<PAGE>
United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
{ X } Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Period Ended September 30, 2000.
or
{ } Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Transition Period From _________to_________
Commission File Number 33-92894
--------
PREFERRED VOICE, INC.
Delaware 75-2440201
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6500 Greenville Avenue
Suite 570
Dallas, TX 75206
--------------------------------- ----------
(Address of Principal Executive (Zip Code)
Offices)
(214) 265-9580
------------------------------------------------
(Registrant's Telephone Number, including area code.)
Not Applicable
-------------------------------------------------------------------------
(Former name, Former Address and Former Fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, $ 0.001 Par Value - 14,780,086 shares as of November 7, 2000.
Transitional Small Business Format Yes No X
--- ---
<PAGE>
INDEX
Preferred Voice, Inc.
<TABLE>
<CAPTION>
<S> <C>
Part I. Financial Information 1
Item 1. Financial Statements 1
Balance Sheets-September 30, 2000, September 30, 1999 and March 31, 2000. 1
Statements of Operations-Three Months Ended September 30, 2000 and
1999, and Six Months Ended September 30, 2000 and 1999, and for the
Year Ended March 31, 2000. 3
Statements of Cash Flows-Six Months Ended September 30, 2000 and 1999
and for the Year Ended March 31, 2000. 4
Notes to Financial Statements - September 30, 2000. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Part II. Other Information 17
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Preferred Voice, Inc.
Balance Sheets
September 30, 2000 and 1999 and March 31, 2000
<TABLE>
<CAPTION>
September 30, September 30, March 31,
2000 1999 2000
Assets (Unaudited) (Unaudited) (Audited)
<S> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 2,366,277 $ 161,699 $ 1,373,291
Accounts Receivable, net of allowance 190 284,721 3,924
for doubtful accounts of $ -0-, $-0-
and $-0- respectively
Inventory 47,785 0 84,724
Prepaid Expenses 761,018 0 0
Employee Receivables 0 583 0
------------------- ------------------- -------------------
Total Current Assets $ 2,414,252 $ 447,003 $ 1,461,939
------------------- ------------------- -------------------
Property and Equipment:
Computer Equipment $ 660,865 $ 274,129 $ 321,248
Furniture and Fixtures 40,791 24,495 38,880
Office Equipment 21,545 10,393 18,198
Computer Software 641,334 248,220 384,686
LESS: Accumulated Depreciation (366,598) (217,557) (253,143)
------------------- ------------------- -------------------
Net Property and Equipment $ 997,937 $ 339,680 $ 509,869
------------------- ------------------- -------------------
Other Assets:
Deposits $ 90,195 $ 85,114 $ 85,114
Prepaid Expenses -0- 761,018 761,018
Deferred Stock Issuance Costs -0- -0- 19,803
Trademarks 23,676 -0- 7,472
------------------- ------------------- -------------------
Total Other Assets $ 874,889 $ 846,132 $ 873,407
------------------- ------------------- -------------------
Total Assets $ 4,287,078 $ 1,632,815 $ 2,845,215
=================== =================== ===================
</TABLE>
1
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
September 30, September 30, March 31,
2000 1999 2000
Liabilities and Stockholder's Deficit (Unaudited) (Unaudited) (Audited)
<S> <C> <C> <C>
Current Liabilities:
Accounts Payable $ 376,010 $ 325,573 $ 272,818
Accrued Operating & Vacation Expenses 39,728 25,237 24,981
Accrued Payroll and Related Tax 3,552 158,109 2,265
Accrued Interest Payable 42,151 261,034 39,851
Customer Deposits 342,118 -0- 390,992
Current Maturities of Long-Term Debt 30,000 30,000 30,000
Notes Payable 50,866 90,866 50,866
Notes Payable-Related Parties -0- 100,000 -0-
------------------- ------------------- -------------------
Total Current Liabilities $ 884,425 $ 990,819 $ 811,773
------------------- ------------------- -------------------
Commitments and Contingencies (Note I, K, and L)
Stockholders' Equity:
Common Stock, $0.001 par value
20,000,000 shares authorized;
shares issued 14,780,086, 11,440,990,
and 13,276,796 respectively $ 14,780 $ 11,436 $ 13,277
Additional Paid In Capital 12,126,947 6,464,620 8,952,788
Accumulated Deficit (8,737,206) (5,832,192) (6,930,755)
Treasury Stock - at cost (1,868) (1,868) (1,868)
------------------- ------------------- -------------------
Total Stockholder Equity $ 3,402,653 $ 641,996 $ 2,033,442
------------------- ------------------- -------------------
Total Liabilities and Stockholder Equity $ 4,287,078 $ 1,632,815 $ 2,845,215
=================== =================== ===================
</TABLE>
2
The accompanying notes are an integral part of these statements.
<PAGE>
Preferred Voice, Inc.
Statements of Operations
For The Three Months Ended September 30, 2000 and 1999
And For the Six Months Ended September 30, 2000 and 1999
And For the Year Ended March 31, 2000
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30, March 31,
2000 1999 2000 1999 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
-------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales $ 51,450 $ 227,471 $ 58,058 $ 822,645 $ 885,134
Cost of Sales 51,565 91,167 60,513 136,082 215,293
-------------- ---------------- ---------------- ---------------- ----------------
Gross Profit (loss) $ (115) $ 136,304 $ (2,455) $ 686,563 $ 669,841
-------------- ---------------- ---------------- ---------------- ----------------
Costs and Expenses:
General & Administrative $ 990,166 355,992 $ 1,801,696 589,167 $ 1,675,971
Interest Expense 1,150 5,450 2,300 21,890 28,556
-------------- ---------------- ---------------- ---------------- ----------------
Total Costs and Expenses $ 991,316 $ 361,442 $ 1,803,996 $ 611,057 $ 1,704,527
-------------- ---------------- ---------------- ---------------- ----------------
Gain/(Loss) From Operations $ (991,431) $ (225,138) $ (1,806,451) $ 75,506 $ (1,034,686)
Other Income (Expense):
Loss From Sale of Assets -0- -0- -0- -0- (18,356)
-------------- ---------------- ---------------- ---------------- ----------------
Gain/(Loss) From Operations Before
Income Taxes / Extraordinary Items $ (991,431) $ (225,138) $ (1,806,451) $ 75,506 $ (1,053,042)
Provision for Income Tax -0- -0- -0- -0- -0-
-------------- ---------------- ---------------- ---------------- ----------------
Gain/(Loss) Before Extraordinary Item $ (991,431) $ (225,138) $ (1,806,451) $ 75,506 $ (1,053,042)
============== ================ ================ ================ ================
Extraordinary Item:
Gain from Extinguishment of Debt -0- 17,935 -0- 29,991 59,976
(less applicable income taxes of -0-)
Net Loss $ (991,431) $ (207,203) $ (1,806,451) $ 105,497 $ (993,066)
============== ================ ================ ================ ================
Per Share Amounts:
Gain/(Loss) from Operations $ (0.07) $ (0.02) $ (0.13) $ 0.01 $ (0.10)
Gain from Extinguishment of Debt $ -0- $ -0- $ -0- $ -0- $ 0.01
Net Gain/Loss (Per Share) $ (0.07) $ (0.02) $ (0.13) $ 0.01 $ (0.09)
</TABLE>
3
The accompanying notes are an integral part of these statements.
<PAGE>
Preferred Voice, Inc.
Statement of Cash Flows
For the Six Months Ended September 30, 2000 and 1999
And For the Year Ended March 31,2000
<TABLE>
<CAPTION>
September 30, September 30, March 31,
2000 1999 2000
(Unaudited) (Unaudited) (Audited)
------------- ------------ -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Cash Received from customers $ 12,918 $ 595,175 $ 1,273,062
Cash Paid to suppliers and employees (1,598,678) (796,233) (2,093,749)
Interest Paid -0- (4,442) (224,235)
------------- ------------ -------------
Net Cash used by Operating Activities $ (1,585,760) $ (205,500) $ (1,044,922)
------------- ------------ -------------
Cash Flows from Investing Activities:
Capital Expenditures $ (601,523) $ (116,801) $ (389,436)
Proceeds from Sale of Fixed Assets -0- 250 1,750
------------- ------------ -------------
Net Cash used by Investing Activities $ (601,523) $ (116,551) $ (387,686)
------------- ------------ -------------
Cash Flows from Financing Activities:
Proceeds from Sale of Stock (net) $ 3,180,269 $ 360,000 $ 2,792,149
Proceeds from Notes Payable -0- 200,000 200,000
Note Principal Payments -0- (118,000) (228,000)
Proceeds from Sale -Leaseback Transaction -0- -0- -0-
------------- ------------ -------------
Net Cash provided by Financing Activities $ 3,180,269 $ 442,000 $ 2,764,149
------------- ------------ -------------
Net Increase (Decrease) in Cash and
Cash Equivalents $ 992,986 $ 119,949 $ 1,331,541
Cash and Cash Equivalents:
Beginning of Period 1,373,291 41,750 41,750
------------- ------------ -------------
End of Period $ 2,366,277 $ 161,699 $ 1,373,291
============= ============ =============
Supplemental Schedule of non-cash investing and
financing activities:
Issuance of Common Stock in
Exchange for Debt $ 15,196 $ 1,173,928 $ 952,383
------------- ------------ -------------
Total Non-Cash Investing Activities $ 15,196 $ 1,173,928 $ 952,383
============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
September 30, September 30, March 31,
2000 1999 2000
(Unaudited) (Unaudited) (Audited)
-------------- ------------ ------------
<S> <C> <C> <C>
Reconciliation of Net Gain/(Loss) to Net
Cash used by Operating Activities:
Net Gain/(Loss) $ (1,806,451) $ 105,497 $ (993,066)
-------------- ------------ ------------
Adjustments to Reconcile Net Loss to Net Cash
used by Operating Activities:
Depreciation $ 113,455 $ 58,083 $ 140,948
Amortization -0- -0- -0-
(Gain) Loss on Sale of Fixed Assets -0- 275 18,356
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 3,734 (283,860) (3,064)
(Increase) Decrease in Inventory 36,939 -0- (84,724)
(Increase) Decrease in Employee Receivables -0- 1,917 2,500
(Increase) Decrease in Patents (16,204) -0- (7,472)
(Increase) Decrease in Deposits (5,081) (3,579) (3,579)
(Increase) Decrease in Prepaid Expenses -0- -0- -0-
(Increase) Decrease in Deferred Debt Issue Costs -0- -0- -0-
Increase (Decrease) in Accounts Payable 118,388 (18,629) (91,016)
Increase (Decrease) in Customer Deposits (48,874) -0- 390,992
Increase (Decrease) in Accrued Expenses 18,334 (65,204) (414,797)
-------------------------------------------------------
Total Adjustments $ 220,691 $ (310,997) $ (51,856)
-------------- ------------ ------------
Net Cash used by Operating Activities $ (1,585,760) $ (205,500) $ (1,044,922)
============== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<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.
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."
6
<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 three months and six
months ended September 30, 2000, the majority of the Company's revenue consisted
of billing one customer for a software and hardware installation.
Advertising expense
-------------------
The Company expenses advertising costs when the advertisement occurs.
Total advertising expense amounted to $2,950 and $23,850 for the three months
and six months ended September 30, 2000, 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 13,746,255 and 13,420,470 for the three months and six months
ended September 30, 2000, respectively.
Amortization
------------
The costs of patents and trademarks are being amortized on the straight-
line method over a period of 15 years.
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.
7
<PAGE>
Note B - Summary of significant accounting policies (continued):
New accounting pronouncements
-----------------------------
The Company adopted the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities on April 1, 2000. 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 did not have a material impact on the
Company's financial position, results of operations or cash flows as the Company
has not entered into any derivative transactions.
Note C - Note payable:
Note payable consists of the following at September 30, 2000:
<TABLE>
<S> <C>
Note payable, Brite Voice Systems, Inc., dated January 31, 1997. Note is
unsecured and payable in monthly installments of $8,112, including $50,866
interest at the rate of prime + 2 (8.5% at March 31, 1999) through
maturity on January 1, 1998.
</TABLE>
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- and $-
0- for the three months and six months ended September 30, 2000, respectively.
Note D - Long-term debt:
Long-term debt consisted of the following at September 30, 2000:
<TABLE>
<S> <C>
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
Note payable to Equity Communication. This note is unsecured, non-interest
bearing, and due upon demand. 10,000
--------------
$30,000
Less current portion 30,000
--------------
Total $ 0
==============
</TABLE>
Interest expense charged to operations related to the long-term debt was
$1,150 and $2,300 for the three months and six months ended September 30, 2000,
respectively.
Note E - Common stock:
Stock purchase warrants
-----------------------
At September 30, 2000, the Company had outstanding warrants to purchase
2,452,453 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 November 12, 2000 to August 24, 2006. At September
30, 2000, 2,452,453 shares of common stock were reserved for that purpose.
8
<PAGE>
Preferred Voice, Inc.
Notes to Financial Statements
Common stock reserved
---------------------
At September 30, 2000, shares of common stock were reserved for the
following purposes:
<TABLE>
<S> <C>
Exercise of stock warrants 2,452,453
Exercise and future grants of stock
options and stock appreciation rights 412,250
--------------
2,864,703
==============
</TABLE>
Note F - Income taxes:
The Company uses the liability method of accounting for income taxes under
the provisions of Statement of Financial Accounting Standards No. 109. Under the
liability method, a provision for income taxes is recorded based on taxes
currently payable on income as reported for federal income tax purposes, plus an
amount which represents the change in deferred income taxes for the year.
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax reporting basis of the Company's
assets and liabilities. The major areas in which temporary differences give
rise to deferred taxes are 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>
For the three For the six
Months ended Months ended
September 30, September 30,
2000 2000
--------------------------------------
<S> <C> <C>
Current income taxes $ 0 $ 0
Change in deferred income taxes due
to temporary differences 0 0
--------------------------------------
$ 0 $ 0
======================================
</TABLE>
9
<PAGE>
Preferred Voice, Inc.
Notes to Financial Statements
Note F - Income taxes (continued):
Deferred tax (liabilities) assets consist of the following:
<TABLE>
<S> <C>
Accumulated depreciation $ (22,000)
--------------
Gross deferred tax liabilities $ (22,000)
--------------
Accrued liabilities $ 9,000
Start-up expenditures 1,000
Net operating loss carryforward 2,941,000
--------------
Gross deferred tax assets $ 2,951,000
Valuation allowance (2,929,000)
--------------
Net deferred tax assets $ 22,000
--------------
$ 0
==============
The increase in the deferred tax valuation
allowance is as follows: $ 612,000
==============
</TABLE>
The increase in the deferred tax valuation allowance for the three months
and six months ended September 30, 2000 was $362,000 and $612,000, respectively.
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 September 30, 2000, a net operating loss
carryforward of approximately $8,651,000 which can be used to offset future
taxable income through the year 2021.
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 September 30,
2000, options to purchase 412,000 shares at exercise prices of $0.69 to $2.50
per share were outstanding. No stock appreciation rights had been granted at
September 30, 2000.
10
<PAGE>
Preferred Voice, Inc.
Notes to Financial Statements
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>
<S> <C>
Expected dividend yield 0.00%
Risk-free interest rate 5.69% - 6.02%
Expected life 2.5 years to
3.5 years
Expected volatility 139%
</TABLE>
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>
For the three months For the six months
ended September 30, ended September 30,
2000 2000
<S> <C> <C>
Net loss:
As reported $ (991,431) $(1,806,451)
======================= ======================
Proforma $(1,001,260) $(1,826,110)
======================= ======================
Loss per common share:
As reported $(0.07) $(0.13)
======================= ======================
Proforma $(0.08) $(0.14)
======================= ======================
</TABLE>
11
<PAGE>
Preferred Voice, Inc.
Notes to Financial Statements
Following is a summary of the stock award and incentive plan during the
three months and six months ended September 30, 2000:
<TABLE>
<CAPTION>
Number of Weighted average
Shares Exercise price
------------------ -----------------------
<S> <C> <C>
Outstanding at March 31, 2000 406,500 $0.96
Granted 15,000 2.50
Exercised (9,500) 1.00
---------------- -----------------------
Outstanding at June 30, 2000 412,000 $1.02
================ =======================
Granted 0 0.00
Exercised 0 0.00
Outstanding at September 30, 2000 412,000 $1.02
================ =======================
Options exercisable at September 30, 2000 295,083 $0.94
================ =======================
Weighted average fair value of options
granted during the six months ended 15,000 $2.13
September 30, 2000
================ =======================
</TABLE>
Note I - Commitments:
The Company leases its office facilities and various office equipment under
operating leases expiring through December 2005. Following is a schedule of
future minimum lease payments required under the above operating leases as of
September 30, 2000:
<TABLE>
<CAPTION>
Year ending
September 30, Amount
-------------
<S> <C>
2001 $177,174
2002 177,739
2003 172,949
2004 169,685
2005 170,526
Thereafter 42,632
-------------
$910,705
=============
</TABLE>
Total rent expense charged to operations was $28,977 and $58,015 for the
three months and six months ended September 30, 2000, 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
12
<PAGE>
Preferred Voice, Inc.
Notes to Financial Statements
$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 current assets in the accompanying balance sheet. 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 - 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.
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. As of September 30, 2000, the Company had completed one
installation.
On September 25, 2000, KMC notified the Company that the initial
installation would not be accepted and KMC intends to terminate the software
license agreement. In addition, KMC requested the refund of the initial license
fee and other amounts paid to the Company. The Company believes it has fully
complied with the terms and conditions of the agreement and intends to
vigorously defend its position. Accordingly, no provision for losses in
connection with the KMC agreement has been charged to operations in the
accompanying financial statements.
In August 2000, the Company completed the issuance of an additional
1,142,858 common shares through a private offering, resulting in net proceeds
(after deducting issuance costs) of $2,787,531. In connection with the
offering, the Company also issued warrants to purchase 285,715 shares of common
stock at an exercise price of $2.625 per share.
As of September 30, 2000, the Company has entered into thirty-one 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 November 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 L - Concentrations:
Concentrations of credit risk
-----------------------------
At September 30, 2000, the Company had cash balances of $2,379,945 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.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth herein
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and those set forth in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" section of the Form 10-KSB for
the fiscal year ended March 31, 2000. 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.
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 Intervoice-Brite, Inc., formerly known
as Brite Voice Systems, Inc. ("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 Incumbent Local Exchange Carriers ("ILECs"), Wireless Communication
Carriers ("WCCs"), and Competitive Local Exchange Carriers ("CLECs"). This
avenue is extremely attractive to the Company because these entities already
have customer bases and the infrastructure to service large numbers of
customers. To date, the Company has signed thirty one ILEC and WCC multi-year
contracts. One contract has been fully implemented and five are in the system
acceptance and early marketing stages.
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
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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 affect the Company's business,
operating results and financial condition.
Results of Operations
For the six month period ended September 30, 2000, the Company recorded net
loss of $1,806,451, or $.013 per share compared to a net gain of $105,497 or
$.01 per share for the six month period ended September 30, 1999. For the three
month period ended September 30, 2000, the Company recorded a net loss of
$991,431, or $.07 per share compared to a net loss of $207,203, or $.02 per
share for the three month period ended September 30, 1999.
Total Revenue
Total revenue for the six months period ended September 30, 2000, was $58,058
compared to $822,645 for the six month period ended September 30, 1999. Of the
revenue booked in the six months period ended September 30, 2000, 84% was
generated from sales of its VIP systems and 16% from service fees for the
Company's "Emma the Perfect Receptionist" and "Smart Line". Of the revenue
booked in the six months period ended September 30, 1999, 69% was generated from
one-time licensing fees to KMC Telecom Holdings, 24% was from sales of its VIP
systems, 4% from customer tests, 2.5% from master distributor fees for specific
marketing rights, and the remaining 5% from service fees for the Company's "Emma
the Perfect Receptionist" and "Smart Line". Total revenue for the three months
period ended September 30, 2000 was $51,450 compared to $227,471 for the three
month period ended September 30, 1999. Of the revenue booked in the three
months period ended September 30, 2000, 95% was from sales of the Company's VIP
systems, and 5% from customer tests. Of the revenue booked in the three months
period ended September 30, 1999, 86% was from sales of the Company's VIP
systems, and 14% from customer tests. The reduction of revenues reflects the
Company's move from a licensing arrangement to a revenue sharing agreement with
its customers.
The Company anticipates that revenues from its revenue sharing agreements will
grow gradually in the final quarter of its fiscal year 2001 as it continues to
install VIP Systems in the ILECs and WCCs which have already signed revenue
sharing agreements. The Company does not anticipate substantial revenue going
forward from the sale of master distributorships or direct licensing such as the
KMC Telecom Holdings ("KMC") agreement.
Cost of Sales
Cost of sales for the six months period ended September 30, 2000 was $60,513
compared to $136,082 for the six months period ended September 30, 1999. Cost
of sales for the three months period ended September 30, 2000 was $51,565
compared to $91,167 for the three months period ended September 30, 1999. For
the six months period ended September 30, 2000, 43% of costs were for VIP system
hardware purchased by KMC and 57% for network infrastructure such as
collocations, connectivity, system access and long distance. For the six months
period ended September 30, 1999, 59% of costs were for VIP system hardware
purchased by KMC, 23% direct costs associated with the closing of the KMC
licensing agreement, and 18% for network infrastructure such as collocations,
connectivity, system access and long distance.
Selling, General and Administrative
Selling, general and administrative expenses for the six months period ended
September 30, 2000 were $1,801,696 compared to $589,167 for the six months
period ended September 30, 1999. Selling, general and administrative expenses
for the three months period ended September 30, 2000 were $990,166 compared to
$355,992 for the three months period ended September 30, 1999. The increase
from 1999 to 2000 are due to increased staffing and increased marketing efforts
of the Company's VIP services to potential parties interested in the Company's
revenue sharing program to wireline and wireless carriers.
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The Company expects that selling, general and administrative expenses will
continue to increase through fiscal year 2001, such expenses to include costs
related to the number of employees, office space requirements and general
overhead.
Research and Development
The Company has not expensed any research and development costs for the
periods stated on its financial statements, but has capitalized costs of
$641,334 for development of its proprietary software and hardware for the period
ended September 30, 2000, in comparison to $248,220 for the period ended
September 30,1999.
Extraordinary Items
The Company has recognized income from the extinguishment of debt of $-0- and
$29,991 respectively for the six months period ended September 30, 2000 and
1999. For the three months period ended September 30, 2000 and 1999, the
Company recognized income from extinguishment of debt of $-0- and $17,935,
respectively.
Income Taxes
As of September 30, 2000, the Company had cumulative federal net operating
losses of approximately $8.7 million, which can be used to offset future income
subject to federal income tax through the fiscal year 2021.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 2000 were $2,366,277
an increase of $992,986 from $1,373,291 at March 31, 2000. The increase in cash
and cash equivalents is primarily due to recent sales of the Company's common
stock and warrants for common stock to new investors. The decrease in accounts
receivable and inventories is due to the Company's move from sales of its
software and hardware to revenue sharing agreements. Accounts receivables
should begin to increase as revenue sharing agreements are implemented.
On June 3, 1999, the Company entered into a software license agreement with
KMC. Under the terms of the agreement, KMC paid the Company an initial license
fee of $570,000. It has also paid the Company $391,000 for hardware for eight
installations. The agreement provides for a total of 39 installations and grants
KMC the ability to add up to 81 additional installations. The agreement is for a
period of 10 years but KMC has the right to terminate the agreement annually and
on standard events of default.
To date the Company has installed one system. On September 25, 2000, KMC
wrote the Company and asserted that since it had not accepted the initial
installation within 90 days, it was refusing to accept the system and exercising
its right to terminate the agreement. KMC requested a refund of most monies paid
relating to the initial market and a refund of all monies paid for other
markets. If the Company were required to refund such monies it would result in
a charge to revenue in the period that the refund is ascertained. The Company
responded by informing KMC that under the terms of the agreement, KMC had
already accepted the initial installation and, therefore, had no right to
terminate the agreement.
On November 1, 2000, KMC wrote to the Company again and disputed the Company's
interpretation of the agreement. KMC reiterated its termination of the agreement
and its request for reimbursement of monies that it had paid. KMC added that if
the Company were correct that the agreement is not terminated, KMC would
exercise its right to remove all other markets from the terms of the agreement
and would demand return of the license fee and hardware costs paid for those
markets. The Company disputes that it has any obligation to refund license fees
for markets that are removed from the agreement. KMC also informed the Company
that if the agreement were in effect, the Company would have breached the
provisions requiring escrow of the software. While the Company has not escrowed
the software, the Company disputes that such inaction constitutes a breach of
the escrow provisions of the agreement.
Cash and cash equivalents increased from fiscal year end March 31, 2000 as
a result of a recent offering. On August 24, 2000, pursuant to Section 4(2) of
the Securities Act, the Company conducted an offering of
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1,142,858 units consisting of shares of the Company's common stock and warrants
to purchase shares of the Company's common stock at $2.625 per share providing
the Company with $3,000,002 working capital. The Company's management believes
that current cash and cash equivalents and cash that may be generated from
operations will be sufficient to meet our anticipated cash needs through March
31,2001. However, any projections of future cash needs and cash flows are
subject to substantial uncertainty.
Future Obligations
The ability of the Company to raise capital is, in the opinion of
management, the primary constraint on the implementation of its business plan.
Management estimates that during the next twelve (12) months, the Company will
require approximately $3,000,000 of equity and/or long term debt to finance its
costs of marketing, system deployment, and continued refinement of its services.
During the next twelve months, subject to raising adequate capital or
securing financing for its VIP systems, the Company intends to substantially
increase its VIP system installations, to continue 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 thirty (30) additional
persons during the next twelve (12) months, primarily to support its expanding
marketing activities, software and hardware development, and system
installations. At November 7, 2000, the Company employed thirty-five (35) full
time employees.
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 not encountered any material problems with its own software
products 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 continues to monitor
its systems for latent issues, however its management 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.
No business can guarantee that there will be no Year 2000 problems. Some
litigation has arisen out of Year 2000 compliance issues, and the Company is
aware of lawsuits against other software vendors. Because of the unprecedented
nature of such litigation, it is uncertain to what extent the Company may be
affected by it.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any material legal proceedings.
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Item 2. Changes in Securities.
(a) There have been no material changes in securities during the period
(b) There have been no material changes in the class of securities or the
rights of the holders of the registered securities.
(c) Recent Sales of Unregistered Securities
Three warrantholders exercised their warrants to purchase a total of 10,736
shares of common stock. On July 13, 2000, the Company issued 5,000 shares of
common stock of the Company to Eugene Starr at an exercise price of $3.00 per
share pursuant to the exercise of a warrant. On July 18, 2000, the Company
issued 736 shares of common stock of the Company to Murray Alter in a cashless
exercise of his warrant to purchase 2,500 shares of common stock at an exercise
price of $3.00 per share. The shares were issued on a net basis. On August 2,
2000, the Company issued 5,000 shares of common stock of the Company to Patrick
Hund at an exercise price of $3.00 per shares pursuant to the exercise of a
warrant.
On August 16, 2000, the Company issued Craig Dierksheide and Ameritel
Communications, LLC each warrants to purchase 13,750 and 11,250 shares of common
stock of the Company, respectively, at an exercise price of $1.00 per share to
be exercised on or before December 30, 2000, in exchange for a warrant to
purchase 25,000 shares of common stock of the Company at the same exercise
price, that was previously issued to In Touch Solutions, LLC.
On August 24, 2000, the Company completed the sale of 1,142,858 units (the
"Units") consisting of one share of the Company's common stock and one warrant
to purchase one-fourth (1/4th) of a share of the Company's common stock. The
Units were sold at a purchase price of $2.625 per Unit. The warrants are
exercisable at an exercise price of $2.625 per share and are exercisable for 5
years, subject to certain adjustments. Stifel, Nicolaus & Company, Incorporated
("Stifel") acted as a placement agent for this offering and received warrants to
purchase 51,035 shares of the Company's common stock at an exercise price of
$3.53 per share, subject to certain adjustments, in addition to commissions
payable to it in cash in the amount of 6% of the gross proceeds of the offering
which gross proceeds equaled $3,000,002. Stifel's warrants are exercisable for
five years beginning on the first anniversary of the completion of the offering.
Additional terms of the offering are incorporated herein by reference to the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 24, 2000.
On September 8, 2000, the Company issued a number of warrants. The Company
issued each of Peter Foster, Tyler Runnels and Mohammed Hadid a warrant to
purchase 20,000 shares of common stock of the Company at an exercise price of
$2.75 per share to be exercised on or before September 8, 2001, related to their
service as advisory council members. The Company also issued Robert Ramsdell a
warrant to purchase 40,000 shares of common stock of the Company on the same
terms and also related to his service as an advisory council member.
On September 15, 2000, the Company issued Gerard Hallaren a warrant to
purchase 40,000 shares of common stock of the Company at an exercise price of
$2.93 per share. The warrant is immediately exercisable with respect to one-
third of the shares; exercisable after the first anniversary of the grant of the
warrant on September 15, 2000, with respect to one-third of the shares; and
exercisable after the second anniversary of the grant of the warrant, with
respect to the final one-third of the shares. The warrant must be exercised on
or before September 19, 2003. This issuance was related to Mr. Hallaren's
service on the board of directors of the Company. Mr. Hallaren is an employee of
Stifel.
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. Except for the offering of Units on August 24, 2000 set forth above,
these transactions did not involve an underwriter and no underwriting discounts
or commissions were paid.
Item 3. Defaults upon Senior Securities
None.
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Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Gerard Hallaren was elected a director of the Company in September 2000 and in
conjunction with that position he received a warrant as set forth above. Mr.
Hallaren is an employee of Stifel.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
------ -----------------------
10.1* Form of Subscription Agreement between the Company and each
purchaser in the August 24, 2000 offering.
10.2* Form of Warrant Certificate issued by the Company to each
purchaser in the August 24, 2000 offering.
10.3* Warrant Certificate, dated August 24, 2000, issued by the
Company to Stifel, Nicolaus & Company, Incorporated.
10.4** Form of Warrant Certificate and Warrant Schedule.
* Filed as an Exhibit to the Company's Form 8-K on August 24, 2000 and
incorporated herein by reference.
** Filed herewith.
(b) Reports on Form 8-K
On August 24, 2000, the Company filed a Current Report on Form 8-K to
announce the completion of its private offering of certain equity securities of
the Company to investors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED VOICE, INC.
November 14, 2000 /s/ G. Ray Miller
------------------------ ---------------------------------------
Date G. Ray Miller
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
November 14, 2000 /s/ Mary G. Merritt
------------------------ ---------------------------------------
Date Mary G. Merritt
Secretary, Treasurer and Vice President
of Finance
(Principal Financial Officer)
20
