U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual report under Section 13 or 15 (d) of the Securities Exchange Act of
1934 for the fiscal year ended March 31, 2000
[ ] Transition report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934 for the transition period from _____________ to ____________
Delaware 75-2440201
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.
6500 Greenville Avenue
Suite 570
Dallas, Texas 75206
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(Address of Principal Executive Offices) (Zip Code)
214-265-9580
-----------------------------
(Issuer's Telephone Number, Including Area Code.)
Securities registered under Section 12(b)
of the Exchange Act:
Title of Each Class Name of Each Exchange
------------------- on Which Registered
NONE ---------------------
N/A
Securities registered under Section Common Stock, $0.001 par value
12(g) of the Exchange Act: ------------------------------
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes X No
--------------- ---------------
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $885,134.00
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of June 30, 2000 was approximately
$42,719,109. For purposes of this computation, all executive officers, directors
and 10% stockholders were deemed affiliates. Such a determination should not be
construed as an admission that such executive officers, directors or 10%
stockholders are affiliates.
As of June 30, 2000, there were 13,626,492 shares of the common stock, $0.001
par value, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
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Preferred Voice, Inc.
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PART I
Item 1. Description of Business....................................................................... 1
Item 2. Description of Properties..................................................................... 8
Item 3. Legal Proceedings............................................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders........................................... 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...................................... 8
Item 6. Management's Discussion and Analysis or Plan of Operations.................................... 9
Item 7. Financial Statements.......................................................................... 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16(a)
of the Exchange Act..................................................................................... 15
Item 10. Executive Compensation........................................................................ 16
Item 11. Security Ownership of Certain Beneficial Owerns and Managements............................... 17
Item 12. Certain Relationships and Related Transactions................................................ 18
Item 13. Exhibits, List and Reports on Form 8-K........................................................ 19
SIGNATURES................................................................................................... 21
INDEX TO EXHIBITS............................................................................................ 22
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PART I
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.
Item 1: Description of Business
Background of the Company
The Company integrates and markets speech recognition
technologies to be used by telecommunications providers, to enhance a
provider's overall package of voice services. 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.
The Market and Market Strategy
The Company's customers are telecommunications providers,
primarily Incumbent Local Exchange Carriers ("ILECs") and Wireless
Communications Carriers ("WCCs"), with a greater marketing effort to be
made to Competitive Local Exchange Carriers ("CLECs") in the future.
These companies are already offering some enhanced services to their
subscribers, such as voice mail, call forwarding, call waiting and
caller identification systems. In order to remain competitive, however,
ILECs, WCCs, and CLECs are providing subscribers more enhanced
services. The Company believes that its VIP System, with its enhanced
speech recognition service, provides a solution to satisfy this need.
ILECs comprise the largest market of telecommunications
providers. Of the approximate 1,700 ILECs in the United States, 1,400
have less than 50,000 lines each. These ILECs comprise fifteen to
twenty percent of the ILEC market and approximately 40 million lines.
ILECs already have an existing subscriber base, and the Company
believes that most of them desire to add enhanced service options to
increase revenue and deter potential competition. The Federal
Communications Commission ("FCC") reported in a report released in
April of 1999 that in 1998 alone, the tier 1 local telephone common
carriers spent over $6 billion on upgrading to digital electronic
central office switches, which enable them to provide their subscribers
the latest enhanced services. Many ILECs have already begun to utilize
outboard platforms for certain call processing services,
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as well as voice mail, however, the Company believes that the
convenience of its System will draw many ILECs to use its collocated
Systems.
WCCs have an estimated 80 million subscribers nationwide. The
FCC has sold spectrum for up to eight operators per market in each of
the 722 FCC designated wireless markets in the United States. A report
dated January, 1999 from Cahners In-Stat Group estimates that by the
year 2002, medium and large businesses will spend over $117 billion on
wireless equipment and services, more than double the $54 billion they
spent in 1998. The WCCs need to capitalize on this growth. The Company
believes that WCCs want to differentiate themselves from each other and
be competitive so that many are beginning to offer their subscribers
enhanced services, including voice messaging and voice activated
services. In addition, WCCs are under pressure from regulatory
authorities to provide wireless phone subscribers a safer method for
using their phones while driving.
As of December, 1999 there were approximately 212 facility
based CLECs nationwide. The general focus of the CLECs has been to
raise capital and build networks with the acquisition of customer bases
lagging behind. The Strategis Group, a telecommunications research
group, in June of 1998 predicted that CLECs will secure more than 17
percent of the local exchange market by 2004. The Company therefore
believes that the CLEC market will provide a tremendous marketing
opportunity over the next two years.
Government regulation requires telecommunications providers to
look for new solutions to provide disabled persons equal access to
their systems. The Company's System may be able to provide a solution
for telecommunication providers' obligations to the disabled. Section
255 of the Telecommunications Act of 1996 requires a provider of
telecommunications service to ensure that its service is accessible to
and usable by individuals with disabilities, if readily achievable. The
Company's VIP System with its voice activated services would allow
people with limited manual dexterity, limited reach or strength,
limited or no vision, or other disabilities to access the national
telecommunication network. The Texas legislature also passed an act
"relating to expanding the specialized telecommunications devices
assistance program and contracts for special features of the
telecommunications relay access service." The act took effect on
September 1, 1999 and expanded an existing voucher program, allowing
the Public Utilities Commission and the Texas Commission for the Deaf
and Hard of Hearing to issue vouchers and provide other financial
assistance to individuals with disabilities that impair the
individuals' ability to effectively access the telephone network. The
act allows the vouchers to be used to purchase certain specialized
services. Originally, this law applied only to the hearing disabled,
but the legislature amended the original act so that people with other
disabilities, without the use of their hands or vision for example,
could also receive vouchers for qualifying services. The Company
provided the Texas Commission for the Deaf and Hard of Hearing with a
Request for Information (:R.F.I.") proposal detailing the VIP System
and the voice dialing services that may be provided through the System
and it is currently awaiting approval. The Company believes that its
System is the only economically feasible voice dialing and activated
service that many telecommunications providers can make available to
people with a disability.
There is also government regulation being proposed regarding
the use of wireless phones while driving. A representative of the
National Conference of State Legislatures stated to a representative of
the Company that a report soon to be published by the National
Conference of State Legislatures will show that at least 37 states
since 1995 have proposed bills concerning cellular telephone use in
automobiles. Five municipalities have passed laws requiring the use of
hands-free cell phone while driving and one municipality passed such
legislation which was declared void in an appellate court as it was
ruled to be preempted by portions of the state motor vehicle code
dealing with careless driving. Legislation of this sort, if enacted
and upheld, would require cellular telephone companies to provide
hands-free enhanced services so that they can keep generating revenue
from their subscribers who make many of their calls while on the road.
The Company believes that its voice activated dialing, along with the
hands-free speaker phones and headsets available in the market, will
provide WCCs with a means of complying with the proposed regulations
and make WCCs using the Company's product and services leaders in the
industry.
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Primary Markets
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The ILECs. The Company believes that its revenue sharing
market strategy is the most economically viable method for many ILECs
to provide speech recognition enhanced services to their subscribers.
The ILECs and WCCs are the two primary markets in which the Company has
focused its marketing efforts, offering these telecommunications
providers a revenue sharing opportunity. The Company focuses on these
markets because the providers in these markets have an existing
customer base. The Company has focused its marketing efforts on ILECs
with access lines of less than 100,000. The Company intends to market
to larger telephone companies when it establishes a strong market
presence in the medium and smaller telephone company market.
The Company's VIP System platform is designed to work in the
telephone company's central office collocated alongside an ILEC's
central office switch. Unlike many other enhanced service companies'
boxes, the Company's VIP System is connected to the ILEC's switch via
industry standard T-1 circuits utilizing direct inward dial trunks.
The Company will provide and install the VIP System without
charge. However, the Company enters into a revenue sharing arrangement
with the ILEC based upon the revenue generated through sales of the
enhanced services. Most contracts require that the ILEC generate at
least $2,000 per month per System for the Company or for the ILEC to
pay the difference if that amount is not reached, otherwise the
contract may be terminated by the Company.
The ILECs are responsible for billing and collecting revenue
generated from the VIP System's enhanced services. However, the VIP
System can produce customer information for marketing or billing use.
In addition, the Company assists each telecommunications provider in
marketing the services by providing various co-branded advertising
materials the Company has designed and by training the ILEC's sales
force and customer service staff. The Company has executed eleven such
long-term revenue sharing agreements.
In addition the Company has a test agreement with Sleepy Eye
Telephone Company in Minnesota dated May 27, 1999. The Sleepy Eye
system began its test period on June 15, 2000 and will continue for a
sixty day period during which time the Company will be responsible for
all testing and customer provisioning while Sleepy Eye will be
responsible for providing collocation space for the System and for
billing and collection services. At the end of the test period, Sleepy
Eye may choose to enter into the standard contract as set forth above.
The WCCs. Of the approximately 722 wireless markets in the United
States, there are 416 rural service areas and 306 metropolitan service areas
that have multiple providers serving the same markets. The Company believes that
many wireless providers want to offer the benefits of speech recognition
services to their subscribers in order to maintain their customer base, but the
WCCs often find such services to be cost prohibitive. As with the ILECs, the
Company offers WCCs the VIP System and installation without charge. The Company
recoups its costs in the revenue sharing arrangements it has negotiated with the
WCCs. These arrangements are based on the same percentages used with the ILECs.
The WCCs, like the ILECs, are responsible for the billing and collecting, and
like the ILECs they will also receive assistance from the Company in marketing
the VIP System enhanced services. The Company has entered into revenue share
arrangements with twelve WCCs.
Standard ILEC/WCC Contract. The Company uses the same standard form of
Software License Agreement and Marketing Agreement for each ILEC and WCC that it
services. The Software License Agreement grants each participating ILEC or WCC a
license to use the Company's software and all subsequent improvements to the
software in the ILEC's or WCC's local calling areas. The Company retains title
to the software and requires that the ILECs and WCCs keep all information
related to the software confidential. The term of the Software License Agreement
coincides with that of the Marketing Agreement.
The Marketing Agreements have provisions to remain in effect for up to
ten years. Most agreements are for an initial five year term which automatically
renews unless cancelled by either party on 60 days notice prior to the
anniversary date of the agreement. In the Marketing Agreement, the Company
agrees to install the VIP System at the
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switch location for the participating ILECs and WCCs and commence testing
following installation. The participating ILECs and WCCs then have the right to
accept or reject the System after testing is completed. Once the participating
ILEC or WCC has accepted the System, it is required to use its best efforts to
promote the sale of the Company's services to subscribers. The participating
provider is responsible for billing and collection on the services, but pricing
is jointly agreed upon by the Company and the provider. The ILECs and WCCs agree
that they will not install any system, for testing or otherwise, that competes
with the VIP System in the area designated under the Marketing Agreement. The
Company agrees to provide marketing materials, technical support and training to
the ILECs and WCCs and their personnel. The Company also provides in the
Marketing Agreement that it may use the System to provide services directly to
its own subscribers in the ILEC's or WCC's designated area. The Marketing
Agreements are subject to termination by either party on standard events of
default, such as breach of the agreement or insolvency.
Secondary Markets
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The Company has also marketed its services to CLECs. CLECs face a
distinct challenge because they must rely on ILECs to provide the final link in
the communications path to subscribers or expend significant resources to build
their own network. The Company is not currently focusing on CLECs because most
CLECs do not currently have the customer base to support the Company's revenue
sharing agreement. The Company, however, has contracted to sell thirty-nine VIP
System boxes to KMC Telecom Holdings, Inc. ("KMC") for installation and use. In
exchange for an initial licensing fee for each market, the Company's contract
with KMC grants KMC a license to use the Company's software and all subsequent
improvements of the software in certain designated markets. The number of
markets covered by the agreement may be expanded up to a defined maximum number
on prior written notice to the Company. As with the ILEC and WCC agreements, the
Company agrees to install and test the System, after which time KMC can accept
or reject the System. The Company has agreed not to install VIP Systems or to
license such systems to others in the designated markets. The Company also has
agreed to provide KMC technical support and training for KMC personnel. Two
years after the Systems are accepted in a licensed market, KMC must begin paying
monthly fees for use of the Systems subject to KMC's right to terminate the
entire contract on standard events of default, like breach of the agreement by
or insolvency of the Company. Throughout the term of the agreement, KMC may also
be required to pay a support fee for training and related support done by the
Company in the designated markets. If the Company desires to provide services
directly to its own subscribers in the designated markets, the Company must pay
KMC $1.25 per month per subscriber. The Company has delivered and installed the
first KMC system in Huntsville, Alabama and anticipates deployment of the
remaining 38 systems by the end of 2000.
In addition to its agreement with KMC, the Company has signed a
collocation agreement with NEXTLINK Texas, Inc. ("NEXTLINK") to place VIP System
platforms in their central office switch locations in the Dallas area. Under the
Company's agreement with NEXTLINK, the Company is granted a license to install,
operate and maintain its VIP System in a certain portion of NEXTLINK's switching
center in exchange for the Company's payment of certain initial and monthly fees
for such collocation. The Company has placed boxes in the Dallas area that
service direct subscribers of the Company's services.
In conjunction with the collocation agreements, the Company has signed
Master Distributor Agreements with several companies to market the Company's
services directly to the end user in six large metropolitan areas. The companies
and the markets they cover are Best Voice, Inc. in Miami, Florida; Voice
Retrieval, Inc. in Dallas, Texas; Answering Service Inc. in Detroit, Michigan;
Amerivoice Telecommunications, Inc. in Milwaukee, Wisconsin; In Touch Solutions,
L.L.C. in Myrtle Beach, South Carolina; Voicenet New Media, Inc. in Boston,
Massachusetts and Nomis Communications, Inc. in Houston, Texas. The Company has
not yet installed VIP Systems in these areas. The form of Master Distributor
Agreement that has been signed by all participating master distributors allows
the distributor to market and sell the Company's services directly to the end
user and through other distributors whom the master distributor is to identify
and contact. The master distributor receives certain marketing materials and
collateral support from the Company. The Company may authorize other
distributors in the master distributor's market area, but will direct those
distributors to work with the master distributor, who pays a fee to acquire the
right to sell the Company's services in a specific market. The Company provides
the master distributor with commissions for accounts acquired based upon the
revenues billed and collected for such accounts. These agreements typically have
an initial term of three years. Over the past year the Company has experienced
problems with the ability to bill customers and therefore has delayed the roll
out of Systems which would allow the master distributors to commence their
marketing
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efforts. The Company has solved its billing problems and expects to roll out
pricing for its offerings to its master distributors by the third quarter of
2000 so that the distributors may begin their selling efforts.
The Company utilizes direct mail and personal sales calls to contact
and market its VIP Systems to telecommunications providers in the targeted
markets.
Product and Services
The Company's proprietary speech-interaction software, a part of the
VIP System, is able to provide the ILECs and WCCs with a host of speech
recognition enhanced services to help comply with applicable regulations and
increase revenues.
The Product
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The Company has developed what it believes to be a unique system that
integrates Philips' Speech Pearl Natural Dialog speech recognition software and
the Company's proprietary software called the VIP System. The Company believes
that its new hardware and software system provides the wide variety of new
speech recognition enhanced services being sought by providers in a deregulated
telecommunications industry. With the VIP System, a telecommunications provider
can offer its subscribers a variety of speech recognition and call processing
services. The VIP System will work in conjunction with the switching platforms
of a number of commonly used technologies, including the Lucent 5ES(2), Nortel
DMS-100/500, and Siemens/Stromberg Carlson switches.
The VIP System is an intelligent call processing system that is capable
of identifying subscribers. The System has the capability of archiving call
traffic information that may be retrieved and collected for marketing and
billing purposes. The VIP System is also equipped with technology capable of
monitoring, reloading and restarting the VIP System in the event of system
failure.
Traditional call processing systems engage at least two ports during an
entire call to process incoming and outgoing information while the conversation
takes place. The VIP System utilizes release link technology that allows the
call to be processed rapidly using speech recognition or dual tone
multi-frequency (DTMF) dialing. After dialing, the System drops off of the call
as the call is routed to the correct phone number by the telecommunication
provider's switch. The VIP System speech recognition software recognizes the
words of the caller and the Company's proprietary software looks up the
telephone number in that subscriber's directory and then hands the call back to
the switch for dialing and other call processing functions. With the release
link technology, the VIP System can process over 7,000 calls per hour in a
single 48 port system.
The VIP System's speech recognition software works in conjunction with
over 13 separate enhanced service applications the Company has created with its
own software, some of which are discussed below. The Company uses speech
recognition technology created by Philips Speech Processing to process natural
dialogue speech for the Company's operating and software systems. The speech
recognition software, which is based on phonetics, may be programmed to be
speaker dependent or speaker independent. The software recognizes spoken words
or sentences and completes the call as instructed. The speech recognition
software allows callers to use continuous digit speech without requiring users
to change the cadence of their speech or speak between beeps to fit a speech
recognition template or prompt.
The Services
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The following speech recognition enhanced services are currently
available through the VIP System for delivery to subscribers by participating
providers:
EMMA the Perfect Receptionist. The Company's VIP System software
provides telephone subscribers with the first remote accessed automated
attendant service. Emma answers the subscriber's phone with a custom greeting
and listens as a caller speaks a name, department, or location listed in the
subscriber's voice dialing directory. Emma the Perfect Receptionist then routes
the call to the person, department or location requested. On outbound calls,
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EMMA uses the same procedure to dial a phone number from a subscriber's
directory upon a speech command such as "Call John".
Smart Line. This application allows a subscriber to receive calls at
any phone. The subscriber must notify the System of a change in his or her
location by giving voice commands to the System. A name from the Subscriber's
voice dialing directory can be used as the new "locate" phone number. Incoming
calls for the Subscriber are routed to the pre-programmed "locate" phone number.
That phone number can be either local or long distance, as required. The Smart
Line may also be used to screen calls allowing the subscriber to take the
incoming call or forward it to voice mail.
My One Special Number. Using the "locate" technology that facilitates
the Smart Line, the Company's VIP System allows a child to reach his or her
parents, wherever they are, with one telephone number. Each child is given a tag
by the participating telecommunications provider or by the Company with "One
Special Number" on it. A teacher, daycare provider or the child can call that
number, and the call will immediately be routed to the parent without requiring
the child to remember multiple telephone numbers because the parent is able to
remotely program the "locate" phone number.
** Talk. Star Star Talk is a speech recognition service that may be
accessed by a residential or business telephone customer. First, a person
placing a call lifts the receiver and presses ** on the keypad to access the VIP
System. Then the subscriber speaks a name, number or location from his or her
personal directory or a common directory, such as the local telephone company's
directory. The System then routes the call to the appropriate party. There is
also an option for the disabled to access the VIP System. By lifting the
receiver or turning on the speakerphone and waiting three seconds, the telephone
switch will automatically activate the VIP System, and the System will prompt
the subscriber to speak a name, number or location to be dialed.
Safety Talk. With this service, a person placing a call on his or her
wireless phone presses the appropriate speed dial code to access the VIP System.
The customer then speaks a name, number or location from the personal directory
that he or she previously created. The System then routes the call to the
appropriate party. This service eliminates the need for the subscriber to look
up or dial a phone number while driving.
Voice Fax. By pressing one button, multiple users of a subscriber's fax
will be able to speak the name of a person or entity to whom they wish to fax a
document. The speech recognition software will dial the appropriate number
listed in the Company's directory and complete the call.
Corporate Direct. This application is designed for subscriber companies
with multiple wireless phone users. A subscriber dials one number and speaks the
name of the person or location to which the caller wishes to be connected
initiating the voice activated dialing feature for completion of the call.
Intelligent Call Screening. The VIP System also provides call
screening, which gives the subscriber the name of the caller, not just a phone
number. The Company's technology informs the subscriber who is calling and
allows the subscriber to choose to accept or deny the call. If the call is
denied, the VIP System will forward the call to the subscriber's voice mail.
Electronic Talking Phone Book. This service allows a provider to load
its entire database of business and residential customers into the VIP System.
Any person making a call in a participating provider's area is able to press 411
or dial a local access number and speak the city and name of the business or
person listed. Like the current live directory assistance systems, the automated
system provides the caller with the number and gives them the option to be
connected. This application may be used as a substitute for an ILEC's, CLEC's or
WCC's current 411 service and provides the ILECs, CLECs and WCCs with a method
for reducing their costs for directory service operators. As with the 41l
service, the ILECs, CLECs and WCCs may also use the service to increase revenue
by charging a nominal fee for the connection of a call. In the Electronic
Talking Phone Book, the ILECs, CLECs and WCCs may also enter a list of the
businesses in the Yellow Pages of the phone book. If such a service is offered,
a subscriber could ask for a list of a certain type of business, such as
airlines, and EMMA would read back the appropriate names. As with the 411
service, the VIP System could then complete the call for the customer for an
extra charge.
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Secure Card. The Secure Card is a speech recognition voice activated
long distance calling card. A Secure Card subscriber will be able to dial an 800
access number and speak a security code, and the System will place a call from
their personal voice directory. This card adds a low-cost long-distance service
to the list of options provided to subscribers.
Speech 2 Content. This application service allows a user to receive
internet content in an audio format by speaking different categories such as
business, weather, horoscopes, entertainment and sports. For example, a user
speaks "business-NASDAQ report" and they will hear the most current market
summary. The user may also retrieve quotes on specific stocks.
Guest Talk. This service provides an automatic answering service for
hotels using speech recognition. At check-in the guest's name will be activated
in the Guest Talk system. Callers to the hotel number are routed to the Guest
Talk System. They may ask for the guest by name and will be connected to the
guest's appropriate hotel extension (room). Guest Talk will also handle the
routing of calls for the hotel's employees, concierge, reservations and the
front desk. Customized call routing may also be set up.
Competition
The speech recognition services market is competitive and marked by
rapid technological innovations. The Company expects competition to continue to
increase as ILECs, WCCs, and CLECs seek to offer their customers enhanced
services and to distinguish themselves from other telecommunications providers.
Many of the Company's current competitors have longer operating histories,
greater name recognition, established customer bases and substantially greater
financial, technical, marketing, sales and other resources than the Company. The
Company believes that the principal factors affecting competition in the speech
recognition services market are ease of use, overall technical performance,
price, and reliability. The Company believes that it competes effectively in
these areas.
Some of the Company's competitors are Wildfire Communications, Inc.
("Wildfire"), General Magic, Inc. ("General Magic"), and Webley Systems, Inc.
("Webley"). Wildfire and Webley, both private companies, market a virtual
assistant that uses voice activated and speech recognition software to track and
answer voice mail, e-mail and fax. General Magic has developed a similar
service, but it has used it to focus on providing voice services through the
Internet. Accessline Technologies, Inc., Call Sciences Ltd. and Intellivoice
Communications, Inc. are also voice service providers offering applications
primarily for use on the Internet and wireless phone systems. These companies
focus on marketing services directly to the end user.
Intervoice-Brite, Inc. ("Intervoice") is the leading supplier of
customer premise equipment that provides call processing and voice recognition
services. Intervoice has a significant market share and markets to businesses
and network operators. Intervoice's revenues have steadily increased over the
past several years. Intervoice markets directly to subscribers and to larger
ILECs. The Company, on the other hand, markets to small to medium ILECs and
WCCs; therefore, the Company does not believe that Intervoice is a significant
competitor at this time.
Other competitors offering voice recognition applications include
Glenayre Electronics, Inc., Centigram Communications Corporation, Periphonics
Corporation, a Nortel Networks company, Octel, a division of Lucent
Technologies, and Aspect Communications, all of which price their systems for
marketing to larger telephone companies. Compaq, IBM and Lucent also have voice
and call processing systems that they market to larger telephone companies, but
it is a small portion of their respective businesses. Companies such as AT&T,
MCI/Worldcom, Inc., Sprint Corporation and a number of wireless phone companies
provide their customers with voice mail and call forwarding features,
applications that the Company will be marketing in conjunction with its speech
recognition applications. The Company does not intend to market to the larger
telephone companies until it establishes a strong market presence in the medium
and smaller telephone company markets.
The Company expects that additional competition will develop. That
competition may include large companies with substantially greater financial,
marketing and technical resources than those available to the Company. Such
competition could adversely affect the revenues and operating results of the
Company.
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Customer Service
The Company has developed an automated customer service called "Help
Me" that can assist subscribers with their services. If a subscriber has a
question regarding any of the applications to which the subscriber has
subscribed, the automated "Help Me" has scripted instructions that tell the
subscriber how to use the different applications. "Help Me" has been programmed
to pull up the particular scripted directions to explain how to use the services
that the subscriber has chosen. This program is currently being used by Sleepy
Eye Telephone Company during its test period to assist new subscribers.
The Company intends to train employees of the participating
telecommunication providers' customer service force to answer certain questions
related to the services. Therefore, the telecommunication providers' employees,
with the assistance of the "Help Me" service, would be able to answer the common
questions subscribers will have about their service.
The Company intends to assist the ILECs, CLECs and WCCs if there are
problems with the VIP System platform. The Company intends to have a 24 hour, 7
day a week customer service line for the ILEC and WCC customer service
representatives or other employees to call with service questions. In addition,
the Company has designed a monitoring system that will continuously poll the VIP
System to assure that it is operating correctly. If the monitoring system
detects any problems with the VIP System, it will set off an alarm that will
send a signal by modem, simultaneously paging and calling a representative of
the Company so the problem can be immediately corrected. In addition, the ILECs
and WCCs will be provided back-up components, such as the Dialogic cards that
help operate the System, to install in the event a System ceases to function
properly. The Company believes that this level of customer service and support,
when fully implemented, will help it market the VIP System to a greater number
of telecommunications providers.
Employees
As of July 10, 2000, the Company had 33 employees, all of whom are full
time.
Patents, Trademarks and Copyright
The Company relies on a combination of trade secret, copyright and
non-disclosure agreements to protect its proprietary rights in its software and
technology. There can be no assurance that such measures are or will be adequate
to protect the Company's proprietary technology. Furthermore, there can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
The Company's software is licensed to customers under license
agreements containing provisions prohibiting the unauthorized use, copying and
transfer of the licensed program. Policing unauthorized use of the Company's
products will be difficult, and any significant piracy of its products could
materially and adversely affect the Company's financial condition and results of
operations.
The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
current or future products. The Company expects that software product developers
will increasingly be subject to infringement claims. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company has received registered trademarks from the United States
Patent and Trademark Office for the following: Preferred/telecom, Secure Card
and Use Your Voice. The Company has applied for various other trademarks
regarding its services but has not yet received them.
8
<PAGE>
Research and Development
The Company has spent the last three years developing its proprietary
software in conjunction with testing the Philips Speech Processing software to
create the VIP System. The Company estimates that it has spent approximately
$690,000 during the last two fiscal years in direct research and development
activities and approximately $2,400,000 in indirect costs, which costs include
general overhead during the time in which the VIP System was being developed.
Item 2: Description of Properties
The Company's executive offices are located in Dallas, Texas. The
Company leases 6,123 square feet of space in a facility as a tenant. The term of
the lease is through December 31, 2003 and the rent is presently $8,357.90 per
month through December 31, 2000, after which point it will be increased each
year thereafter.
Item 3: Legal Proceedings
As of July 10, 2000, there were no material legal proceedings pending
against the Company.
Item 4: Submission of Matters to a Vote of Security Holders
There have been no matters submitted for vote to the security holders,
through the solicitation of proxies or otherwise in the fourth quarter of the
fiscal year covered by this report.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Common Stock is listed on the OTC Electronic Bulletin Board. The
following table indicates the quarterly high and low bid price for the Common
Stock on the OTC Electronic Bulletin Board for the fiscal year ending March 31,
2000 and March 31, 1999. Such inter-dealer quotations do not necessarily
represent actual transactions and do not reflect retail mark-ups, mark-downs or
commissions.
OTC ELECTRONIC
BULLETIN BOARD
BID PRICE
Fiscal 1999 HIGH LOW
1st Quarter $3.25 $1.865
2nd Quarter $2.875 $1.00
3rd Quarter $1.25 $0.75
4th Quarter $2.75 $0.687
Fiscal 2000
1st Quarter $2.25 $0.875
2nd Quarter $2.125 $1.375
3rd Quarter $5.00 $1.437
4th Quarter $7.625 $3.375
<PAGE>
On July 10, 2000, the bid price of the Common Stock as reported on the
OTC Electronic Bulletin Board was $4.03.
As of June 30, 2000, there were approximately 835 holders of record of
the Common Stock.
The Company has not declared or paid any cash or other dividends on the
Common Stock to date for the last two (2) fiscal years and has no intention of
doing so in the foreseeable future.
Recent Sales of Unregistered Securities
The Company also hereby incorporates all the transactions listed in the "Certain
Relationships and Related Transactions" section as recent sales of unregistered
securities that should be listed as such pursuant to Item 701 of Regulation S-B.
On January 21, 2000, the Company issued 500 shares of common stock to Anthony
Clure at a purchase price of $1.03 per share pursuant to the exercise of an
employee stock option. On the same day, the Company also issued 750 shares of
common stock to Lori Rubottom at a purchase price of $.20 per share pursuant to
the exercise of an employee stock option.
On February 23, 2000, the Company issued 100,000 shares of common stock to Jacob
Wizman at a purchase price of $2.00 per share for $200,000.
On March 24, 2000, the Company issued 5,000 shares of common stock to Harolyn
Glicker at a purchase price of $3.00 per share for $15,000 pursuant to exercise
of a warrant.
All of the transactions referred to in this section are exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act. These
transactions did not involve an underwriter and no underwriting discounts or
commissions were paid.
Item 6. Management's Discussion and Analysis or Plan of Operations
The following description of "Management's Plan of Operation"
constitutes forward-looking statements for purposes of the Securities Act and
the Exchange Act and as such involves known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. The words
"expect", "estimate", "anticipate", "predict", "believes", "plan", "seek",
"objective" and similar expressions are intended to identify forward-looking
statements or elsewhere in this report. Important factors that could cause the
actual results, performance or achievement of the Company to differ materially
from the Company's expectations include the following: 1) one or more of the
assumptions or other factors discussed in connection with particular
forward-looking statements or elsewhere in this report prove not to be accurate;
2) the Company is unsuccessful in increasing sales through its anticipated
marketing efforts; 3) mistakes in cost estimates and cost overruns; 4) the
Company's inability to obtain financing for general operations including the
marketing of the Company's products; 5) non-acceptance of one or more products
of the Company in the marketplace for whatever reason; 6) the Company's
inability to supply any product to meet market demand; 7) generally unfavorable
economic conditions which would adversely effect purchasing decisions by
distributors, resellers or consumers; 8) development of a similar competing
product at a similar price point; 9) the inability to adequately protect the
Company's intellectual property; 10) if the Company experiences labor and/or
employment problems such as the loss of key personnel, inability to hire and/or
retain competent personnel, etc.; and 11) if the Company experiences
unanticipated problems and/or force majeure events (including but not limited to
accidents, fires, acts of God etc.), or is adversely affected by problems of its
suppliers, shippers, customers or others. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by such factors. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after
10
<PAGE>
the date hereof or to reflect the occurrence of unanticipated events.
Notwithstanding the foregoing, the Company is not entitled to rely on the safe
harbor for forward looking statements under 27A of the Securities Act or 21E of
the Exchange Act as long as the Company's stock is classified as a penny stock
within the meaning of Rule 3a51-1 of the Exchange Act. A penny stock is
generally defined to be any equity security that has a market price (as defined
in Rule 3a51-1) of less than $5.00 per share, subject to certain exceptions.
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
Overview
The Company began operations in April 1995 as a traditional 1+
long-distance reseller. The need to distinguish itself from other resellers led
it to concentrate on enhanced services utilizing voice recognition call
completion technology. The Company contracted with Brite to develop a switching
platform that incorporated its service applications with voice recognition
technology acquired through a licensing agreement with Voice Control Systems,
Inc.
Recognizing the declines in telecommunications service prices and the
decreasing margins being experienced in long distance sales, the Company decided
to sell its long distance customer base and assets in early 1997. The Company
also concluded that the underlying architecture used by Brite to develop its
services would not be flexible enough to continue to create a variety of
services in the future. Therefore, the Company reduced its staff and overhead
and began its focus on developing its own proprietary software.
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 of 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 the use of 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
ILECs, WCCs, and CLECs. This avenue is extremely attractive to the Company
because these entities already have customer bases and the infrastructure to
service large numbers of customers. To date, the Company has signed twenty three
ILEC and WCC multi-year contracts.
The Company is still at an 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 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, including adequate numbers of technical support staff to
provide service for its customers; 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
The Company recorded a net loss of $993,066, or $0.09 per share, for
the fiscal year ended March 31, 2000, compared to a net loss of $690,598 or
$0.10 per share, for the fiscal year ended March 31, 1999, and a net loss of
$381,991 or $0.07 per share, for the fiscal year ended March 31, 1998.
11
<PAGE>
Total Sales
Total revenue for the fiscal year ended March 31, 2000, was $885,134
compared to $180,383 and $6,874 for the years ended March 31, 1999 and 1998
respectively. Of the revenue booked in the fiscal year ended March 31, 2000, 65%
was generated from one-time licensing fees to KMC Telecom Holdings, 22% was from
sales of its VIP systems, 9.9% from customer tests, 2.4% from master distributor
fees for specific marketing rights, and the remaining .7% from service fees for
the Company's "Emma the Perfect Receptionist" and "Smart Line". 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. For the fiscal period ended March 31, 1998, revenues of
$6,874 were generated 100% from service fees for the Company's end user
customers.
The Company anticipates that revenues from the sale of its services
will grow gradually in the second half of calendar year 2000 as it installs VIP
Systems in the ILECs and WCCs which have already signed revenue sharing
agreements and as VIP Systems are purchased and installed at KMC's switch
locations. The Company does not anticipate substantial revenues going forward
from the sale of master distributorships, as it has had in fiscal year ended
1999.
Cost of Sales
Cost of sales for the year ended March 31, was $215,293 compared to
$15,033 and $2,206 for the years ended March 31, 1999 and 1998, respectively. In
fiscal year 2000, 54% of costs were for VIP system hardware purchased by KMC,
13% direct costs associated with the closing of the KMC licensing agreement, and
33% for network infrastructure such as collocations, connectivity, system access
and long distance. For 1999 and 1998 cost of sales was 100% for network
infrastructure such as collocations, connectivity, system access and long
distance.
Selling, General and Administrative
Selling, general and administrative expenses for the fiscal year ended
March 31, 2000 were $1,675,971 compared to $768,024 and $425,304 for the fiscal
years ended March 31, 1999 and 1998, respectively. The increases from 1998 to
1999 and 1999 to 2000 are due to increased staffing and additional marketing
efforts of the Company's Emma services to potential parties to the Company's
revenue sharing and master distributor agreements. The Company expects that
selling, general and administrative expenses will continue to increase in fiscal
year 2001, such expenses to include costs related to the number of employees,
office space requirements and general overhead. However, the Company believes
that such expenses will not increase proportionately with revenue from sales.
Research and Development
The Company has not expensed any research and development costs for the
years stated on its financial statements, but has capitalized costs of $705,934
for development of its software and hardware for the year ended March 31, 1999,
in comparison to $413,109 and $233,093 for the fiscal years ended March 31, 1999
and 1998 respectively.
Extraordinary Items
The Company has recognized income from the extinguishment of debt of
$59,976 for the fiscal year ended March 31, 2000 and $88,828 and $217,442 for
the fiscal years ended March 31, 1999 and 1998 respectively.
Income Taxes
As of March 31, 2000, the Company had cumulative federal net operating
losses of approximately $6.8 million, which can be used to offset future income
subject to federal income tax through the fiscal year 2020.
12
<PAGE>
Liquidity and Capital Resources
Throughout fiscal 1999 and 2000, the Company has continued to sustain
operating losses that have resulted in the use of its cash reserves. The
Company's cash and cash equivalents at March 31, 2000 were $1,373,291 compared
to $41,750 and $82,284 respectively for the fiscal years ended March 31, 1999
and 1998.
In June of 1997, the Company conducted a Regulation S offering and sold
$480,000 of 12% convertible debentures due December 25, 1997. From this offering
$320,000 was received in cash and a note issued on November 12, 1996 with
accrued interest valued at $160,000 which was exchanged for debentures in this
offering. On February 19, 1998, $160,000 of the debentures was converted into
183,908 shares of the Company's common stock. On September 30, 1998, the
remaining $320,000 was converted into 367,816 shares of the Company's common
stock.
In March of 1998 and again in May of 1998, the Company entered into a
sale leaseback arrangement under which the Company sold two of its VIP Systems,
each for a $100,000 and leased them back for a period of three years. In
November 1998, the Company agreed to issue 579,971 shares of common stock to the
lessor in exchange for the release of the then past due lease payments and
release of the future liabilities.
In September of 1998, the Company borrowed $100,000 from a more than 5%
beneficial owner. The note was unsecured and bore interest at 10% per annum with
principal and interest due on various dates through October 16, 1999. This note
has been paid in full.
From June of 1998 until January of 1999, three separate shareholders
lent the Company varying amounts totaling $193,000. On June 18, 1999, the full
$193,000 was converted into 386,000 shares of the Company's common stock.
From December of 1998 through May of 1999, the Company received
$195,000 from the sale of Master Distributorships to eight different entities.
On March 31, 1999, the Company borrowed $43,000 from a more than 5%
beneficial owner. The note was unsecured and bore interest at 12% per annum with
the principal and interest due on March 30, 2000. The note was convertible into
shares of common stock at a conversion price of $1.00 per share. On June 16,
1999 the note was repaid in full.
In April of 1999, the Company borrowed $200,000 from three separate
individuals. The loans accrue interest at 12% per annum due at various dates
between April 7, 2000 and April 23, 2000. On June 28, 1999, $100,000 of these
notes were used to purchase 200,000 shares of the Company's common stock by
paying the exercise price under a warrant held by one of the entities.
Twenty-five thousand dollars of a remaining note plus interest of $1,381 was
converted into 26,381 shares of the Company's common stock, and the remaining
$75,000 plus interest of $3,353.76 was repaid to the note holders.
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 December, 2000 which would obligate KMC to pay the
Company monthly license fees of $131,500, subject to certain adjustments and to
KMC's right to terminate the entire contract on standard events of default by
the Company, beginning January, 2003 and continuing through July, 2010.
On July 1, 1999, pursuant to Section 4(2) of the Securities Act, 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.
13
<PAGE>
On December 22, 1999, pursuant to Section 4(2) of the Securities Act,
the Company conducted an offering of 1,500,000 shares of the Company's common
stock at $1.50 per share providing the Company with $2,250,000 working capital.
On February 23, 2000, pursuant to Section 4(2) of the Securities Act,
the Company conducted an offering of 100,000 shares of the Company's common
stock at $2.00 per share providing the Company with $200,000 working capital.
In contemplation of additional capital needs required to continue the
Company's current growth rate, on February 15, 2000, the Company engaged an
investment banking firm to act as a financial advisor to assist the Company in
obtaining additional financing to expand its business.
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 30 additional persons during
the next twelve (12) months, primarily to support its expanding marketing
activities and system installations. At July 10, 2000, the Company employed
thirty-three (33) full time 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 $6,000,000 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 $811,000 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).
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 and 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 changes. 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 has collected certifications from third parties on compliance.
14
<PAGE>
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.
Item 7. Financial Statements
PREFERRED VOICE, INC.
FINANCIAL STATEMENTS
MARCH 31, 2000, 1999 AND 1998
C O N T E N T S
Page
Independent Auditors' Report......................................... F-1
Financial Statements:
Balance Sheets .................................................. F-2
Statements of Operations ........................................ F-4
Statement of Stockholders' Equity (Deficit)...................... F-5
Statements of Cash Flows......................................... F-7
Notes to Financial Statements.................................... F-9-F-19
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Shareholders
Preferred Voice, Inc.
We have audited the accompanying balance sheets of Preferred Voice, Inc. as of
March 31, 2000 and 1999, and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Preferred Voice, Inc. at March
31, 2000 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 2000, in conformity with
generally accepted accounting principles.
PHILIP VOGEL & CO. PC
Certified Public Accountants
Dallas, Texas
May 5, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
PREFERRED VOICE, INC.
BALANCE SHEETS
MARCH 31, 2000 AND 1999
2000 1999
-------------- ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,373,291 $ 41,750
Accounts receivable, net of allowance for doubtful
accounts of $-0- in 2000 and $-0- in 1999 3,924 860
Employee receivables 0 2,500
Inventory 84,724 0
-------------- ---------------
Total current assets $ 1,461,939 $ 45,110
-------------- ---------------
Property and equipment:
Computer equipment $ 321,248 $ 223,046
Furniture and fixtures 38,880 16,934
Office equipment 18,198 12,493
Computer software 384,686 190,063
-------------- ---------------
$ 763,012 $ 442,536
Less accumulated depreciation 253,143 161,049
-------------- ---------------
Net property and equipment $ 509,869 $ 281,487
-------------- ---------------
Other assets:
Prepaid expenses $ 761,018 $ 761,018
Deposits 85,114 81,535
Trademarks 7,472 0
Deferred stock issuance costs 19,803 0
-------------- ---------------
Total other assets $ 873,407 $ 842,553
-------------- ---------------
$ 2,845,215 $ 1,169,150
============== ===============
F-2
<PAGE>
2000 1999
-------------- ---------------
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 272,818 $ 363,834
Accrued payroll and payroll taxes 2,265 226,755
Accrued interest payable 39,851 248,967
Accrued operating expenses 13,128 13,041
Accrued vacation 11,853 6,570
Customer deposits 390,992 0
Current maturities of long-term debt 30,000 53,000
Note payable 50,866 50,866
Notes payable - related parties 0 100,000
-------------- ---------------
Total current liabilities $ 811,773 $ 1,063,033
-------------- ---------------
Long-term liabilities:
Notes payable - related parties $ 0 $ 590,946
Long-term debt, net of current maturities 0 253,000
-------------- ---------------
Total long-term liabilities $ 0 $ 843,946
-------------- ---------------
Commitments (Note I)
Stockholders' equity (deficit):
Common stock, $0.001 par value;
20,000,000 shares authorized; shares
issued 13,276,796 and 9,695,681, respectively $ 13,277 $ 9,695
Additional paid-in capital 8,952,788 5,192,033
Accumulated deficit (6,930,755) (5,937,689)
-------------- ---------------
$ 2,035,310 $ (735,961)
Treasury stock - 385,224 and 385,224
shares, respectively, at cost 1,868 1,868
-------------- ---------------
Total stockholders' equity (deficit) $ 2,033,442 $ (737,829)
-------------- ---------------
$ 2,845,215 $ 1,169,150
============== ===============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PREFERRED VOICE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Sales $ 885,134 $ 180,383 $ 6,874
Cost of sales 215,293 15,033 2,206
-------------- -------------- ---------------
Gross profit $ 669,841 $ 165,350 $ 4,668
-------------- -------------- ---------------
Costs and expenses:
Selling, general and administrative expenses $ 1,675,971 $ 768,024 $ 425,304
Interest expense 28,556 176,752 178,797
-------------- -------------- ---------------
Total costs and expenses $ 1,704,527 $ 944,776 $ 604,101
-------------- -------------- ---------------
Loss from operations $ (1,034,686) $ (779,426) $ (599,433)
Other income (expense):
Loss from sale of assets (18,356) 0 0
-------------- -------------- ---------------
Loss from operations before income taxes
and extraordinary item $ (1,053,042) $ (779,426) $ (599,433)
Provision for income taxes 0 0 0
-------------- -------------- ---------------
Loss from operations before extraordinary item $ (1,053,042) $ (779,426) $ (599,433)
Extraordinary item:
Gain from extinguishment of debt (less applicable
income taxes of $-0-)(Note L) 59,976 88,828 217,442
-------------- -------------- ---------------
Net loss $ (993,066) $ (690,598) $ (381,991)
============== ============== ===============
Per share amounts:
Loss from continuing operations $(0.10) $(0.11) $(0.11)
============== ============== ===============
Gain from extinguishment of debt $0.01 $0.01 $0.04
============== ============== ===============
$
Net loss $(0.09) $(0.10) (0.07)
============== ============== ===============
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
PREFERRED VOICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
Shares of common stock
---------------------------------------------------------
Authorized Issued Outstanding In treasury
------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Balance - March 31, 1997 20,000,000 5,430,422 5,267,922 162,500
Conversion of 8.5% debenture - June 12, 1997 0 20,000 20,000 0
Exercise of stock options - December 15, 1997 0 450,000 450,000 0
Issuance of common stock - December 30, 1997 0 50,000 50,000 0
Conversion of 12% debenture - March 5, 1998 0 183,908 183,908 0
Acquisition of treasury stock 0 0 (222,724) 222,724
Net loss for the year 0 0 0 0
------------- ------------- -------------- -----------
Balance - March 31, 1998 20,000,000 6,134,330 5,749,106 385,224
Conversion of 7% debentures - June 24, 1998 0 11,259 11,259 0
Conversion of 8.5% debenture - June 30, 1998 0 27,881 27,881 0
Conversion of 7% debentures - July 31, 1998 0 209,587 209,587 0
Conversion of 7% debenture - August 31, 1998 0 10,450 10,450 0
Conversion of 10% debentures - August 31, 1998 0 869,276 869,276 0
Conversion of related party notes - September 30, 1998 0 48,975 48,975 0
Conversion of 12% debentures - September 30, 1998 0 367,816 367,816 0
Conversion of 7% debenture - October 20, 1998 0 11,373 11,373 0
Conversion of equipment lease agreement - November 5, 1998 0 579,971 579,971 0
Conversion of 7% debenture - December 29, 1998 0 79,662 79,662 0
Conversion of 7% debenture - December 30, 1998 0 159,323 159,323 0
Conversion of 7% debentures - December 31, 1998 0 603,142 603,142 0
Conversion of 7% debentures - January 4, 1999 0 156,554 156,554 0
Conversion of 7% debentures - January 7, 1999 0 119,199 119,199 0
Conversion of 7% debenture - January 8, 1999 0 20,930 20,930 0
Conversion of 7% debentures - January 11, 1999 0 130,060 130,060 0
Conversion of 7% debenture - January 22, 1999 0 43,919 43,919 0
Issuance of common stock in exchange for release
of trade liability - February 2, 1999 0 111,974 111,974 0
Net loss for the year 0 0 0 0
------------- ------------- -------------- -----------
Balance - March 31, 1999 20,000,000 9,695,681 9,310,457 385,224
Conversion of prime plus 2% debentures - April 6, 1999 0 121,261 121,261 0
Conversion of 8% debentures - April 6, 1999 0 200,000 200,000 0
Conversion of 9% debentures - April 6, 1999 0 466,667 466,667 0
Exercise of stock warrants - April 6, 1999 0 5,000 5,000 0
Conversion of 10% debentures - June 18, 1999 0 386,000 386,000 0
Exercise of stock warrants - June 28, 1999 0 200,000 200,000 0
Conversion of 12% debentures - June 29, 1999 0 26,381 26,381 0
Issuance of common stock - July 1, 1999 0 320,000 320,000 0
Exercise of stock warrants - September 29, 1999 0 20,000 20,000 0
Exercise of stock warrants - October 4, 1999 0 22,297 22,297 0
Exercise of stock warrants - December 16, 1999 0 160,000 160,000 0
Conversion of 7% debenture - December 17, 1999 0 47,254 47,254 0
Issuance of common stock - December 29, 1999 0 1,500,005 1,500,005 0
Exercise of employee stock option - January 20, 2000 0 500 500 0
Issuance of common stock - February 16, 2000 0 100,000 100,000 0
Exercise of employee stock option - February 22, 2000 0 750 750 0
Exercise of stock warrants - March 27, 2000 0 5,000 5,000 0
Net loss for the year 0 0 0 0
------------- ------------- -------------- -----------
Balance - March 31, 2000 20,000,000 13,276,796 12,891,572 385,224
============= ============= ============== ===========
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Amounts
---------------------------------------------------------------------------------------
Common Additional Total
stock $0.001 Treasury paid-in Accumulated stockholders'
par value stock capital deficit equity (deficit)
-------------- ------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
$ 5,430 $ (1,868) $ 3,014,385 $ (4,865,100) $ (1,847,153)
20 0 27,962 0 27,982
450 0 35,550 0 36,000
50 0 78,072 0 78,122
184 0 159,816 0 160,000
0 0 0 0 0
0 0 0 (381,991) (381,991)
-------------- ------------- ------------- -------------- ----------------
$ 6,134 $ (1,868) $ 3,315,785 $ (5,247,091) $ (1,927,040)
11 0 22,626 0 22,637
28 0 41,794 0 41,822
210 0 290,663 0 290,873
10 0 11,380 0 11,390
869 0 347,431 0 348,300
49 0 16,275 0 16,324
368 0 319,632 0 320,000
11 0 22,737 0 22,748
580 0 219,809 0 220,389
80 0 30,988 0 31,068
159 0 61,977 0 62,136
603 0 234,623 0 235,226
157 0 60,900 0 61,057
119 0 49,945 0 50,064
21 0 8,979 0 9,000
130 0 56,062 0 56,192
44 0 24,551 0 24,595
112 0 55,876 0 55,988
0 0 0 (690,598) (690,598)
-------------- ------------- ------------- -------------- ----------------
$ 9,695 $ (1,868) $ 5,192,033 $ (5,937,689) $ (737,829)
121 0 90,826 0 90,947
200 0 149,800 0 150,000
467 0 349,533 0 350,000
5 0 0 0 5
386 0 192,614 0 193,000
200 0 99,800 0 100,000
27 0 26,354 0 26,381
320 0 359,680 0 360,000
20 0 3,980 0 4,000
22 0 22,275 0 22,297
160 0 159,840 0 160,000
47 0 42,009 0 42,056
1,500 0 2,048,500 0 2,050,000
1 0 500 0 501
100 0 199,900 0 200,000
1 0 149 0 150
5 0 14,995 0 15,000
0 0 0 (993,066) (993,066)
-------------- ------------- ------------- -------------- ----------------
$ 13,277 $ (1,868) $ 8,952,788 $ (6,930,755) $ 2,033,442
============== ============= ============= ============== ================
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
PREFERRED VOICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000, 1999 AND 1998
2000 1999 1998
--------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,273,062 $ 179,510 $ 23,576
Cash paid to suppliers and employees (2,093,749) (500,572) (189,734)
Interest received 0 0 2,376
Interest paid (224,235) 0 (4)
--------------- -------------- ----------------
Net cash used by operating activities $ (1,044,922) $ (321,062) $ (163,786)
--------------- -------------- ----------------
Cash flows from investing activities:
Capital expenditures $ (389,436) $ (151,772) $ (138,621)
Proceeds from sale of assets 1,750 1,300 5,683
--------------- -------------- ----------------
Net cash used by investing activities $ (387,686) $ (150,472) $ (132,938)
--------------- -------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of stock $ 2,811,952 $ 0 $ 0
Proceeds from notes payable 200,000 351,000 314,850
Note principal payments (228,000) (20,000) (700)
Proceeds from sale - leaseback transaction 0 100,000 0
Deferred stock issuance costs (19,803) 0 0
--------------- -------------- ----------------
Net cash provided by financing activities $ 2,764,149 $ 431,000 $ 314,150
--------------- -------------- ----------------
Net increase (decrease) in cash and cash equivalents $ 1,331,541 $ (40,534) $ 17,426
Cash and cash equivalents:
Beginning of year 41,750 82,284 64,858
--------------- -------------- ----------------
End of year $ 1,373,291 $ 41,750 $ 82,284
=============== ============== ================
F-7
<PAGE>
2000 1999 1998
---------------- -------------- ----------------
Reconciliation of net loss to net cash used
by operating activities:
Net loss $ (993,066) $ (690,598) $ (381,991)
---------------- -------------- ----------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation $ 140,948 $ 80,113 $ 45,945
Amortization 0 2,869 1,900
(Gain) loss on sale of assets 18,356 (186) 4,937
Provision for losses on accounts receivable 0 0 446
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (3,064) (860) 18,207
(Increase) decrease in employee receivables 2,500 (2,500) 1,500
Increase in inventory (84,724) 0 0
Increase in other receivables 0 0 (25,854)
Decrease in certificate of deposit 0 0 52,376
(Increase) decrease in deposits (3,579) 2,875 7,359
Decrease in prepaid expenses 0 38,982 1,676
Decrease in deferred contract costs 0 0 50,000
Increase in patents and trademarks (7,472) 0 0
Increase (decrease) in accounts payable (91,016) 58,635 (46,129)
Increase (decrease) in accrued expenses (414,797) 189,608 35,718
Increase in customer deposits 390,992 0 0
Increase in deferred gain on sale - leaseback 0 0 70,124
---------------- -------------- ----------------
$ $ $
Total adjustments (51,856) 369,536 218,205
---------------- -------------- ----------------
Net cash used by operating activities $ (1,044,922) $ (321,062) $ (163,786)
Schedule of non-cash investment and financing activities:
Issuance of common stock in exchange for debt $ 952,383 $ 1,879,809 $ 304,122
================ ============== ================
</TABLE>
F-8
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
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 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.
Inventory
---------
Inventories consist of finished goods and are stated at the lower of cost
(specific identification) or market.
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."
F-9
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note B - Summary of significant accounting policies (continued):
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, 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 year ended March 31,
2000, the majority of the Company's revenue consisted of licensing fees and
systems sales. Licensing fees are paid in order to obtain the rights to
utilize the Company's software applications in certain geographical areas.
Licensing fee income is recognized when the contract is executed. Licensing
fee income for the years ended March 31, 2000, 1999 and 1998 was $570,000,
$-0- and $-0-, respectively. System sales revenues are recognized when the
customer accepts the system, which usually occurs within five days from
delivery and installation. System sale income for the years ended March 31,
2000, 1999 and 1998 was $195,496, $-0- and $-0-, respectively.
Advertising expense
-------------------
The Company expenses advertising costs when the advertisement occurs.
Total advertising expense amounted to $39,613, $42,269 and $-0- for the years
ended March 31, 2000, 1999 and 1998, respectively.
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 or loss (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.
Loss per share is based on the weighted average number of shares
outstanding of 11,283,538, 7,205,065 and 5,219,890 for the years ended March
31, 2000, 1999 and 1998, respectively.
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-, $2,869 and $1,900 for the years ended March 31, 2000, 1999 and 1998,
respectively.
The cost of trademarks are being amortized on the straight-line method
over a period of 15 years.
F-10
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note B - Summary of significant accounting policies (continued):
Impairment of long-lived assets and long-lived assets to be disposed of
-----------------------------------------------------------------------
The Company has adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. 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.
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 Standard board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 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:
<TABLE>
<CAPTION>
Notes payable consist of the following at March 31, 2000 and 1999:
2000 1999
---------- -----------
<S> <C>
Outside interests $ 50,866 $ 50,866
Related parties 0 690,946
---------- -----------
$ 50,866 $ 741,812
========== ===========
F-11
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note C - Notes payable (continued):
Note payable to outside interests include:
2000 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)
through maturity on January 1, 1998. $ 50,866 $ 50,866
========== ============
The note to Brite Voice Systems, Inc. (Brite) is currently in dispute and
effective April 1997, the Company discontinued the accrual of interest
expense. Interest expense charged to operations related to the Brite note
was $-0- for each of the years ended March 31, 2000, 1999 and 1998,
respectively.
Notes payable to related parties include:
2000 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 were unsecured and bore interest at rates ranging
from 9% to 10% and prime rate (8.5% at March 31, 1999) with the
principal and accrued interest payable at maturity on various dates
through December 31, 1998. The notes were converted into 787,928
shares of common stock on April 6, 1999. $ 0 $ 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. 0 100,000
----------- ------------
Total related party notes payable $ 0 $ 690,946
Less current portion 0 100,000
----------- -------------
Long-term portion $ 0 $ 590,946
=========== =============
The PST notes payable that were converted into common stock subsequent to
March 31, 1999, 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 $8,485, $64,199 and $86,172 for the years ended March 31, 2000, 1999
and 1998, respectively.
F-12
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note D - Long-term debt:
Long-term debt consisted of the following at March 31, 2000 and 1999:
2000 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 1,602,712 shares of
common stock on various dates through March 31, 2000. $ 20,000 $ 60,000
Notes payable to Bisbro Investments Co., Ltd. The notes were unsecured
and bore interest at 10% per annum with the principal and interest due
on various maturity dates through January 5, 2000. These notes were
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 60,000
Notes payable to Universal Asset Fund, Ltd. The notes were unsecured
and bore interest at 10% per annum with the principal and interest due
on various maturity dates through November 25, 1999. These notes were
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 40,000
Notes payable to Capital Growth Fund, Ltd. The notes were unsecured
and bore interest at 10% per annum with the principal and interest due
on various maturity dates through August 14, 1999. These notes were
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 93,000
Note payable to Equity Communication. This note is unsecured, non-
non-interest bearing, and due upon demand. 10,000 10,000
Note payable to an individual. This note was unsecured and bore
interest at 12% per annum with the principal and interest due on
March 30, 2000. 0 43,000
---------- -------------
Total related party notes payable $ 30,000 $ 306,000
Less current portion 30,000 53,000
---------- -------------
Long-term portion $ 0 $ 253,000
========== =============
</TABLE>
F-13
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note D - Long-term debt (continued):
Current maturities of long-term debt obligations that were converted into
common stock subsequent to March 31, 1999, 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
$20,072, $112,553 and $92,625 for the years ended March 31, 2000, 1999 and 1998,
respectively.
During the year ended March 31, 1999, $348,300 of 10% notes payable were
converted into 869,276 shares of common stock, $35,000 of 8.5% convertible
debentures were converted into 27,881 shares of common stock, $320,000 of 12%
convertible debentures were converted into 367,816 shares of common stock,
$745,000 of 7% notes payable were converted into 1,555,458 shares of common
stock and $17,500 of notes payable to officers of the Company were converted
into 48,975 shares of common stock.
During the year ended March 31, 2000, $590,947 of notes payable with various
interest rates were converted into 787,928 shares of common stock, $193,000 of
10% convertible debentures were converted into 386,000 shares of common stock,
$125,000 of 12% convertible debentures were converted into 226,381 shares of
common stock and $30,000 of 7% convertible debentures were converted into 47,254
shares of common stock.
Note E - Common stock:
Stock purchase warrants
-----------------------
At March 31, 2000, the Company had outstanding warrants to purchase
2,303,203 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 12, 2000 to December 1, 2004. At March
31, 2000, 2,303,203 shares of common stock were reserved for that purpose.
Common stock reserved
---------------------
At March 31, 2000, shares of common stock were reserved for the following
purposes:
Exercise of stock warrants 2,303,203
Exercise and future grants of stock
options and stock appreciation rights 421,750
-------------
2,724,953
=============
F-14
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
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>
2000 1999 1998
-------------- --------------- -------------
<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>
Deferred tax (liabilities) assets consist of the following:
2000 1999
-------------- ---------------
Accumulated depreciation $ (38,000) $ (30,000)
-------------- ---------------
Gross deferred tax liabilities $ (38,000) $ (30,000)
-------------- ---------------
Accounts receivable $ 0 $ 0
Accrued liabilities 4,000 2,000
Start-up expenditures 2,000 7,000
Net operating loss carryforward 2,324,000 2,010,000
-------------- ---------------
Gross deferred tax assets $ 2,330,000 $ 2,019,000
Valuation allowance (2,292,000) (1,989,000)
-------------- ---------------
$ 38,000 $ 30,000
Net deferred tax assets $ 0 $ 0
The increases in the deferred tax valuation
allowance are as follows: $ 303,000 $ 235,000
============== ===============
F-15
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note F - Income taxes (continued):
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, 2000, a net operating loss
carryforward of approximately $6,835,000 which can be used to offset future
taxable income through the year 2020.
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 March 31,
2000, options to purchase 406,500 shares at exercise prices of $0.20 to $1.50
per share were outstanding. No stock appreciation rights had been granted at
March 31, 2000.
Note H - Stock options:
The per share weighted-average fair value of stock options granted was
determined using the Black Scholes Option- Pricing Model. The following
weighted-average assumptions were used in the pricing model:
<TABLE>
<CAPTION>
2000 1999 1998
----------------- -------------------- -----------------
<S> <C> <C> <C>
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.31% - 6.35% 5.06% - 5.09% 5.62% - 5.65%
Expected life 2.5 years to 3.5 2.5 years to 3.5 1.5 years to 2.5
years years years
Expected volatility 177% 189% 207%
</TABLE>
F-16
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note H - Stock options (continued):
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, has recognized no compensation expense for stock options granted at
exercise prices at least equal to the market value of the Company's common
stock. Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net loss
and loss per share would have been increased to the proforma amounts indicated
below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- --------------- --------------
<S> <C> <C> <C>
Net loss:
As reported $ (993,066) $ (690,598) $ (381,991)
Proforma $ (1,111,018) $ (841,514) $ (424,637)
Loss per common share:
As reported $ (0.09) $ (0.10) $ (0.07)
Proforma $ (0.10) $ (0.12) $ (0.08)
</TABLE>
Following is a summary of the stock award and incentive plan during the years
ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
Weighted Weighted Weighted
Number Average Number Average Number Average
Of Exercise Of Exercise Of Exercise
Shares Price shares Price shares Price
------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 382,750 $ 0.92 297,000 $ 1.00 0 $ 0.00
Granted 30,000 1.50 245,750 0.86 297,000 1.00
Exercised (1,250) 0.53 0 0.00 0 0.00
Forfeited (5,000) 1.03 (160,000) 1.00 0 0.00
------- -------- -------- -------- ------- ---------
Outstanding at end of year 406,500 $ 0.96 382,750 $ 0.96 297,000 $ 1.00
======= ======== ======== ======== ======= =========
Options exercisable at end of year 304,583 $ 0.94 173,250 $ 0.93 304,583 $ 1.00
Weighted average fair value of
options granted at end of year 30,000 $ 1.28 245,750 $ 0.75 297,000 $ 0.93
</TABLE>
F-17
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note I - Commitments:
The Company leases its office facilities and various office equipment under
operating leases expiring through December 2003. Following is a schedule of
future minimum lease payments required under the above operating leases as of
March 31, 2000:
Year ending
March 31, Amount
--------------- ------------
2001 $ 112,919
2002 116,067
2003 114,377
2004 81,033
------------
$ 424,396
Total rent expense charged to operations was $76,317, $27,416 and $64,463
for the years ended March 31, 2000, 1999 and 1998, respectively.
Note J - 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 sheets. 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 K - Sale - leaseback transactions:
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 L - Extinguishment of debt:
During the years ended March 31, 2000, 1999 and 1998, 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 $59,976, $88,828 and $217,442,
respectively, which has been reported as an extraordinary item in the
accompanying statements of operations.
F-18
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Note M - Going concern:
The Company has incurred substantial operating losses to date. 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 December 2000 which would obligate KMC to pay the Company monthly
license fees of $131,500, subject to certain adjustments, beginning January 2003
and continuing through January 2010.
As of May 5, 2000, the Company has entered into fifteen revenue sharing
agreements with various telecommunication service providers throughout the
United States. Generally, the agreements provide for the Company to receive 30%
to 70% of the revenue from the sale of the Company's services depending upon the
level of revenue generated. The Company anticipates to begin receiving revenue
from the agreements in September 2000.
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.
Note N - Concentrations:
Concentrations of credit risk
-----------------------------
At March 31, 2000, the Company had cash balances of $1,536,804 with one
banking institution, which is in excess of the federally insured amount of
$100,000 per institution. These balances are before considering outstanding
items.
Concentrations of business - major customers
--------------------------------------------
During the years ended March 31, 2000 and 1999, a substantial portion of
its revenue was derived from one and six customers, respectively. Revenue
from these customers was approximately $852,921 and $170,000, respectively.
F-19
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors, Executive Officers, Promoters and Control Persons
The Board of Directors currently consists of three (3) people. The
following table sets forth information about all Directors and executive
officers of the Company and all persons nominated or chosen to become such:
<TABLE>
<CAPTION>
YEAR FIRST ELECTED
NAME AND BUSINESS ADDRESS AGE OFFICE DIRECTOR
------------------------- --- ------ ------------------
<S> <C> <C> <C>
G. Ray Miller 60 Director, Chief Executive 1994
Officer and President
Mary G. Merritt 43 Director, Vice President- 1994
Finance and
Secretary/Treasurer
Scott V. Ogilvie 46 Director 2000
Richard K. Stone 39 Vice President-Sales and N/A
Marketing
Robert R. Williams 50 Vice President-Software N/A
Development
William D. Sprague 51 Vice President-Corporate N/A
Operations
</TABLE>
Mr. Miller is a founder of the Company. He has served as an Officer and
Director of the Company since May, 1994; he has been Chief Executive Officer
since June, 1994 and President since April 1997. Prior to the founding of the
Company, Mr. Miller founded United Medicorp Inc. ("United Medicorp") in 1989 and
served through February, 1992 as Chairman of the Board and Chief Executive
Officer. United Medicorp is a publicly-held corporation which manages medical
insurance claims. Prior to that time, Mr. Miller served in executive capacities
with International Telecharge, Inc., an operator services company; Automatic
Radius Management, Inc. ("ARM"), a security alarm service company; and U.S.
Telephone, Inc., a long distance carrier. After leaving United Medicorp, Mr.
Miller managed personal investments until he began work at the Company.
Ms. Merritt is a founder of the Company and has been a director since May,
1994. She has served as Vice President - Finance and Secretary/Treasurer since
inception. She served as President of Star of Texas, Inc., a trust management
account service from 1989 to May 1994. She served as Controller of United
Medicorp for several months during 1992. Ms. Merritt is a certified public
accountant and was employed by Ernst & Whinney from 1981 to 1989, her last
position being senior manager for entrepreneurial services.
Mr. Ogilvie was elected as a director of the Company on February 20, 2000.
Mr. Ogilvie has been employed by Classic Residence by Hyatt as Managing Director
of Development-Western Division since January of 1998. From the middle of 1993
to December of 1998, Mr. Ogilvie was a partner in the John Buck Company, a full
service real estate brokerage, development and property management company.
Mr. Stone joined the Company in December 1998 as Vice President of Sales
and Marketing after serving for two years as a Vice President of Sales and
Marketing for US Metrolines and Director of National Accounts at Matrix, both
Jensen UICI Companies. Before that from June 1994 to March 1996, he served as
Co-Founder/President of Telecable Communications, Inc. and from February 1991 to
June 1994 Director of Sales at Value Added
16
<PAGE>
Communications. All of the businesses in which Mr. Stone has worked are
telecommunications providers servicing a customer base similar to that which the
Company currently serves.
Mr. Williams joined the Company in January 1998 as Vice President of
Software Development bringing 25 years experience in system design and
development. During 1990, Mr. Williams worked with Voice Control Systems, Inc.,
a company in the speech recognition field, as a software programmer. After that
he served as Vice President of Engineering for ActionFax, Inc. for 5 years, a
company that designed multi-dialing and other fax related services. From 1995 to
1998, Mr. Williams owned and operated Business Hotlines, a software development
company headquartered in Dallas, Texas. He also worked in the Central Research
Laboratory at Texas Instruments on the development team that delivered the
world's first commercially available voice-mail system for VMX, Inc.
Mr. Sprague joined the Company in July 1999 as Vice President of
Corporate Operations responsible for product development, production,
deployment, technical support, customer service and day-to-day operations of the
company. Mr. Sprague brings to Preferred Voice over 29 years of experience in
operations in the telecommunications industry. From 1990 until joining the
Company, he held executive positions in network engineering, planning and
technical operations, both in the field and headquarters, with GTE. He also, at
one time, held the position of Chief Engineer at Citizens Utilities Company of
California. He has spoken at industry forums regarding telephony access
technologies and issues.
The Company is not aware of any "family relationships" (as defined in
Item 401(c) of Regulation S-B promulgated by the Commission) among directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers.
Except as set forth above, the Company is not aware of any event (as
listed in Item 401(d) of Regulation S-B promulgated by the Commission) that
occurred during the past five years that are material to an evaluation of the
ability or integrity of any director, person nominated to become a director,
executive officer, promoter or control person of the Company.
Item 10. Executive Compensation
The following tables set forth the compensation paid by the Company to
certain executive officers during the fiscal year ended March 31, 2000, 1999 and
1998.
<TABLE>
<CAPTION>
Annual Compensation
Securities Underlying
Name/Principal Year Ending Options/Warrants
Position March 31 Salary Bonus Granted
-------------- ----------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
G. Ray Miller-Chief 2000 $ 70,083 $10,000 ---
Executive Officer 1999 $ 47,333 --- 250,000
1998 $ 6,000 --- 200,000
Richard K. Stone 2000 $ 92,769 $10,500 ---
Vice President-Sales 1999 11,538 --- 120,000
and Marketing 1998 --- --- ---
</TABLE>
No other stock options or convertible securities were granted to the
aforementioned executive officers.
17
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the close of business on June 30,
2000, information as to the beneficial ownership of shares of the Company common
stock for all directors, each of the named executive officers (as defined in
Item 402(a)(2) of Regulation S-B promulgated by the Commission), for all
directors and executive officers as a group, and any person or "group" (as that
term is defined in Item 403 of Regulation S-B promulgated by the Commission) who
or which is known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of Company common stock. In addition, except as set forth
below, the Company does not know of any person or group who or which owns
beneficially more than 5% of its outstanding shares of Company common stock as
of the close of business on June 30, 2000.
<TABLE>
<CAPTION>
Beneficial Ownership (1), (2)
Number of
Name of Beneficial Owner Shares Percentage
------------------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pegasus Settlement Trust (3) 2,715,667 19.93%
G. Ray Miller (4) 550,250 3.91%
Mary G. Merritt(5) 3,517,542 25.17%
Scott V. Ogilvie(6) 40,000 *
Lawrence E. Steinberg(7) 1,407,584 10.25%
Richard K. Stone(8) 120,000 *
All Directors, and executive officers as a group (five 4,393,792 29.85%
persons)(9)
<FN>
* Less than one percent (1%).
1) The rules of the SEC provide that, for purposes hereof, person is
considered the "beneficial owner" of shares with respect to which the
person, directly or indirectly, has or shares the voting or investment
power, irrespective of his economic interest in the shares. Unless
otherwise noted, each person identified possesses sole voting and
investment power over the shares listed, subject to community property
laws.
2) Based on 13,626,492 shares of common stock outstanding o June 30, 2000.
Shares of common stock subject to options that are exercisable within 60
days of June 30, 2000, are deemed beneficially owned by the person holding
such options for the purposes of calculating the percentage of ownership of
such person but are not treated as outstanding for the purpose of computing
the percentage of any other person.
3) Pegasus Settlement Trust is a Channel Islands Trust of which SG Hambros
Trust Company (Jersey) Limited of 7 the Esplanade, St. Helier, Jersey,
Channel Islands is Trustee, and Mary Merritt is protector, with shared
voting and dispositive power. G. Ray Miller is the sole beneficiary of the
Trust. Pegasus Settlement Trust's address is % SG Hambros Trust Company
(Jersey) Limited, 7 The Esplanade, St. Helier, Jersey, Channel Islands JE4
8RT.
4) Includes 450,000 shares issuable upon exercise of warrants. Mr. Miller is
the sole beneficiary of the Pegasus Settlement Trust but is not the
beneficial owner of the common stock owned by the Trust because Mr. Miller
does not exercise voting or investment power over such shares. Mr. Miller's
address is 6500 Greenville Avenue, Suite 570, Dallas, Texas 75206.
5) Includes 350,000 shares issuable upon exercise of warrants, 36,000 shares
held by her minor children, and 2,715,667 shares held by Pegasus Settlement
Trust. Ms. Merritt's address is 6500 Greenville Avenue, Suite 570, Dallas,
Texas 75206.
18
<PAGE>
6) Consists of 40,000 shares issuable upon exercise of a warrant. Mr.
Ogilvie's address is 6500 Greenville Avenue, Suite 570, Dallas, Texas
75206.
7) Includes 100,000 shares issuable upon exercise of warrants held by Mr.
Steinberg and 216,448 shares in trusts of which he is the Trustee, two of
which his children are beneficiaries. Mr. Steinberg's address is 5420 LBJ
Freeway, Suite 1280, Dallas, Texas 75240.
8) Consists of 120,000 shares issuable upon exercise of options. Mr. Stone's
address is 6500 Greenville Avenue, Suite 570, Dallas, Texas 75206.
9) Includes the shares described in footnotes 4, 5, 6 and 8.
</FN>
</TABLE>
19
<PAGE>
Item 12. Certain Relationships and Related Transactions
On January 5, 1998, the Company issued G. Ray Miller, the Chief Executive
Officer and a director of the Company, a warrant to purchase 200,000 shares of
common stock of the Company at an exercise price of $1.00 per share on or before
January 5, 2001. The warrant was issued for Mr. Miller's past work for the
Company.
On January 5, 1998, the Company issued Mary Merritt, the Vice President of
Finance and a director of the Company, a warrant to purchase 100,000 shares of
common stock of the Company at an exercise price of $1.00 per share on or before
January 5, 2001. The warrant was issued for Ms. Merritt's past work for the
Company.
On September 3, 1998, the Company issued Lawrence E. Steinberg, a beneficial
owner of 5% or more of the Company's stock, 751,136 shares of common stock at
$0.39 per share for $302,100 that the Company owed to him on outstanding
promissory notes.
On September 3, 1998, the Company issued the Lawrence E. Steinberg Charitable
Remainder Trust, a Texas trust of which Lawrence E. Steinberg is a trustee,
75,180 shares of common stock at a $0.39 per share for $29,400 that the Company
owed to the trust on outstanding promissory notes.
On September 3, 1998, the Company issued the Ilana S. Steinberg Trust A, a Texas
trust for the benefit of one of Lawrence E. Steinberg's children of which Mr.
Steinberg is a trustee, 21,480 shares of common stock at $0.39 per share for
$8,400 that the Company owed to the trust on outstanding promissory notes.
On September 3, 1998, the Company issued the Adam J. Steinberg Trust A, a Texas
trust for the benefit of one of Lawrence E. Steinberg's children of which Mr.
Steinberg is a trustee, 21,480 shares of common stock at $0.39 per share for
$8,400 that the Company owed to the trust on outstanding promissory notes.
On September 3, 1998, Lawrence E. Steinberg agreed to loan $100,000 to the
Company. In return, the Company issued Mr. Steinberg its promissory note in the
amount of $50,000 bearing interest at a rate of 10% per annum due on September
3, 1999, and its promissory note in the amount of $50,000 bearing interest at a
rate of 10% per annum due on October 16, 1999 and a warrant to purchase 100,000
shares of common stock at a price of $1.00 per share on or before October 16,
2001. The notes due on September 3, 1999 and October 16, 1999 have been paid.
On March 31, 1999, the Company issued G. Ray Miller a warrant to purchase
250,000 shares of common stock of the Company at an exercise price of $0.84 per
share on or before March 31, 2004. The warrant was issued for Mr. Miller's past
work for the Company.
On March 31, 1999, the Company issued Mary Merritt a warrant to purchase 250,000
shares of common stock of the Company at an exercise price of $0.84 per share on
or before March 31, 2004. The warrant was issued for Ms. Merritt's past work for
the Company.
20
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of Preferred/telecom, Inc. filed on August 3, 1992 with the Secretary
of State of Delaware (Incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
3.2 Certificate of Amendment, filed on May 2, 1994 with the Secretary of State of Delaware
(Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
3.3 Certificate of Amendment, filed on March 21, 1995 with the Secretary of State of Delaware
(Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
3.4 Certificate of Amendment, filed on July 27, 1995 with the Secretary of State of Delaware
(Incorporated by reference to Exhibit 3.5 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
3.5 Certificate of Amendment, filed on March 7, 1997 with the Secretary of State of Delaware
3.6 Bylaws of Preferred/telecom, Inc. (Incorporated by reference to Exhibit 3.4 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
4.1 Specimen Certificate evidencing Common Stock of Preferred/telecom, Inc. (Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, registration no.
33-92894)
10.1* Form of Warrant Certificate and Schedule of Warrant Certificates
10.2** Office Building Lease between Greenville Avenue Properties, Ltd. and Preferred Voice, Inc.
10.3** Collocation License Agreement between NEXTLINK Texas, Inc. and Preferred Voice, Inc.
10.4** Promissory Note to Capital Growth Fund Ltd., in original principal amount of $83,000.00, dated
as of August 3, 1998
10.5** Promissory Note to Capital Growth Fund Ltd., in original principal amount of $10,000.00, dated
as of August 14, 1998
10.6** Promissory Note to Lawrence E. Steinberg, in original principal amount of $50,000.00, dated as
of September 3, 1998
10.7** Promissory Note to Bisbro Investments Co., Ltd., in original principal amount of $20,000.00,
dated as of October 1, 1998
10.8** Promissory Note to Universal Asset Fund Ltd., in original principal amount of $20,000.00, dated
as of October 1, 1998
10.9** Promissory Note to Lawrence E. Steinberg, in original principal amount of $50,000.00 dated as
of October 16, 1998
10.10** Promissory Note to Bisbro Investments Co., Ltd., in original principal amount of $30,000.00, dated
as of November 10, 1998
10.11** Promissory Note to Universal Asset Fund Ltd., in original principal amount of $20,000.00, dated
as of November 25, 1998
10.12** Promissory Note to Bisbro Investments Co. Ltd., in original principal amount of $10,000.00, dated
as of January 5, 1999
10.13** Software License Agreement between KMC Telecom Holdings, Inc. and Preferred Voice, Inc.
10.14** Promissory Note to G. Tyler Runnels, in original principal amount of $43,000.00, dated as of
March 30, 1999
10.15** Equipment Lease between Capital Growth Fund, Ltd. and Preferred Voice, Inc.
10.16** Equipment Lease between Capital Growth Fund, Ltd. and Preferred Voice, Inc.
10.17** First Amendment to Lease between Dallas Office Portfolio, L.P. as successor in interest to
Greenville Avenue Properties, Ltd. and Preferred Voice, Inc.
10.18** Master Distributor Agreement between In Touch Solutions, L.L.C. and Preferred Voice, Inc.
21
<PAGE>
10.19** Master Distributor Agreement between Answering Service, Inc. and Preferred Voice, Inc.
10.20** Master Distributor Agreement between Amerivoice Telecommunications, Inc. and Preferred Voice,
Inc.
10.21** Master Distributor Agreement between Voicenet New Media, Inc. and Preferred Voice, Inc.
10.22** Master Distributor Agreement between Best Voice, Inc. and Preferred Voice, Inc.
10.23** Master Distributor Agreement between Nomis Communications, Inc. and Preferred Voice, Inc.
10.24** Master Distributor Agreement between Florida Wireless and Preferred Voice, Inc.
10.25** Master Distributor Agreement between Voice Retrieval, Inc. and Preferred Voice, Inc.
10.26*** Form of Promissory Note and Schedule (10.7)
10.27**** Subscription Agreement and Letter of Investment Intent of Trition Capital Investments, Ltd., dated
July 1, 1999 (10.1)
10.28**** Subscription Agreement and Letter of Investment Intent of JMG Capital Partners, L.P., dated July
1, 1999 (10.2)
10.29**** Second Amendment to Lease between Dallas Office Portfolio, L.P. as successor in interest to
Greenville Avenue Properties, Ltd. and Preferred Voice, Inc. (10.3)
10.30***** Form of Subscription Agreement and Schedule (4.8)
10.31* Volume License Agreement between Philips Speech Processing North America, a division of
Philips Electronics North America Corporation, and Preferred Voice, Inc.+
27* Financial Data Schedule
<FN>
*Filed herewith
** 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.
*** Filed as an exhibit to the Company's Form 10-QSB for the quarter ended June
30, 1999 (File no. 33-92894) and incorporated herein by reference.
**** Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
September 30, 1999 (File no. 33-92894) and incorporated herein by reference.
***** Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
December 31, 1999 (File no. 33- 92894) and incorporated by reference.
+ Confidential materials deleted and filed separately with the Securities and
Exchange Commission.
</FN>
</TABLE>
(b) Reports on Form 8-K
None
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this annual report on Form 10-KSB to be
signed on its behalf by the undersigned thereto duly authorized.
Preferred Voice, Inc.
(Registrant)
Date: July 14, 2000 By: /s/ G. Ray Miller
------------------------
G. Ray Miller, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10-KSB has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE OFFICE DATE
--------- ------ ----
<S> <C> <C>
/s/ G. Ray Miller President, Chief Executive Officer and July 14, 2000
---------------------------- Chairman of the Board of Directors
G. Ray Miller (Principal Executive Officer)
/s/ Mary G. Merritt Secretary, Treasurer and Vice President July 14, 2000
---------------------------- of Finance
Mary G. Merritt
</TABLE>
23
<PAGE>
INDEX TO EXHIBITS
Exhibit
Numbers Description of Exhibit
------- ----------------------
10.1 Form of Warrant Certificate and Schedule of Warrant
Certificates
10.31 Volume License Agreement between Philips Speech Processing
North merica, a division of Philips Electronics North
America Corporation, and Preferred Voice, Inc.
27 Financial Data Schedule
+ Confidential materials deleted and filed separately with the Securities and
Exchange Commission.
24
