U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
[X] Annual report under Section 13 or 15 (d) of the Securities Exchange Act of
1934 for the fiscal year ended March 31, 1999
[ ] Transition report under 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.
(Name of Small Business Issuer in its Charter)
DELAWARE 75-2440201
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6500 GREENVILLE AVENUE
SUITE 570
DALLAS, TEXAS 75206
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(Address of Principal Executive Offices) (Zip code)
214-265-9580
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(Issuer's Telephone Number, Including Area Code.)
Securities registered under Section 12(b)
of the Exchange Act: Name of Each Exchange
Title of Each Class on Which Registered
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NONE N/A
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
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(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes No X
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB/A or any subsequent
amendment to the Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $180,383.00
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of November 17, 1999 was approximately
$9,750,926. For purposes of this computation, all executive officers, directors
and 10% stockholders were deemed affiliates. Such a determination should not be
construed as an admission that such executive officers, directors or 10%
stockholders are affiliates.
As of October 31, 1999, there were 11,440,990 shares of the common stock, $0.001
par value, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format: Yes No X
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PREFERRED VOICE, INC.
Page
PART I
Item 1. Description of Business..................................... 1
Item 2. Description of Properties................................... 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.... 9
Item 6. Management's Discussion and Analysis or Plan of Operations.. 11
Item 7. Financial Statements........................................ 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.. 17
Item 10. Executive Compensation...................................... 18
Item 11. Security Ownership of Certain Beneficial
Owners and Management....................................... 18
Item 12. Certain Relationships and Related Transactions.............. 20
Item 13. Exhibits, List and Reports on Form 8-K...................... 22
SIGNATURES................................................................ 24
INDEX TO EXHIBITS......................................................... 25
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PART I
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in, or incorporated by reference into, this report.
ITEM 1: DESCRIPTION OF BUSINESS
Background of the Company
The Company integrates and markets speech recognition technologies to be
used by telecommunications providers, to enhance a provider's overall package of
voice services. The Company's key product, the Voice Integrated Platform ("VIP
System" or the "System"), successfully integrates the Philips Speech Pearl
Natural Dialog, Philips Speech Processing's speech recognition technology, with
the Company's proprietary software application. The System is designed to
utilize standard industrial grade hardware and a rack-mountable
microprocessor-based computing system, with a Windows NT operating system. The
System has been developed for collocation at the telecommunication provider's
central office switch. With the VIP System, a provider's subscriber can use
natural conversational speech to access a variety of enhanced service
applications. The Company believes that the Philips speech recognition
technology that its System incorporates is superior to other similar
technologies and that its VIP System's enhanced services will become standard
telephony options offered by telecommunications providers in the 21st century.
The Company was incorporated in Delaware in 1992 under the name of Direct
Connect, Inc. and began operations in the telecommunications industry under the
name of Preferred Telecom, Inc. in April 1995. The Company began as a long
distance telecommunications carrier with a variety of enhanced services,
however, in February 1997 the Company sold to Brite Voice Systems, Inc.
("Brite") a number of assets, including the Company's end-user customer base.
The Company elected to sell these assets because it believed that the growth
prospects of this aspect of the business were limited. The Company has since
focused on enhanced telephone services that feature speech recognition
technology, believing that there are larger market opportunities in offering
enhanced speech recognition services to telecommunications providers.
The Market and Market Strategy
Incumbent Local Exchange Carriers ("ILECs") comprise the largest market of
telecommunications providers. Of the approximate 1,700 ILECs in the United
States, 1,400 have less than 50,000 lines each. These ILECs comprise fifteen to
twenty percent of the ILEC market and approximately 40 million lines. ILECs
already have an existing subscriber base, and the Company believes that most of
them desire to add enhanced service options to increase revenue and deter
potential competition. The Federal Communications Commission reported that in
1998 alone, the local telephone common carriers spent over $12 billion on
upgrading to digital central office switches, which enable them to provide their
subscribers the latest enhanced services. Many ILECs have already begun to
utilize outboard platforms for certain call processing services, as well as
voice mail, however, the Company believes that the convenience of its System
will draw many ILECs to use its collocated Systems.
Wireless Communications Carriers ("WCCs") have an estimated 80 million
subscribers nationwide. The Federal Communications Commission ("FCC") has sold
spectrum for up to eight operators per market in each of the 722 FCC designated
wireless markets in the United States. A report from Cahners In-Stat Group
estimates that by the year 2002, medium and large businesses will spend over
$117 billion on wireless equipment and services, more than double the $54
billion they spent in 1998. The WCCs need to capitalize on this growth. The
Company believes that WCCs want to differentiate themselves from each other and
be
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competitive so that many are beginning to offer their subscribers enhanced
services, including voice messaging and voice activated services. In addition,
WCCs are under pressure from regulatory authorities to provide wireless phone
subscribers a safer method for using their phones while driving.
The Company's customers are telecommunications providers, primarily ILECs
and WCCs, with a greater marketing effort to be made to competitive local
exchange carriers ("CLECs") in the future. These companies are already offering
some enhanced services to their subscribers, such as voice mail, call
forwarding, call waiting and caller identification systems. In order to remain
competitive, however, ILECs, CLECs and WCCs are providing subscribers more
enhanced services. The Company believes that its VIP System, with its enhanced
speech recognition service, provides a solution to satisfy this need.
Government regulation requires telecommunications providers to look for new
solutions to provide disabled persons equal access to their systems. The
Company's System may be able to provide a solution for telecommunication
providers' obligations to the disabled. Section 255 of the Telecommunications
Act of 1996 requires a provider of telecommunications service to ensure that its
service is accessible to and usable by individuals with disabilities, if readily
achievable. The Company's VIP System with its voice activated services would
allow people with limited manual dexterity, limited reach or strength, limited
or no vision, or other disabilities to access the national telecommunication
network. The Texas legislature also passed an act "relating to expanding the
specialized telecommunications devices assistance program and contracts for
special features of the telecommunications relay access service." This act took
effect on September 1, 1999 and expands an existing voucher program, allowing
the Public Utilities Commission and the Texas Commission for the Deaf and Hard
of Hearing to issue vouchers and provide other financial assistance to
individuals with disabilities that impair the individuals' ability to
effectively access the telephone network. The act allows the vouchers to be used
to purchase certain specialized services. Originally, this law applied only to
the hearing disabled, but the legislature amended the original act so that
people with other disabilities, without the use of their hands or vision for
example, could also receive vouchers for qualifying services. The Company
intends to pursue authorization for the VIP System's services as qualifying
services. The Company believes that its System is the only economically feasible
voice dialing and activated service that many telecommunications providers can
make available to people with a disability.
There is also government regulation being proposed regarding the use of
wireless phones while driving. A report published by the National Conference of
State Legislatures in 1999 stated that at least 22 states since 1995 have
proposed bills concerning cellular telephones in automobiles. Although none of
the bills have passed, legislation is still pending at this time in Georgia,
Illinois, New Jersey, Pennsylvania and New York. All of these states, except for
New Jersey which prohibits use of a car phone while driving, have proposed
legislation that restricts the use of hand-held telephones while driving. In at
least one municipality, use of a cell phone while driving is prohibited unless
both hands are on the steering wheel. Legislation of this sort requires cellular
telephone companies to provide enhanced services so that they can keep
generating revenue from their subscribers who make many of their calls while on
the road. The Company believes that its voice activated dialing and message
services, along with the hands-free speaker phones and headsets available in the
market, will provide WCCs with a means of complying with the proposed
regulations and make WCCs using the Company's product and services leaders in
the industry.
Primary Markets
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THE ILECS. The Company believes that its revenue sharing market strategy is
the most economically viable method for many ILECs to provide speech recognition
enhanced services to their subscribers. The ILECs and WCCs are the two primary
markets in which the Company has focused its marketing efforts, offering these
telecommunications providers a revenue sharing opportunity. The Company focuses
on these markets because the providers in these markets have an existing
customer base. In the first phase of the marketing process, the Company has
identified and contacted 528 ILECs with more than 5,000 access lines. In phase
two, the Company intends to concentrate on those ILECs with 3,000 to 5,000
access lines and in phase three the Company will focus its marketing efforts on
those ILECs with 3,000 or fewer access lines. The Company does not intend to
market to the larger telephone companies until it establishes a strong market
presence in the medium and smaller telephone company market.
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The Company's VIP System platform is designed to work in the telephone
company's central office, collocated alongside an ILEC's central office switch.
Unlike many other enhanced service companies' boxes, the Company's VIP System is
connected to the ILEC's switch via industry standard T-1 circuits utilizing
direct inward dial trunks.
The Company will provide and install the VIP System without charge.
However, the Company enters into a revenue sharing arrangement with the ILEC
based upon the revenue generated through sales of the enhanced services. Most
contracts require that the ILEC generate at least $2,000 per month per System or
for the ILEC to pay the difference if that amount is not reached, otherwise the
contract may be terminated.
The ILECs are responsible for billing and collecting revenue generated from
the VIP System's enhanced services. However, the VIP System can produce customer
information for marketing or billing use. In addition, the Company will assist
each telecommunications provider to market the services by providing various
co-branded advertising materials the Company has designed and by training the
ILEC's sales force and customer service staff.
The Company has signed test agreements with Sleepy Eye Telephone Company in
Minnesota dated May 27, 1999 and Northeast Pennsylvania Telephone Company dated
May 18, 1999. These test agreements provide that the Company will provide a
System to each ILEC for a sixty day period during which time the Company will be
responsible for all testing and customer provisioning while the ILECs are
responsible for providing collocation space for the System and for billing and
collection services. At the end of the test period, the ILEC may choose to enter
into the Standard Contract as set forth below.
The Company has already executed agreements providing for a long-term
revenue sharing arrangement with the following companies on the following dates:
o Southwest Texas Telephone Company in Texas dated September
21, 1999 (4,000 subscribers)
o Kaplan Telephone Company in Louisiana dated October 13, 1999
(4,000 subscribers)
THE WCCS. Of the approximately 722 wireless markets in the United States,
there are 416 rural service areas and 306 metropolitan service areas that have
multiple providers serving the same markets. The Company believes that many
wireless providers want to offer the benefits of speech recognition services to
their subscribers in order to maintain their customer base, but the WCCs often
find such services to be cost prohibitive. As with the ILECs, the Company offers
WCCs the VIP System and installation without charge. The Company recoups its
costs in the revenue sharing arrangements it has negotiated with the WCCs. These
arrangements are based on the same percentages used with the ILECs. The WCCs,
like the ILECs, are responsible for the billing and collecting, and like the
ILECs they will also receive assistance from the Company in marketing the VIP
System enhanced services. The Company has already entered into revenue share
arrangements with the following companies:
o Rural Cellular Corporation dated September 25, 1999 (240,000
subscribers)
o Kaplan Telephone Company in Louisiana dated October 13, 1999
(6,000 subscribers)
o Midwest Wireless Communications dated November 8, 1999
(125,000 subscribers)
STANDARD ILEC/WCC CONTRACT. The Company uses the same standard form of
Software License Agreement and Marketing Agreement for each ILEC and WCC that it
services. The Software License Agreement grants each participating ILEC or WCC a
license to use the Company's software and all subsequent improvements in the
ILEC's or WCC's local calling areas. The Company retains title to the software
and requires that the ILEC's and WCC's keep
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all information related to the software confidential. The term of the Software
License Agreement coincides with that of the Marketing Agreement.
The Marketing Agreements have provisions to remain in effect for up to
ten years. In the Marketing Agreement, the Company agrees to install the VIP
System at the switch location for the participating ILECs and WCCs and commence
testing following installation. The participating ILECs and WCCs then have the
right to accept or reject the System after testing is completed. Once the
participating ILEC or WCC has accepted the System, it is required to use its
best efforts to promote the sale of the Company's services to subscribers. The
participating provider is responsible for billing and collection on the
services, but the pricing is jointly agreed upon by the Company and the
provider. The ILECs and WCCs agree that they will not install any system, for
testing or otherwise, that competes with the VIP System in the area designated
under the Marketing Agreement. The Company agrees to provide marketing
materials, technical support and training to the ILECs and WCCs and their
personnel. The Company also provides in the Marketing Agreement that it may use
the System to provide services directly to its own subscribers in the ILEC's or
WCC's designated area.
Secondary Markets
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The Company has also marketed its services to CLECs. CLECs face a
distinct challenge because they must rely on ILECs to provide the final link in
the communications path to subscribers or expend significant resources to build
their own network. The Company is not currently focusing on CLECs because most
CLECs do not currently have the customer base to support the Company's revenue
sharing agreement. The Company, however, has contracted to sell thirty-nine VIP
System boxes to KMC Telecom Holdings, Inc. ("KMC") for installation and use. In
exchange for an initial licensing fee for each market, the Company's contract
with KMC grants KMC a license to use the Company's software and all subsequent
improvements of the software in certain designated markets. The number of
markets covered by the agreement may be expanded up to a defined maximum number
on prior written notice to the Company. As with the ILEC and WCC agreements, the
Company agrees to install and test the System, after which time KMC can accept
or reject the System. The Company has agreed not to install VIP Systems or to
license such systems to others in the designated markets. The Company also has
agreed to provide KMC technical support and training for KMC personnel. Two
years after the Systems are accepted in a licensed market, KMC must begin paying
monthly fees for use of the Systems. Throughout the term of the agreement, KMC
may also be required to pay a support fee for training and related support done
by the Company in the designated markets. If the Company desires to provide
services directly to its own subscribers in the designated markets, the Company
must pay KMC $1.25 per month per subscriber.
In addition to its agreement with KMC, the Company has signed a
collocation agreement with NEXTLINK Texas, Inc. ("NEXTLINK") to place VIP System
platforms in their central office switch locations in the Dallas area. Under the
Company's agreement with NEXTLINK, the Company is granted a license to install,
operate and maintain its VIP System in a certain portion of NEXTLINK's switching
center in exchange for the Company's payment of certain initial and monthly fees
for such collocation. The Company has placed boxes in the Dallas area that
service direct subscribers of the Company's services.
In conjunction with the collocation agreements, the Company has signed
Master Distributor Agreements with several companies to market the Company's
services directly to the end user in six large metropolitan areas. The companies
and the markets they cover are Best Voice, Inc. in Miami, Florida; Voice
Retrieval, Inc. in Dallas, Texas; Answering Service Inc. in Detroit, Michigan;
Amerivoice Telecommunications, Inc. in Milwaukee, Wisconsin; In Touch Solutions,
L.L.C. in Myrtle Beach, South Carolina; Voicenet New Media, Inc. in Boston,
Massachusetts and Nomis Communications, Inc. in Houston, Texas. The Company has
not yet installed VIP Systems in these areas. The form of Master Distributor
Agreement that has been signed by all participating master distributors allows
the distributor to market and sell the Company's services directly to the end
user and through other distributors whom the master distributor is to identify
and contact. The master distributor receives certain marketing materials and
collateral support from the Company. The Company may authorize other
distributors in the master distributor's market area, but will direct those
distributors to work with the master distributor, who pays a fee to acquire the
right to sell the Company's services in a specific market. The Company provides
the master distributor with commissions for accounts acquired based upon the
revenues billed and collected for such accounts. These agreements typically have
an initial term of three years. The Company is not actively marketing directly
to subscribers.
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The Company has been engaged in Beta testing the VIP System in CLEC
environments for 18 months. In particular the Company had to work on systems
that would be able to readily produce billable call records. Although the
Company had received assurances from the CLECs with whom it was testing its
equipment that they would be able to produce call records, the Company
experienced various problems. In addition to working with the CLECs, the Company
has approached various switch manufacturers about solutions to such problems.
The Company believes that it has solutions for the billing problems and is now
completing the Beta testing phase. The Company expects to be able to roll out
pricing for its offerings to its master distributors in the first quarter of
2000 so that they may begin their selling efforts.
The Company utilizes direct mail, telemarketing, and personal sales
calls to contact and market its product and services to telecommunications
providers in the targeted markets:
Product and Services
The Company's proprietary speech-interaction software, a part of the
VIP System, is able to provide the ILECs and WCCs with a host of speech
recognition enhanced services to help comply with applicable regulations and
increase revenues.
The Product
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The Company has developed what it believes to be a unique system that
integrates Philips' Speech Pearl Natural Dialog speech recognition software and
the Company's proprietary software called the VIP System. The Company believes
that its new hardware and software system provides the wide variety of new
speech recognition enhanced services being sought by providers in a deregulated
telecommunications industry. With the VIP System, a telecommunications provider
can offer its subscribers a variety of speech recognition and call processing
services. The VIP System will work in conjunction with the switching platforms
of a number of commonly used technologies, including the Lucent 5ES(2), Nortel
DMS-100/500, and Siemens/Stromberg Carlson Switches.
The VIP System is an intelligent call processing system that is capable
of identifying subscribers. All access lines are connected in such a way as to
allow the VIP System to identify the provider. The System has the capability of
archiving call traffic information that may be retrieved and collected for
marketing and billing purposes. The VIP System is also equipped with technology
capable of monitoring, reloading and restarting the VIP System in the event of
system failure.
Traditional call processing systems engage at least two ports during an
entire call to process incoming and outgoing information while the conversation
takes place. The VIP System utilizes release link technology which allows the
call to be processed rapidly using speech recognition or dual tone
multi-frequency (DTMF) dialing. After dialing, the System drops off of the call
as the call is routed to the correct phone number by the telecommunication
provider's switch. The VIP System speech recognition software recognizes the
words of the caller and the Company's proprietary software looks up the
telephone number in that subscriber's directory and then hands the call back to
the switch for dialing and other call processing functions. With the release
link technology, the VIP System can process over 7,000 calls per hour in a
single 48 port system.
The VIP System's speech recognition software works in conjunction with
over 15 separate enhanced service applications the Company has created with its
own software, some of which are discussed below. The Company uses speech
recognition technology created by Philips Speech Processing to process natural
dialogue speech for the Company's operating and software systems. The speech
recognition software, which is based on phonetics, may be programmed to be
speaker dependent or speaker independent. The software recognizes spoken words
or sentences and completes the call as instructed. The speech recognition
software allows callers to use continuous digit speech without requiring users
to change the cadence of their speech or speak between beeps to fit a speech
recognition template or prompt. The Company has not yet signed a definitive
licensing agreement to use the Philips Speech Pearl Natural Dialog software, but
has signed a letter of intent regarding the terms of such an agreement.
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The Services
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The following speech recognition enhanced services are currently
available through the VIP System for delivery to subscribers by participating
providers:
EMMA THE PERFECT RECEPTIONIST. The Company's VIP System software
provides telephone subscribers with the first remote accessed automated
attendant service. Emma answers the subscriber's phone with a custom greeting
and listens as a caller speaks a name, department, or location listed in the
subscriber's voice dialing directory. Emma the Perfect Receptionist then routes
the call to the person, department or location requested.
SMART LINE. This application allows a subscriber to receive calls at
any phone. The subscriber must notify the System of a change in his or her
location by giving voice commands to the System. A name from the subscriber's
voice dialing directory can be used as the new "locate" phone number. Incoming
calls for the subscriber are routed to the pre-programmed "locate" phone number.
That phone number can be either local or long distance, as required. The Smart
Line may also be used to screen calls allowing the subscriber to take the
incoming call or forward it to voice mail.
MY ONE SPECIAL NUMBER. Using the "locate" technology that facilitates
the Smart Line, the Company's VIP System allows a child to reach his or her
parents, wherever they are, with one telephone number. Each child is given a tag
by the participating telecommunications provider or by the Company with "One
Special Number" on it. A teacher, daycare provider or the child can call that
number, and the call will immediately be routed to the parent without requiring
the child to remember multiple telephone numbers because the parent is able to
remotely program the "locate" phone number.
** TALK. Star Star Talk is a speech recognition service that may be
accessed by a residential or business telephone customer. First, a person
placing a call lifts the receiver and presses ** on the keypad to access the VIP
System. Then the subscriber speaks a name, number or location from his or her
personal directory or a common directory, such as the local telephone company's
directory. The System then routes the call to the appropriate party. There is
also an option for the disabled to access the VIP System. By lifting the
receiver or turning on the speakerphone and waiting three seconds, the telephone
switch will automatically activate the VIP System, and the System will prompt
the subscriber to speak a name, number or location to be dialed.
SAFETY TALK. With this service, a person placing a call on his or her
wireless phone presses the appropriate speed dial code to access the VIP System.
The customer then speaks a name, number or location from the personal directory
that he or she previously created. The System then routes the call to the
appropriate party. This service eliminates the need for the subscriber to look
up or dial a phone number while driving.
CORPORATE FAX. By pressing one button, multiple users of a subscriber's
fax will be able to speak the name of a person or entity to whom they wish to
fax a document. The speech recognition software will dial the appropriate number
listed in the Company's directory and complete the call.
CORPORATE DIRECT. This application is designed for subscriber companies
with multiple wireless phone users. A subscriber dials one number and speaks the
name of the person or location to which the caller wishes to be connected
initiating the voice activated dialing feature for completion of the call.
INTELLIGENT CALL SCREENING. The VIP System also provides call
screening, which gives the subscriber the name of the caller, not just a phone
number. The Company's technology informs the subscriber who is calling and
allows the subscriber to choose to accept or deny the call. If the call is
denied, the VIP System will forward the call to the subscriber's voice mail.
ELECTRONIC TALKING PHONE BOOK. This service allows a provider to load
its entire database of business and residential customers into the VIP System.
Any person making a call in a participating provider's area is able to press 411
or dial a local access number and speak the city and name of the business or
person listed. Like the current live directory assistance systems, the automated
system provides the caller with the number and gives them the option to be
connected. This application may be used as a substitute for an ILEC's, CLEC's or
WCC's current 411 service and provides the ILECs, CLECs and WCCs with a method
for reducing their costs for directory service operators. As with the 41l
service, the ILECs, CLECs and WCCs may also use the service to increase revenue
by charging a nominal fee
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for the connection of a call. In the Electronic Talking Phone Book, the ILECs,
CLECs and WCCs may also enter a list of the businesses in the Yellow Pages of
the phone book. If such a service is offered, a subscriber could ask for a list
of a certain type of business, such as airlines, and EMMA would read back the
appropriate names. As with the 411 service, the VIP System could then complete
the call for the customer for an extra charge.
SECURE CARD. The Secure Card is a speech recognition voice activated
long distance calling card. A Secure Card subscriber will be able to dial an 800
access number and speak a security code, and the System will place a call from
their personal voice directory. This card adds a low-cost long-distance service
to the list of options provided to subscribers.
Competition
The speech recognition services market is competitive with rapid
technological innovations. The Company expects competition to continue to
increase as ILECs, WCCs, and CLECs seek to offer their customers enhanced
services and to distinguish themselves from other telecommunications providers.
Many of the Company's current competitors have longer operating histories,
greater name recognition, established customer bases and substantially greater
financial, technical, marketing, sales and other resources than the Company. The
Company believes that the principal factors affecting competition in the speech
recognition services market are ease of use, overall technical performance,
price, and reliability. The Company believes that it competes effectively in
these areas.
Some of the Company's competitors are Wildfire Communications, Inc.
("Wildfire"), General Magic, Inc. ("General Magic"), and Webley Systems, Inc.
("Webley"). Wildfire and Webley, both private companies, market a virtual
assistant that uses voice activated and speech recognition software to track and
answer voice mail, e-mail and fax. General Magic has developed a similar
service, but it has used it to focus on providing voice services through the
Internet. Accessline Technologies, Inc., Call Sciences Ltd. and Intellivoice
Communications, Inc. are also voice service providers offering applications
primarily for use on the Internet and wireless phone systems. These companies
focus on marketing services directly to the end user.
Intervoice-Brite, Inc. ("Intervoice") is the leading supplier of
customer premise equipment that provides call processing and voice recognition
services. Intervoice has a significant market share and markets to businesses
and network operators. Intervoice's revenues have steadily increased over the
past several years. Intervoice markets directly to subscribers and to larger
ILECs. The Company, on the other hand, markets to small to medium ILECs and
WCCs; therefore, the Company does not believe that Intervoice is a significant
competitor at this time.
Other competitors offering voice recognition applications include
Glenayre Electronics, Inc., Centigram Communications, Periphonics Corporation,
Nortel Networks, Octel (a division of Lucent) and Aspect Communications, all of
which price their systems for marketing to larger telephone companies. Compaq,
IBM and Lucent also have voice and call processing systems that they market to
larger telephone companies, but it is a small portion of their respective
businesses. Companies such as AT&T, MCI/Worldcom, Inc., Sprint Corporation and a
number of wireless phone companies provide their customers with voice mail and
call forwarding features, applications that the Company will be marketing in
conjunction with its speech recognition applications. The Company does not
intend to market to the larger telephone companies until it establishes a strong
market presence in the medium and smaller telephone company markets.
The Company expects that additional competition will develop. That
competition may include large companies with substantially greater financial,
marketing and technical resources than those available to the Company. Such
competition could adversely affect the revenues and operating results of the
Company.
Customer Service
The Company has developed an automated customer service called "Help
Me" that can assist subscribers with their services. If a subscriber has a
question regarding any of the applications to which the subscriber has
subscribed, the automated "Help Me" has scripted instructions which tell the
subscriber how to use the different applications.
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"Help Me" will be programmed to pull up the particular scripted directions to
explain how to use the services which the subscriber has chosen.
In addition, the Company intends to train employees of the
participating telecommunication providers' customer service force to answer
certain questions related to the services. Therefore, the telecommunication
providers' employees, with the assistance of the "Help Me" service, would be
able to answer the common questions subscribers will have about their service.
The Company intends to assist the ILECs, CLECs and WCCs if there are
problems with the VIP System platform. The Company intends to have a 24 hour, 7
day a week customer service line for the ILEC and WCC customer service
representatives or other employees to call with service questions. In addition,
the Company has designed a monitoring system that will continuously poll the VIP
System to assure that it is operating correctly. If the monitoring system
detects any problems with the VIP System, it will set off an alarm that will
send a signal by modem, simultaneously paging and calling a representative of
the Company so the problem can be immediately corrected. In addition, the ILECs
and WCCs will be provided back-up components, such as the Dialogic cards that
help operate the System, to install in the event a System ceases to function
properly. The Company believes that this high level of customer service and
support will help them market the VIP System to a greater number of
telecommunications providers.
Employees
As of November 17, 1999, the Company had 15 employees, all of whom are
full time.
Patents, Trademarks and Copyright
The Company relies on a combination of trade secret, copyright and
non-disclosure agreements to protect its proprietary rights in its software and
technology. There can be no assurance that such measures are or will be adequate
to protect the Company's proprietary technology. Furthermore, there can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
The Company's software will be licensed to customers under license
agreements containing provisions prohibiting the unauthorized use, copying and
transfer of the licensed program. Policing unauthorized use of the Company's
products will be difficult, and any significant piracy of its products could
materially and adversely affect the Company's financial condition and results of
operations.
The Company relies on the Philips Speech Pearl Natural Dialog software.
The Company has not yet signed a definitive licensing agreement to use the
software, but has signed a letter of intent regarding the terms of such an
agreement. The Speech Pearl Natural Dialog software is integrated with
internally developed software and used in the Company's products to perform key
functions. There can be no assurances that the developers of such software will
otherwise continue to make the product available to the Company on commercially
reasonable terms, will enter into a definitive agreement with the Company or
will continue to remain in business. The inability to obtain and maintain any of
the Company's software licenses could result in delays or reductions in product
shipments until equivalent software can be developed, identified, licensed and
integrated, which could adversely affect the Company's business, operating
results and financial condition.
The Company is not aware that any of its software products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
current or future products. The Company expects that software product developers
will increasingly be subject to infringement claims. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
8
<PAGE>
The Company has received registered trademarks from the United States
Patent and Trademark Office for the following: Preferred/telecom, Secure Card
and Use Your Voice.
Research and Development
The Company has spent the last two years developing its proprietary
software in conjunction with testing the Philips Speech Processing software to
create the VIP System. The Company estimates that it has spent $413,109 during
the last two fiscal years on such research and development activities.
ITEM 2: DESCRIPTION OF PROPERTIES
The Company's executive offices are located in Dallas, Texas. The
Company leases 6,123 square feet of space in a facility as a tenant. The term of
the lease is through December 31, 2003 and the rent is presently $6,662.67 per
month through December 31, 1999, after which point it will be increased each
year thereafter.
ITEM 3: LEGAL PROCEEDINGS
As of October 31, there were no material legal proceedings pending
against the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted for vote to the security holders,
through the solicitation of proxies or otherwise in the fourth quarter of the
fiscal year covered by this report.
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the OTC Electronic Bulletin Board. The
following table indicates the quarterly high and low bid price for the Common
Stock on the OTC Electronic Bulletin Board for the fiscal year ending March 31,
1999 and March 31, 1998. Such inter-dealer quotations do not necessarily
represent actual transactions and do not reflect retail mark-ups, mark-downs or
commissions.
OTC ELECTRONIC
BULLETIN BOARD
BID PRICE
FISCAL 1998 HIGH LOW
1st Quarter $4.00 $0.875
2nd Quarter $2.25 $0.781
3rd Quarter $1.00 $0.510
4th Quarter $2.062 $1.25
FISCAL 1999
1st Quarter $3.25 $1.865
2nd Quarter $2.875 $1.00
3rd Quarter $1.25 $0.75
4th Quarter $2.75 $0.687
On November 17, 1999, the bid price of the Common Stock as reported on
the OTC Electronic Bulletin Board was $1.625.
As of September 30, 1999, there were approximately 830 holders of
record of the Common Stock.
The Company has not declared or paid any cash or other dividends on the
Common Stock to date for the last two (2) fiscal years and in any subsequent
period for which financial information is required and has no intention of doing
so in the foreseeable future.
Recent Sales of Unregistered Securities
The Company also hereby incorporates all the transactions listed in the "Certain
Relationships and Related Transactions" section as recent sales of unregistered
securities that should be listed as such pursuant to Item 701 of Regulation S-B.
On April 23, 1998, the Company issued Invest, Inc. a warrant to purchase 100,000
shares of common stock of the Company at an exercise price of $1.00 per share on
or before November 12, 1999. On October 5, 1999, Invest's warrants were extended
to November 12, 2000 and were repriced to $1.25.
On September 3, 1998, the Company issued Eugene Starr a warrant to purchase
2,500 shares of common stock of the Company at an exercise price of $3.00 per
share on or before September 3, 2000.
On September 3, 1998, George Michael and Tom Bolger, formerly MBRK, agreed to
convert $55,987.00 of the amount owed by the Company to them, as vendors, in
exchange for shares of the Company. The Company issued Mr. Michael 107,474
shares of common stock at $0.50 per share for the respective portion of the debt
owed to him. The Company issued Mr. Bolger 4,500 shares of common stock at $0.50
per share for the respective portion of the debt owed to him.
On September 30, 1998, the Company issued JMG Capital Partners a warrant to
purchase 25,000 shares of common stock of the Company at an exercise price of
$1.00 per share on or before September 30, 2001.
On September 30, 1998, the Company issued Triton Capital Investments a warrant
to purchase 25,000 shares of common stock of the Company at an exercise price of
$1.00 per share on or before September 30, 2001.
10
<PAGE>
On November 1, 1998, the Company issued J. Steven Emerson a warrant to purchase
50,000 shares of common stock of the Company at an exercise price of $1.00 per
share on or before November 1, 2001.
On December 30, 1998, the Company issued In Touch Solutions, L.L.C. a warrant to
purchase 25,000 shares of common stock of the Company at an exercise price of
$1.00 per share on or before December 30, 2000.
On December 30, 1998, the Company issued Answering Service, Inc. a warrant to
purchase 30,000 shares of common stock of the Company at an exercise price of
$1.00 per share on or before December 30, 2000.
On December 30, 1998, the Company issued Amerivoice Telecommunications, Inc. a
warrant to purchase 40,000 shares of common stock of the Company at an exercise
price of $1.00 per share on or before December 30, 2000.
On December 30, 1998, the Company issued Voicenet New Media, Inc. a warrant to
purchase 25,000 shares of common stock of the Company at an exercise price of
$1.00 per share on or before December 30, 2000.
On December 30, 1998, the Company issued Best Voice, Inc. a warrant to purchase
25,000 shares of common stock of the Company at an exercise price of $1.00 per
share on or before December 30, 2000.
On December 30, 1998, the Company issued Nomis Communications, Inc. a warrant to
purchase 25,000 shares of common stock of the Company at an exercise price of
$1.00 per share on or before December 30, 2000.
11
<PAGE>
On February 10, 1999, the Company issued Edwin G. Bowles a warrant to purchase
25,000 shares of common stock of the Company at an exercise price of $1.00 per
share on or before February 10, 2001.
On March 31, 1999, the Company issued Kathryn Jergens a warrant to purchase
25,000 shares of common stock of the Company at an exercise price of $0.84 per
share on or before March 31, 2004.
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
those securities that were sold to Capital Growth Fund, Ltd. ("Capital"), Bisbro
Investments, Ltd. ("Bisbro") or Universal Asset Fund, Ltd. ("Universal") which
were offered pursuant to Regulation S.
12
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following description of "Management's Plan of Operation" constitutes
forward-looking statements for purposes of the Securities Act and the Exchange
Act and as such involves known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. The words
"expect", "estimate", "anticipate", "predict", "believes", "plan", "seek",
"objective" and similar expressions are intended to identify forward-looking
statements or elsewhere in this report. Important factors that could cause the
actual results, performance or achievement of the Company to differ materially
from the Company's expectations include the following: 1) one or more of the
assumptions or other factors discussed in connection with particular
forward-looking statements or elsewhere in this report prove not to be accurate;
2) the Company is unsuccessful in increasing sales through its anticipated
marketing efforts; 3) mistakes in cost estimates and cost overruns; 4) the
Company's inability to obtain financing for general operations including the
marketing of the Company's products; 5) non-acceptance of one or more products
of the Company in the marketplace for whatever reason; 6) the Company's
inability to supply any product to meet market demand; 7) generally unfavorable
economic conditions which would adversely effect purchasing decisions by
distributors, resellers or consumers; 8) development of a similar competing
product at a similar price point; 9) the inability to negotiate a favorable
licensing agreement for the speech recognition technology or to adequately
protect the Company's intellectual property; 10) a failure by the Company or its
third party vendors to accurately assess and prepare for any problems that may
arise related to the year 2000; (11) if the Company experiences labor and/or
employment problems such as the loss of key personnel, inability to hire and/or
retain competent personnel, etc.; and 12) if the Company experiences
unanticipated problems and/or force majeure events (including but not limited to
accidents, fires, acts of God etc.), or is adversely affected by problems of its
suppliers, shippers, customers or others. All written or oral forward-looking
statements attributable to the Company are expressly qualified in their entirety
by such factors. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements which may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Notwithstanding the foregoing, the Company
is not entitled to rely on the safe harbor for forward looking statements under
27A or the Securities Act or 21E of the Exchange Act as long as the Company's
stock is classified as a penny stock within the meaning of Rule 3a51-1 of the
Exchange Act. A penny stock is generally defined to be any equity security that
has a market price (as defined in Rule 3a51-1) of less than $5.00 per share,
subject to certain exceptions.
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
Overview
The Company began operations in April 1995 as a traditional 1+
long-distance reseller. The need to distinguish itself from other resellers led
it to concentrate on enhanced services utilizing voice recognition call
completion technology. The Company contracted with Brite to develop a switching
platform that incorporated its service applications with voice recognition
technology acquired through a licensing agreement with Voice Control Systems,
Inc.
Recognizing the declines in telecommunications service prices and the
decreasing margins being experienced in long distance sales, the Company decided
to sell its long distance customer base and assets in early 1997. The Company
also concluded that the underlying architecture used by Brite to develop its
services would not be flexible enough to continue to create a variety of
services in the future. Therefore, the Company reduced its staff and overhead
and began its focus on developing its own proprietary software.
From June of 1997 until April of 1998, all corporate activities were
focused on the development and testing of services to be deployed to the public
through a platform the Company calls the VIP System. In late April 1998 the
first operational VIP System was collocated in a switch environment. The initial
sales activity focused its efforts on introducing the concept of voice dialing
to prospective customers to gauge consumer response with respect to pricing,
features and viability of the services provided.
In December of 1998, the Company realized that the resources necessary
to sell and market its services directly to subscribers would require extensive
amounts of working capital and began researching venues which already had
inherent customer bases. The first distribution channel that the Company
explored was master distributors in various cities and states around the
country. The Company believes this will be a source of customer addition once
the Company is in the position to locate its VIP Systems in the master
distributor marketing areas. The second is through
13
<PAGE>
revenue sharing directly with ILECs, WCCs, and CLECs. This avenue is extremely
attractive to the Company because these entities already have customer bases and
the infrastructure to service large number of customers.
The Company is at a very early stage of implementing its business plan.
It is subject to risks inherent in the establishment and deployment of
technology with which the consumer has very little experience. As voice
recognition becomes more prevalent in everyday life, such as in computer
programs, reservation systems and telecommunications information systems, the
public will be more apt to accept and utilize its many features. In order for
the Company to succeed it must secure adequate financial and human resources to
meet its requirements; establish and maintain relationships with
telecommunications providers; facilitate integration with various switch
environments; establish a lead time for delivery of hardware; achieve user
acceptance for its services; generate reasonable margins on its services; deploy
and install VIP Systems on a timely and acceptable schedule; respond to
competitive developments; mitigate risk associated with obtaining patents and
copyrights and other protections of intellectual property; and continually
update its software to meet the needs of end users. Failure to achieve these
objectives could adversely effect the Company's business, operating results and
financial condition.
Results of Operations
The Company recorded a net loss of $690,598, or $0.10 per share, for
the year ended March 31, 1999, compared to a net loss of $381,991 or $0.07 per
share, for the year ended March 31, 1998, and a net loss of $1,708,672 or $0.33
per share, for the year ended March 31, 1997. The net loss per share for the
year ended March 31, 1997 included the loss for the period and a net loss from
the discontinued operations of $1,365,547 and gains of $527,181 and $253,694
from disposal of a business segment and extinguishment of debt respectively.
Excluding the effect of these adjustments, the loss per share for the year ended
March 31, 1997, would have been $0.22 per share.
Total Sales
Total revenue for the year ended March 31, 1999 was $180,383, compared
to $6,874 and $0 for the years ended March 31, 1998 and 1997 respectively. Total
revenues consisted of master distributor fees for specific marketing rights and
service fees for the Company's "Emma the Perfect Receptionist" and "Smart Line"
services. Revenues in 1998 consisted of service fees.
The Company anticipates that revenues from the sale of its services
will grow gradually in the first half of 2000 as it installs VIP Systems in the
ILECs and WCCs which have already signed revenue sharing agreements and as VIP
Systems are purchased and installed at KMC's switch locations. The Company does
not anticipate substantial revenues going forward from the sale of master
distributorships, as it has had in the past year. However, the Company does
anticipate significant revenue growth in the second half of the year as more
ILEC, WCC, and CLEC agreements are completed.
Cost of Sales
Cost of sales for the year ended March 31, 1999 was $15,033, compared
to $2,206 and $0 for the years ended March 31, 1998 and 1997, respectively. In
1999 and 1998, cost of sales consisted of service costs associated with
providing the Company's "Emma the Perfect Receptionist" and "Smart Line"
services.
Selling, General and Administrative
Selling, general and administrative expenses for the year ended March
31, 1999 were $768,024 compared to $425,304 and $954,213 for the years ended
March 31, 1998 and 1997, respectively. The increase from 1998 to 1999 was due to
staffing increases and additional marketing efforts of the Company's Emma
services. The decrease from 1997 to 1998 was due to the implementation of the
Company's 1997 restructuring plan, which resulted, among other things, in a
substantial decrease in number of employees, lease space and general overhead.
The Company expects that selling, general and administrative expenses
will increase in fiscal year 2000, 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.
14
<PAGE>
Restructuring
In the first quarter of 1997, the Company began to implement a
restructuring plan designed to reduce operating expenses and allow it to
dedicate all of its cash flows to software and service development. Drastic
headcount reduction and overhead elimination allowed the Company the needed
resources to develop the VIP system and the services it is now marketing.
Research and Development
The Company has not expensed any research and development costs for the
years stated on its financial statements, but has capitalized cost of $413,109
for development of its software and hardware for the year ended March 31, 1999,
in comparison to $233,093 and $103,086 for the years ended March 31, 1998 and
1997 respectively.
Extraordinary Items
The Company has recognized income from the extinguishment of debt of
$88,828 for the year ended March 31, 1999 and $217,442 and $253,694 for the
years ended March 31, 1998 and 1997 respectively.
Income Taxes
As of March 31, 1999, the Company had cumulative federal net operating
losses of approximately $5.9 million, which can be used to offset future income
subject to federal income tax through the year 2019.
Liquidity and Capital Resources
Throughout fiscal 1998 and 1999, the Company has continued to sustain
operating losses that have resulted in the use of its cash reserves. The
Company's cash and cash equivalents at March 31, 1999 were $41,750 compared to
$82,284 and $64,858 respectively for the years ended March 31, 1998 and 1997.
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 was converted into 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 is unsecured and bears interest at 10% per annum with
principal and interest due on various dates through October 16, 1999.
From June 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 March 31, 1999, the Company received
$170,000 from the sale of Master Distributorships to seven different entities.
On March 31, 1999, the Company borrowed $43,000 from a more than 5%
beneficial owner. The note is unsecured and bears interest at 12% per annum with
the principal and interest due on March 30, 2000. The note is convertible into
shares of common stock at a conversion price of $1.00 per share.
15
<PAGE>
In April 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 exercise 200,000 warrant shares of the Company's common
stock. $25,000 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 June 2000 which would obligate KMC to pay the Company
monthly license fees of $131,500, subject to certain adjustments, beginning July
2002 and continuing through July 2009.
On July 1, 1999 pursuant to Section 4(2), the Company conducted an
offering of 320,000 shares of the Company's common stock at $1.25 per share
providing the Company with $400,000 working capital.
The Company requires additional capital to meet its current and future
obligations. On November 4, 1999, the Company signed a finders agreement with a
Colorado securities firm whereby the firm on a non-exclusive basis will
introduce the Company to companies or other business opportunities which
represent potential investment dollars.
Future Obligations
During the next twelve months, the Company plans, subject to raising
adequate capital, to increase substantially the marketing of its VIP Systems, to
introduce new services, and to continue refining the services it currently
provides. Subject to the Company's ability to fund the cost, management expects
the Company to hire or contract with approximately 25 additional persons during
the next twelve (12) months, primarily to support its expanding marketing
activities and system installations. At November 17, 1999, the Company employed
fifteen (15) employees.
The ability of the Company to raise capital is, in the opinion of
management, the primary constraint on the implementation of its business plan.
Management estimates that during the next twelve (12) months, the Company will
require approximately $3,000,000 of equity and/or long term debt to finance its
costs of marketing, system deployment, and continued refinement of its services.
In addition, the Company will be required to obtain extensions of its current
debt or raise additional funds of approximately $943,000 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
16
<PAGE>
of the Company's suppliers and customers. The Company has developed a policy to
ensure that all key customers, suppliers and strategic partners operate and
provide Year 2000 compliant systems and software. The Company is currently
collecting certifications from third parties on compliance. Also, there is a
risk that existing and potential customers may not purchase the Company's
products in the future if the computer systems of such existing or potential
customers are adversely impacted by the Year 2000 date change.
Based on the information to date, the Company has completed its Year
2000 compliance review and made necessary modifications. However, the issue is
complex and no business can guarantee that there will be no Year 2000 problems.
Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and the Company is aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain to what extent the Company may be affected
by it.
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ITEM 7. FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report.................................................F-1
Financial Statements:
Balance Sheets .........................................................F-2
Statements of Operations ...............................................F-4
Statement of Stockholders' Deficit......................................F-5
Statements of Cash Flows................................................F-7
Notes to Financial Statements....................................F-9 - F-20
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
and Shareholders
Preferred Voice, Inc.
We have audited the accompanying balance sheets of Preferred Voice, Inc. as of
March 31, 1999 and 1998, and the related statements of operations, stockholders'
deficit and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Preferred Voice, Inc. at March
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles.
PHILIP VOGEL & CO. PC
Certified Public Accountants
DALLAS, TEXAS
SEPTEMBER 15, 1999
F-1
<PAGE>
PREFERRED VOICE, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
MARCH 31, 1999 AND 1998
1999 1998
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,750 $ 82,284
Accounts receivable, net of allowance for doubtful
accounts of $-0- in 1999 and $86,166 in 1998 860 0
Employee receivables 2,500 0
----------- -----------
Total current assets $ 45,110 $ 82,284
----------- -----------
Property and equipment:
Computer equipment $ 223,046 $ 136,061
Furniture and fixtures 16,934 18,134
Office equipment 12,493 9,303
Computer software 190,063 97,032
----------- -----------
$ 442,536 $ 260,530
Less accumulated depreciation 161,049 83,218
----------- -----------
Net property and equipment $ 281,487 $ 177,312
----------- -----------
Other assets:
Prepaid expenses $ 761,018 $ 800,000
Deposits 81,535 84,410
Deferred debt issue costs - net 0 2,869
----------- -----------
Total other assets $ 842,553 $ 887,279
----------- -----------
$ 1,169,150 $ 1,146,875
=========== ===========
F-2
<PAGE>
1999 1998
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 363,834 $ 361,187
Accrued payroll and payroll taxes 226,755 140,236
Accrued interest payable 248,967 316,940
Accrued operating expenses 13,041 13,004
Accrued vacation 6,570 4,812
Current maturities of long-term debt 53,000 1,160,000
Deferred gain on sale - leaseback transaction 0 23,375
Note payable 50,866 50,866
Notes payable - related parties 100,000 956,746
----------- -----------
Total current liabilities $ 1,063,033 $ 3,027,166
----------- -----------
Long-term liabilities:
Deferred gain on sale - leaseback transaction $ 0 $ 46,749
Notes payable - related parties 590,946 0
Long-term debt, net of current maturities 253,000 0
----------- -----------
Total long-term liabilities $ 843,946 $ 46,749
----------- -----------
Commitments and contingencies (Note I)
Stockholders' deficit:
Common stock, $0.001 par value;
20,000,000 shares authorized; shares
issued 9,695,681 and 6,134,330, respectively $ 9,695 $ 6,134
Additional paid-in capital 5,192,033 3,315,785
Accumulated deficit (5,937,689) (5,247,091)
----------- -----------
$ (735,961) $(1,925,172)
Treasury stock - 385,224 and 385,224
shares, respectively, at cost 1,868 1,868
----------- -----------
Total stockholders' deficit $ (737,829) $(1,927,040)
----------- -----------
$ 1,169,150 $ 1,146,875
=========== ===========
</TABLE>
F-3
<PAGE>
PREFERRED VOICE, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Sales $ 180,383 $ 6,874 $ 0
Cost of sales 15,033 2,206 0
---------- ---------- ------------
Gross profit $ 165,350 $ 4,668 $ 0
---------- ---------- ------------
Costs and expenses:
General and administrative expenses $ 768,024 $ 425,304 $ 954,213
Interest expense 176,752 178,797 169,787
---------- ---------- ------------
Total costs and expenses $ 944,776 $ 604,101 $ 1,124,000
---------- ---------- ------------
Loss from continuing operations before income taxes $ (779,426) $ (599,433) $ (1,124,000)
Provision for income taxes 0 0 0
---------- ---------- ------------
Loss from continuing operations before
extraordinary item $ (779,426) $ (599,433) $ (1,124,000)
Discontinued operations (Note L):
Loss from operations of discontinued business
segment (less applicable income taxes of $-0-) 0 0 (1,365,547)
Gain on disposal of business segment (less applicable
income taxes of $-0-) 0 0 527,181
Extraordinary item:
Gain from extinguishment of debt (less applicable
income taxes of $-0-)(Note M) 88,828 217,442 253,694
---------- ---------- ------------
Net loss $ (690,598) $ (381,991) $ (1,708,672)
========== ========== ============
Per share amounts:
Loss from continuing operations $ (0.11) $ (0.11) $ (0.22)
========== ========== ============
Loss from operations of discontinued business segment $ 0.00 $ 0.00 $ (0.26)
========== ========== ============
Gain on disposal of business segment $ 0.00 $ 0.00 $ 0.10
========== ========== ============
Gain from extinguishment of debt $ 0.01 $ 0.04 $ 0.05
========== ========== ============
Net loss $ (0.10) $ (0.07) $ (0.33)
========== ========== ============
</TABLE>
F-4
<PAGE>
PREFERRED VOICE, INC.
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
Shares of common stock
------------------------------------------------------------------
Authorized Issued Outstanding In treasury
------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance - March 31, 1996 20,000,000 8,949,942 8,904,942 45,000
Issuance of common stock - June 3, 1996 0 400,000 400,000 0
Exercise of stock warrants - June 28, 1996 0 1,406,200 1,406,200 0
Conversion of 8.5% debentures - July 2, 1996 0 10,000 10,000 0
Exercise of stock options - September 8, 1996 0 45,000 45,000 0
Purchase of treasury stock 0 0 (280,000) 280,000
Conversion of 8.5% debentures - September 27, 1996 0 40,000 40,000 0
Exercise of stock options - November 27, 1996 0 9,000 9,000 0
Forgiveness of stockholder debt 0 0 0 0
One-for-two reverse stock split - February 24, 1997 0 (5,429,720) (5,267,220) (162,500)
Net loss for the year 0 0 0 0
---------- ---------- ---------- --------
Balance - March 31, 1997 20,000,000 5,430,422 5,267,922 162,500
Conversion of 8.5% debenture - June 12, 1997 0 20,000 20,000 0
Exercise of stock options - December 15, 1997 0 450,000 450,000 0
Issuance of common stock - December 30, 1997 0 50,000 50,000 0
Conversion of 12% debenture - March 5, 1998 0 183,908 183,908 0
Acquisition of treasury stock 0 0 (222,724) 222,724
Net loss for the year 0 0 0 0
---------- ---------- ----------- --------
Balance - March 31, 1998 20,000,000 6,134,330 5,749,106 385,224
Conversion of 7% debentures - June 24, 1998 0 11,259 11,259 0
Conversion of 8.5% debenture - June 30, 1998 0 27,881 27,881 0
Conversion of 7% debentures - July 31, 1998 0 209,587 209,587 0
Conversion of 7% debenture - August 31, 1998 0 10,450 10,450 0
Conversion of 10% debentures - August 31, 1998 0 869,276 869,276 0
Conversion of related party notes - September 30, 1998 0 48,975 48,975 0
Conversion of 12% debentures - September 30, 1998 0 367,816 367,816 0
Conversion of 7% debenture - October 20, 1998 0 11,373 11,373 0
Conversion of equipment lease agreement - November 5, 1998 0 579,971 579,971 0
Conversion of 7% debenture - December 29, 1998 0 79,662 79,662 0
Conversion of 7% debenture - December 30, 1998 0 159,323 159,323 0
Conversion of 7% debentures - December 31, 1998 0 603,142 603,142 0
Conversion of 7% debentures - January 4, 1999 0 156,554 156,554 0
Conversion of 7% debentures - January 7, 1999 0 119,199 119,199 0
Conversion of 7% debenture - January 8, 1999 0 20,930 20,930 0
Conversion of 7% debentures - January 11, 1999 0 130,060 130,060 0
Conversion of 7% debenture - January 22, 1999 0 43,919 43,919 0
Issuance of common stock in exchange for release
of trade liability - February 2, 1999 0 111,974 111,974 0
Net loss for the year 0 0 0 0
---------- ---------- ----------- --------
Balance - March 31, 1999 20,000,000 9,695,681 9,310,457 385,224
========== ========== =========== ========
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
AMOUNTS
--------------------------------------------------------------------------------------------
Common Additional Total
Stock $0.001 Treasury paid-in Accumulated stockholders'
par value stock capital deficit deficit
------------------- ---------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
$ 8,950 $ (135) $ 1,916,632 $ (3,156,428) $ (1,230,981)
400 0 799,600 0 800,000
1,406 0 107,647 0 109,053
10 0 14,990 0 15,000
45 0 90 0 135
0 (1,733) 0 0 (1,733)
40 0 59,960 0 60,000
9 0 36 0 45
0 0 110,000 0 110,000
(5,430) 0 5,430 0 0
0 0 0 (1,708,672) (1,708,672)
-------- --------- ----------- ------------ ------------
$ 5,430 $ (1,868) $ 3,014,385 $ (4,865,100) $ (1,847,153)
20 0 27,962 0 27,982
450 0 35,550 0 36,000
50 0 78,072 0 78,122
184 0 159,816 0 160,000
0 0 0 0 0
0 0 0 (381,991) (381,991)
-------- --------- ----------- ------------ ------------
$ 6,134 $ (1,868) $ 3,315,785 $ (5,247,091) $ (1,927,040)
11 0 22,626 0 22,637
28 0 41,794 0 41,822
210 0 290,663 0 290,873
10 0 11,380 0 11,390
869 0 347,431 0 348,300
49 0 16,275 0 16,324
368 0 319,632 0 320,000
11 0 22,737 0 22,748
580 0 219,809 0 220,389
80 0 30,988 0 31,068
159 0 61,977 0 62,136
603 0 234,623 0 235,226
157 0 60,900 0 61,057
119 0 49,945 0 50,064
21 0 8,979 0 9,000
130 0 56,062 0 56,192
44 0 24,551 0 24,595
112 0 55,876 0 55,988
0 0 0 (690,598) (690,598)
-------- --------- ----------- ------------ ------------
$ 9,695 $ (1,868) $ 5,192,033 $ (5,937,689) $ (737,829)
======== ========= =========== ============ ============
</TABLE>
F-6
<PAGE>
PREFERRED VOICE, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 179,510 $ 23,576 $ 810,759
Cash paid to suppliers and employees (500,572) (189,734) (3,540,302)
Interest received 0 2,376 0
Interest paid 0 (4) (37,356)
---------- ----------- ------------
Net cash used by operating activities $ (321,062) $ (163,786) $ (2,766,899)
---------- ----------- ------------
Cash flows from investing activities:
Capital expenditures $ (151,772) $ (138,621) $ (18,955)
Proceeds from sale of assets 1,300 5,683 743,000
---------- ----------- ------------
Net cash provided (used) by investing activities $ (150,472) $ (132,938) $ 724,045
---------- ----------- ------------
Cash flows from financing activities:
Proceeds from sale of stock $ 0 $ 0 $ 1,111,733
Proceeds from notes payable 351,000 314,850 1,422,831
Note principal payments (20,000) (700) (392,665)
Increase in loan costs 0 0 (75,028)
Purchase of treasury stock 0 0 (1,733)
Proceeds from sale - leaseback transaction 100,000 0 0
---------- ----------- ------------
Net cash provided by financing activities $ 431,000 $ 314,150 $ 2,065,138
---------- ----------- ------------
Net increase (decrease) in cash and cash equivalents $ (40,534) $ 17,426 $ 22,284
Cash and cash equivalents:
Beginning of year 82,284 64,858 42,574
---------- ----------- ------------
End of year $ 41,750 $ 82,284 $ 64,858
========== =========== ============
F-7
<PAGE>
1999 1998 1997
-------------- -------------- -------------
Reconciliation of net loss to net cash used
By operating activities:
Net loss $ (690,598) $ (381,991) $ (1,708,672)
---------- ---------- ------------
Adjustments to reconcile net loss to net cash
Used by operating activities:
Depreciation $ 80,113 $ 45,945 $ 47,636
Amortization 2,869 1,900 130,026
(Gain) loss on sale of assets (186) 4,937 (600,483)
Provision for losses on accounts receivable 0 446 88,630
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (860) 18,207 (49,808)
(Increase) decrease in employee receivables (2,500) 1,500 11,685
Increase in other receivables 0 (25,854) 0
(Increase) decrease in certificate of deposit 0 52,376 (1,922)
(Increase) decrease in deposits 2,875 7,359 (76,917)
(Increase) decrease in prepaid expenses 38,982 1,676 (770,759)
Decrease in deferred contract costs 0 50,000 0
Increase in patents and trademarks 0 0 (10,162)
Decrease in accounts payable 58,635 (46,129) (40,723)
Increase in accrued expenses 189,608 35,718 214,580
Increase (decrease) in deferred gain on sale - leaseback 0 70,124 0
---------- ---------- ------------
Total adjustments $ 369,536 $ 218,205 $ (1,058,217)
---------- ---------- ------------
Net cash used by operating activities $ (321,062) $ (163,786) $ (2,766,889)
========== ========== ============
Schedule of non-cash investment and financing activities:
Issuance of common stock in exchange for debt $1,879,809 $ 304,122 $ 0
========== ========== ============
</TABLE>
F-8
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - GENERAL ORGANIZATION:
Preferred Voice, Inc. (the "Company") is a Delaware corporation
incorporated in 1992. On February 25, 1997, the Company's stockholders approved
changing the name of the Company to better reflect the nature of the Company's
business. The Company commenced business on May 13, 1994, and was in the
development stage until August 1, 1995. The Company provides products and
services to the telecommunications industry throughout the United States and
maintains its principal offices in Dallas, Texas. The Company has not presented
financial statements for the period from incorporation in 1992 through May 13,
1994, as the Company did not begin its planning and organizational activities
until May 13, 1994. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates. Certain
prior year amounts have been reclassified for comparison purposes.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include
amounts due from banks.
ACCOUNTS RECEIVABLE
- -------------------
In the normal course of business, the Company extends unsecured credit to
its customers with payment terms generally 30 days. Because of the credit risk
involved, management has provided an allowance for doubtful accounts which
reflects its opinion of amounts which will eventually become uncollectible. In
the event of complete nonperformance by the Company's customers, the maximum
exposure to the Company is the outstanding accounts receivable balance at the
date of nonperformance.
DEPRECIATION
- ------------
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed on the straight-line
method for financial reporting purposes and the double declining method for
income tax purposes.
Maintenance and repairs are charged to operations when incurred.
Betterments and renewals are capitalized.
The useful lives of property and equipment for purposes of computing
depreciation are as follows:
Computer equipment 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Software development 3 years
INCOME TAXES
- ------------
Income taxes are accounted for using the liability method under the
provisions of SFAS 109 "Accounting for Income Taxes".
F-9
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
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 their services and products are provided. During the current year, however,
a majority of the Company's revenue consisted of distributor fees. A one-time
only distributor fee is paid by master distributors in order to obtain
distribution rights to the Company's products and services. The distributor fee
income was derived from six major customers and was recognized when the contract
became final. The distributor fee income for the years ended March 31, 1999,
1998 and 1997 was $170,000, $-0- and $-0-, respectively.
ADVERTISING EXPENSE
- -------------------
The Company expenses advertising costs when the advertisement occurs. Total
advertising expense amounted to $42,269, $-0- and $19,182 for the years ended
March 31, 1999, 1998 and 1997, 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 (available to common stockholders) by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. The adoption of SFAS
128 did not affect per share amounts for 1997 as previously reported.
Loss per share is based on the weighted average number of shares
outstanding of 7,205,065 and 5,219,890 and 5,102,314 for the years ended March
31, 1999, 1998 and 1997, respectively. The weighted average share amounts have
been restated for the one-for-two reverse stock split approved by the Company's
Board of Directors on February 24, 1997 (see Note E).
AMORTIZATION
- ------------
Fees and other expenses associated with the issuance of subordinated
convertible debentures are being amortized on the straight-line method over the
term of the debentures beginning in April, 1995. Amortization expense was
$2,869, $1,900 and $4,333 for the years ended March 31, 1999, 1998 and 1997,
respectively.
The cost of patents and trademarks was being amortized on the straight-line
method over a period of 15 years. During the year ended March 31, 1997, the
Company charged off the remaining unamortized cost of its patents and
trademarks in connection with the disposal of its long distance
telecommunications services business. Amortization expense charged to operations
in 1999, 1998 and 1997 was $-0-, $-0- and $26,370, respectively.
F-10
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES
- -----------------------------------------------------------------------------
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996, and
is to be applied prospectively. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Adoption of this statement did
not have a material impact on the Company's financial position, results of
operations or liquidity.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
- -----------------------------------------------------------------------
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
April 1, 1997. This statement requires that long-lived assets and certain
identified intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison on the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
COMPREHENSIVE INCOME
- --------------------
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income on April 1, 1998. SFAS No. 130 requires that an enterprise report, by
major components and as a single total, the change in its net assets during the
period from nonowner sources. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations or cash flows,
as the Company did not have any changes in net assets resulting from nonowner
sources during the periods covered by the accompanying financial statements.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
- -------------------------------------------------
The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information on April 1, 1998. SFAS No. 131
establishes annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services, geographic areas
and major customers. Adoption of this statement did not have a material impact
on the Company's financial position, results of operations or cash flows, as any
effects are limited to the form and content of its disclosures.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No.1-33
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Adoption of this statement is not expected to impact the
Company's financial position, results of operations or cash flows. This
statement is effective for fiscal years beginning after June 15, 1999.
NOTE C - NOTES PAYABLE:
Notes payable consist of the following at March 31, 1999 and 1998:
F-11
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Outside interests $ 50,866 $ 50,866
Related parties 690,946 956,746
---------- -----------
$ 741,812 $ 1,007,612
========== ===========
Note payable to outside interests include:
Note payable, Brite Voice Systems, Inc., dated January 31, 1997. Note is
unsecured and payable in monthly installments of $8,112, including interest
at the rate of prime + 2 (8.5% at March 31, 1999 and 1998) through January
1, 1998. $ 50,866 $ 50,866
========== ===========
The note to Brite Voice Systems, Inc. is currently in dispute and beginning
April 1996, the Company has discontinued the accrual of interest expense.
Interest expense charged to operations related to the note payable to
outside parties was $-0- for each of the years ended March 31, 1999, 1998
and 1997, respectively.
Notes payable to related parties include: 1999 1998
---------- ----------
Note payable to a director and officer, dated September 1, 1994, due on
December 31, 1998, and unsecured, interest was payable semi-annually at the
rate of prime +2 (8.5% at March 31, 1998). This note was converted into
15,000 shares of common stock on September 30, 1998. $ 0 $ 7,500
Notes payable to Pegasus Settlement Trust (PST), a stockholder of the
Company. The beneficiary and a trustee of PST are officers of the Company.
The notes are unsecured and bear interest at rates ranging from 9% to 10%
and prime rate (8.5% at March 31, 1999 and 1998) with the principal and
accrued interest payable at maturity on various dates through December 31,
1998. Subsequent to the balance sheet date, the notes were converted into
787,928 shares of common stock on April 6, 1999. 590,946 590,946
Notes payable to a stockholder of the Company and several affiliated trusts
of which the stockholder is the trustee. The notes were unsecured and bore
interest at rates ranging from 9% to 10% and prime (8.5% at March 31, 1998)
with principal and accrued interest payable at various dates through
December 31, 1998. These notes were converted into 869,276 shares of common
stock on September 3, 1998. 0 348,300
Note payable to an officer dated May 20, 1996, secured by common stock with
principal and accrued interest due at maturity on May 20, 1998. This note
was converted into 33,975 shares of common stock on
September 30, 1998. 0 10,000
Notes payable to a stockholder of the Company. The notes are unsecured
and bear interest at 10% per annum with the principal and interest due
on various maturity dates through October 16, 1999. 100,000 0
---------- ----------
Total related party notes payable $ 690,946 $ 956,746
Less current portion 100,000 956,746
---------- ----------
Long-term portion $ 590,946 $ 0
========== ==========
</TABLE>
F-12
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Related party notes payable that were converted into common stock
subsequent to the balance sheet date have been classified as long-term
liabilities in the accompanying 1999 balance sheet.
Interest expense charged to operations related to the related party notes
payable was $64,199, $86,172 and $83,257 for the years ended March 31, 1999,
1998 and 1997, respectively.
NOTE D - LONG-TERM DEBT:
<TABLE>
<CAPTION>
Long-term debt consisted of the following at March 31, 1999 and 1998:
1999 1998
---------- ----------
<S> <C> <C>
8.5% convertible debentures due September 27, 1996, convertible into shares
of common stock at a conversion price of $1.50 per share, interest was
payable on December 27, 1995, and at maturity. This note was converted into
27,881 shares of common stock on June 30, 1998. $ 0 $ 35,000
12% convertible debentures due December 25, 1997, convertible into shares
of common stock at a conversion price of $.87 per share. Principal and
interest were payable on demand at maturity. Convertible debentures were
secured by a media purchase credit (see Note J). These notes were converted
into 367,816 shares of common stock on September 30, 1998. 0 320,000
Notes payable dated various dates from May 20, 1996 through September 9,
1996, secured by common stock with principal and accrued interest due at
maturity on various dates through September 9, 1998. 216,250 warrants to
purchase shares of common stock at $3.00 per share expiring on various
dates through September 9, 1998 were issued to the note holders. These
notes were converted into 1,555,458 shares of common stock on various dates
through March 31, 1999. 60,000 805,000
Notes payable to Bisbro Investments Co., Ltd. The notes are unsecured and
bear interest at 10% per annum with the principal and interest due on
various maturity dates through January 5, 2000. These notes are convertible
into shares of common stock at a conversion price of $.50 per share.
Subsequent to the balance sheet date, the notes were converted into 120,000
shares of common stock on June 18, 1999. 60,000 0
F-13
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Notes payable to Universal Asset Fund, Ltd. The notes are unsecured and
bear interest at 10% per annum with the principal and interest due on
various maturity dates through November 25, 1999. These notes are
convertible into shares of common stock at a conversion price of $.50 per
share. Subsequent to the balance sheet date, the notes were converted
into 80,000 shares of common stock on June 18, 1999. 40,000 0
Notes payable to Capital Growth Fund, Ltd. The notes are unsecured and bear
interest at 10% per annum with the principal and interest due on various
maturity dates through August 14, 1999. These notes are convertible into
shares of common stock at a conversion price of $.50 per share. Subsequent
to the balance sheet date, the notes were converted into 186,000 shares of
common stock on June 18, 1999. 93,000 0
Note payable to Equity Communication. This note is unsecured, non-interest
bearing, and due upon demand. 10,000 0
Note payable to an individual. This note is unsecured and bears interest at
12% per annum with the principal and interest due on March 30, 2000. This
note is convertible into shares of common stock at a conversion price of
$1.00 per share. 43,000 0
---------- ----------
$ 306,000 $1,160,000
Less current portion 53,000 1,160,000
---------- ----------
Total $ 253,000 $ 0
========== ==========
</TABLE>
Current maturities of long-term debt obligations that were converted into
common stock subsequent to the balance sheet date have been classified as
long-term liabilities in the accompanying 1999 balance sheet.
Interest expense charged to operations related to the long-term debt was
$112,553, $92,625 and $86,530 for the years ended March 31, 1999, 1998 and 1997,
respectively.
During the year ended March 31, 1997, $75,000 of 8.5% convertible
debentures were converted into 50,000 shares of common stock. During the year
ended March 31, 1998, $30,000 of 8.5% convertible debentures were converted into
20,000 shares of common stock and $160,000 of 12% convertible debentures were
converted into 183,908 shares of common stock. During the year ended March 31,
1999, $348,300 of 10% notes payable were converted into 869,276 shares of common
stock, $35,000 of 8.5% convertible debentures were converted into 27,881 shares
of common stock, $320,000 of 12% convertible debentures were converted into
367,816 shares of common stock, $745,000 of 7% notes payable were converted into
1,555,458 shares of common stock and $17,500 of notes payable to officers of the
Company were converted into 48,975 shares of common stock.
NOTE E - COMMON STOCK:
STOCK PURCHASE WARRANTS
- -----------------------
At March 31, 1999, the Company had outstanding warrants to purchase 2,605,500
shares of the Company's common stock at prices which ranged from $0.20 per share
to $4.88 per share. The warrants are exercisable at any time and
F-16
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
expire on dates ranging from August 31, 1999 to March 31, 2004. At March 31,
1999, 2,605,500 shares of common stock were reserved for that purpose.
COMMON STOCK RESERVED
- ---------------------
At March 31, 1999, shares of common stock were reserved for the following
purposes:
Exercise of stock warrants 2,605,500
Exercise and future grants of stock
options and stock appreciation rights 423,000
---------
3,028,500
=========
NOTE F - INCOME TAXES:
The Company uses the liability method of accounting for income taxes under
the provisions of Statement of Financial Accounting Standards No. 109. Under the
liability method, a provision for income taxes is recorded based on taxes
currently payable on income as reported for federal income tax purposes, plus an
amount which represents the change in deferred income taxes for the year.
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax reporting basis of the Company's
assets and liabilities. The major areas in which temporary differences give rise
to deferred taxes are accounts receivable, accrued liabilities, start-up
expenditures, accumulated depreciation, and net operating loss carryforwards.
Deferred income taxes are classified as current or noncurrent depending on the
classification of the assets and liabilities to which they relate. Deferred
income taxes arising from temporary differences that are not related to an asset
or liability are classified as current or noncurrent depending on the years in
which the temporary differences are expected to reverse.
The provision for income taxes consists of:
1999 1998 1997
----------- ----------- -------------
Current income taxes $ 0 $ 0 $ 0
Change in deferred income taxes due
to temporary differences $ 0 $ 0 $ 0
----------- ----------- -------------
$ 0 $ 0 $ 0
=========== =========== =============
F-15
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
Deferred tax (liabilities) assets consist of the following:
1999 1998
--------------- ------------
Accumulated depreciation $ (30,000) $ (22,000)
--------------- ------------
Gross deferred tax liabilities $ (30,000) $ (22,000)
--------------- ------------
Accounts receivable $ 0 $ 29,000
Accrued liabilities 2,000 2,000
Start-up expenditures 7,000 18,000
Net operating loss carryforward 2,010,000 1,727,000
--------------- ------------
Gross deferred tax assets $ 2,019,000 $ 1,776,000
Valuation allowance (1,989,000) (1,754,000)
--------------- ------------
Net deferred tax assets $ 30,000 $ 22,000
--------------- ------------
$ 0 $ 0
=============== ============
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- -------------
<S> <C> <C> <C>
The increases in the deferred
tax valuation allowance are as follows: $ 235,000 $ 128,000 $ 566,000
=============== ============== =============
</TABLE>
The Company has recorded a valuation allowance amounting to the entire
deferred tax asset balance because of the Company's uncertainty as to whether
the deferred tax asset is realizable. However, if the Company is able to utilize
the deferred tax asset in the future, the valuation allowance will be reduced
through a credit to income.
The Company has available at March 31, 1999, a net operating loss
carryforward of approximately $5,910,000 which can be used to offset future
taxable income through the year 2019.
NOTE G - STOCK OPTION PLAN:
On November 1, 1994, the Company adopted a stock award and incentive plan
which permits the issuance of options and stock appreciation rights to selected
employees and independent contractors of the Company. The plan 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.
F-16
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
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. During the year
ended March 31, 1997, options to purchase 27,000 shares were exercised at a
price of $0.01 per share. At March 31, 1999, options to purchase 382,750 shares
at exercise prices of $0.20 to $1.25 per share had been granted. No stock
appreciation rights had been granted at March 31, 1999.
NOTE H - STOCK OPTIONS:
The per share weighted-average fair value of stock options granted during
the year ended March 31, 1999 was $0.98, on the date of grant, using the Black
Scholes Option-Pricing Model. All stock options granted during the year ended
March 31, 1997 were subsequently forfeited. The following weighted-average
assumptions were used in the pricing model:
1999 1998
---------------------- ------------------------
Expected dividend yield 0.00% 0.00%
Risk-free interest rate 5.06% - 5.09% 5.62% - 5.65%
Expected life 2.5 years to 3.5 years 1.5 years to 2.5 years
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:
1999 1998 1997
-------------- --------------- --------------
Net loss:
As reported $ (690,598) $ (381,991) $ (1,708,672)
============== ============== ============
Proforma $ (841,514) $ (424,637) $ (1,708,672)
============== ============== ============
Loss per common share:
As reported $ (0.10) $ (0.07) $ (0.33)
============== ============== ============
Proforma $ (0.12) $ (0.08) $ (0.33)
============== ============== ============
F-19
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
- -----------------
The company has entered into a non-cancelable operating lease for office
facilities under a lease arrangement commencing on February 3, 1998 and expiring
on December 31, 2003.
Minimum future rentals to be paid on non-cancelable leases as of March 31,
1999 for each of the next five years and in the aggregate are:
YEAR ENDING
MARCH 31, AMOUNT
--------------- ----------------
2000 $ 73,766
2001 101,060
2002 103,540
2003 104,856
2004 80,364
--------------
$ 463,586
==============
Total rent expense charged to operations was $27,416, $64,463 and $128,475
for the years ended March 31, 1999, 1998 and 1997, respectively.
NOTE J - BARTER TRANSACTION:
On June 3, 1996, the Company entered into a media purchase agreement for
the promotion of its products and services with Proxhill Marketing, Ltd.
(Proxhill). Under the terms of the agreement, the Company committed to purchase
$1,200,000 of media advertising time in exchange for 200,000 shares of common
stock at a value of $4.00 per share, and $400,000 in cash. The agreement is for
a period of five years. For each purchase of media advertising time, the Company
will receive a barter credit equal to 66.67% of the transaction value with the
remaining balance payable in cash. A prepaid barter credit in the amount of
$761,018 and $800,000 is included in other assets in the accompanying balance
sheet as of March 31, 1999 and 1998, respectively. In connection with this
agreement, the Company issued to Proxhill 50,000 warrants to purchase the
Company's common stock at a price of $4.00 per share. The options expire June 3,
2001.
NOTE K - SALE - LEASEBACK TRANSACTION:
The Company entered into a sale-leaseback arrangement during each of the
years ended March 31, 1999 and 1998. Under these arrangements, the Company sold
telecommunications equipment and leased it back for a period of three years.
Both leases were originally accounted for as operating leases. The gain of
$66,119 and $70,124 realized in these transactions had originally been deferred
and amortized to income in proportion to rental expense over the term of the
lease. In November 1998, the Company agreed to issue 579,971 shares of common
stock to the lessor in exchange for the release of the liability for all future
and past due lease payments.
F-18
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE L - DISCONTINUED OPERATIONS:
On February 4, 1997, the Company entered into an agreement with Brite Voice
Systems, Inc. (BVS) to sell to BVS its long distance telecommunications services
business. The assets sold consisted of property and equipment and intangible
assets. The selling price was $743,000. Accordingly, the operating results of
the long distance telecommunications services business have been segregated from
continuing operations and reported separately in the accompanying statement of
operations. The Company has restated its prior financial statements to present
the operating results of the long distance telecommunications services business
as a discontinued operation.
Operating results (exclusive of any corporate charges or interest expense)
from discontinued operations are as follows:
1999 1998 1997
----------- ----------- -----------
Net sales $ 0 $ 0 $ 771,937
----------- ----------- -----------
Costs and expenses:
Cost of sales $ 0 $ 0 $ 899,192
Sales and marketing expenses 0 0 661,206
General and administrative
expenses 0 0 577,086
----------- ----------- -----------
Total costs and expenses $ 0 $ 0 $ 2,137,484
----------- ----------- -----------
Loss before income taxes $ 0 $ 0 $(1,365,547)
Provision for income taxes 0 0 0
----------- ----------- -----------
Loss from operations $ 0 $ 0 $(1,365,547)
=========== =========== ===========
NOTE M - EXTINGUISHMENT OF DEBT:
During the years ended March 31, 1999, 1998 and 1997, the Company
negotiated settlements of amounts owed to certain of its vendors and employees.
The negotiated settlements resulted in a reduction of the Company's accounts
payable and accrued operating expenses in the amount of $88,828, $217,442 and
$253,694, respectively, which has been reported as an extraordinary item in the
accompanying statements of operations.
NOTE N - GOING CONCERN:
The Company has incurred substantial operating losses to date. In June
1995, the Company issued 600,000 shares of its common stock to Star Resources,
Inc. (Star), a public company, for $24,000. The Company then filed a
registration statement with the Securities and Exchange Commission to allow Star
to distribute to its stockholders the 600,000 shares of common stock. Upon
completion of the Star distribution, the Company became a separate public
company. The Company has raised, and intends to continue to raise, additional
capital through subsequent offerings of its common stock in over-the-counter
securities markets.
On June 3, 1999, the Company entered into a software license agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company an initial license fee of $570,000. The agreement is for a period of 10
years and provides for a total of 39 installations and grants KMC the ability to
add up to 81
F-19
<PAGE>
PREFERRED VOICE, INC.
NOTES TO FINANCIAL STATEMENTS
additional installations. The agreement also calls for KMC to pay the Company a
monthly license fee ranging from $1,000 to $3,500 per month for each software
and hardware installation beginning in the 25th month after each installation.
The Company anticipates having the initial 39 installations completed by June
2000 which would obligate KMC to pay the Company monthly license fees of
$131,500, subject to certain adjustments, beginning July 2002 and continuing
through July 2009.
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.
F-20
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The Board of Directors currently consists of two (2) persons, G. Ray
Miller and Mary G. Merritt. The following table sets forth information about all
Directors and executive officers of the Company and all persons nominated or
chosen to become such:
<TABLE>
<CAPTION>
NAME AND BUSINESS ADDRESS AGE OFFICE YEAR FIRST ELECTED
- ------------------------- --- ------ DIRECTOR
--------
<S> <C> <C> <C>
G. Ray Miller 60 Director, Chief Executive
Officer and President 1994
Mary G. Merritt 42 Director, Vice President- 1994
Finance and
Secretary/Treasurer
Richard K. Stone 39 Vice President-Sales and N/A
Marketing
Robert R. Williams 50 Vice President-Software N/A
Development
</TABLE>
Mr. Miller is a founder of the Company. He has served as an Officer and
Director of the Company since May, 1994; he has been Chief Executive Officer
since June, 1994 and President since April 1997. Prior to the founding of the
Company, Mr. Miller founded United Medicorp Inc. ("United Medicorp") in 1989 and
served through February, 1992 as Chairman of the Board and Chief Executive
Officer. United Medicorp is a publicly-held corporation which manages medical
insurance claims. Prior to that time, Mr. Miller served in executive capacities
with International Telecharge, Inc., an operator services company; Automatic
Radius Management, Inc. ("ARM"), a security alarm service company; and U.S.
Telephone, Inc., a long distance carrier. After leaving United Medicorp, Mr.
Miller managed personal investments until he began work at the Company.
Ms. Merritt is a founder of the Company and has been a director since
May, 1994. She has served as Vice President - Finance and Secretary/Treasurer
since inception. She served as President of Star of Texas, Inc., a trust
management account service from 1989 to May 1994. She served as Controller of
United Medicorp for several months during 1992. Ms. Merritt is a certified
public accountant and was employed by Ernst & Whinney from 1981 to 1989, her
last position being senior manager for entrepreneurial services.
Mr. Stone joined the Company in December 1998 as Vice President of
Sales and Marketing after serving for two years as a Vice President of Sales and
Marketing for US Metrolines and Director of National Accounts at Matrix, both
Jensen UICI Companies. Before that from June 1994 to March 1996, he served as
Co-Founder/President of Telecable Communications, Inc. and from February 1991 to
June 1994 Director of Sales at Value Added Communications. All of the businesses
in which Mr. Stone has worked are telecommunications providers servicing a
customer base similar to that which the Company currently serves.
Mr. Williams joined the Company in January 1998 as Vice President of
Software Development bringing 25 years experience in system design and
development. During 1990, Mr. Williams worked with Voice Control Systems, Inc.,
a company in the speech recognition field, as a software programmer. After that
he served as Vice President of Engineering for ActionFax, Inc. for 5 years, a
company that designed multi-dialing and other fax related services. From 1995 to
1998, Mr. Williams owned and operated Business Hotlines, a software development
company
19
<PAGE>
headquartered in Dallas, Texas. He also worked in the Central Research
Laboratory at Texas Instruments on the development team that delivered the
world's first commercially available voice-mail system for VMX, Inc.
The Company is not aware of any "family relationships" (as defined in
Item 401(c) of Regulation S-B promulgated by the Commission) among directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers.
Except as set forth above, the Company is not aware of any event (as
listed in Item 401(d) of Regulation S-B promulgated by the Commission) that
occurred during the past five years that are material to an evaluation of the
ability or integrity of any director, person nominated to become a director,
executive officer, promoter or control person of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth the compensation paid by the Company to
its Chief Executive Officer during the fiscal year ended March 31, 1999. No
other executive officer earned in excess of $100,000.
ANNUAL COMPENSATION
NAME/PRINCIPAL YEAR ENDING WARRANTS
POSITION MARCH 31 SALARY GRANTED
- -------- -------- ------ -------
G. Ray Miller-Chief 1999 $47,333 250,000
Executive Officer 1998 $6,000 200,000
1997 $30,000
No other stock options were granted to the aforementioned executive officer.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR
NUMBER OF
SECURITIES % OF TOTAL OPTIONS EXERCISE OR
UNDERLYING GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME OPTIONS GRANTED(#) IN FISCAL YEAR ($/SH) DATE
- ---- ------------------ -------------------- ----------- ----
<S> <C> <C> <C> <C>
G. Ray Miller 250,000(1) 33.6% $0.84 3/31/2004
<FN>
1 All warrants are currently exercisable.
</FN>
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the close of business on October
31, 1999, information as to the beneficial ownership of shares of the Company
Common Stock for all directors, each of the named executive officers (as defined
in Item 402(a)(2) of Regulation S-B promulgated by the Commission), for all
directors and executive officers as a group, and any person or "group" (as that
term is defined in Item 403 of Regulation S-B promulgated by the Commission) who
or which is known to the Company to be the beneficial owner of more than 5% of
the outstanding shares of Company Common Stock. In addition, except as set forth
below, the Company does not know of any person or group who or which owns
beneficially more than 5% of its outstanding shares of Company Common Stock as
of the close of business on October 31, 1999.
20
<PAGE>
BENEFICIAL OWNERSHIP (1), (2)
NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE
- ------------------------ ------ ----------
Pegasus Settlement Trust (3) 2,715,667 23.74%
G. Ray Miller (4) 630,250 5.30%
Mary G. Merritt(5) 3,480,642 29.52%
Lawrence E. Steinberg(6) 1,419,276 12.30%
G. Tyler Runnels(7) 662,421 5.77%
Capital Growth Fund Ltd(8) 778,971 6.60%
All Directors, and executive
officers as a group (four
persons)(9) 4,110,892 34.65%
1) The rules of the SEC provide that, for purposes hereof, a person is
considered the "beneficial owner" of shares with respect to which the
person, directly or indirectly, has or shares the voting or investment
power, irrespective of his economic interest in the shares. Unless
otherwise noted, each person identified possesses sole voting and
investment power over the shares listed, subject to community property
laws.
2) Based on 11,440,990 shares outstanding on October 31, 1999. Shares of
Common Stock subject to options that are exercisable within 60 days of
November 19, 1999, are deemed beneficially owned by the person holding such
options for the purposes of calculating the percentage of ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage of any other person.
3) Pegasus Settlement Trust is a Channel Islands Trust of which SG Hambros
Trust Company (Jersey) Limited of 7 the Esplanade, St. Helier, Jersey,
Channel Islands is Trustee, and Mary Merritt is protector, with shared
voting and dispositive power. G. Ray Miller is the sole beneficiary of the
Trust. Pegasus Settlement Trust's address is % SG Hambros Trust Company
(Jersey) Limited, 7 The Esplanade, St. Helier, Jersey, Channel Islands JE4
8RT.
4) Includes 450,000 shares issuable upon exercise of warrants. Mr. Miller is
the sole beneficiary of the Pegasus Settlement Trust but is not the
beneficial owner of the common stock owned by the Trust because Mr. Miller
does not exercise voting or investment power over such shares. Mr. Miller's
address is 6500 Greenville, Suite 570, Dallas, Texas 75206.
5) Includes 350,000 shares issuable upon exercise of warrants, 6,000 shares
held by her minor children, and 2,715,667 shares held by Pegasus Settlement
Trust. Ms. Merritt's address is 6500 Greenville, Suite 570, Dallas, Texas
75206.
6) Includes 100,000 shares issuable upon exercise of warrants held by Mr.
Steinberg and 228,140 shares in trusts of which he is the Trustee, two of
which his children are beneficiaries. Mr. Steinberg's address is 5420 LBJ
Freeway, LB 56, Dallas, Texas 75240.
7) Includes 43,000 shares issuable upon exercise of warrants. Mr. Runnels'
address is 1999 Avenue of the Stars, Suite 2530, Los Angeles, CA 90067.
8) Does not include 120,000 shares and 360,000 warrants held by Bisbro or
80,000 shares and 160,000 warrants held by Universal who have the same
Chief Financial Officer, Badar Al-Rezaihan. The number of shares owned by
Bisbro includes 20,000 shares issued in the name of Bisbro upon exercise of
the warrants held by Mr. Al-Rezaihan individually. Includes 360,000 shares
issuable upon exercise of warrants.
9) Includes the shares described in footnotes 4 and 5.
21
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 25, 1997, the Company completed the offering of 3 units for aggregate
gross proceeds of U.S. $480,000 to three private foreign investors. Each Unit
consisted of one 12% Convertible Debenture in the principal amount of $160,000
payable on or before December 25, 1997, and one common stock purchase warrant to
purchase 160,000 shares of common stock of the Company. The investors in that
offering were Capital, a beneficial owner of 5% or more of the Company's stock,
Universal and Bisbro and they each received a warrant to purchase shares of
Common Stock at an exercise price of $1.00 per share on or before June 25, 2000.
On February 19, 1998, Capital converted its $160,000 convertible debenture into
183,908 shares of the Company's common stock. On September 14, 1998, Bisbro and
Universal each converted their $160,000 convertible debenture into 183,908
shares of the Company's common stock.
On February 11, 1998, the Company entered into a sale leaseback agreement with
Capital, whereby Capital would provide from $200,000 to $1,000,000 in lease
financing for VIP systems. On March 18, 1998, Capital purchased the first VIP
system for $100,000 and then leased it back to the Company for 36 months. Also
on February 11, 1998, Capital received a warrant to purchase 200,000 shares of
the Company's common stock at an exercise price of $1.25 per share on or before
February 11, 2001.
On January 5, 1998, the Company issued G. Ray Miller, the Chief Executive
Officer and a director of the Company, a warrant to purchase 200,000 shares of
common stock of the Company at $1.00 per share on or before January 5, 2001. The
warrant was issued for Mr. Miller's past work for the Company.
On January 5, 1998, the Company issued Mary Merritt, the Vice President of
Finance and a director of the Company, a warrant to purchase 100,000 shares of
common stock of the Company at an exercise price of $1.00 per share on or before
January 5, 2001. The warrant was issued for Ms. Merritt's past work for the
Company.
On October 2, 1995, Badar Al-Rezaihan was issued a warrant to purchase 20,000
shares of common stock at an exercise price of $0.20 per share with an
expiration date of October 1, 1998. The Company extended the warrant to October
1, 1999 before which time Mr. Al-Rezaihan exercised his warrant to purchase
20,000 shares and the shares were issued in the name of Bisbro. Mr. Al-Rezaihan
received the warrant in consideration of his assistance to the Company in
creating and maintaining international market contacts to provide the Company
with capital investment.
On April 23, 1998, the Company issued two new warrants, a warrant to purchase
200,000 shares of common stock of the Company at an exercise price of $1.00 per
share on or before November 12, 1999 to Bisbro and a warrant to purchase 100,000
shares of common stock of the Company at an exercise price of $1.00 per share on
or before November 12, 1999 to Invest. On October 5, 1999, Bisbro exercised
22,000 of the warrant shares and a new warrant was issued for 178,000 shares of
common stock. Also on October 5, 1999, both Bisbro's and Invest's warrants were
extended to November 12, 2000 and repriced from $1.00 to $1.25. The previous
warrants were granted in connection with a Regulation S offering made by the
Company in 1995.
On May 1, 1998, the Company entered a sale lease back agreement with Capital
whereby it sold a VIP System to Capital for $100,000 and then leased it back for
36 months.
On August 3, 1998, Capital agreed to lend $83,000 to the Company. In return, the
Company issued Capital its promissory note in the amount of $83,000 bearing
interest at a rate of 10% per annum due on August 3, 1999. On August 14, 1998,
Capital agreed to lend $10,000 to the Company. In return, the Company issued
Capital its promissory note in the amount of $10,000 bearing interest at a rate
of 10% per annum due on August 14, 1999. Both of those notes were converted into
shares of common stock at a conversion price of $0.50 per share for a total of
186,000 shares on June 18, 1999.
On September 3, 1998, the Company issued Lawrence E. Steinberg, a beneficial
owner of 5% or more of the Company's stock, 751,136 shares of common stock at
$0.39 per share for $302,100 that the Company owed to him on outstanding
promissory notes.
<PAGE>
On September 3, 1998, the Company issued the Lawrence E. Steinberg Charitable
Remainder Trust, a Texas trust of which Lawrence E. Steinberg is a trustee,
75,180 shares of common stock at a $0.39 per share for $29,400 that the Company
owed to the trust on outstanding promissory notes.
On September 3, 1998, the Company issued the Ilana S. Steinberg Trust A, a Texas
trust for the benefit of one of Lawrence E. Steinberg's children of which Mr.
Steinberg is a trustee, 21,480 shares of common stock at $0.39 per share for
$8,400 that the Company owed to the trust on outstanding promissory notes.
On September 3, 1998, the Company issued the Adam J. Steinberg Trust A, a Texas
trust for the benefit of one of Lawrence E. Steinberg's children of which Mr.
Steinberg is a trustee, 21,480 shares of common stock at $0.39 per share for
$8,400 that the Company owed to the trust on outstanding promissory notes.
On September 3, 1998, Lawrence E. Steinberg agreed to loan $100,000 to the
Company. In return, the Company issued Mr. Steinberg its promissory note in the
amount of $50,000 bearing interest at a rate of 10% per annum due on September
3, 1999, and its promissory note in the amount of $50,000 bearing interest at a
rate of 10% per annum due on October 16, 1999 and a warrant to purchase 100,000
shares of common stock at a price of $1.00 per share on or before October 16,
2001. The notes due on September 3, 1999 and October 16, 1999 are currently
delinquent.
On October 1, 1998, Bisbro agreed to loan $20,000 to the Company. In return, the
Company issued to Bisbro its promissory note in the amount of $20,000 bearing
interest at a rate of 10% per annum due on October 1, 1999. This note was
converted into shares of common stock at a conversion price of $0.50 per share
for 40,000 shares on June 18, 1999.
On October 1, 1998, Universal agreed to loan $20,000 to the Company. In return
the Company issued to Universal its promissory note in the amount of $20,000
bearing interest at a rate of 10% per annum due on October 1, 1999. This note
was converted into shares of common stock at a conversion price of $0.50 per
share for 40,000 shares on June 18, 1999.
On November 10, 1998, Bisbro agreed to loan $30,000 to the Company. In return
the Company issued to Bisbro its promissory note in the amount of $30,000
bearing interest at a rate of 10% per annum due on November 10, 1999. This note
was converted into shares of common stock at a conversion price of $0.50 per
share for 60,000 shares on June 18, 1999.
On November 5, 1998 Capital converted the amounts owed to it by the Company
under the Company's outstanding lease obligations under Equipment Lease
Agreements dated March 18, 1998 and May 1, 1998 into 579,971 shares of the
Company's common stock.
On November 25, 1998, Universal agreed to loan $20,000 to the Company. In return
the Company issued to Universal its promissory note in the amount of $20,000
bearing interest at a rate of 10% per annum due on November 25, 1999. This note
was converted into shares of common stock at a conversion price of $0.50 per
share for 40,000 shares on June 18, 1999.
On January 5, 1999, Bisbro agreed to loan $10,000 to the Company. In return the
Company issued to Bisbro its promissory note in the amount of $10,000 bearing
interest at a rate of 10% per annum due on January 5, 2000. This note was
converted into shares of common stock at a conversion price of $0.50 per share
for 20,000 shares on June 18, 1999.
On March 30, 1999, G. Tyler Runnels, a beneficial owner of 5% or more of the
Company's stock, agreed to lend $43,000 to the Company. In return, the Company
issued to Mr. Runnels its promissory note in the amount of $43,000 bearing
interest at a rate of 12% per annum due on March 30, 2000. The note was repaid
with interest on June 16, 1999. On March 31, 1999, the Company issued Mr.
Runnels a warrant to purchase 43,000 shares of common stock of the Company at an
exercise price of $0.50 per share on or before March 31, 2004.
On March 31, 1999, the Company issued G. Ray Miller a warrant to purchase
250,000 shares of common stock of the Company at $0.84 per share on or before
March 31, 2004. The warrant was issued for Mr. Miller's past work for the
Company.
On March 31, 1999, the Company issued Mary Merritt a warrant to purchase 250,000
shares of common stock of the Company at an exercise price of $0.84 per share on
or before March 31, 2004. The warrant was issued for Ms. Merritt's past work for
the Company.
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1 Certificate of Incorporation of Preferred/telecom, Inc. filed on August 3,
1992 with the Secretary of State of Delaware (Incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
3.2 Certificate of Amendment, filed on May 2, 1994 with the Secretary of State
of Delaware (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
3.3 Certificate of Amendment, filed on March 21, 1995 with the Secretary of
State of Delaware (Incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
3.4 Certificate of Amendment, filed on July 27, 1995 with the Secretary of
State of Delaware (Incorporated by reference to Exhibit 3.5 to Amendment
No. 1 to the Company's Registration Statement on Form S-1, registration no.
33-92894)
3.5* Certificate of Amendment, filed on March 7, 1997 with the Secretary of
State of Delaware
3.6 Bylaws of Preferred/telecom, Inc. (Incorporated by reference to Exhibit 3.4
to the Company's Registration Statement on Form S-1, registration no.
33-92894)
4.1 Specimen Certificate evidencing Common Stock of Preferred/telecom, Inc.
(Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.1**Form of Warrant Certificate and Schedule of Warrant Certificates
10.2*Office Building Lease between Greenville Avenue Properties, Ltd. And
Preferred Voice, Inc.
10.3*Collocation License Agreement between NEXTLINK Texas, Inc. and Preferred
Voice, Inc.
10.4*Promissory Note to Capital Growth Fund Ltd., in original principal amount
of $83,000.00, dated as of August 3, 1998
10.5*Promissory Note to Capital Growth Fund Ltd., in original principal amount
of $10,000.00, dated as of August 14, 1998
10.6*Promissory Note to Lawrence E. Steinberg, in original principal amount of
$50,000.00, dated as of September 3, 1998
10.7*Promissory Note to Bisbro Investments Co., Ltd., in original principal
amount of $20,000.00, dated as of October 1, 1998
10.8*Promissory Note to Universal Asset Fund Ltd., in original principal amount
of $20,000.00, dated as of October 1, 1998
10.9*Promissory Note to Lawrence E. Steinberg, in original principal amount of
$50,000.00 dated as of October 16, 1998
10.10*Promissory Note to Bisbro Investments Co., Ltd., in original principal
amount of $30,000.00, dated as of November 10, 1998
10.11*Promissory Note to Universal Asset Fund Ltd., in original principal amount
of $20,000.00, dated as of November 25, 1998
10.12*Promissory Note to Bisbro Investments Co. Ltd., in original principal
amount of $10,000.00, dated as of January 5, 1999
10.13*Software License Agreement between KMC Telecom Holdings, Inc. and
Preferred Voice, Inc.+
10.14*Promissory Note to G. Tyler Runnels, in original principal amount of
$43,000.00, dated as of March 30, 1999
10.15*Equipment Lease between Capital Growth Fund, Ltd. and Preferred Voice,
Inc. and Amendment No. 1 to Lease Agreement+
10.16*Equipment Lease between Capital Growth Fund, Ltd. and Preferred Voice,
Inc. and Amendment No. 1 to Lease Agreement+
10.17*First Amendment to Lease between Dallas Office Portfolio, L.P. as
successor in interest to Greenville Avenue Properties, Ltd. and Preferred
Voice, Inc.
10.18*Master Distributor Agreement between In Touch Solutions, L.L.C. and
Preferred Voice, Inc.
24
<PAGE>
10.19*Master Distributor Agreement between Answering Service, Inc. and Preferred
Voice, Inc.
10.20*Master Distributor Agreement between Amerivoice Telecommunications, Inc.
and Preferred Voice, Inc.
10.21*Master Distributor Agreement between Voicenet New Media, Inc. and
Preferred Voice, Inc.
10.22*Master Distributor Agreement between Best Voice, Inc. and Preferred Voice,
Inc.
10.23*Master Distributor Agreement between Nomis Communications, Inc. and
Preferred Voice, Inc.
10.24*Master Distributor Agreement between Florida Wireless and Preferred Voice,
Inc.
10.25*Master Distributor Agreement between Voice Retrieval, Inc. and Preferred
Voice, Inc.
10.26*Software License Agreement between Rural Cellular Corporation and
Preferred Voice, Inc.
10.27*Marketing Agreement between Rural Cellular Corporation and Preferred
Voice, Inc.+
10.28*Software License Agreement between Southwest Texas Telephone Company and
Preferred Voice, Inc.
10.29*Marketing Agreement between Southwest Texas Telephone Company and
Preferred Voice, Inc.+
10.30*Software License Agreement between Kaplan Telephone Company and Preferred
Voice, Inc.
10.31*Marketing Agreement between Kaplan Telephone Company and Preferred Voice,
Inc.+
10.32*Software License Agreement between Midwest Wireless Communications, L.L.C.
and Preferred Voice, Inc.
10.33*Marketing Agreement between Midwest Wireless Communications, L.L.C. and
Preferred Voice, Inc.+
27* Financial Data Schedule
*Filed with the Form 10-KSB filed with the Securities and Exchange Commission on
November 29, 1999.
**Filed herewith.
+Confidential materials deleted and filed separately with the Securities and
Exchange Commission
(b) Reports on Form 8-K
None.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this amended annual report on Form 10-KSB/A
to be signed on its behalf by the undersigned thereto duly authorized.
Preferred Voice, Inc.
(Registrant)
Date: February 28, 2000 By: /s/ G. Ray Miller
------------------------
G. Ray Miller, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended annual report on Form 10-KSB/A has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE OFFICE DATE
--------- ------ ----
<S> <C> <C>
/s/ G. Ray Miller
- --------------------------- President, Chief Executive Officer and February 28, 2000
G. Ray Miller Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Mary G. Merritt Secretary, Treasurer and Vice President February 28, 2000
- --------------------------- of Finance
Mary G. Merritt
</TABLE>
26
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
10.1 Form of Warrant Certificate and Schedule of Warrant Certificates
EXHIBIT 10.1
These Warrants have not been registered under the Securities Act of
1933, as amended (the "Act"), and may not be sold, transferred,
assigned or otherwise disposed of unless the person requesting the
transfer of the Warrants shall provide an opinion of counsel to
Preferred Voice, Inc. (the "Company") (both counsel and opinion to be
satisfactory to the Company) to the effect that such sale, transfer,
assignment or disposition will not involve any violation of the
registration provisions of the Act or any similar or superseding
statute.
No. Warrants
-------------- ----------------
PREFERRED VOICE, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for
value received ____________ (the "Initial Warrant Holder") or registered assigns
is the owner of the number of warrants specified above, each of which entitles
the holder thereof to purchase, at any time on or before the Expiration Date
hereinafter provided, one fully paid and non-assessable share of common Stock,
$0.001 par value per share, of Preferred Voice, Inc., a Delaware corporation
(the "Company"), at a purchase price of $____ per share of Common Stock payable
in lawful money of the United States of America, in cash, by official bank or
certified check, or by wire transfer ("Warrants").
1. Warrant; Purchase Price
Each Warrant shall entitle the holder thereof to purchase one share of
Common Stock, $0.001 par value per share, of the Company ("Common Stock") during
the period commencing on the date hereof and ending on the Expiration Date. The
purchase price payable upon exercise of a Warrant shall be $____ (the "Purchase
Price"). The Purchase Price and number of Warrants evidenced by this Warrant
Certificate are subject to adjustment as provided in Article 7. Common Stock
purchased or subject to purchase pursuant to the Warrants shall be called
"Warrant Shares" herein.
2. Exercise; Expiration Date
2.1 Each Warrant is exercisable, at the option of the holder, at any
time after issuance and on or before the Expiration Date. In the case of
exercise of less than all the Warrants represented by a Warrant Certificate, the
Company shall cancel the Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate for the balance of such
Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m. Dallas time on ____
__, _____, or if such date shall in the State of Texas be a holiday or a day on
which banks are authorized to close, then 5:00 p.m. Dallas time the next
following day which in the State of Texas is not a holiday or a day on which
banks are authorized to close.
<PAGE>
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and transfer
of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the Company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferee(s) and the
surrendered Warrant Certificate shall be cancelled by the Company. A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
4. Securities Law Registration
4.1 The Warrant Shares will not be registered under the Securities Act
or any state securities law and shall not be transferrable unless registered or
an exemption from registration is available. A legend to the foregoing effect
will be placed on any certificate representing such shares.
4.2 If, at any time ____________________, the Company proposes for any
reason to register any of its securities under the Securities Act other than a
registration on Form S-8 relating solely to employee stock option or purchase
plans, on Form S-4 relating solely to an SEC Rule 145 transaction or on any
other form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
Warrant Shares, it shall each such time give written notice to the holder of
these Warrants or the Warrant Shares ("Holder" for purposes of this Section 4)
of the Company's intention to register such securities, and, upon the written
request, given within thirty (30) days after receipt of any such notice, of the
Holders of the Warrants and Warrant Shares outstanding, to register any of the
Warrant Shares, the Company shall cause the Warrant Shares so requested by the
Holder to be registered, whether such Warrant Shares are outstanding or subject
to purchase hereby, to be registered under the Securities Act, all to the extent
requisite to permit the sale or other disposition by the Holder of the Warrant
Shares so registered; provided, however, that the Warrant Shares as to which
registration had been requested need not be included in such registration if in
the opinion of counsel for the Company and counsel for the Holder the proposed
transfer by the Holder may be effected without registration under the Securities
Act and any certificate evidencing the Warrant Shares need not bear any
restrictive legend. In the event that any registration pursuant to this Section
4.2 shall be, in whole or in part, an underwritten offering of securities of the
Company, then (i) any request pursuant to this Section 4.2 to register Warrant
Shares may specify that such shares are to be included in the underwriting on
the same terms and conditions as the shares of the Company's capital stock
otherwise being sold through underwriters under such registration, (ii) if the
managing underwriter of such offering determines that the number of shares to be
offered by
-2-
<PAGE>
all selling shareholders must be reduced, then the Company shall have the right
to reduce the number of shares registered on behalf of the Holder, provided that
the number of shares to be registered on behalf of the Holder shall not be
reduced to such an extent that the ratio of the shares which the Holder is
permitted to register to the total number of shares the Holder owns is less than
that ratio for any other selling shareholder, and (iii) the Holder will be bound
by the terms of the underwriting agreement and the conditions imposed by the
underwriter on selling shareholders.
4.3 If and whenever the Company is under an obligation pursuant to the
provisions of this Warrant Certificate to register any Warrant Shares, the
Company shall, as expeditiously as practicable:
(a) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to
such shares and use its best efforts to cause such registration
statement to become and remain effective for at least nine (9) months;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for at least nine months and to comply with the
provisions of the Securities Act with respect to the sale or other
disposition of all Warrant Shares covered by such registration
statement;
(c) furnish to the Holder a suitable number of copies of all
preliminary and final prospectuses to enable the Holder to comply with
the requirements of the Securities Act, and such other documents as the
Holder may reasonably request in order to facilitate the public sale or
other disposition of the Warrant Shares;
(d) use its best efforts to register or qualify the Warrant
Shares covered by such registration statement under such securities or
blue sky laws of such jurisdictions as the Holder shall reasonably
request and where registration or qualification will not involve
unreasonable expense or delay and provided, however, that the Company
will not have to register or qualify in any state in which solely
because of such registration or qualification it would have to qualify
to do business; and the Company shall do any and all other reasonable
acts and things which may be necessary or advisable to enable the
Holder to consummate the public sale or other disposition of the
Warrant Shares in such jurisdiction;
(e) notify the Holder, at any time when a prospectus relating
to the Warrant Shares is required to be delivered under the Securities
Act within the appropriate period mentioned in clause (b) of this
Section 4.3, of the happening of any event as a result of which the
prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances
then existing, and at the request of the Holder prepare and furnish to
the Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of the Warrant Shares, such prospectus
shall not include an untrue statement of a material fact or
-3-
<PAGE>
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of
the circumstances then existing; and
(f) exercise its best efforts to furnish, at the request of
the Holder on the date that the Warrant Shares are delivered to the
underwriters for sale pursuant to such registration or, if the Warrant
Shares are not being sold through underwriters, on the date that the
registration statements with respect to such Warrant Shares are
declared effective, (1) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration,
addressed to the Holder, stating that such registration statement has
become effective under the Securities Act and that (i) to the best of
the knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the
Securities Act; (ii) the registration statement, the related
prospectus, and each amendment or supplement thereto, comply as to form
in all material respects with the requirements of the Securities Act
and the applicable rules and regulations of the Commission thereunder
(except that such counsel need express no opinion as to financial
statements and other financial data contained therein); and (iii) such
counsel has no reason to believe that either the registration statement
or the prospectus, or any amendment or supplement thereto, contains any
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; and (2) a letter dated such date, from the
independent certified public accountants of the Company, stating that
they are independent certified public accountants within the meaning of
the Securities Act and the rules and regulations of the Commission
thereunder and that in the opinion of such accountants, the financial
statements and other financial data of the Company included in the
registration statement or the prospectus, or any amendment or
supplement thereof, comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the rules
and regulations of the Commission thereunder. Such letter from the
independent certified public accountants shall additionally cover such
other financial matters (including information as to periods ending not
more than five business days prior to the date of such letter) as the
Holder may reasonably request.
If the Holder exercises its rights to have the Warrant Shares
registered, it is understood that the Holder shall furnish to the Company such
information regarding the securities held by it and the intended method of
disposition thereof as the Company shall reasonably request and as shall be
required in connection with the action to be taken by the Company.
4.4 All Registration Expenses incurred in connection with any
registration pursuant to this Warrant Certificate shall be borne by the Company.
All Selling Expenses in connection with any registration pursuant to this
Warrant Certificate shall be borne by the Holder.
For purposes of Section 4.4, all expenses incurred by the company in
complying with Section 4.3, including, without limitation, all registration and
filing fees, fees and expenses of complying with securities and blue sky laws,
printing expenses, and fees and disbursements of counsel and of independent
public accountants for the Company (including the expense of any special audits
in connection with any such registration), are herein called "Registration
Expenses",
-4-
<PAGE>
and all underwriting discounts and selling commissions applicable to the Warrant
Shares covered by any such registration and all fees and disbursements of
counsel for the Holder are herein called "Selling Expenses".
4.5 In the event of any registration of any Warrant Shares under the
Securities Act pursuant to this Warrant Certificate, the Company shall indemnify
and hold harmless the Holder, each underwriter of such shares, if any, each
broker, and any other person, if any, who controls any of the foregoing persons
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which any of the foregoing persons may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any registration statement under which the Warrant Shares were
registered under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, or any
document incident to registration or qualification of any Warrant Shares
pursuant to paragraph 4.3(d) above, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or,
with respect to any prospectus, necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or any
violation by the Company of the Securities Act or state securities or blue sky
laws applicable to the Company and relating to action or inaction required of
the company in connection with such registration or registration or
qualification under such state securities or blue sky laws; and shall reimburse
the Holder and such underwriter, broker or other person acting on behalf of the
Holder and each such controlling person for any legal or any other expenses
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with written information furnished to the Company in an
instrument duly executed by the Holder or such underwriter specifically for use
in the preparation thereof. The indemnity agreement set forth in this Section
4.5, insofar as it relates to any such omission, alleged omission, untrue
statement or alleged untrue statement made in a preliminary prospectus but
eliminated or remedied in the final prospectus, shall not inure to the benefit
of any of the beneficiaries named in this Section 4.5 whose responsibility it
was to send, furnish or give a copy of the final prospectus to a person
asserting a claim for which indemnification is sought (the "Claimant") unless a
copy of the final prospectus was so sent, furnished or given to the Claimant at
or prior to the time such action is required by the Act.
Before Warrant Shares held or purchasable by the Holder shall be
included in any registration pursuant to this Warrant Certificate, the Holder
and any underwriter acting on its behalf shall have agreed to indemnify and hold
harmless (in the same manner and to the same extent as set forth in the
preceding paragraph) the Company, each director of the Company, each officer of
the Company who shall sign such registration statement and any person who
controls the Company within the meaning of the Securities Act, with respect to
any failure of the Holder or such underwriter to comply with all laws, rules and
regulations in connection with the offer and sale of Warrant Shares, or any
statement or omission from such registration statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
-5-
<PAGE>
thereto, if such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company in an instrument
duly executed by the Holder or such underwriter specifically for use in the
preparation of such registration statement, preliminary prospectus, final
prospectus or amendment or supplement.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs of this Section 4.5, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the indemnifying party of the commencement of such action. In case any such
action is brought against an indemnified party, the indemnifying party will be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof.
5. Reservation of Warrant Shares
The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of the Warrants, such number of shares of Common Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall be duly and validly issued and fully paid and
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof.
6. Loss or Mutilation
Upon receipt by the Company of reasonable evidence of the ownership of
and the loss, theft, destruction or mutilation of any Warrant Certificate and,
in the case of loss, theft or destruction, of indemnity reasonably satisfactory
to the Company, or, in the case of mutilation, upon surrender and cancellation
of the mutilated Warrant Certificate, the Company shall execute and deliver in
lieu thereof a new Warrant Certificate representing an equal number of Warrants.
7. Adjustment of Purchase Price and Number of Warrant Shares Deliverable
7.1 The Purchase Price and the number of shares of Common Stock
purchasable pursuant to this Warrant shall be subject to adjustment from time to
time as hereinafter set forth in this Article 7. Whenever reference is made in
this Article 7 to the issue or sale of shares of Common Stock, or simply shares,
such term shall mean any stock of any class of the Company other than preferred
stock with a fixed limit on dividends and a fixed amount payable in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Company. The shares issuable upon exercise of the Warrants shall however be
shares of Common Stock of the Company, par value $0.001 per share, as
constituted at the date hereof, except as otherwise provided in Sections 7.3 and
7.4.
-6-
<PAGE>
7.2 In case the Company shall at any time change as a whole, by
subdivision or combination in any manner or by the making of a stock dividend,
the number of outstanding shares into a different number of shares, with or
without par value, (i) the number of shares which immediately prior to such
change the holder of each Warrant shall have been entitled to purchase pursuant
to this Warrant shall be increased or decreased in direct proportion to the
increase or decrease, respectively, in the number of shares outstanding
immediately prior to such change, and (ii) the Purchase Price in effect
immediately prior to such change shall be increased or decreased in inverse
proportion to such increase or decrease in the number of such shares outstanding
immediately prior to such change. For the purpose of this Section 7.2, the
number of shares outstanding at any given time shall not include shares in the
treasury of the Company.
7.3 In case of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation, or in case of any sale, transfer or other
disposition to another corporation of all or substantially all the property,
assets, business and good will of the Company, the holder of each Warrant shall
thereafter be entitled to purchase (and it shall be a condition to the
consummation of any such reorganization, reclassification, consolidation,
merger, sale, transfer or other disposition that appropriate provision shall be
made so that such holder shall thereafter be entitled to purchase) the kind and
amount of shares of stock and other securities and property receivable in such
transaction which a shareholder receives who holds the number of shares which
the Warrant entitled the holder to purchase immediately prior to such capital
reorganization, reclassification of capital stock, consolidation, merger, sale,
transfer or other disposition; and in any such case appropriate adjustments
shall be made in the application of the provisions of this Article 7 with
respect to rights and interests thereafter of the holder of the Warrants to the
end that the provisions of this Article 7 shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares or other property
thereafter purchasable upon the exercise of the Warrants.
7.4 In the event the Company shall declare a dividend upon the Common
Stock payable otherwise than out of earnings or earned surplus or otherwise than
in shares of Common Stock or in stock or obligations directly or indirectly
convertible into or exchangeable for such shares, the holder of each Warrant
shall, upon exercise of the Warrant, be entitled to purchase, in addition to the
number of shares deliverable upon such exercise, against payment of the Warrant
Price therefor but without further consideration, the cash, stock or other
securities or property which the holder of the Warrant would have received as
dividends (otherwise than out of such earnings or earned surplus and otherwise
than in shares or in obligations convertible into or exchangeable for Common
Stock) if continuously since the date hereof such holder (i) had been the holder
of record of the number of shares deliverable upon such exercise and (ii) had
retained all dividends in stock or other securities (other than shares or such
convertible or exchangeable stock or obligations) paid or payable in respect of
said number of shares or in respect of any such stock or other securities so
paid or payable as such dividends.
7.5 No certificate for fractional shares shall be issued upon the
exercise of the Warrants, but in lieu thereof the Company shall purchase any
such fractional interest calculated to the nearest cent.
-7-
<PAGE>
7.6 Whenever the Purchase Price is adjusted as herein provided, the
Company shall forthwith deliver to each Warrant holder a statement signed by the
President of the Company and by its Treasurer or Secretary stating the adjusted
Purchase Price and number of shares determined as herein specified. Such
statement shall show in detail the facts requiring such adjustment, including a
statement of the consideration received by the Company for any additional stock
issued.
7.7 In the event at any time:
(i) The Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution (other than cash
dividends) to the holders of its Common Stock; or
(ii) The Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of
any class or any other rights; or
(iii) The Company shall effect any capital reorganization or
any reclassification of or change in the outstanding capital
stock of the Company (other than a chance in par value, or a
change from par value to no par value, or a change from no par
value to par value, or a change resulting solely from a
subdivision or combination of outstanding shares), or any
consolidation or merger, or any sale, transfer or other
disposition of all or substantially all its property, assets,
business and good will as an entirety, or the liquidation,
dissolution or winding up of the Company; or
(iv) The Company shall declare a dividend upon its Common
Stock payable otherwise than out of earnings or earned surplus
or otherwise than in Common Stock or any stock or obligations
directly or indirectly convertible into or exchangeable for
Common Stock;
then, in any such case, the Company shall cause at least thirty days' prior
notice to be mailed to the registered holder of each Warrant at the address of
such holder shown on the books of the Company. Such notice shall also specify
the date on which the books of the Company shall close, or a record be taken,
for such stock dividend, distribution or subscription rights, or the date on
which such reclassification, reorganization, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution, winding up or dividend, as the
case may be, shall take place, and the date of participation therein by the
holders of shares if any such date is to be fixed, and shall also set forth such
facts with respect thereto as shall be reasonably necessary to indicate the
effect of such action on the rights of the holders of the Warrants.
-8-
<PAGE>
8. Governing Law
8.1 This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed by its officers thereunto duly authorized and its corporate
seal to be affixed hereon as of the ___ day of _________, ____.
PREFERRED VOICE, INC.
BY:
---------------------
Chairman of the Board
Attest:
- ------------------------
Secretary
-9-
<PAGE>
<TABLE>
<CAPTION>
Schedule to Exhibit 10.1
WARRANT Piggyback Registration
NO. Warrant Holder Price Shares Expiration Date Rights Terminology
- ------- -------------- ----- ------ --------------- -----------------------
<S> <C> <C> <C> <C> <C>
67 Mary Merritt $1.00 100,000 January 5, 2001 Within Three (3) Years
68 G. Ray Miller $1.00 200,000 January 5, 2001 Within Three (3) Years
69 C. H. Fallon $1.25 20,000 February 11, 2001 Within Three (3) Years
70 Capital Growth Fund Ltd. $1.25 200,000 February 11, 2001 None
71 Bisbro Investments Company, Ltd. $1.25 200,000 November 12, 2000 Before November 12, 2000
72 Invest, Inc. $1.25 100,000 November 12, 2000 Before November 12, 2000
74 Eugene Starr $3.00 5,000 July 19, 2000 Before July 19, 2000
75 JMG Capital Partners, L.P. $1.00 25,000 September 30, 2001 Within Five (5) Years
76 Triton Capital Investment, Ltd. $1.00 25,000 September 30, 2001 Within Five (5) Years
77 Lawrence E. Steinberg $1.00 100,000 October 16, 2001 Within Five (5) Years
78 J. Steven Emerson $1.00 50,000 November 25, 2001 Within Five (5) Years
79 In Touch Solutions, LLC $1.00 25,000 December 30, 2000 Within Four (4) Years
80 Answering Service, Inc. $1.00 30,000 December 30, 2000 Within Four (4) Years
81 Amerivoice Telecommunications, Inc. $1.00 40,000 December 30, 2000 Within Four (4) Years
82 Voicenet New Media, Inc. $1.00 25,000 December 30, 2000 Within Four (4) Years
83 Best Voice, Inc. $1.00 25,000 December 30, 2000 Within Four (4) Years
84 Nomis Communications $1.00 25,000 December 30, 2000 Within Four (4) Years
85* Edwin G. Bowles d/b/a Data Management $1.00 25,000 February 10, 2001 Within Five (5) Years
Services
86 G. Tyler Runnels $0.50 43,000 March 31, 2004 Within Five (5) Years
87 John B. Davies $0.50 50,000 March 31, 2004 Within Five (5) Years
88 Jacqueline Knapp $0.50 75,000 March 31, 2004 Within Five (5) Years
89 Larry Kupferberg $0.50 75,000 March 31, 2004 Within Five (5) Years
90 G. Ray Miller $0.84 250,000 March 31, 2004 Within Five (5) Years
91 Mary Merritt $0.84 250,000 March 31, 2004 Within Five (5) Years
92 Kathryn Jergens $0.84 25,000 March 31, 2004 Within Five (5) Years
<FN>
* The Warrant Certificate contains an extra provision (Section 2.3) which
provides that the Warrant Holder may only use funds designated from
such Warrant Holder's deferred compensation pool as indicated on the
books and records of the Company at the time of exercise.
</FN>
</TABLE>
