommunication provider's central office switch. With the VIP System, a
provider's subscriber can use natural conversational speech to access a variety
of enhanced service applications. The Company believes that the Philips speech
recognition technology that its System incorporates is superior to other similar
technologies and that its VIP System's enhanced services will become standard
telephony options offered by telecommunications providers in the 21st century.
The Company was incorporated in Delaware in 1992 under the name of
Direct Connect, Inc. and began operations in the telecommunications industry
under the name of Preferred Telecom, Inc. in April 1995. The Company began as a
long distance telecommunications carrier with a variety of enhanced services,
however, in February 1997 the Company sold to Brite Voice Systems, Inc.
("Brite") a number of assets, including the Company's end-user customer base.
The Company elected to sell these assets because it believed that the growth
prospects of this aspect of the business were limited. The Company has since
focused on enhanced telephone services that feature speech recognition
technology, believing that there are larger market opportunities in offering
enhanced speech recognition services to telecommunications providers.
From June of 1997 until April of 1998, all corporate activities were
focused on the development and testing of services to be deployed to the public
through a platform the Company calls the VIP System. In late April 1998 the
first operational VIP System was collocated in a switch environment. The initial
sales activity focused its efforts on introducing the concept of voice dialing
to prospective customers to gauge consumer response with respect to pricing,
features and viability of the services provided.
In December of 1998, the Company realized that the resources necessary
to sell and market its services directly to subscribers would require extensive
amounts of working capital and began researching venues which already had
inherent customer bases. The first distribution channel that the Company
explored was master distributors in various cities and states around the
country. The Company believes this will be a source of customer addition once
the Company is in the position to locate its VIP Systems in the master
distributor marketing areas. The second is through revenue sharing directly with
incumbent local exchange carriers ("ILECs"), wireless communications carriers
("WCCs"), and competitive local exchange carriers ("CLECs"). This avenue is
extremely attractive to the Company because these entities already have customer
bases and the infrastructure to service large number of customers. In June of
1999, the Company announced its revenue sharing marketing plan to wireline and
wireless telecommunications providers providing services such as The Smart
Linesm, Emma-The Perfect Receptionistsm, ** Talksm, My One Special Number sm ,
and Safety*Talksm.
The Company is at a very early stage of implementing its business plan. It
is subject to risks inherent in the establishment and deployment of technology
with which the consumer has very little experience. As voice recognition becomes
more prevalent in everyday life, such as in computer programs, reservation
systems and
<PAGE>
telecommunications information systems, the public will be more apt to
accept and utilize its many features. In order for the Company to succeed it
must secure adequate financial and human resources to meet its requirements;
establish and maintain relationships with telecommunications providers;
facilitate integration with various switch environments; establish a lead time
for delivery of hardware; achieve user acceptance for its services; generate
reasonable margins on its services; deploy and install VIP Systems on a timely
and acceptable schedule; respond to competitive developments; mitigate risk
associated with obtaining patents and copyrights and other protections of
intellectual property; and continually update its software to meet the needs of
end users. Failure to achieve these objectives could adversely effect the
Company's business, operating results and financial condition.
Results of Operations
For the six month period ended September 30,1999, the Company recorded net
gain of $105,497, or $.01 per share compared to a net loss of $339,364,or $.06
per share for the six month period ended September 30, 1998. For the three month
period ended September 30, 1999, the Company recorded a net loss of $207,203, or
$.02 per share compared to a net loss of $87,013, or $.02 per share for the
three month period ended September 30, 1998.
Total Revenue
Total revenue for the six months period ended September 30, 1999, was
$822,645 compared to -0- for the six month period ended September 30, 1998. Of
the revenue booked in the six months period ended September 30, 1999, 69% was
generated from one-time licensing fees to KMC Telecom Holdings, 24% was from
sales of its VIP systems, 4% from customer tests, 2.5% from master distributor
fees for specific marketing rights, and the remaining.5% from service fees for
the Company's "Emma the Perfect Receptionist" and "Smart Line". Total revenue
for the three months period ended September 30, 1999 was $227,471 compared to
- -0- for the three month period ended September 30, 1998. Of the revenue booked
in the three months period ended September 30, 1999, 86% was from sales of the
Company's VIP systems, and 14% from customer tests. For the fiscal period ended
March 31, 1999, revenues of $180,383 were generated 94% from master distributor
fees and the remaining 6% from service fees for the Company's end user
customers. The Company does not anticipate significant revenue growth from
either direct sales to ILECs and WCCs as negotiated with KMC or through master
distributorships. However the Company does anticipate significant revenue growth
in the second half of the year 2000 from its revenue sharing agreements and as
more ILEC, WCC and CLEC agreements are completed.
Cost of Sales
Cost of sales for the six months period ended September 30, 1999 was
$136,082 compared to $415 for the six months period ended September 30, 1998.
Cost of sales for the three months period ended September 30, 1999 was $91,167
compared to $415 for the three months period ended September 30, 1998. For the
six months period ended September 30, 1999, 59% of costs were for VIP system
hardware purchased by KMC, 23% direct costs associated with the closing of the
KMC licensing agreement, and 18% for network infrastructure such as
collocations, connectivity, system access and long distance.
Selling, General and Administrative
Selling, general and administrative expenses for the six months period
ended September 30, 1999 was $589,167 compared to $321,053 for the six months
period ended September 30, 1998. Selling, general and administrative expenses
for the three months period ended September 30, 1999 was $355,992 compared to
$119,530 for the three months period ended September 30, 1998. The increase in
the period ended September 30, 1998 and the same period in 1999 was primarily
due from the staffing increases and increased marketing efforts of the Company's
revenue sharing program to wireline and wireless carriers.
The Company expects that selling, general and administrative expenses will
increase significantly as it begins its full deployment of its sales and
marketing plan. To date the Company infrastructure has focused on system
development and now must support its sales, marketing and customer service
departments, as such, the Company believes fiscal 2000 will experience increases
in cost related to increased headcount, lease space, and general overhead.
<PAGE>
Extraordinary Items
The Company has recognized income from the extinguishment of debt of
$29,991 and $88,828 respectively for the six months period ended September 30,
1999 and 1998. For the three months period ended September 30, 1999 and 1998,
the Company recognized income from extinguishment of debt of $17,935 and
$88,828, respectively.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 1999 were
$161,699 an increase of $119,949 from $41,750 at March 31, 1999. The improved
liquidity was due primarily to the proceeds received on the licensing of the
Company's VIP application software to KMC Telecom Holdings, Inc. (KMC). Under
the terms of the agreement, KMC paid the Company an initial license fee of
$570,000. The agreement is for a period of 10 years and provides for a total of
39 installations and grants KMC the ability to add up to 81 additional
installations. The agreement also calls for KMC to pay the Company a monthly
license fee ranging from $1,000 to $3,500 per month for each software and
hardware installation beginning in the 25th month after each installation. The
Company anticipates having the initial 39 installations completed by June 2000
which would obligate KMC to pay the Company monthly license fees of $131,500,
subject to certain adjustments, beginning July 2002 and continuing through July
2009.
On July 1, 1999, pursuant to Section 4(2), the Company conducted an
offering of 320,000 shares of the Company's common stock at $1.25 per share
providing the Company with $400,000 working capital.
At September 30, 1999, the Company had $284,721 of accounts receivable which the
Company collected on its credit terms of net 30.
Future Obligations
During the next twelve months, the Company plans, subject to raising
adequate capital, to increase substantially the marketing of its VIP Systems, to
introduce new services, and to continue refining the services it currently
provides. Subject to the Company's ability to fund the cost, management expects
the Company to hire or contract with approximately 40 additional persons during
the next twelve (12) months, primarily to support its expanding marketing
activities and system installations. At February 7, 2000, the Company employed
fifteen 22 employees.
The ability of the Company to raise capital is, in the opinion of
management, the primary constraint on the implementation of its business plan.
Management estimates that during the next twelve (12) months, the Company will
require approximately $3,000,000 of equity and/or long term debt to finance its
costs of marketing, system deployment, and continued refinement of its services.
In addition, the Company will be required to obtain extensions of its current
debt or raise additional funds of approximately $1,000,000 to retire its debt.
There is no assurance that the Company will be able to secure any such financing
or extensions of its current debt.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, many companies' computer systems and/or
software may need to be upgraded or replaced to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance.
The Company has reviewed its own software products and believes that
there will be no adverse impact with the Year 2000 date change. All of the
Company's products are designed to record, store, and process calendar dates
occurring before and after January 1, 2000 with the same full year accuracy
(i.e. four numeric characters instead of two).
<PAGE>
An impact analysis has been conducted to identify the risk of failure
within the Company's in-house computer systems. The Company believes that there
will be no adverse impact with the Year 2000 date change. However, this risk to
the Company's business relates not only to the Company's computer systems, but
also to some degree to those of the Company's suppliers and customers. The
Company has developed a policy to ensure that all key customers, suppliers and
strategic partners operate and provide Year 2000 compliant systems and software.
The Company is currently collecting certifications from third parties on
compliance. Also, there is a risk that existing and potential customers may not
purchase the Company's products in the future if the computer systems of such
existing or potential customers are adversely impacted by the Year 2000 date
change.
Based on the information to date, the Company has completed its Year
2000 compliance review and made necessary modifications. However, the issue is
complex and no business can guarantee that there will be no Year 2000 problems.
Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and the Company is aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain to what extent the Company may be affected
by it.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 2. Changes in Securities.
(a) There have been no material changes in securities during the period
(b) There have been no material changes in the class of securities or the
rights of the holders of the registered securities.
(c) Recent Sales of Unregistered Securities
On July 1, 1999, the Company issued 160,000 shares of common stock to Triton
Capital Investments, Ltd. at a purchase price of $1.25 per share for
$200,000.00. On the same day, the Company also issued 160,000 shares of common
stock to JMG Capital Partners, L.P. at a purchase price of $1.25 per share for
$200,000.00.
On September 21, 1999, the Company issued Southwest Texas Telephone a warrant to
purchase 5,000 shares of common stock of the Company at an exercise price of
$1.66 per share on or before September 20, 2000.
None of these transactions involved an underwriter and no underwriting discounts
or commissions were paid. These transactions are exempt from registration under
the Securities Act of 1933 (the "Securities Act") pursuant to Section 4(2) of
the Securities Act.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<PAGE>
Exhibit
Number Description of Exhibits
10.1* Subscription Agreement and Letter of Investment Intent of
Triton Capital Investments, Ltd., dated July 1, 1999
10.2* Subscription Agreement and Letter of Investment Intent of
JMG Capital Partners, L.P., dated July 1, 1999
10.3* Second Amendment to Lease between Dallas Office Portfolio,
L.P. as successor in interest to Greenville Avenue
Properties, Ltd. and Preferred Voice, Inc.
10.4** Software License Agreement between Southwest Texas
Telephone Company and Preferred Voice, Inc.(10.28)
10.5** Marketing Agreement between Southwest Texas Telephone
Company and Preferred Voice, Inc. (10.29)
10.6* Warrant Certificate No. 98 issued to Southwest Texas
Telephone Company, dated September 21, 1999
10.7** Software License Agreement between Rural Cellular
Corporation and Preferred Voice, Inc. (10.26)
10.8** Marketing Agreement between Rural Cellular Corporation and
Preferred Voice, Inc. (10.27)
27* Financial Data Schedule
* Filed with the Form 10-QSB for the period ending September 30, 1999 filed with
the Securities and Exchance Commission on February 11, 2000.
** Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
March 31, 1999 (File No. 33-92894) and incorporated herein by reference.
(b) Reports on Form 8-K
None
<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 VOICE, INC.
March 9, 2000 /s/ G. Ray Miller
- ----------------- -----------------
Date G. Ray Miller
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
March 9, 2000 /s/ Mary G. Merritt
- ----------------- -------------------
Date Mary G. Merritt
Secretary, Treasurer and Vice President
of Finance (Principal Financial Officer)
