FIRST PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(3)
(to Prospectus dated August 23, 2001) Registration No. 333-56728
6,911,828 Shares
PREFERRED VOICE, INC.
Common Stock
$.001 par value
-----------------------------
This first prospectus supplement supplements and amends the prospectus
dated August 23, 2001 relating to 6,911,828 shares of the common stock, par
value $.001, of Preferred Voice, Inc., that may be offered and sold from time to
time by certain of our stockholders. Unless the context otherwise requires,
"Preferred Voice," the "Company," "we," "our," "us" and similar expressions
refers to Preferred Voice, Inc. and its predecessors, but not to the selling
stockholders. "Selling stockholders" refers to the stockholders identified on
pages 37-39 of the prospectus.
Our common stock is traded in the over the counter (OTC) market and
quoted through the OTC Bulletin Board under the symbol "PFVI." On November 21,
2001, the reported closing bid and asked prices for our common stock were $1.82
per share and $2.12 per share, respectively.
We will receive none of the proceeds from the sale of the common stock
offered by the selling stockholders. We will pay the expenses of preparing and
filing this prospectus supplement and all other prospectus supplements. The
selling stockholders will pay all selling and other related expenses that they
incur.
The prospectus, together with this prospectus supplement, constitutes
the prospectus required to be delivered by Section 5(b) of the Securities Act of
1933, as amended, with respect to offers and sales of the shares of common
stock. All references in the prospectus to "this prospectus" are hereby amended
to read "this prospectus (as supplemented and amended)".
YOU SHOULD READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT CAREFULLY
BEFORE YOU INVEST, INCLUDING THE RISK FACTORS WHICH BEGIN ON PAGE 2 OF THE
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
The date of this Prospectus Supplement is November 21, 2001.
This prospectus is hereby amended to add a new section entitled "Recent
Developments."
RECENT DEVELOPMENTS
The information that follows is contained in the Company's Quarterly
Report on Form 10-QSB for the period ended September 30, 2001 (without
exhibits), which was filed with the SEC on November 19, 2001 and the Company's
Current Report on Form 8-K (without exhibits), which was filed with the SEC on
November 21, 2001, both of which are attached hereto.
United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
(X) Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the Period Ended
September 30, 2001.
or
( ) Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the Transition Period From
_____________to _____________
Commission File Number 33-92894
--------
PREFERRED VOICE, INC.
Delaware 75-2440201
- ------------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6500 Greenville Avenue
Suite 570
Dallas, TX 75206
- ------------------------------------------ ------------------------------------
(Address of Principal Executive (Zip Code)
Offices)
(214) 265-9580
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, including area code.)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, Former Address and Former Fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------------- ---------------
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, $ 0.001 Par Value - 15,844,531 shares as of November 6, 2001.
Transitional Small Business Format Yes No X
------------ ----------------
INDEX
Preferred Voice, Inc.
Part I. Financial Information 1
Item 1. Financial Statements 1
Balance Sheets-September 30, 2001, September 30, 2000 and March 31, 2001. 1
Statements of Operations-Three Months Ended September 30, 2001 and
2000, and Six Months Ended September 30, 2001 and 2000, and for the
Year Ended March 31, 2001. 4
Statements of Cash Flows-Six Months Ended September 30, 2001 and 2000
and for the Year Ended March 31, 2001. 5
Notes to Financial Statements - September 30, 2001. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Part II. Other Information 25
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Part I. FINANCIAL INFORMATION
Preferred Voice, Inc.
Balance Sheets
September 30, 2001 and 2000 and March 31, 2001
September 30, September 30, March 31,
2001 2000 2001
(Unaudited) (Unaudited) (Audited)
Assets
Current Assets:
Cash and Cash Equivalents $ 234,723 $ 2,366,277 $ 1,735,752
Accounts Receivable, net of allowance
for doubtful accounts of $ -0-, $-0-
and $-0- respectively 88,880 190 39,141
Employee Advances -0- -0- 922
Inventory 49,085 47,785 49,085
Prepaid expenses 159 761,018 493
------------------ ------------------- -------------------
Total Current Assets $ 372,847 $ 3,175,270 $ 1,825,393
------------------ ------------------- -------------------
Property and Equipment:
Computer Equipment $ 1,105,736 $ 660,865 $ 882,960
Furniture and Fixtures 42,691 40,791 42,691
Office Equipment 62,997 21,545 61,889
------------------------------------------------------------
$ 1,211,424 $ 723,201 $ 987,540
Less Accumulated Depreciation 288,545 129,372 187,807
------------------ ------------------- -------------------
Net Property and Equipment $ 922,879 $ 593,829 $ 799,733
------------------ ------------------- -------------------
Other Assets:
Capitalized Software Development Costs, net
of accumulated amortization of $453,444,
$237,226 and $324,747, respectively $ 425,873 $ 404,108 $ 380,173
Deposits 15,687 90,195 14,093
Trademarks 52,365 23,676 48,533
------------------ ------------------- -------------------
Total Other Assets $ 493,925 $ 517,979 $ 442,799
------------------ ------------------- -------------------
Total Assets $ 1,789,651 $ 4,287,078 $ 3,067,925
================== =================== ===================
The accompanying notes are an integral part of these statements.
1
September 30, September 30, March 31,
2001 2000 2001
(Unaudited) (Unaudited) (Audited)
------------------- ------------------- -------------------
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts Payable $ 376,388 $ 376,010 $ 338,270
Accrued Operating Expenses 31,264 12,168 39,379
Accrued Vacation Expenses 33,001 27,560 22,194
Accrued Payroll and Related Tax 72,936 3,552 3,589
Accrued Interest Payable 39,515 42,151 44,451
Customer Deposits 342,118 342,118 342,118
Current Maturities of Long-Term Debt 20,000 30,000 30,000
Notes Payable 50,866 50,866 50,866
Notes Payable-Related Parties -0- -0- -0-
------------------- ------------------- -------------------
Total Current Liabilities $ 966,088 $ 884,425 $ 870,867
Commitments (Note J)
Stockholders Deficit:
Common Stock, $0.001 par value
50,000,000 shares authorized;
shares issued 15,744,571, 14,780,086
and 15,672,586 respectively $ 15,745 $ 14,780 $ 15,674
Additional Paid In Capital 14,652,779 12,126,947 13,856,051
Accumulated Deficit (13,843,456) (8,737,206) (11,672,799)
Treasury Stock - at cost (1,505) (1,868) (1,868)
------------------- ------------------- -------------------
Total Stockholder Deficit $ 823,563 $ 3,402,653 $ 2,197,058
------------------- ------------------- -------------------
Total Liabilities and Stockholder Deficit $ 1,789,651 $ 4,287,078 $ 3,067,925
=================== =================== ===================
The accompanying notes are an integral part of these statements.
2
THIS PAGE INTENTIONALLY LEFT BANK
3
Preferred Voice, Inc.
Statements of Operations
For The Three Months Ended September 30, 2001 and 2000
And For the Six Months Ended September 30, 2001 and 2000
And For the Year Ended March 31, 2001
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30, March 31,
2001 2000 2001 2000 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
-------------- ---------------- ----------------- ---------------- ---------------
Sales $ 210,908 $ 51,450 $ 295,180 $ 58,058 $ 138,097
Cost of Sales 54,334 51,565 73,545 60,513 101,188
-------------- ---------------- ----------------- ---------------- ---------------
Gross Profit (loss) $ 156,574 $ (115) $ 221,635 $ (2,455) $ 36,909
-------------- ---------------- ----------------- ---------------- ---------------
Costs and Expenses:
General & Administrative $ 1,282,459 990,166 $ 2,390,442 1,801,696 $4,011,608
Interest Expense 700 1,150 1,850 2,300 4,600
-------------- ---------------- ----------------- ---------------- ---------------
Total Costs and Expenses $ 1,283,159 $ 991,316 $ 2,392,292 $ 1,803,996 $4,016,208
-------------- ---------------- ----------------- ---------------- ---------------
Loss From Operations $(1,126,585) $ (991,431) $(2,170,657) $(1,806,451) $(3,979,299)
Other Income (Expense):
Loss From Impairment of Assets -0- -0- -0- -0- (837,120)
-------------- ---------------- ----------------- ---------------- ---------------
Loss From Operations Before Income
Taxes / Extraordinary Items $(1,126,585) $ (991,431) $(2,170,657) $(1,806,451) $ (837,120)
Provision for Income Taxes -0- -0- -0- -0- -0-
-------------- ---------------- ----------------- ---------------- ---------------
Loss Before Extraordinary Item $(1,126,585) $ (991,431) $(2,170,657) $(1,806,451) $(4,816,419)
============== ================ ================= ================ ===============
Extraordinary Item:
Gain from Extinguishment of Debt
(less applicable income taxes of -0-)
(Note L) -0- -0- -0- -0- 74,375
-------------- ---------------- ----------------- ---------------- ---------------
Net Loss $(1,126,585) $ (991,431) $(2,170,657) $(1,806,451) $(4,742,044)
============== ================ ================= ================ ===============
Per Share Amounts:
Loss from Operations $ (0.07) $ (0.07) $ (0.14) $ (0.13) $ (0.35)
Gain from Extinguishment of Debt $ -0- $ -0- $ -0- $ -0- 0.01
Loss Per Share $ (0.07) $ (0.07) $ (0.14) $ (0.13) $ (0.34)
The accompanying notes are an integral part of these statements.
4
Preferred Voice, Inc.
Statement of Cash Flows
For the Six Months Ended September 30, 2001 and 2000
And For the Year Ended March 31,2001
September 30, September 30, March 31,
2001 2000 2001
(Unaudited) (Unaudited) (Audited)
------------------- ------------------- -------------------
Cash Flows from Operating Activities:
Cash Received from customers $ 245,441 $ 12,918 $ 54,006
Cash Paid to suppliers and employees (2,151,420) (1,598,678) (3,643,002)
Interest Paid -0- -0- -0-
------------------- ------------------- -------------------
Net Cash used by Operating Activities $ (1,905,979) $ (1,585,760) $ (3,588,996)
------------------- ------------------- -------------------
Cash Flows from Investing Activities:
Capital Expenditures $ (379,639) $ (601,523) $ (948,089)
Employee Advances 922 -0- (922)
------------------- ------------------- -------------------
Net Cash used by Investing Activities $ (378,717) $ (601,523) $ (949,011)
------------------- ------------------- -------------------
Cash Flows from Financing Activities:
Proceeds from Sale of Stock (net) $ 783,667 $ 3,180,269 $ 4,900,468
------------------- ------------------- -------------------
Net Cash provided by Financing Activities $ 783,667 $ 3,180,269 $ 4,900,468
------------------- ------------------- -------------------
Net Increase (Decrease) in Cash and
Cash Equivalents $ (1,501,029) $ 992,986 $ 362,461
Cash and Cash Equivalents:
Beginning of Period 1,735,752 1,373,291 1,373,291
------------------- ------------------- -------------------
End of Period $ 234,723 $ 2,366,277 $ 1,735,752
=================== =================== ===================
Supplemental Schedule of non-cash investing and
financing activities:
Issuance of Common Stock in
Exchange for Debt $ 16,786 $ 15,196 $ -0-
------------------- ------------------- -------------------
Total Non-Cash Investing Activities $ 16,786 $ 15,196 $ -0-
=================== =================== ===================
The accompanying notes are an integral part of these statements.
5
September 30, September 30, March 31,
2001 2000 2001
---------------------- -------------------- -------------------
(Unaudited) (Unaudited) (Audited)
Reconciliation of Net Gain/(Loss) to Net
Cash used by Operating Activities:
Net Loss $ (2,170,657) $ (1,806,451) $(4,742,044)
---------------------- -------------------- -------------------
Adjustments to Reconcile Net Loss to Net Cash
used by Operating Activities:
Depreciation $ 210,793 $ 113,455 $ 278,052
Loss on Sale of Fixed Assets (3,291) -0- -0-
Impairment loss -0- -0- 837,120
Fair Value of Stock Warrants
Issued in Exchange for Services 131,162
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (49,739) 3,734 (35,217)
(Increase) Decrease in Inventory -0- 36,939 35,639
(Increase) Decrease in Patents and Trademarks (3,832) (16,204) (41,061)
(Increase) Decrease in Deposits (1,594) -0- (5,081)
(Increase) Decrease in Prepaid Expenses 334 (5,081) (493)
Increase (Decrease) in Accounts Payable 38,118 118,388 (40,715)
Increase (Decrease) in Customer Deposits -0- (48,874) (48,874)
Increase (Decrease) in Accrued Expenses 73,889 18,334 42,516
----------------------------------------------------------------
Total Adjustments $ 264,678 $ 220,691 $ 1,153,048
---------------------- -------------------- -------------------
Net Cash used by Operating Activities $ (1,905,979) $ (1,585,760) $ (3,588,996)
====================== ==================== ===================
The accompanying notes are an integral part of these statements.
6
Preferred Voice, Inc.
Notes to Financial Statements
Note A - General organization:
Preferred Voice, Inc. (the "Company") is a Delaware corporation incorporated
in 1992. On February 25, 1997, the Company's stockholders approved changing the
name of the Company to better reflect the nature of the Company's business. The
Company commenced business on May 13, 1994, and was in the development stage
until August 1, 1995. The Company provides products and services to the
telecommunications industry throughout the United States and maintains its
principal offices in Dallas, Texas. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Certain prior period amounts have been reclassified for comparison
purposes.
Note B - Summary of significant accounting policies:
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
amounts due from banks.
Accounts receivable
In the normal course of business, the Company extends unsecured credit to
its customers with payment terms generally 30 days. Because of the credit risk
involved, management has provided an allowance for doubtful accounts which
reflects its opinion of amounts which will eventually become uncollectible. In
the event of complete nonperformance by the Company's customers, the maximum
exposure to the Company is the outstanding accounts receivable balance at the
date of nonperformance.
Inventory
Inventories consist of finished goods and are stated at the lower of cost
(specific identification) or market.
Capitalized software development
The capitalization of software development costs begins when a product's
technological feasibility has been established and ends when the product is
available for general release to customers. Capitalized software development
costs include direct costs incurred subsequent to establishment of technological
feasibility for significant product enhancements. Amortization is computed on an
individual product basis using the straight-line method over the estimated
economic life of the product, generally three years. During the three and six
months ended September 30, 2001 and 2000 and year ended March 31, 2001, software
development costs capitalized were $88,459, $155,755, $140,379, $256,648 and
$338,815, respectively. The amortization of capitalized software development
costs for the three and six months ended September 30, 2001 and 2000 and the
year ended March 31, 2001 was $84,664, $128,697, $42,742, $78,326 and $184,488,
respectively.
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.
7
Preferred Voice, Inc.
Notes to Financial Statements
Note B - Summary of significant accounting policies (continued):
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
Income taxes
Income taxes are accounted for using the liability method under the
provisions of SFAS 109 "Accounting for Income Taxes."
Fair value of financial instruments
The Company defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. Financial instruments included in the Company's financial
statements include cash and cash equivalents, trade accounts receivable, other
receivables, other assets, notes payable and long-term debt. Unless otherwise
disclosed in the notes to the financial statements, the carrying value of
financial instruments is considered to approximate fair value due to the short
maturity and characteristics of those instruments. The carrying value of
long-term debt approximates fair value as terms approximate those currently
available for similar debt instruments.
Revenue recognition
The Company is engaged as a provider of telecommunication products and
services. Generally, the Company recognizes revenue under the accrual method
when its services and products are provided. During the six months ended
September 30, 2001, the majority of the Company's revenue consisted of revenue
sharing receipts. During the six months ended September 30 2000, the majority of
the Company's revenue consisted of billing end-users for services. Revenue
sharing income is recognized when the voice dialing services are provided.
Revenue sharing income for the six months ended September 2001 and 2000 was
$291,207 and $-0-, respectively and $74,779 for the year ended March 31, 2001.
Advertising expense
The Company expenses advertising costs when the advertisement occurs. Total
advertising expense amounted to $-0-, $-0-, $20,900 and $23,850 for the three
and six months ended September 30, 2001 and 2000, respectively, and $74,158 for
the year ended March 31, 2001.
Loss per share
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share, during the year ended March 31,
1998. SFAS No. 128 reporting requirements replace primary and fully-diluted
earnings per share (EPS) with basic and diluted EPS. Basic EPS is calculated by
dividing net income or loss (available to common stockholders) by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
Loss per share is based on the weighted average number of shares
outstanding of 15,722,071, 15,656,708, 13,746,255 and 13,420,470 for the three
and six months ended September 30, 2001 and 2000, respectively, and 13,884,662
for the year ended March 31, 2001.
Amortization
The cost of trademarks are being amortized on the straight-line method
over a period of 15 years.
8
Preferred Voice, Inc.
Notes to Financial Statements
Note B - Summary of significant accounting policies (continued):
Impairment of long-lived assets and long-lived assets to be disposed of
The Company has adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets and certain identified
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison on the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. An impairment loss in the amount of $837,120 was recognized during the
year ended March 31, 2001 (See Note K).
New accounting pronouncements
The Company adopted the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities on April 1, 2000. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Adoption of this statement did not have a material impact on the
Company's financial position, results of operations or cash flows as the Company
has not entered into any derivative transactions.
Note C - Note payable:
Note payable consists of the following:
September September March
2001 2000 2001
------------- -------------- -----------
Note payable, Brite Voice Systems, Inc., dated January 31,
1997. Note is unsecured and payable in monthly
installments of $8,112, including interest at the rate
of prime + 2 (8.5% at March 31, 1999) through maturity
on January 1, 1998. $ 50,866 $ 50,866 $50,866
============= ============== ===========
The note to Brite Voice Systems, Inc. (Brite) is currently in dispute, and
effective April 1997 the Company discontinued the accrual of interest
expense. Interest expense charged to operations related to the Brite note was
$-0- for the three and six months ended September 30, 2001 and 2000 and for
the year ended March 31, 2001.
9
Preferred Voice, Inc.
Notes to Financial Statements
Note D - Long-term debt:
Long-term debt consists of the following:
September September March
2001 2000 2001
------------- ------------- -----------
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 1,612,421 shares of common
stock on various dates through September 30,
2001. $ 10,000 $ 20,000 $ 20,000
Note payable to Equity Communication. This note is
unsecured, non-interest bearing, and due upon demand 10,000 10,000 10,000
------------- ------------- -----------
$ 20,000 $ 30,000 $ 30,000
Less current portion 20,000 30,000 30,000
------------- ------------- -----------
Total $ 0 $ 0 $ 0
============= ============= ===========
Interest expense charged to operations related to the long-term debt was
$700, $1,850, $1,150 and $2,300 for the three and six months ended September 30,
2001 and 2000, respectively, and $4,600 for the year ended March 31, 2001.
Note E - Common stock:
Common stock authorized
On September 29, 2000, the Company's Board of Directors adopted a
resolution to increase the number of authorized shares of common stock from
20,000,000 to 50,000,000. The increase in authorized shares was approved by the
Company's stockholders on September 21, 2001.
Stock purchase warrants
At September 30, 2001, the Company had outstanding warrants to purchase
2,831,203 shares of the Company's common stock at prices which ranged from $0.50
per share to $3.53 per share. The warrants are exercisable at any time and
expire on dates ranging from October 16, 2001 to April 19, 2006. At September
30, 2001, 2,831,203 shares of common stock were reserved for that purpose.
10
Preferred Voice, Inc.
Notes to Financial Statements
Note E - Common stock (continued):
Common stock reserved
At September 30, 2001, shares of common stock were reserved for the
following purposes:
Exercise of stock warrants 2,831,203
Exercise of future grants of stock options
and stock appreciation rights under the
1994 stock option plan 412,250
Exercise of future grants of stock options
and stock appreciation rights under the
2000 stock option plan 2,000,000
--------------
5,243,453
==============
Note F - Income taxes:
The Company uses the liability method of accounting for income taxes under
the provisions of Statement of Financial Accounting Standards No. 109. Under the
liability method, a provision for income taxes is recorded based on taxes
currently payable on income as reported for federal income tax purposes, plus an
amount which represents the change in deferred income taxes for the year.
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax reporting basis of the Company's assets
and liabilities. The major areas in which temporary differences give rise to
deferred taxes are accounts receivable, accrued liabilities, start-up
expenditures, accumulated depreciation, and net operating loss carryforwards.
Deferred income taxes are classified as current or noncurrent depending on the
classification of the assets and liabilities to which they relate. Deferred
income taxes arising from temporary differences that are not related to an asset
or liability are classified as current or noncurrent depending on the years in
which the temporary differences are expected to reverse.
The provision for income taxes consists of:
Three months Six months Three months Six months
ended September ended September ended September ended September March
2001 2001 2000 2000 2001
----------------- ------------- ---------------- --------------- ---------------
Current income taxes $ 0 $ 0 $ 0 $ 0 $ 0
Change in deferred income
taxes due to temporary
differences 0 0 0 0 0
----------------- ------------- ---------------- --------------- ---------------
$ 0 $ 0 $ 0 $ 0 $ 0
================= ============= ================ =============== ===============
11
Preferred Voice, Inc.
Notes to Financial Statements
Note F - Income taxes (continued):
Deferred tax (liabilities) assets consist of the following:
September 30, September 30, March 31,
2001 2000 2001
----------------- ----------------- -----------------
Accumulated depreciation $ (69,000) $ (22,000) $ (59,000)
----------------- ----------------- -----------------
Gross deferred tax liabilities $ (69,000) $ (22,000) $ (59,000)
----------------- ----------------- -----------------
Stock warrant compensation $ 70,000 $ 0 $ 70,000
Accrued liabilities 11,000 9,000 8,000
Start-up expenditures 0 1,000 0
Net operating loss carryforward 4,621,000 2,941,000 3,881,000
----------------- ----------------- -----------------
Gross deferred tax assets $ 4,702,000 $ 2,951,000 $ 3,959,000
Valuation allowance (4,633,000) (2,929,000) $(3,900,000)
----------------- ----------------- -----------------
Net deferred tax assets $ 69,000 $ 22,000 $ 59,000
----------------- ----------------- -----------------
$ 0 $ 0 $ 0
================= ================= =================
The increase in the deferred tax valuation
allowance is as follows: $ 733,000 $ 612,000 $ 1,608,000
================= ================= =================
The Company has recorded a valuation allowance amounting to the entire
deferred tax asset balance because of the Company's uncertainty as to whether
the deferred tax asset is realizable. However, if the Company is able to utilize
the deferred tax asset in the future, the valuation allowance will be reduced
through a credit to income.
The Company has available at September 30, 2001, a net operating loss
carryforward of approximately $13,591,000, which can be used to offset future
taxable income through the year 2022. Utilization of net operating loss
carryforwards in the future may be limited if changes in the Company's stock
ownership create a change of control as provided in Section 382 of the Internal
Revenue Code.
Note G - Stock option plan:
On November 1, 1994, the Company adopted a stock award and incentive plan
which permits the issuance of options and stock appreciation rights to selected
employees and independent contractors of the Company. The plan reserves 450,000
shares of common stock for grant and provides that the term of each award be
determined by the committee of the Board of Directors (Committee) charged with
administering the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options, and the exercise price, determined by the Committee,
may not be less than the fair market value of a share on the date of grant.
Stock appreciation rights granted in tandem with an option shall be exercisable
only to the extent the underlying option is exercisable and the grant price
shall be equal to the exercise price of the underlying option. At September 30,
2001, options to purchase 385,334 shares at exercise prices of $0.69 to $2.50
per share were outstanding. No stock appreciation rights had been granted at
September 30, 2001.
12
Preferred Voice, Inc.
Notes to Financial Statements
Note G- Stock option plan (continued):
On September 29, 2000, the Company adopted an incentive stock option and other
equity participation plan which permits the issuance of stock purchase
agreements, stock awards, incentive stock options, non-qualified stock options
and stock appreciation rights to selected employees and independent contractors
of the Company. The plan reserves 2,000,000 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. These stock
options vest over a period of two years.
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 the grant.
Stock appreciation rights granted in tandem with an option shall be exercisable
only to the extent the underlying option is exercisable and the grant price
shall be equal to the exercise price of the underlying option. At September 30,
2001, options to purchase 968,000 shares at exercise prices of $1.40 to $3.00
per share were outstanding. No stock appreciation rights had been granted at
September 30, 2001.
During the year ended March 31, 2001, the Company issued 105,000 warrants to
certain officers or directors at exercise prices ranging from $0.84 to $2.93.
The warrants can be exercised at any time and expire on various dates through
March 31, 2004.
Note H - Proforma information related to stock options and warrants:
The per share weighted-average fair value of stock options granted was
determined using the Black Scholes Option-Pricing Model. The following
weighted-average assumptions were used in the pricing model:
September 30, 2001 September 30, 2000 March 31, 2001
--------------------- -------------------- -------------------
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 4.13% - 4.78% 5.69% - 6.02% 4.14% - 6.35%
Expected life 1.5 years to 3.5 2.5 years to 3.5 1.5 years to 3.5
years years years
Expected volatility 168% 139% 172%
13
Preferred Voice, Inc.
Notes to Financial Statements
Note H - Proforma information related to stock options and warrants (continued):
If 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:
Three months Six months Three months Six months
ended ended ended ended
September 30, September 30, September 30, September 30,
2001 2001 2001 2001 March 31, 2001
----------------- ---------------- ------------------ ------------------ ------------------
Net loss:
As reported $ (1,126,584) $ (2,170,657) $ (991,431) $ (2,170,657) $ (4,742,044)
================= ================ ================== ================== ==================
$
Proforma $ (1,139,350) $ (2,193,767) $ (991,431) $ (2,193,767) $ (5,384,131)
================= ================ ================== ================== ==================
Loss per common share:
As reported $ (0.07) $ (0.14) $ (0.07) $ (0.13) $ (0.34)
================= ================ ================== ================== ==================
Proforma $ (0.07) $ (0.14) $ (0.08) $ (0.14) $ (0.39)
================= ================ ================== ================== ==================
Proforma loss reflects only options granted during the periods ended
September 30, 2001 and 2000 and March 31, 2001. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the proforma net loss amounts presented above because compensation
cost is reflected over the option's vesting period.
Following is a summary of the stock award and incentive plans and warrants:
2000 stock award and incentive plan
---------------------------------------------------------------------------------------------------
Three months ended Six months ended
September 2001 September 2001 March 2001
------------------------------- -------------------------------- ----------------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
-------------- ---------------- --------------- ---------------- ---------------- ----------------
Outstanding at beginning
of period 572,000 $ 1.45 576,000 $ 1.45 0 $ 1.45
Granted 520,000 1.88 520,000 1.88 576,000 1.88
Exercised 0 0.00 0 0.00 0 0.00
Expired 0 0.00 0 0.00 0 0.00
Forfeited (124,000) (1.61) (128,000) (1.61) 0 (1.61)
-------------- ---------------- --------------- ---------------- ---------------- ----------------
Outstanding at end of
period 968,000 $ 1.66 968,000 $ 1.66 576,000 $ 1.66
============== ================ =============== ================ ================ ================
Options exercisable at
end of period 190,666 $ 1.45 190,666 $ 1.45 190,666 $ 1.45
Weighted average fair
value of options granted
during the period 520,000 $ 1.54 520,000 $ 1.54 576,000 $ 1.21
14
Preferred Voice, Inc.
Notes to Financial Statements
Note H - Proforma information related to stock options and warrants (continued):
2000 stock award and incentive plan
----------------------------------------------------------------------------------
Three months ended Six months ended
September 2000 September 2000
----------------------------------------------------------------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
------------------- ------------------- ----------------- ----------------------
Outstanding at beginning of period 0 $ 0.00 0 $ 0.00
Granted 0 0.00 0 0.00
Exercised 0 0.00 0 0.00
Expired 0 0.00 0 0.00
Forfeited 0 0.00 0 0.00
------------------- ------------------- ----------------- ----------------------
Outstanding at end of period 0 $ 0.00 0 $ 0.00
=================== =================== ================= ======================
Options exercisable at end of period 0 N/A 0 N/A
Weighted average fair value of
options granted during the period 0 N/A 0 N/A
1994 stock award and incentive plan
------------------------------------------------------------------------------------
Three months ended Six months ended
September 2001 September 2001 March 2001
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------------------------------------------------------------------------------------
Outstanding at beginning of period 412,000 $ 1.02 $ 412,000 $ 1.02 406,500 $ 0.96
Granted 0 0.00 0 0.00 15,000 2.50
Exercised 0 0.00 0 0.00 (9,500) (1.00)
Expired 0 0.00 0 0.00 0 0.00
Forfeited (26,666) (0.99) (26,666) (0.99) 0 0.00
------------------------------------------------------------------------------------
Outstanding at end of period 385,334 $ 1.02 $ 385,334 $ 1.02 412,000 $ 0.96
====================================================================================
Options exercisable at end of period 293,667 $ 0.98 $ 293,667 $ 0.94 392,000 $ 0.96
Weighted average fair value of
options granted during the period 0 N/A $ 15,000 $ 2.13 15,000 $ 2.09
15
Preferred Voice, Inc.
Notes to Financial Statements
Note H - Proforma information related to stock options and warrants (continued):
1994 stock award and incentive plan
--------------------------------------------------------
Three months ended Six months ended
September 2000 September 2000
--------------------------------------------------------
Weighted Weighted
Number average Number average
Of exercise of exercise
shares price shares price
--------------------------------------------------------
Outstanding at beginning of period 412,000 $ 0.00 406,500 $ 0.96
Granted 0 0.00 15,000 2.50
Exercised 0 0.00 (9,500) (1.00)
Expired 0 0.00 0 0.00
Forfeited 0 0.00 0 0.00
--------------------------------------------------------
Outstanding at end of period 412,000 $ 0.00 412,000 $ 1.02
========================================================
Options exercisable at end of
period 295,083 $ 0.94 295,083 $ 0.94
Weighted average fair value of
options granted during the
period 0 N/A 15,000 $ 2.13
Following is a summary of warrants issued to employees:
Warrants
------------------------------------------------------------------------------------
Three months ended Six months ended
September 2001 September 2001 March 2001
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------------------------------------------------------------------------------------
Outstanding at beginning of period 905,000 $ 1.10 905,000 $ 1.02 800,000 $ 0.96
Granted 0 0.00 0 0.00 105,000 2.50
Exercised 0 0.00 0 0.00 0 (1.00)
Expired 0 0.00 0 0.00 0 0.00
------------------------------------------------------------------------------------
Outstanding at end of period 905,000 $ 1.10 905,000 1.10 905,000 $ 0.96
====================================================================================
Options exercisable at end of period 905,000 $ 1.10 905,000 1.10 905,000 $ 1.10
Weighted average fair value of
options granted during the period 0 N/A 0 N/A 105,000 $ 1.96
16
Preferred Voice, Inc.
Notes to Financial Statements
Note H - Proforma information related to stock options and warrants (continued):
Warrants
---------------------------------------------------------
Three months ended Six months ended
September 2000 September 2000
---------------------------------------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares Price
---------------------------------------------------------
Outstanding at beginning of period 800,000 $ 0.90 800,000 $ 0.96
Granted 105,000 2.66 105,000 2.50
Exercised 0 0.00 0 (1.00)
Expired 0 0.00 0 0.00
---------------------------------------------------------
Outstanding at end of period 905,000 $ 1.10 905,000 $ 1.02
=========================================================
Options exercisable at end of period 905,000 $ 1.10 905,000 $ 1.10
Weighted average fair value of
options granted during the period 105,000 $ 1.96 105,000 $ 1.96
Note I - Stock warrants:
During the year ended March 31, 2001, the Company issued 151,035 warrants to
certain service providers and business partners at exercise prices ranging from
$0.84 to $3.53. The warrants can be exercised at any time and expire at various
dates through August 24, 2006.
In accordance with SFAS No. 123, the Company accounts for warrants issued to
non-employees at fair value of the warrants at the grant date. The Company
recognized $131,162 as compensation expense during the year ended March 31, 2001
related to warrants issued to non-employees. No warrants were issued and no
compensation expense was recognized by the Company during the periods ended
September 30, 2001 and 2000 with respect to warrants issued to non-employees.
The per share weighted-average fair value of warrants granted to
non-employees was determined using the Black Scholes Option-Pricing Model. The
following weighted-average assumptions were used in the pricing model:
September 2001 September 2000 March 2001
-------------------- ------------------- -----------------------
Expected dividend yield N/A N/A 0.00%
Risk-free interest rate N/A N/A 5.69%
Expected life N/A N/A 0.5 years to 3.5 years
Expected volatility N/A N/A 172%
17
Preferred Voice, Inc.
Notes to Financial Statements
Note I - Stock warrants (continued):
Following is a summary of warrants issued to non-employees in exchange for
goods and services:
Three months ended Six months ended
September 2001 September 2001 March 2001
--------------------------- ---------------------------- --------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
--------------------------- ---------------------------- --------------------------
Outstanding at beginning of period 621,035 $ 1.76 621,035 $ 1.76 470,000 $ 1.36
Granted 0 0.00 0 0.00 151,035 3.01
Exercised 0 0.00 0 0.00 0 0.00
Expired 0 0.00 0 0.00 0 0.00
--------------------------- ---------------------------- --------------------------
Outstanding at end of period 621,035 $ 1.76 621,035 $ 1.76 621,035 $ 1.76
=========================== ============================ ==========================
Options exercisable at end of period 612,035 $ 1.76 612,035 $ 1.76 621,035 $ 1.76
Weighted average fair value of
options granted during the period 0 N/A 0 N/A 151,035 $ 1.67
Three months ended Six months ended
September 2000 September 2000
--------------------------- ----------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
--------------------------- ----------------------------
Outstanding at beginning of period 470,000 $ 1.36 470,000 $ 1.36
Granted 0 2.66 0 0.00
Exercised 0 0.00 0 0.00
Expired 0 0.00 0 0.00
--------------------------- ----------------------------
Outstanding at end of period 470,000 $ 1.36 470,000 $ 1.36
=========================== ============================
Options exercisable at end of period 470,000 $ 1.36 470,000 $ 1.36
Weighted average fair value of
Options granted during the period 0 N/A 0 N/A
18
Preferred Voice, Inc.
Notes to Financial Statements
Note I - Stock warrants (continued):
Following is an overall summary of the stock warrant activity:
Three months ended Six months ended
September 2001 September 2001 March 2001
--------------------------- ---------------------------- --------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
--------------------------- ---------------------------- --------------------------
Outstanding at beginning of period 2,851,203 $ 1.66 2,778,703 $ 1.75 2,303,203 $ 1.14
Granted 0 0.00 197,500 1.95 973,000 2.39
Exercised 0 0.00 (50,000) (1.00) (420,196) (1.02)
Expired (20,000) (2.75) (95,000) (3.04) (77,304) (2.01)
--------------------------- ---------------------------- --------------------------
Outstanding at end of period 2,831,203 $ 1.65 2,831,203 $ 1.65 2,778,703 $ 1.75
=========================== ============================ ==========================
Three months ended Six months ended
September 2000 September 2000
--------------------------- ----------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
--------------------------- ----------------------------
Outstanding at beginning of period 2,659,965 $ 1.36 2,303,203 $ 1.14
Granted 476,750 2.66 541,750 2.50
Exercised (2,500) 0.00 (342,696) (1.09)
Expired (25,000) 0.00 (49,804) (3.00)
--------------------------- ----------------------------
Outstanding at end of period 3,109,215 $ 1.36 2,452,453 $ 1.32
=========================== ============================
Note J - Commitments:
The Company leases its office facilities and various office equipment under
operating leases expiring through December 2005. Following is a schedule of
future minimum lease payments required under the above operating leases as of
September 30, 2001:
Year ending
September 30, Amount
----------------- -------------
2002 $ 196,070
2003 191,281
2004 188,620
2005 189,662
2006 47,415
-------------
$ 813,048
=============
19
Preferred Voice, Inc.
Notes to Financial Statements
Note J - Commitments (continued):
Total rent expense charged to operations was $51,062, $98,123, $29,038,
$58,015 and $153,515 for the three and six months ended September 30, 2001 and
2000 and for the year ended March 31, 2001, respectively.
Note K - 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 prepaid media commissions in the amount of $76,102 are included in
other assets in the accompanying balance sheet at September 30, 2000. 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 expired June 3, 2001. The Company and Proxhill are currently involved in
litigation over the agreement, and due to the uncertainty of the realization of
the barter credits, the Company recognized an impairment loss in the amount of
$837,120 during the year ended March 31, 2001.
Note L - Extinguishment of debt:
During the year ended March 31, 2001, 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 $74,375, which has been reported as an extraordinary
item in the accompanying statements of operations.
Note M - Going concern:
The Company has incurred substantial operating losses to date. The Company
has raised, and intends to continue to raise, additional capital through
subsequent offerings of its common stock in over-the-counter securities markets.
On June 3, 1999, the Company entered into a software license agreement with
KMC Telecom Holdings, Inc. (KMC). Under the terms of the agreement, KMC paid the
Company initial license fees of $570,000 for the rights to utilize the Company's
software applications in certain geographical markets. The agreement is for a
period of ten years and provides of a total of thirty-nine installations and
grants KMC the ability to add up to 81 additional installations. The agreement
also calls for KMC to pay the Company a monthly license fee ranging from $1,000
to $3,500 per month for each software and hardware installation beginning in the
25th month after each installation. As of September 30, 2001, the Company had
completed one installation.
On September 25, 2000, KMC notified the Company that the initial installation
would not be accepted and KMC intends to terminate the software license
agreement. In addition, KMC requested the refund of the initial license fees and
other amounts paid to the Company. The Company believes it has fully complied
with the terms and conditions of the agreement and intends to vigorously defend
its position. Accordingly, no provision for losses in connection with the KMC
agreement has been charged to operations in the accompanying financial
statements. If required to refund such monies, it would result in a charge to
revenue in the period that the refund is ascertained and could impair the
Company's ability to continue as a going concern. The Company filed a breach of
contract suit against KMC on November 16, 2000.
In August 2000, the Company completed the issuance of an additional 1,142,858
common shares through a private offering, resulting in net proceeds (net of
stock issuance costs) of $2,787,531. In connection with the offering, the
Company also issued warrants to purchase 285,715 shares of common stock at a
price of $2.625 per share.
In April 2001, the Company completed a private placement offering in which
937,500 shares of common stock were issued at a price of $2.00 per share
resulting in net proceeds (net of stock issuance costs) of $1,752,500. In
connection with the offering, the Company also issued warrants to purchase
593,750 shares of common stock at a price of $2.00 per share.
20
Preferred Voice, Inc.
Notes to Financial Statements
As of September 30, 2001, the Company has entered into forty revenue sharing
agreements with various telecommunication service providers throughout the
United States. Generally, the agreements provide for the Company to receive 30%
to 70% of the revenue from the sale of the Company's services depending upon the
level of revenue generated. The Company began receiving revenue from the
agreements in November 2000.
Note M - Going concern (continued):
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to meet the Company's financial
requirements will provide the Company the opportunity to continue as a going
concern.
Note N - Concentrations:
Concentrations of credit risk
At September 30, 2001, the Company had cash balances of $321,899 with one
banking institution, which is in excess of the federally insured amount of
$100,000 per institution. These balances are before considering outstanding
items.
Concentration of business - major customers
During the three and six-month periods ended September 30, 2001,
approximately $146,035 and $264,481 of the Company's revenue was derived from
five customers, respectively. During the year ended March 31, 2001,
approximately $118,000 of the Company's revenue was derived from four
customers.
21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including those set forth herein
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and those set forth in the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" section of the Form 10-KSB/A
for the fiscal year ended March 31, 2001. Notwithstanding the foregoing, the
Company is not entitled to rely on the safe harbor for forward looking
statements under 27A of the Securities Act or 21E of the Exchange Act as long as
our 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. All references to "we," "us," and "our"
refer to Preferred Voice, Inc.
Overview
We began operations in May 1994 as a traditional 1+ long-distance
reseller. Recognizing the declines in telecommunications service prices and the
decreasing margins being experienced in long distance sales, we decided to sell
our long distance customer base and assets in early 1997. Since June of 1997, we
have focused solely on the development, testing, and deployment of voice
activated telecommunications services that would allow any consumer the ability
to "dial" their calls using their voice.
In December of 1998, we realized that we would need extensive amounts
of working capital to sell and market our services directly to individual
consumers. Therefore, we began researching venues which already had inherent
customer or subscriber bases. The first distribution channel that we explored
was the use of master distributors in various cities and states around the
country. We believe the distributors will be a source of direct subscriber
addition once we include the master distributor marketing area in the network of
a VIP system, which we expect to occur by the end of 2001. The second
distribution channel is directly with Incumbent Local Exchange Carriers, or
local telephone companies, Wireless Communication Carriers, or cell phone
companies, and Competitive Local Exchange Carriers, or competitive local
telephone companies. This avenue of distribution is extremely attractive because
these companies already have the subscriber bases and the infrastructure to
service large numbers of subscribers.
We first attempted to sell our hardware and license our application
software but after only one such agreement with KMC Telecom Holdings, Inc.
("KMC") we decided to pursue revenue sharing whereby we provide all hardware,
software applications and support in exchange for a portion of revenue generated
from the service provided by our customer to their subscribers. Our entire sales
force focuses on marketing our revenue sharing agreements and, as of November 9,
2001, we had signed forty (40) local telephone company and cell phone company
multi-year contracts. Also, as of November 9, 2001, eight system locations had
been fully implemented so that the systems installed pursuant to such contracts
are already generating revenues for us. In the month ended September 30, 2001,
these eight locations generated revenues of approximately $83,000. Each of these
companies has signed a revenue sharing agreement with us and these types of
revenue sharing arrangements are the standard manner in which we intend to
contract with customers to generate revenue going forward. Since our deployments
began in October of 2000, we have experienced increased revenues each month but
with a new technology it is difficult to project continued satisfaction with the
product; therefore, revenues will fluctuate with subscriber additions and
deletions. Two other contracting phone companies are in the system acceptance
and early marketing stages, and we should generate revenues from these contracts
by the third quarter of the fiscal year ending March 31, 2002. Six additional
contracting phone companies will start the installation and implementation phase
early in the third fiscal quarter.
We are still at an early stage of implementing our business plan. It is
subject to risks inherent in the establishment and deployment of technology with
which consumers have limited experience. We believe our services are services
that any consumer who uses a phone can utilize. For example, any cell phone user
who wants to speak a name or use our dial number feature without punching
buttons on his cell phone would be a user, or a company who
22
wants their employees accessed by the caller saying an employee name instead of
asking the caller to punch in an extension or spell a name on the key pad. Our
services are generic to cell phone users as well as land line users, children as
well as the elderly. As voice recognition becomes more prevalent in everyday
life, such as in computer programs, reservation systems and telecommunications
information systems, we believe the public will be more apt to accept and
utilize voice-related features. In order for us to succeed, we must:
o secure adequate financial and human resources to meet our
requirements, including adequate numbers of technical support
staff to provide service for our phone company customers;
o establish and maintain relationships with phone companies;
o make sure the VIP system works with the telephone switches of all
of the major manufacturers;
o establish a lead time for delivery of hardware;
o achieve user acceptance for our services;
o generate reasonable margins on our services;
o deploy and install VIP systems on a timely and acceptable
schedule;
o respond to competitive developments;
o mitigate risk associated with our technology by obtaining patents
and copyrights and other protections of our intellectual
property; and
o continually update our software to meet the needs of consumers.
Failure to achieve these objectives could adversely affect our business,
operating results and financial condition.
Results of Operations
We recorded a net loss of $2,170,657, or $0.14 per share, for the
six-month period ended September 30, 2001, compared to a net loss of $1,806,451
or $0.13 per share, for the six-month period ended September 30, 2000. For the
three-month period ended September 30, 2001, we recorded a net loss of
$1,126,585, or $.07 per share compared to a net loss of $991,431, or $.07 per
share for the three-month period ended September 30, 2000.
Total Sales
Total revenue for the six-month period ended September 30, 2001, was
$295,180 compared to $58,058 for the six-month period ended September 30, 2000.
Total revenue for the three-month period ended September 30, 2001, was $210,908
compared to $51,450 for the three-month period ended September 30, 2000.
Revenues in both the six-month and three-month periods for both years consisted
of revenue sharing receipts from our customer phone companies and billing our
direct end-users for individual services. The increase of revenues reflects our
commercial deployment of our services through our revenue sharing agreement with
our customers.
We anticipate that revenues from the sale of our services will grow
gradually in the second half of our fiscal year 2002 as we continue to install
VIP systems in the service areas for the local telephone companies and cell
phone companies which have already signed revenue sharing agreements.
Cost of Sales
Cost of sales for the six-month period ended September 30, 2001 was
$73,545 compared to $60,513 for the six-month period ended September 30, 2000.
Cost of sales for the three-month period ended September 30, 2001 was $54,334
compared to $51,565 for the three-month period ended September 30, 2000. Cost of
sales consisted entirely of costs for network infrastructure such as
collocations, connectivity, system access and long distance to end-users during
both periods.
23
Selling, General and Administrative
Selling, general and administrative expenses for the six-month period
ended September 30, 2001 were $2,390,442 compared to $1,801,696 for the
six-month period ended September 30, 2000. Selling, general and administrative
expenses for the three-month period ended September 30, 2001 were $1,282,459
compared to $990,166 for the three-month period ended September 30, 2000. The
increases from 2000 to 2001 are due to increased staffing and additional
marketing efforts by our marketing staff of our VIP system services to potential
parties interested in our revenue sharing agreements. We expect that selling,
general and administrative expenses will continue to increase through fiscal
year 2002, such expenses to include costs related to the number of employees,
office space requirements and general overhead. However, we believe that such
expenses will not increase proportionately with revenue from sales.
Core Technology Enhancements Software Applications and Hardware
The capitalization of software development costs begins when a
product's technological feasibility has been established and ends when the
product is available for general release to customers. Capitalized software
development costs include direct costs incurred subsequent to establishment of
technological feasibility for significant product enhancements. During the six
month periods ended September 30, 2001 and 2000, software development costs
capitalized were $155,755, and $256,648 respectively. The amortization of
capitalized software development costs for the periods ended September 30, 2001
and 2000 was $128,697, and $78,326 respectively.
Income Taxes
As of September 30, 2001, we had cumulative federal net operating
losses of approximately $13.6 million, which can be used to offset future income
subject to federal income tax through the fiscal year 2022. Net operating loss
limitations may be imposed if changes in our stock ownership create a change of
control as provided in Section 382 of the Internal Revenue Code of 1986.
Liquidity and Capital Resources
Our cash and cash equivalents at September 30, 2001 were $234,723, a
decrease of $1,501,029 from $1,735,752 at March 31, 2001. We have relied
primarily on the issuance of stock and warrants to fund our operations since
January of 1997 when we sold our long-distance resale operation.
On June 3, 1999, we entered into a software license agreement with KMC.
Under the terms of the agreement, KMC paid us an initial license fee of
$570,000. It has also paid us $391,000 for hardware for eight installations. The
agreement provides for a total of 39 installations and grants KMC the ability to
add up to 81 additional installations.
To date we have installed one system. On September 25, 2000, KMC wrote
us and asserted that since it had not accepted the initial installation within
90 days, it was refusing to accept the system and exercising its right to
terminate the agreement with cause under the terms of the contract. KMC
requested a refund of most monies paid relating to the initial market and a
refund of all monies paid for other markets. We responded by informing KMC that
under the terms of the agreement, KMC had already accepted the initial
installation and, therefore, had no right to terminate the agreement with cause
pursuant to the terms of the agreement. If the judge were to determine that KMC
had properly terminated the contract for cause, then KMC would be entitled to
the refund of money paid under the agreement.
On November 16, 2000, we filed a breach of contract suit against KMC.
We continue to carry approximately $342,000 in deferred revenue related to sales
of hardware to KMC and we will continue to carry such amounts as deferred
revenue until the conclusion of and final judgment on the case. If we are
required to refund such monies in the period that the refund is ascertained, it
could have a material adverse effect on our financial condition, particularly
our liquidity.
On March 1, 2001, KMC gave written notice to us that it was terminating
its agreement with us effective on the anniversary date, June 3, 2001, without
cause. Upon a termination without cause under the terms of the contract,
24
neither party would be entitled to receive any money back. However, we will
continue to carry the $342,000 related to sales of hardware to KMC as deferred
revenue until final judgment is entered on this case.
On August 24, 2000, pursuant to Section 4(2) of the Securities Act and
Regulation D thereunder, we conducted an offering of 1,142,858 units consisting
of shares of our common stock and warrants to purchase shares of our common
stock at $2.625 per share providing us with net proceeds of $2,787,531, for
working capital. On April 11, 2001, pursuant to Section 4(2) of the Securities
Act and Regulation D thereunder, we conducted an offering of 1,187,500 units
consisting of shares of our common stock and warrants to purchase shares of our
common stock at $2.00 per share providing us with net proceeds of $1,752,500,
before commissions and expenses, for working capital. We began recording
revenues from our revenue sharing agreements in November of 2000. These revenues
are approximately $83,000 per month but we expect these to continue to rise to a
level to meet our monthly cash requirements by June of 2002, subject to raising
needed funds.
On October 11, 2001, we entered into a Professional Services and
Development Contract with VeriSign, Inc. ("VeriSign") (the "Contract"), the
terms of which are more fully set forth in Part II, Item 5 of this Form 10-QSB.
VeriSign has agreed to pay us an aggregate contract amount of $500,000 for all
of the deliverables to be delivered under the Contract. Sixty percent (60%) of
this amount was paid on the date the Contract was executed, and the remaining
amounts are to be paid upon our completion of milestones related to the
deliverables. The revenue received from this Contract has improved our
liquidity.
We have also issued stock or convertible securities to fulfill certain
obligations or motivate various people. We have issued warrants to purchase
shares of our common stock in connection with services provided by various
individuals and entities in their capacity as members of our Board of Directors,
Council of Advisors, various forms of consulting services, capital raising (such
as a private offering), and marketing distributors. These warrants are always
priced at the fair market value of our common stock on the date of issuance. We
have utilized our common stock as actual compensation in only one instance where
5,000 shares were issued as compensation for consulting services. These services
were valued at total fair market value for the 5,000 shares on the date of
completion of services. We need information regarding grant of stock.
Future Obligations
We project our working capital needs to be $2,100,000 over the next six
months for corporate overhead and will require approximately $950,000 of
equipment financing to continue to deploy our systems in carrier locations.
Management believes that current cash and cash equivalents and cash that may be
generated from operations will be insufficient to meet these anticipated capital
requirements and to finance continued growth for the foreseeable future,
however, management is taking actions which it believes will provide the Company
with adequate resources to meet its short-term capital needs. We may be forced
to raise additional capital through the issuance of new shares and the exercise
of outstanding warrants and to reduce our current overhead. However, any
projections of future cash needs and cash flows are subject to substantial
uncertainty.
We do not make any assurance that we will be able to raise any
additional capital or to raise capital on terms satisfactory to us. Subject to
our ability to fund the cost, we expect to hire or contract with approximately
thirty (30) additional persons during the twelve (12) months ending in October,
2002, primarily to support our expanding marketing activities, software and
hardware development, and system installations. At November 9, 2001, we employed
thirty-one (31) full time employees.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material developments in the litigation we have reported
regarding KMC in our Form 10-KSB/A for the fiscal year ended March 31, 2001,
filed with the SEC on August 10, 2001. With respect to the Proxhill Marketing
Limited litigation, which was reported in the Form 10-KSB/A, we have received a
ruling in the Colorado state action denying all injunctive and declaratory
relief and have also filed a motion to dismiss the action in Colorado on the
basis that we filed claims first in the state of Texas and that case will settle
all issues that are part of the action
25
filed in Colorado. We are also evaluating the filing of a counterclaim in the
Colorado action. We are not involved in any other material legal proceedings.
Item 2. Changes in Securities.
(a) Our stockholders approved the amendment of our certificate of incorporation
to increase the number of authorized common stock of the company from
20,000,000 to 50,000,000 shares.
(b) There have been no material changes in the class of securities or the rights
of the holders of the registered securities.
(c) Recent Sales of Unregistered Securities
None
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Our Stockholders met for the 2001 Annual Meeting of the Stockholders on
September 21, 2001
At that meeting, the following directors were elected : G. Ray Miller, Mary
G. Merritt, Scott V. Ogilvie and Gerard Hallaren. Set forth in the
following chart are the matters voted upon and the votes cast for, against
or withheld, as well as abstentions and broker non-votes, on each such
matter:
Proposals For Withhold/ Abstain Broker Non-
Against Votes
------------------------------------------- -------------- ----------------- -------------- -----------------
Directors:
G. Ray Miller 9,739,607 31,703
Mary G. Merritt 9,739,607 31,703
Scott V. Ogilvie 9,738,607 32,703
Gerard Hallaren 9,739,607 31,703
Adoption of Company's 2000 Stock Plan for 9,737,497 33,807 6
Incentive Stock Options and Other Equity
Participation, as amended
Increase of Authorized shares from 9,739,197 32,109 4
20,000,000 to 50,000,000
Authorization of Class of Preferred Stock 5,417,540 65,106 6 4,288,658
Item 5. Other Information.
Philips Contract
On October 5, 2001, we entered into a Patent License Agreement with
Koninklijke Philips Electronics N.V. ("Philips") (the "License Agreement"). We
had previously signed a Volume License Agreement with Philips, dated as of
January 17, 2001 ("Volume License Agreement"), under which we received a license
to use certain Philips software that is incorporated into our VIP System in
order to provide the services we provide through the VIP System. The new License
Agreement provides us with a worldwide, non-exclusive, non-transferable license,
without the right to sublicense, to Philips' voice activated dialing patents
("VAD Patents") in exchange for an initial license fee, license maintenance fees
and certain royalties. As long as we pay the fees provided for under the License
Agreement, Philips has agreed not to assert any claim for infringement of the
VAD Patents for our offering of services through the use of
26
the VIP System, which services involve the use of Philips' VAD Patents, or
against any of our customers that have signed acknowledgements to the License
Agreement.
In addition to these basic license rights, Philips has also agreed that
it will not assert any claim for infringement of certain other voice patents for
services provided through our VIP System against any of our existing and future
customers set forth in the License Agreement through October 5, 2005. After that
time period, we may negotiate a new patent license agreement related to such
other voice patents with Philips. Philips has also issued us seventy (70)
Philips Speech Pearl 1999 or 2000 software copyright licenses under the terms of
the Volume License Agreement.
The License Agreement may be terminated by either party at any time on
thirty (30) days notice to the other party in the event that the other party has
committed a material breach of the obligations under the License Agreement and
the breach has not been cured within thirty (30) days after receipt of written
notice specifying the nature of the breach. The License Agreement may also be
terminated if we file for bankruptcy or take similar action. Additionally, if
there is a change of control or ownership of our company that results in
transfer of our assets to a direct competitor of Philips or a person or entity
that has been given notice of infringement concerning Philips' patent rights,
then the royalty fees due under the License Agreement increase. Our license for
the VAD Patents continues until the License Agreement is terminated.
VeriSign Contract
On October 11, 2001, we entered into a Professional Services and
Development Contract with VeriSign. VeriSign has entered into the Contract to
utilize our professional services to provide reportable results on the
functionality of our and VeriSign's voice recognition directory assistance
programs, or voice registry systems. Our program is called Business Connect, and
VeriSign's program is called the Global Voice Registry. Our Business Connect
service is designed to allow subscribers to the service use our voice
recognition software to access local business listings, and VeriSign's Global
Voice Registry is designed to allow subscribers to access national businesses.
Under the Contract, we have agreed to configure and launch a fully
functional voice registry module of Business Connect and applications that allow
access between our Voice User Interface and the VeriSign Global Voice Registry
software to demonstrate the functionality of the voice registry systems. Under
the Contract, we are obligated deliver VeriSign a number of agreed upon
deliverables in the process of demonstrating the functionality of our and
VeriSign's voice registry systems, including the reportable results on such
functionality, over a time period beginning on October 15, 2001 and ending on
December 31, 2001. For wireless and wireline carriers that choose to offer voice
registry services to their customers, the subscribers to the Business
Connect/Global Voice Registry integrated service will be able to speak the name
of any national or local business in the United States into the telephone and be
connected to the appropriate business.
VeriSign has the right, at any time during the course of the project,
to make changes to the statement of work, the deliverables and various other
aspects of the work to be done by us by written notice. Such changes may result
in a decrease or an increase in the amounts to be received by us under the
Contract. Additionally, either party may terminate the Contract without default
or cause at any time upon thirty (30) days notice to the other party. Both of
these provisions could affect the aggregate contract amount that we receive
under the Contract. VeriSign has agreed to pay us an aggregate contract amount
of $500,000 for all of the deliverables to be delivered under the Contract,
subject to the amendment and termination provisions previously discussed. Sixty
percent (60%) of this amount was paid on the date the Contract was executed, and
the remaining amounts are to be paid upon our completion of milestones related
to the deliverables.
Pursuant to the terms of the Contract, VeriSign will own all of the
deliverables set forth in the Contract, excluding the Business Connect System
and any other software or other proprietary information owned by us. We have
also granted VeriSign a perpetual, non-exclusive, irrevocable, worldwide license
for VeriSign to use, execute and display all or part of our Business Connect
System as it is incorporated into any of the deliverables delivered pursuant to
the terms of the Contract. In conjunction with that license, we granted VeriSign
the right to use documentation we provided to them related to the use of the
Business Connect System and the regional databases we developed for use in
connection with our Business Connect System. VeriSign has granted us a
worldwide, royalty free, nonexclusive
27
license to use any of the deliverables solely for the marketing and promotion of
the Business Connect/Global Voice Registry service.
Reduction in Work Force
In August, 2001, we laid off nine employees: six in Corporate
Operations, and three in Sales and Marketing. Among those laid off was our Vice
President of Corporate Operations, William D. Sprague.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit Description
3.1 Certificate of Amendment.
10.1 Professional Services and Development Contract No. 1000003770 by and
between Preferred Voice, Inc. and VeriSign, Inc.
10.2+ Patent License Agreement by and between Preferred Voice, Inc. and
KoninklijkePhilips Electronic, N.V.
+ Confidential material deleted and filed separately with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
None.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED VOICE, INC.
November 19, 2001 /s/ G. Ray Miller
- -------------------------------- --------------------------------------
Date G. Ray Miller
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
November 19, 2001 /s/ Mary G. Merritt
- -------------------------------- --------------------------------------
Date Mary G. Merritt
Secretary, Treasurer and Vice President
of Finance
(Principal Financial Officer)
28
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 21, 2001
Preferred Voice, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 033-92894 75-2440201
- -------------------------------- --------------------------- -------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation Identification No.)
6500 Greenville Avenue, Suite 800, Dallas, Texas 75206
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 265-9580
-----------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed from last report)
Item 5. Other Events.
On November 21, 2001, Preferred Voice, Inc., a Delaware corporation,
(the "Company") completed the sale of 2,400,000 units (the "Units") consisting
of one (1) share of the common stock (the "Common Stock") of the Company and one
(1) warrant (the "Warrant") to purchase one half (1/2) of a share of Common
Stock. The Units were sold at a purchase price of $1.25 per Unit for an
aggregate of $3 million (the "Purchase Price"). The Units were sold pursuant to
a subscription agreement (the "Subscription Agreement") with the purchasers of
the Units. The Subscription Agreement provides for a downward adjustment of the
Purchase Price, subject to certain exceptions, if the Company sells, or agrees
to sell, securities of the Company at a purchase price (or with a conversion or
exercise price) less than the Purchase Price within twelve months of the
closing. The Warrants are governed by the terms of a warrant certificate (the
"Warrant Certificate") and are exercisable for 5 years at an exercise price of
$1.50 per share of Common Stock, subject to certain adjustments.
T.R. Winston & Company Incorporated received an aggregate of ten
percent (10%) of $1.7 million of the proceeds of the offering as a commission
payable to them in cash for serving as placement agents on behalf of the Company
for that portion of the offering.
The offering of such securities was not registered under the Securities
Act of 1933, as amended, (the "Securities Act") pursuant to Regulation D. Such
securities may not be reoffered or resold absent registration under the
Securities Act or pursuant to an applicable exemption from such registration
requirements. The Company has agreed to file a registration statement to
register the resale of the Common Stock and the shares issuable upon exercise of
the Warrants as promptly as reasonably practicable after November 21, 2001,
which date is the closing of the offering. If such registration statement is not
declared effective by the Securities and Exchange Commission ("SEC") within 90
days, and the Company has failed to (i) file the initial registration statement
within 20 business days of the closing of the offering or (ii) respond to any
request by the SEC within 5 business days of its receipt by the Company, the
Company will be obligated to pay to each subscriber in cash an amount equal to
2% of the aggregate purchase price paid by such subscriber for the Units for
each month that the registration statement is not effective beyond such 90 day
period. However, the Company will not be subject to the foregoing liquidated
damages if the failure of the registration statement to be declared effective is
attributable primarily to the subscriber's breach of certain covenants set forth
in the Subscription Agreement.
The foregoing summary of the sale of the Units is not intended to be
complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of the Subscription Agreement and the Warrant Certificate,
a copy of each of which is filed as an exhibit to this Current Report on Form
8-K.
2
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
10.1 Form of Subscription Agreement, by and between
Preferred Voice, Inc. and certain signatories
thereto.
10.2* Form of Warrant Certificate, issued by Preferred
Voice, Inc. pursuant to the Subscription Agreement
attached hereto as Exhibit 10.1.
* Incorporated by reference to Exhibit 10.2 to the Company's Current Report
on Form 8-K, filed with the SEC on April 11, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PREFERRED VOICE, INC.
Dated as of November 21, 2001 By: /s/ Mary Merritt
---------------------------------
Mary Merritt, Vice President
3