United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
( X } Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
for the Period Ended June 30, 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 - 13,626,492 shares as of July 8, 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-June 30, 2000, June 30, 1999 and March 31, 2000. 1
Statements of Cash Flows-Three Months Ended June 30, 2000 and 1999
and for the Year Ended March 31, 2000. 3
Statements of Operations-Three Months Ended June 30, 2000 and 1999
and for the Year Ended March 31, 2000. 5
Notes to Financial Statements - June 30, 2000. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Part II. Other Information 18
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
Preferred Voice, Inc.
Balance Sheets
June 30, 2000 and 1999 and March 31, 2000
June 30, June 30, March 31,
2000 1999 2000
Assets (Unaudited) (Unaudited) (Audited)
<S> <C> <C> <C>
Current Assets:
Cash and Cash $ 644,739 $ 390,731 $ 1,373,291
Equivalents
Accounts Receivable, net of allowance
for doubtful accounts of $ -0-, $-0-
and $-0- respectively 7,020 1,000 3,924
Inventory 86,314 0 84,724
------------------- ------------------- --------------------
Total Current Assets $ 738,073 $ 391,731 $ 1,461,939
------------------- ------------------- --------------------
Property and Equipment:
Computer Equipment $ 472,927 $ 270,062 $ 321,248
Furniture and Fixtures 40,791 20,119 38,880
Office Equipment 18,198 12,493 18,198
Computer Software 500,955 222,405 384,686
LESS: Accumulated Depreciation (305,466) (189,215) (253,143)
-------------------------------------------------------------
Net Property and Equipment $ 727,405 $ 335,864 $ 509,869
------------------- ------------------- --------------------
Other Assets:
Deposits $ 85,114 $ 81,535 $ 85,114
Prepaid Expenses 761,018 761,018 761,018
Trademarks 11,452 0 7,472
Deferred Stock Issuance Costs 32,470 0 19,803
------------------- ------------------- --------------------
Total Other Assets $ 890,054 $ 842,553 $ 873,407
------------------- ------------------- --------------------
Total Assets $ 2,355,532 $ 1,570,148 $ 2,845,215
=================== =================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, June 30, March 31,
2000 1999 2000
(Unaudited) (Unaudited) (Audited)
Liabilities and Stockholders' Equity
<S> <C> <C> <C>
Current Liabilities:
Accounts Payable $ 228,285 $ 319,478 $ 272,818
Accrued Operating & Vacation 32,202 19,611 24,981
Expenses
Accrued Payroll and Related Tax 5,631 187,057 2,265
Accrued Interest Payable 41,001 262,937 39,851
Customer deposits 390,992 0 390,992
Notes Payable 80,868 195,866 80,866
Notes Payable-Related Parties 0 100,000 0
------------------- ------------------ --------------------
Total Current Liabilities $ 778,979 $ 1,084,949 $ 811,773
------------------- ------------------ --------------------
Commitments and Contingencies (Note I)
Stockholders' Equity:
Common Stock, $0.001 par value
20,000,000 shares authorized;
shares issued 13,626,492, 9,700,681
and 13,276,796 respectively $ 13,626 $ 11,096 $ 13,277
Additional Paid In Capital 9,310,570 6,100,961 8,952,788
Accumulated Deficit (7,745,775) (5,624,990) (6,930,755)
Treasury Stock - 385,224
shares at cost (1,868) (1,868) (1,868)
------------------- ------------------ --------------------
Total Stockholder Equity $ 1,576,553 $ 485,199 $ 2,033,442
------------------- ------------------ --------------------
Total Liabilities and Stockholder Equity $ 2,355,532 $ 1,570,148 $ 2,845,215
=================== ================== ====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Preferred Voice, Inc.
Statement of Cash Flows
For the Three Months Ended June 30, 2000 and 1999
And For the Year Ended March 31, 2000
June 30, June 30, March 31,
2000 1999 2000
(Unaudited) (Unaudited) (Audited)
------------------ ------------------- ---------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Cash Received from customers $ 3,512 $ 595,035 $ 1,273,062
Cash Paid to suppliers and employees (792,473) (318,048) (2,093,749)
Interest Paid 0 (2,467) (224,235)
------------------ ------------------- ---------------------
Net Cash used by Operating Activities $ (788,961) $ 274,523 $ (1,044,922)
------------------ ------------------- ---------------------
Cash Flows from Investing Activities:
Capital Expenditures $ (269,859) $ (82,542) $ (389,436)
Proceeds from Sale of Fixed Assets 0 0 1,750
------------------ ------------------- ---------------------
Net Cash used by Investing Activities $ (269,859) $ (82,542) $ (387,686)
------------------ ------------------- ---------------------
Cash Flows from Financing Activities:
Proceeds from Issuance of Stock $ 342,935 $ 0 $ 2,811,952
Proceeds from Notes Payable 0 200,000 200,000
Note Principal Payments 0 (43,000) (228,000)
Deferred Stock Issuance Costs (12,667) 0 (19,803)
------------------ ------------------- ---------------------
Net Cash provided by Financing Activities $ 330,268 $ 157,000 $ 2,764,149
------------------ ------------------- ---------------------
Net Increase (Decrease) in
Cash and Cash Equivalents $ (728,552) $ 348,981 $ 1,331,541
Cash and Cash Equivalents:
Beginning of Period 1,373,291 41,750 41,750
------------------ ------------------- ---------------------
End of Period $ 644,739 $ 390,731 $ 1,373,291
================== =================== =====================
Supplemental Schedule of non-cash investing
and financing activities:
Issuance of Common Stock in
Exchange for Debt $ 15,197 $ 910,329 $ 952,383
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, June 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) $ (815,020) $ 312,700 $ (993,066)
------------------- -------------------- --------------------
Adjustments to Reconcile Net Loss to
Net Cash used by Operating Activities:
Depreciation $ 52,323 $ 28,166 $ 140,948
(Gain) Loss on Sale of Fixed Assets 0 0 18,356
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (3,096) (140) (3,064)
(Increase) Decrease in Inventory (1,590) 0 (84,724)
(Increase) Decrease in Employee Receivables 0 2,500 2,500
(Increase) Decrease in Deposits 0 0 (3,579)
(Increase) Decrease in Patents and Trademarks (3,980) 0 (7,472)
Increase in Customer Deposits 0 0 390,992
Increase (Decrease) in Accounts Payable (29,336) (44,356) (91,016)
Increase (Decrease) in Accrued Expenses 11,738 (24,347) (414,797)
------------------- -------------------- --------------------
Total Adjustments $ 26,059 $ (38,177) $ (51,856)
------------------- -------------------- --------------------
Net Cash used by Operating Activities $ (788,961) $ 274,523 $ (1,044,922)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Preferred Voice, Inc.
Statements of Operations
For the Three Months Ended June 30, 2000 and 1999
And For the Year Ended March 31, 2000
June 30, June 30, March 31,
2000 1999 2000
(Unaudited) (Unaudited) (Audited)
------------------- -------------------- -------------------
<S> <C> <C> <C>
Sales $ 6,608 $ 595,175 $ 885,134
Cost of Sales 8,949 44,916 215,293
------------------- -------------------- -------------------
Gross Profit (loss) $ (2,341) $ 550,259 $ 669,841
------------------- -------------------- -------------------
Costs and Expenses:
General & Administrative $ 811,529 $ 233,15 $ 1,675,971
Interest Expense 1,150 16,440 28,556
------------------- -------------------- -------------------
Total Costs and Expenses $ 812,679 $ 249,615 $ 1,704,527
------------------- -------------------- -------------------
Income (Loss) from Operations $ (815,020) $ 300,644 $ (1,034,686)
Other Income (Expense):
Loss from Sale of Assets 0 0 (18,356)
Provision for Income Tax 0 0 0
------------------- -------------------- -------------------
Loss From Operations Before
Extraordinary Item $ (815,020) $ 300,644 $ (1,053,042)
=================== ==================== ===================
Extraordinary Item:
Gain/(Loss) from Extinguishment
of Debt (less applicable income
taxes of -0-) (Note K) 0 12,056 59,976
Net Gain/(Loss) $ (815,020) $ 312,700 $ (993,066)
=================== ==================== ===================
Per Share Amounts:
Gain/(Loss) from Operations $ (0.06) 0.03 $ (0.10)
Gain from Extinguishment of Debt
(less applicable income taxes of -0-) 0 0 .01
Net Loss Per Share $ (0.06) $ 0.03 $ (0.09)
=================== ==================== ===================
</TABLE>
<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."
<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 ended
June 30, 2000, the majority of the Company's revenue consisted of billing
end-users for long distance charges.
Advertising expense
-------------------
The Company expenses advertising costs when the advertisement occurs.
Total advertising expense amounted to $2,950 for the three months ended June
30, 2000.
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 13,091,105 at June 30, 2000.
Amortization
------------
The cost of 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.
<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:
<TABLE>
<CAPTION>
Note payable consists of the following at June 30, 2000:
<S> <C>
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
=========
</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- for the three months ended June 30, 2000.
Note D - Long-term debt:
<TABLE>
<CAPTION>
Long-term debt consisted of the following at June 30, 2000:
<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
30,000
-----------
$ 0
===========
</TABLE>
Interest expense charged to operations related to the long-term debt was
$1,150 for the three months ended June 30, 2000.
<PAGE>
Note E - Common stock:
Stock purchase warrants
-----------------------
At June 30, 2000, the Company had outstanding warrants to purchase 2,003,203
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 July 1, 2000 to December 1, 2004. At June 30, 2000,
2,003,203 shares of common stock were reserved for that purpose.
Common stock reserved
---------------------
At June 30, 2000, shares of common stock were reserved for the following
purposes:
Exercise of stock warrants 2,003,203
Exercise and future grants of stock
options and stock appreciation rights 412,250
--------------
2,415,453
==============
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:
Current income taxes $ 0
Change in deferred income taxes due
to temporary differences 0
---------------
$ 0
===============
<PAGE>
Note F - Income taxes (continued):
Deferred tax (liabilities) assets consist of the following:
Accumulated depreciation $ (39,000)
---------------
Gross deferred tax liabilities $ (39,000)
---------------
Accrued liabilities $ 7,000
Start-up expenditures 1,000
Net operating loss carryforward 2,598,000
---------------
Gross deferred tax assets $ 2,606,000
Valuation allowance (2,567,000)
---------------
Net deferred tax assets $ 39,000
---------------
$ 0
===============
The increase in the deferred tax valuation
allowance is as follows: $ 275,000
===============
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 June 30, 2000, a net operating loss
carryforward of approximately $7,643,000 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 June 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 June
30, 2000.
<PAGE>
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:
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%
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:
Net loss:
As reported $ (815,020)
==============
Proforma $ (824,849)
==============
Loss per common share:
As reported $ (0.06)
==============
Proforma $ (0.07)
==============
Following is a summary of the stock award and incentive plan during the three
months ended June 30, 2000:
Number Weighted
of average
shares exercise price
---------- -----------------
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
========== =================
Options exercisable at June 30, 2000 295,083 $ 0.94
========== =================
Weighted average fair value of
options granted at June 30, 2000 15,000 $ 2.13
=========== ==================
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
June 30, 2000:
<PAGE>
Year ending
June 30, Amount
---------------- -------------
2001 $ 114,353
2002 116,250
2003 112,679
2004 53,576
-------------
$ 396,858
=============
Total rent expense charged to operations was $28,977 for the three months
ended June 30, 2000.
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- 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 June 30, 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.
<PAGE>
Note K - Going concern (continued):
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 June 30, 2000, the Company had cash balances of $765,045 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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth 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 Exchcange 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 twenty seven 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 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
The Company recorded a net loss of $815,020, or $0.06 per share, for
the period ended June 30, 2000, compared to a net gain of $312,700 or $0.03 per
share, for the period ended June 30, 1999.
Total Sales
Total revenue for the period ended June 30, 2000, was $6,608 compared
to $595,175 for the period ended June 30, 1999. During the three months ended
June 30, 2000, the Company's revenue consisted entirely of billing end-users for
services. For the three months ended June 30, 1999, revenue consisted of
$570,000 from one-time license fees to KMC Telecom Holdings, $25,000 from master
distributor fees, and the remainder from sales of services. The reduction of
revenues reflects the Company' move from a licensing arrangement to a revenue
sharing agreement with its customers.
The Company anticipates that revenues from the sale of its services
will grow gradually in the second half of its fiscal year 2001 as it continues
to install 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.
Cost of Sales
Cost of sales for the period ended June 30, 2000 was $8,949 compared to
$44,916 for the period ended June 30, 1999. Cost of sales consisted 100% for
network infrastructure such as collocations, connectivity, system access and
long distance to end-users during the period ended June 30, 2000, whereas cost
of sales consisted primarily for direct costs associated with the licensing
agreement with KMC in the period ended June 30, 1999.
Selling, General and Administrative
Selling, general and administrative expenses for the period ended June
30, 2000 were $811,529 compared to $233,175 for the period ended June 30, 1999.
The increases from 1999 to 2000 are due to increased staffing and additional
marketing efforts of the Company's Emma services to potential parties interested
in the Company's revenue sharing agreements. 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. 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
periods stated on its financial statements, but has capitalized costs of
$973,882 for development of its software and hardware for the period ended June
30, 2000, in comparison to $492,467 for the period ended June 30, 1999.
Extraordinary Items
The Company has recognized income from the extinguishment of debt of
$-0- and $12,056 for the period ended June 30, 2000 and 1999 respectively.
<PAGE>
Income Taxes
As of June 30, 2000, the Company had cumulative federal net operating
losses of approximately $7.6 million, which can be used to offset future income
subject to federal income tax through the fiscal year 2021.
Liquidity and Capital Resources
Throughout fiscal 2000 and 2001, 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 June 30, 2000 were $644,739 compared to
$390,731 at June 30, 1999.
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 6, 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
<PAGE>
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.
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 intends, subject to raising
adequate capital, to substantially increase 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 15 additional persons during
the next twelve (12) months, primarily to support its expanding marketing
activities and system installations. At August 10, 2000, the Company employed
thirty-five (35) 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 $780,000 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
<PAGE>
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.
Based on the information to date, the Company has completed its Year
2000 compliance review and made necessary modifications. However, the issue is
complex and no business can guarantee that there will be no Year 2000 problems.
Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and the Company is aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain to what extent the Company may be affected
by it.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 2. Changes in Securities.
(a) There have been no material changes in securities during the period
(b) There have been no material changes in the class of securities or the
rights of the holders of the registered securities.
(c) Recent Sales of Unregistered Securities
On April 6, 2000, the Company issued 9,500 shares of common stock of the
Company to Anthony Clure at an exercise price of $1.03 per share pursuant to the
exercise of an employee stock option.
On April 14, 2000, the Company issued Scott V. Ogilvie a warrant to
purchase 40,000 shares of common stock of the Company at an exercise price of
$2.50 per share on or before April 14, 2003 related to his position as a
director of the Company.
On April 14, 2000, the Company issued Robert R. Williams a warrant to
purchase 25,000 shares of common stock of the Company at an exercise price of
$2.50 per share on or before April 14, 2003 related to his position as an
officer and employee of the Company.
On April 14, 2000, the Company issued an aggregate of 15,000 options to
purchase common stock of the Company at an exercise price of $2.50 to three
employees of the Company pursuant to the Company's option plan.
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 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
10.1* Warrant Certificate No. 106 issued to Scott Ogilvie (10.1)
10.2* Warrant Certificate No. 107 issued to Robert R. Williams (10.1)
27.1 Financial Data Schedule
* Filed as an exhibit to the Company's Form 10-KSB for the fiscal year ended
March 31, 2000 (File No. 33-92894) and incorporated herein by reference.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED VOICE, INC.
August 14, 2000 /s/ G. Ray Miller
------------------------------------ ------------------------------
Date G. Ray Miller
President, Chief Executive
Officer and Chairman of
the Board of Directors
(Principal Executive Officer)
August 14, 2000 /s/ Mary G. Merritt
------------------------------------ ------------------------------
Date Mary G. Merritt
Secretary, Treasurer and
Vice President of Finance
(Principal Financial Officer)
