-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MYJ+j8WOAtPd7dl8o9fb/S+hyJRRQfVBpTtdPwXVqLciOJEPtwpZ3OHqyC53MVcO zdQO6Wy2nMGucxtjN0Ecpw== 0000950144-97-009233.txt : 19970815 0000950144-97-009233.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950144-97-009233 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREFERRED NETWORKS INC CENTRAL INDEX KEY: 0000893335 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 581954892 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27658 FILM NUMBER: 97662480 BUSINESS ADDRESS: STREET 1: 5300 OAKBROOK PARKWAY STREET 2: SUITE 320 CITY: ATLANTA STATE: GA ZIP: 30093 BUSINESS PHONE: 7708066970 MAIL ADDRESS: STREET 1: 5300 OAKBROOK PKWY STREET 2: STE 320 CITY: NORCROSS STATE: GA ZIP: 30093 10-Q 1 PREFERRED NETWORKS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1997 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: 0-27658 PREFERRED NETWORKS, INC. (Exact name of Registrant as Specified in its Charter) GEORGIA 58-1954892 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 850 Center Way, Norcross, GA 30071 (Address of principal executive offices) (Zip Code) (770) 582-3500 (Registrant's telephone number including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last year) 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 such shorter period 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 ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 16,193,534 shares of common stock, no par value, as of August 11, 1997. 2 PREFERRED NETWORKS, INC. INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NUMBER ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets, June 30, 1997 (Unaudited) and December 31, 1996..................................... 3 Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 1997 and 1996 4 (Unaudited)........................................................... Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 1997 5 (Unaudited)........................................................... Condensed Consolidated Statements of Cash Flows for the three months and six months ended June 30, 1997 and 1996 (Unaudited) ....... 6 Notes to Condensed Consolidated Financial Statements (Unaudited) ..... 7 Item 2. Management's Discussion and Analysis of Financial Condition .......... and Results of Operations............................................. 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................................... 17 Item 2. Changes in Securities................................................. 17 Item 3. Defaults under Senior Securities...................................... 17 Item 4. Submission of Matters to a Vote of Security Holders................... 17 Item 5. Other Information..................................................... 18 Item 6. Exhibits and Reports on Form 8-K...................................... 18 Signatures............................................................ 20
2 3 PREFERRED NETWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1997 1996 ------------- ------------ (UNAUDITED) ASSETS Current assets Cash and cash equivalents...................................... $ 12,919,194 $ 21,645,354 Accounts receivable, net....................................... 4,640,482 2,909,379 Inventory...................................................... 4,549,728 5,630,478 Prepaid expenses and other current assets...................... 845,785 540,190 ------------- ------------ Total current assets......................................... 22,955,189 30,725,401 Property and equipment, net....................................... 26,955,259 21,559,407 Goodwill, net..................................................... 13,710,139 5,779,321 FCC licenses, net................................................. 9,876,532 4,601,792 Other assets, net................................................. 2,869,971 3,459,416 ============ ============ $ 76,367,090 $ 66,125,337 ============ ============ LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable............................................... $ 4,874,965 $ 5,017,467 Accrued liabilities............................................ 1,313,544 2,878,573 Accrued salaries............................................... 686,818 621,493 Current portion of notes payable and capital lease obligations. 1,759,812 995,164 ------------ ------------ Total current liabilities.................................... 8,635,139 9,512,697 Notes payable and capital lease obligations, less current portion. 16,667,167 16,029,652 Class A Redeemable Preferred Stock, no par value, $1.50 per share redemption price; 13,500,000 shares authorized in 1997, 10,000,000 shares issued and outstanding in 1997 .............. 12,977,666 - ------------ ------------ Total liabilities and Redeemable Preferred Stock............. 38,279,972 25,542,349 Stockholders' equity Preferred stock, no par value, 30,000,000 shares authorized in 1997, 10,000,000 shares issued and outstanding in 1997 ...... - - Preferred stock, $.01 par value, 5,000,000 shares authorized in 1996, none issued and outstanding in 1996 ................ - - Common Stock, no par value, 100,000,000 shares authorized in 1997, 16,193,534 shares issued and outstanding in 1997 ... 61,680,039 - Common Stock, $.0001 par value, 70,000,000 shares authorized in 1996, 15,290,921 shares issued and outstanding in 1996 ... - 1,529 Additional paid-in capital on $.0001 par value Common Stock ... - 56,312,399 Common Stock Purchase Warrants ................................ 1,930,963 - Accretion on Class A Redeemable Preferred Stock ............... (34,769) - Accumulated deficit............................................ (25,489,115) (15,730,940) ------------ ------------ 38,087,118 40,582,988 ------------ ------------ $ 76,367,090 $ 66,125,337 ============ ============
See notes to condensed consolidated financial statements. 3 4 PREFERRED NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- -------------------------------- 1997 1996 1997 1996 -------------- --------------- -------------- ------------- Revenues Network services....................................... $ 3,250,921 $ 1,444,850 $ 5,816,509 $ 2,744,046 Product sales.......................................... 3,473,108 1,049,797 6,406,433 2,086,177 Other services......................................... 2,864,809 - 5,482,247 32,957 -------------- ------------ ------------ ------------ Total revenues .................................... 9,588,838 2,494,647 17,705,189 4,863,180 Costs of revenues Network services....................................... 2,195,442 946,521 4,103,650 1,688,080 Product sales.......................................... 3,558,806 1,307,720 6,638,724 2,668,719 Other services......................................... 2,358,656 - 4,384,817 - -------------- ------------ ------------ ------------ Total costs of revenues ........................... 8,112,904 2,254,241 15,127,191 4,356,799 -------------- ------------ ------------ ------------ Gross margin ............................................. 1,475,934 240,406 2,577,998 506,381 Selling, general and administrative expenses.............. 4,127,679 1,680,135 8,219,955 3,139,846 Depreciation and amortization............................. 1,803,814 399,325 3,449,716 762,701 Other expenses ........................................... 277,707 - 277,707 - -------------- ------------ ------------ ------------ Operating loss..................................... (4,733,266) (1,839,054) (9,369,380) (3,396,166) Interest expense.......................................... (379,587) (13,237) (606,383) (155,182) Interest income........................................... 79,152 374,363 217,588 572,660 -------------- ------------ ------------ ------------ Net loss........................................... (5,033,701) (1,477,928) (9,758,175) (2,978,688) Accretion of Redeemable Preferred Stock.................... (34,769) - (34,769) (1,121,316) Redeemable Preferred Stock dividend requirements.......... (58,333) - (58,333) (353,651) -------------- ------------ ------------ ------------ Net loss attributable to Common Stock.............. $ (5,126,803) $ (1,477,928) $ (9,851,277) $ (4,453,655) ============== ============ ============ ============ Net loss per share of Common Stock........................ $ (.32) $ (.10) $ (.62) $ (.28) ============== ============ ============ ============ Weighted average number of common shares used in calculating net loss per share of Common Stock........................................... 16,148,065 14,417,732 16,004,034 12,679,831 ============== ============ ============ ============
See notes to condensed consolidated financial statements. 4 5 PREFERRED NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
COMMON COMMON ACCRETION OF STOCK ADDITIONAL COMMON STOCK REDEEMABLE ($.0001 PAID-IN STOCK PURCHASE PREFERRED ACCUMULATED PAR) CAPITAL (NO PAR) WARRANTS STOCK DEFICIT TOTAL ------- ---------- ----------- ------------ ------------ ------------ ----------- Balance at December 31, 1996...... $1,529 $56,312,399 $ - $ - $ - $(15,730,940) $40,582,988 Corporate reincorporation ........(1,529) (56,312,399) 56,313,928 - Issuance of 828,613 shares of Common Stock pursuant to acquisitions...... - - 5,179,989 - - - 5,179,989 Issuance of 74,000 shares of Common Stock pursuant to Directors' Restricted Stock Award Plan..... - - 95,703 - - - 95,703 Issuance of Common Stock Purchase Warrants............. - - 1,930,963 - - 1,930,963 Non-cash stock option compensation......... - - 148,752 - - - 148,752 Accretion of Class A Redeemable Preferred Stock...... - - - - (34,769) - (34,769) Undeclared dividends on Class A Redeemable Preferred Stock ..... - - (58,333) - - - (58,333) Net loss............... - - - - - (9,758,175) (9,758,175) ------ ----------- ----------- ---------- -------- ------------ ----------- Balance at June 30, 1997.. $ - $ - $61,680,039 $1,930,963 $(34,769) $(25,489,115) $38,087,118 ====== =========== =========== ========== ======== ============ ===========
See notes to condensed consolidated financial statements. 5 6 PREFERRED NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------------------------- 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss ............................................................ $(9,758,175) $(2,978,688) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................................... 3,449,716 762,701 Bad debt expense.................................................. 265,695 101,087 Stock option and restricted stock grant compensation expense...... 244,455 14,666 Changes in operating assets and liabilities: Accounts receivable............................................. (1,567,252) (30,479) Inventory....................................................... 1,444,981 (350,941) Prepaid expenses and other assets............................... (280,328) 81,557 Accounts payable................................................ (860,133) 1,214,808 Accrued liabilities............................................. (184,864) (192,542) Accrued salaries................................................ 65,325 415,953 ----------- ----------- Net cash used in operating activities................................ (7,180,580) (961,878) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment............................................... (3,734,426) (3,076,367) Purchases of other assets and FCC licenses........................... (762,900) (1,573,848) Payment for acquisitions, net of cash acquired....................... (10,629,768) - ----------- ----------- Net cash used in investing activities................................ (15,127,094) (4,650,215) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings............................................. 10,000,000 - Payments of borrowings............................................... (1,234,002) (5,748,316) Net proceeds from initial public offering of Common Stock............ - 31,160,709 Net proceeds from issuance of Redeemable Preferred Stock ............ 2,884,553 - Net proceeds from issuance of Common Stock Purchase Warrants......... 1,930,963 - Payment of Redeemable Convertible Preferred Stock dividends.......... - (176,149) Issuance of Common Stock upon exercise of stock options.............. - 5,626 ----------- ----------- Net cash provided by financing activities............................ 13,581,514 25,241,870 ----------- ----------- Net increase in cash and cash equivalents............................ (8,726,160) 19,629,777 Cash and cash equivalents, beginning of period....................... 21,645,354 9,311,379 ----------- ----------- Cash and cash equivalents, end of period............................. $12,919,194 $28,941,156 =========== ===========
See notes to condensed consolidated financial statements. 6 7 PREFERRED NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. THE COMPANY Preferred Networks, Inc. (the "Company") provides outsourcing services to the wireless industry. The Company commenced operations in 1991 as a carrier's carrier of one-way paging networks, whereby the Company's customers purchase wholesale network services and resell the services to their subscribers. During the second half of 1996, the Company began to broaden its service offerings and expand its customer base through two acquisitions of businesses which provide non-network services. In July 1996, the Company acquired Preferred Technical Services, Inc. ("PTS"), a provider of paging network equipment installation, maintenance and engineering services. In December 1996, the Company acquired EPS Wireless, Inc. ("EPS"), a national provider of paging and cellular product repair services, sales of new, used and refurbished paging and cellular products and inventory management services. In June 1997, pursuant to a merger into a wholly-owned shell subsidiary, the Company reincorporated from Delaware to Georgia, increased the amount of its authorized Common Stock and Preferred Stock and provided that all of its stock was without par value. The Company has formed wholly-owned subsidiaries and limited liability companies to execute certain business transactions. All significant intercompany activity has been eliminated. 2. BASIS FOR PRESENTATION The interim condensed consolidated financial information contained herein has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and include in the opinion of management, all adjustments, which are of a normal recurring nature necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. These financial statements and related notes should be read in conjunction with the financial statements and notes as of December 31, 1996, included in the Company's Annual Report on Form 10-K (File No. 0-27658). Results of operations for the periods presented herein are not necessarily indicative of results to be expected for the full year or any other interim period. 3. SUPPLEMENTAL CASH FLOW INFORMATION Cash and cash equivalents include investments in money market instruments, which are carried at fair market value. Cash payments made for interest during the six months ended June 30, 1997 and 1996, were approximately $823,000 and $111,000, respectively. There were no significant federal or state income taxes paid or refunded for the six months ended June 30, 1997 and 1996. 4. INITIAL PUBLIC OFFERING (IPO) On March 1, 1996, the Company issued 3,300,000 shares of Common Stock in a public offering. The Company received net proceeds before offering expenses of $30.7 million. In addition, on March 28, 1996, the underwriters exercised their over-allotment option to purchase an additional 148,000 shares of Common Stock and the Company received additional net proceeds of $1.4 million. Pursuant to their terms, upon consummation of the IPO all outstanding shares of Series A Redeemable Convertible Preferred Stock (the "Series A") and Series B Redeemable Convertible Preferred Stock (the "Series B") automatically converted into Common Stock. The Company elected to pay accrued dividends on the Series B through January 31, 1996, in shares of Common Stock and the remainder of the accrued dividends from February 1 to March 1, 1996, in the amount of $176,000 in cash. The total number of shares of Common Stock 7 8 PREFERRED NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 4. INITIAL PUBLIC OFFERING (IPO)-(CONTINUED) issued upon such conversion and such dividend payment was 6,860,280 shares. All accretion previously accrued was eliminated upon conversion to shares of Common Stock. Approximately $5.6 million of the proceeds of the IPO was used to repay all debt then outstanding and the balance was used to fund network expansion, acquisitions, and operations. 5. LOAN AGREEMENTS The Company has a secured credit facility for $12.0 million of vendor financing bearing interest at a five-year U.S. Treasury rate plus 6.5% payable in various monthly installments of principal and interest over 60 months, with maturity dates through 2001. This credit facility contains various conditions, financial covenants and restrictions and is secured by paging equipment. As of June 30, 1997, there was $4.7 million outstanding under this facility with an additional $7.3 million available. The Company also has a $5.0 million credit facility to finance paging system equipment from a finance company bearing interest at 10% payable in various monthly installments of principal and interest over 60 months, with maturity dates through 2002. This credit facility contains various conditions, financial covenants and restrictions and is secured by paging equipment. As of June 30, 1997, there was $4.0 million outstanding under this facility with an additional $500,000 available. The Company has a $9.25 million revolving credit facility with a financial institution, the majority of which is to be used to finance paging network acquisitions and capital expenditures. The outstanding balance under this facility bears interest at a rate of prime plus 1% or at a rate of LIBOR plus 3.75%, at the Company's option. Interest only is payable monthly in arrears with the entire principal due in full in August 1998. Borrowings under this facility and the other two credit facilities are secured by substantially all the assets of the Company. This credit facility contains various conditions, financial covenants and restrictions related to debt service, minimum net worth, acquisitions and future requirements for raising $5.0 million in additional subordinated debt or equity capital by the end of January 1998, among other things. Availability under this facility is based on a multiple of the positive EBITDA (defined below) in certain markets. As of June 30, 1997, there was $9.25 million outstanding under this facility with no additional availability. 6. LOSS PER SHARE Net loss per share was computed using the requirements of Accounting Principles Board Opinion No. 15 and SEC Staff Accounting Bulletin No. 83 and as such equals the net loss increased by accretion on the Class A Redeemable Preferred Stock (see Note 8) and the portion of accretion of the Series A which relates to shares which are not considered as cheap stock, as defined below, and the dividends on the Class A Redeemable Preferred Stock and the Series B divided by the weighted average number of shares of Common Stock outstanding, plus cheap stock as defined below up to the March 1, 1996 closing date of the IPO. The calculation excludes any antidilutive shares during the period, other than cheap stock. Pursuant to SEC Staff Accounting Bulletin No. 83, common stock and common stock equivalents (including preferred stock) issued at prices equal to or below the IPO price per share ("cheap stock") during the twelve-month period immediately preceding the initial filing date of the Company's registration statement for the IPO have been included as if outstanding for all periods presented, up until the March 1, 1996 closing date for the IPO (using the treasury stock method at the IPO price) even though the effect is to reduce the loss per share. A portion of the Series A, all of the Series B and certain of the stock options and warrants have been treated as cheap stock. The computation of fully diluted net loss per share of Common Stock was antidilutive in each of the periods presented; therefore the amounts reported for primary and fully diluted are the same. In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which generally simplifies the calculation of earnings per share. The Company will adopt the new accounting statement effective for the fourth quarter of 1997 and the effect is not expected to be material. 8 9 PREFERRED NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 7. ACQUISITIONS In September 1996, the Company acquired substantially all the assets of Big Apple Paging Corporation ("Big Apple") for $3.8 million. Of this amount, $1.4 million was paid in cash and $1.0 million was paid by the issuance of 125,598 shares of Company's Common Stock in September 1996. In January 1997, $1.1 million was paid by the issuance of 165,317 shares of Common Stock and $130,000 was paid in cash. In April 1997, the remaining $250,000 was paid in cash. The transaction was accounted for as a purchase as of September 13, 1996. Big Apple is a reseller-based paging carrier in the states of New York, New Jersey, and Connecticut, and this acquisition provided the Company with a base of customers upon opening its Northeast TCC. In December 1996, the Company acquired the stock of EPS Wireless, Inc. ("EPS") for approximately $4.8 million, and possible additional consideration of up to an additional $5.0 million in cash based on EPS's achievement of targeted operating performance during the two year period ending December 31, 1998. Of the purchase price, $4.5 million was paid by the issuance of 673,524 shares of Common Stock with the remainder of $300,000 paid in cash in February 1997. The transaction was accounted for as a purchase as of December 1, 1996 and the excess purchase price over the fair value of the assets acquired has been recorded as goodwill. Additional consideration, if any, will be recorded as goodwill. The Chairman of the Company was a minority stockholder and member of the Board of Directors of EPS prior to the acquisition. In January 1997, the Company acquired the stock of Mercury Paging & Communications, Inc. ("Mercury") and its affiliated companies for approximately $14.2 million of which approximately $10.3 million was paid in cash and the remainder by the issuance of 624,321 shares of Common Stock, 156,080 of which were held in escrow until April 1997 then released to the former Mercury shareholders after Mercury achieved certain revenue targets. Proceeds from the Company's revolving credit facility which were drawn in December 1996 were used to fund the majority of the cash portion of the purchase price, with working capital being used to fund the remainder. The transaction was accounted for as a purchase as of January 31, 1997. Mercury is a reseller-based paging carrier in the states of New York, New Jersey and Connecticut. Prior to closing, the Company earned revenues from Mercury under an agency agreement. In addition, in the second quarter of 1997 the Company purchased network assets and FCC licenses from two companies for a total purchase price of $100,000, paid by issuance of 38,975 shares of the Company's Common Stock. 8. ISSUANCE OF CLASS A REDEEMABLE PREFERRED STOCK AND COMMON STOCK PURCHASE WARRANTS On June 17, 1997, the Company issued to five of its shareholders and two affiliates of one of them (collectively, the "Investors") 10.0 million shares of Class A Redeemable Preferred Stock (the "Preferred Stock") which will accrue dividends at the rate of 10% per annum and warrants to purchase up to 11.5 million shares of Common Stock for a total purchase price of $15.0 million. The Preferred Stock may be redeemed at any time at the option of the Company at a price equal to $1.50 per share plus accrued dividends and if the holder so demands, five years from the date of issuance, the Preferred Stock must be redeemed by the Company at a price equal to $1.50 per share plus accrued dividends. Each warrant is exercisable for five years following the issuance of the Preferred Stock and entitles the holder to purchase one share of Common Stock for $1.50 per share subject to possible downward adjustment based on any private placement of the Company's Preferred or Common Stock. A portion of the warrants may be canceled by the Company in the event of an early redemption of all of the Preferred Stock. The Preferred Stock is recorded at cost, net of expenses, plus undeclared dividends and accretion. The Warrants are recorded at cost, net of expenses. In April 1997 and May 1997, the Company borrowed a total of $10.0 million from the Investors under a 10% bridge loan. The Company's indebtedness under the $10.0 million bridge loan was applied against the purchase price of the Preferred Stock. 9 10 PREFERRED NETWORKS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW In this section, the Company makes reference to "EBITDA" which represents earnings before interest expense, interest income, taxes, depreciation and amortization. EBITDA is a financial measure commonly used in the telecommunications industry and should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles ("GAAP")), as an alternative to cash flows from operating activities (as determined in accordance with GAAP), or as a measure of liquidity. The following table presents certain items in the Consolidated Statements of Operations as a percentage of total revenues for the three months and six months ended June 30, 1997 and 1996, respectively.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------- 1997 1996 1997 1996 ------- ------- ------- ------- Revenues Network services 33.9 % 57.9 % 32.9 % 56.4 % Product sales 36.2 42.1 36.2 42.9 Other services 29.9 - 30.9 0.7 ----- ----- ----- ----- Total revenues 100.0 100.0 100.0 100.0 Costs of revenues Network services 22.9 37.9 23.2 34.7 Product sales 37.1 52.5 37.5 54.9 Other services 24.6 - 24.7 - ----- ----- ----- ----- Total cost of revenues 84.6 90.4 85.4 89.6 ----- ----- ----- ----- Gross margin 15.4 9.6 14.6 10.4 Selling, general & administrative 43.0 67.3 46.4 64.5 Depreciation and amortization 18.8 16.0 19.5 15.7 Other 2.9 - 1.6 - ----- ----- ----- ----- Operating loss (49.3) (73.7) (52.9) (69.8) Interest expense (4.0) (0.5) (3.4) (3.2) Interest income 0.8 15.0 1.2 11.8 ----- ----- ----- ----- Net loss (52.5)% (59.2) % (55.1)% (61.2)% ===== ===== ===== ===== EBITDA (30.6)% (57.7) % (33.4)% (54.1)%
The table below provides information about the Company's units in service by customer type and average revenue per unit ("ARPU") for the six months ended June 30. ARPU is calculated by dividing pager airtime revenues for the month by the total units in service at month end. ARPU for periods greater than one month equals the average of the monthly ARPUs during the period.
JUNE 30, PERCENTAGE INCREASE (DECREASE) ------------------------ ------------------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Units in service Reseller units 317,386 143,273 121.5 % 93.4 % Co-location/interconnection units 107,605 45,228 137.9 288.8 -------- -------- Total 424,991 188,501 125.5 120.0 Units under agency agreement - 27,205 (100.0) - -------- -------- Total units 424,991 215,706 97.0 % 151.7 % ======== ======== ARPU $ 2.51 $ 2.60 (3.5)% (15.9)%
10 11 PREFERRED NETWORKS, INC. RESULTS OF OPERATIONS Total revenues increased $7.1 million, or 284.4%, to $9.6 million for the three-month period ended June 30, 1997, from $2.5 million for the three-month period ended June 30, 1996. Total revenues increased $12.8 million, or 264.1%, to $17.7 million for the six-month period ended June 30, 1997, from $4.9 million for the six-month period ended June 30, 1996. The Company operates networks in 23 markets as of June 30, 1997 as compared to only 15 markets as of June 30, 1996. Revenues from network services increased by $1.8 million, or 125.0%, to $3.3 million for the three-month period ended June 30, 1997, from $1.4 million for the three-month period ended June 30, 1996. Revenues from network services increased by $3.1 million, or 112.0%, to $5.8 million for the six-month period ended June 30, 1997, from $2.7 million for the six-month period ended June 30, 1996. Units in service increased by 236,490, or 125.5%, to 424,991 at June 30, 1997, from 188,501 at June 30, 1996. The increases in revenues from network services were attributable to the growth in units in service and the associated recurring revenue stream, which resulted from expansion into 8 new markets (New York, Chicago, Detroit, Boston, Albany NY, Richmond, Raleigh/Durham, and Charlotte), continued growth in existing markets and from the acquisition of substantially all of the paging assets of Big Apple Paging Corporation ("Big Apple") and the acquisition of Mercury Paging & Communications, Inc. and its affiliated companies ("Mercury"). The growth in units in service was offset in part by declining ARPU due to competitive pricing pressures in the industry, a continued shift to co-location/interconnection customers which were 25.3% of total units in service as of June 30, 1997 up from 24.0% as of June 30, 1996, and to a lesser extent, unit volume and airtime usage discounts. Co-location and interconnection customers generate lower ARPU to the Company because certain operating expenses customarily incurred by the Company are borne by the customer. Revenues from product sales increased $2.4 million, or 230.8%, to $3.5 million for the three-month period ended June 30, 1997 from $1.0 million for the three-month period ended June 30, 1996. Revenues from product sales increased $4.3 million, or 207.1%, to $6.4 million for the six-month period ended June 30, 1997 from $2.1 million for the six-month period ended June 30, 1996. The majority of the increase results from revenues from the sourcing and sales of new, used and refurbished pager and cellular products by EPS Wireless, Inc. ("EPS"), which was acquired in December 1996. Other services revenues increased to $2.9 million for the three-month period ended June 30, 1997 from $0 for the three-month period ended June 30, 1996. Other services revenues increased to $5.5 million for the six-month period ended June 30, 1997 from $33,000 for the six-month period ended June 30, 1996. The increase was due to the revenues of Preferred Technical Services, Inc. ("PTS") (acquired by the Company in July 1996) from paging network equipment installation services, maintenance and engineering services and EPS's revenues associated with repair and refurbishment of pager and cellular products and inventory management. Cost of network services increased by $1.2 million, or 131.9%, to $2.2 million for the three-month period ended June 30, 1997, from $947,000 for the three-month period ended June 30, 1996. Cost of network services increased by $2.4 million, or 143.1%, to $4.1 million for the six-month period ended June 30, 1997, from $1.7 million for the six-month period ended June 30, 1996. The increase was primarily attributable to the expansion into 8 new markets and the increased number of units in service. Cost of network services as a percentage of network services revenues was 67.5% and 70.6% for the three-month and six-month periods ended June 30, 1997 compared to 65.5% and 61.5% for the three-month and six-month periods ended June 30, 1996, reflecting lower ARPU and expansion into new markets where there are currently fewer units in service producing revenue, although the market bears fully-loaded network cost. Cost of product sales increased by $2.3 million, or 172.1%, to $3.6 million for the three-month period ended June 30, 1997, from $1.3 million for the three-month period ended June 30, 1996. Cost of product sales increased by $4.0 million, or 148.8%, to $6.6 million for the six-month period ended June 30, 1997, from $2.7 million for the six-month period ended June 30, 1996. The increases were due primarily to the cost of sourcing and sales of new, used and refurbished pager and cellular products by EPS and to a lesser extent due to costs of pager sales associated with network airtime. Cost of product sales as a percentage of product sales was 102.5% and 103.6% for the three-month and six-month periods ended June 30, 1997, compared to 124.6% and 127.9% for the three-month and six-month periods ended June 30, 1996. The decreases in the percentages were due to EPS's profits on product sales and decreased losses on pager sales associated with network airtime. Due to the competitive nature of pricing in the 11 12 PREFERRED NETWORKS, INC. industry, the overall loss on product sales reflects the Company's marketing programs whereby pagers are sold to resellers at a loss to attract customers to its networks. Cost of other services increased to $2.4 million for the three-month period ended June 30, 1997 from $0 for the three-month period ended June 30, 1996. Cost of other services increased to $4.4 million for the six-month period ended June 30, 1997 from $0 for the six-month period ended June 30, 1996. The increases were due to PTS's costs associated with paging network equipment installation services, maintenance and engineering services and EPS's costs associated with repair and refurbishment of pager and cellular products and inventory management. Cost of other services as a percentage of other services revenues was 82.3% and 80.0% for the three-month and six-month periods ended June 30, 1997. SG&A increased by $2.4 million, or 145.7%, to $4.1 million for the three-month period ended June 30, 1997, from $1.7 million for the three-month period ended June 30, 1996, but decreased as a percentage of total revenues to 43.0% for the three-month period ended June 30, 1997, from 67.3% for the three-month period ended June 30, 1996. SG&A increased by $5.1 million, or 161.8%, to $8.2 million for the six-month period ended June 30, 1997, from $3.1 million for the six-month period ended June 30, 1996, but decreased as a percentage of total revenues to 46.4% for the six-month period ended June 30, 1997, from 64.5% for the six-month period ended June 30, 1996. The increase in dollars reflects additional sales and administrative cost to support the increasing number of customers and expansion into new markets associated with the Company's network services, and the additional personnel and other SG&A costs associated with PTS and EPS. Depreciation and amortization increased by $1.4 million, or 351.7%, to $1.8 million for the three-month period ended June 30, 1997, from $399,000 for the three-month period ended June 30, 1996. Depreciation and amortization increased by $2.7 million, or 352.3%, to $3.4 million for the six-month period ended June 30, 1997, from $763,000 for the six-month period ended June 30, 1996. The increases were primarily due to additional assets purchased or constructed for expansion into new markets, increased amortization of market entry costs as new markets begin to generate revenues and amortization of goodwill related to the acquisition of EPS and PTS. Depreciation and amortization increased as a percentage of total revenues to 18.8% and 19.5% for the three-month and six-month periods ended June 30, 1997, from 16.0% and 15.7% for the three-month and six-month periods ended June 30, 1996. Other expenses were $278,000 for the three-month and six-month periods ended June 30, 1997, up from $0 for the three-month and six-month periods ended June 30, 1996 and represent certain non-recurring severance expenses. The Company took certain cost reduction measures primarily in the area of SG&A through employee terminations. As a part of the reduction in force, the Company modified the terms of the terminated employees' stock options to purchase 187,143 shares of Common Stock, to immediately fully vest these options, and to extend the exercise period that the employees have to exercise the options. These changes resulted in $138,000 of severance costs which are included in the severance cost amount described above. In addition, the Company canceled certain of the outstanding stock options granted to the Company's remaining employees, covering in the aggregate options to purchase 485,493 shares of Common Stock with exercise prices ranging from $2.87 to $10.61 per share and regranted an identical number of options at the then current market price of $2.50 per share. The newly granted options vest annually in equal amounts over a three year period beginning with the 1997 date of grant. Interest expense increased $366,000, or 2767.7%, to $380,000 for the three-month period ended June 30, 1997, from $13,000 for the three-month period ended June 30, 1996. Interest expense increased $451,000, or 290.8%, to $606,000 for the six-month period ended June 30, 1997, from $155,000 for the six-month period ended June 30, 1996. The increases were due to the financing of the network buildout and borrowings related to the acquisition of Mercury on January 31, 1997. Also contributing to the increase was the repayment of all outstanding debt with a portion of the proceeds of the IPO in March 1996 resulting in lower debt outstanding in 1996, and the $10,000,000 bridge loan for the Class A Redeemable Preferred Stock offering which was outstanding in the second quarter of 1997. Interest income decreased $295,000, or 78.9%, to $79,000 for the three-month period ended June 30, 1997, from $374,000 for the three-month period ended June 30, 1996. Interest income decreased $355,000, or 62.0%, to $218,000 for the six-month period ended June 30, 1997, from $573,000 for the six-month period ended June 30, 1996. The decreases are due to the higher level of funds available for investment in 1996 due to the proceeds of the IPO, which was consummated in March 1996. 12 13 PREFERRED NETWORKS, INC. Net loss for the three-month period ended June 30, 1997, as compared with the three-month period ended June 30, 1996, increased to $5.0 million from $1.5 million. Net loss for the six-month period ended June 30, 1997, as compared with the six-month period ended June 30, 1996, increased to $9.8 million from $3.0 million. The increase was primarily due to substantial increases in SG&A, as described above. The net loss per share of Common Stock for the three-month period ended June 30, 1997 increased to ($.32) from ($.10) for the same three month period ended in 1996. The net loss per share of Common Stock for the six-month period ended June 30, 1997 increased to ($.62) from ($.28) for the same six-month period ended in 1996. The increase in net loss per share was due to the increased net loss attributable to common stockholders in 1997 as compared to 1996 offset by the increased number of shares outstanding due to shares issued for acquisitions. Weighted average shares outstanding includes cheap stock until the IPO date. LIQUIDITY AND CAPITAL RESOURCES The Company's expansion strategy will continue to require substantial funds to finance the expansion of existing operations, the expansion into new markets as part of the nationwide build-out of its networks, the purchase of network assets and related FCC licenses, capital expenditures, debt service and general corporate purposes. The Company has augmented its wide-area 157.740 MHz networks by purchasing and consolidating existing local network assets licensed on the 150 MHz, 450 MHz and 900 MHz frequency bands to offer new geographical markets, additional capacity and flexibility to its customers. As of June 30, 1997, the Company was operating in 23 markets with 6 Technical Control Centers (TCC's) in operation and was constructing networks in 29 new markets, including a TCC in Southern California and network expansions into Denver, Seattle, San Francisco, Los Angeles, Cleveland, Indianapolis, and Minneapolis. The Company has two secured credit facilities totaling $17.0 million. As of June 30, 1997, there was $8.7 million outstanding under these facilities with an additional $7.8 million available for additional paging network equipment purchases. The Company also has a $9.25 million secured revolving credit facility with a financial institution, the majority of which is to be used to finance paging network acquisitions and capital expenditures. This credit facility contains various conditions, financial covenants and restrictions related to debt service, minimum net worth, acquisitions and future requirements for raising $5.0 million additional subordinated debt or equity capital by the end of January 1998, among other things. The Company has no commitment for these additional funds. If additional funds of $5.0 million are not obtained by the end of January 1998, the Company would be required to seek an amendment to its debt covenants or refinance its revolving credit facility and the failure to obtain such additional funds, absent an amendment or refinancing, would have a material adverse effect on the Company. Availability under this facility is based on a multiple of the positive EBITDA in certain markets. As of June 30, 1997, there was $9.25 million outstanding under this facility with no additional availability. The revolving credit facility matures in August 1998. In June 1997, the Company issued 10.0 million shares of Class A Redeemable Preferred Stock (the "Preferred Stock") which will accrue dividends at a rate of 10% per annum and warrants to purchase up to 11.5 million shares of Common Stock to five of its shareholders and two affiliates of one of them (collectively, the "Investors") for a total purchase price of $15.0 million. In April 1997 and May 1997, the Company borrowed a total of $10.0 million from the Investors under a 10% bridge loan. The Company's indebtedness under the $10.0 million bridge loan was applied against the purchase price of the Preferred Stock. As of June 30, 1997, the Company had $11.3 million invested in short-term investment grade securities at various interest rates. Management believes that cash and cash equivalents on hand as of June 30, 1997, together with availability under the secured credit facilities mentioned above, will be sufficient to meet the Company's working capital, capital expenditure and debt covenant requirements until January 1998 without obtaining additional financing. In addition to the $5.0 million required to be raised per certain debt agreements, the Company will need to seek financing to satisfy the $9.25 million debt maturity in August 1998 and may need additional funds in the form of equity, bank debt, or other debt financing to funds its operations or network expansion. The Company has no commitment for any refinancing or additional funds, and no assurances can be given that such additional refinancing or funds will be available on terms acceptable to the Company, if at all; the failure to obtain such funds 13 14 PREFERRED NETWORKS, INC. could have a material adverse effect on the Company. In addition, future acquisitions of paging network assets and licenses or other assets or businesses or other events may change the Company's capital requirements. The market price of the Common Stock is likely to be highly volatile. Factors such as delays by the Company in achieving its expansion goals, fluctuations in the Company's operating results, announcements of new services offered by the Company or its competitors, changes in earnings estimates of securities analysts, regulatory changes and general market conditions, among other things, could cause the market price of the Common Stock to fluctuate substantially. Such market fluctuations could adversely affect the market price for the Common Stock. ACQUISITIONS In September 1996, the Company completed the acquisition of substantially all the assets of Big Apple Paging Corporation ("Big Apple") for $3.8 million. Of this amount, $1.4 million was paid in cash in 1996, $1.0 million was paid by the issuance of 125,598 shares of Common Stock in 1996, $1.1 million was paid in January 1997 by the issuance of 165,317 shares of Common Stock, an additional $130,000 was paid in cash in first quarter of 1997 and $250,000 was paid in cash in April 1997. The transaction was accounted for as a purchase as of September 13, 1996. Big Apple was a reseller-based paging carrier in the states of New York, New Jersey, and Connecticut. Prior to closing, the Company earned revenues from Big Apple under an agency agreement. The purchase of Big Apple provided the Company with a base of customers upon opening its Northeast TCC. In December 1996, the Company acquired the stock of EPS Wireless, Inc. ("EPS") for approximately $4.8 million and possible additional consideration of up to an additional $5.0 million based on EPS's achievement of targeted operating performance during the two year period ending December 31, 1998. The Company issued 673,524 shares of Common Stock in 1996 and paid $300,000 in cash in February 1997. The transaction was accounted for as a purchase as of December 1, 1996. Additional consideration, if any, will be recorded as goodwill. EPS repairs or sells more than 70,000 product units per month. The acquisition of EPS expanded the Company's revenue sources to include paging companies that do not currently buy network services from the Company due to geography or frequency and also expands the Company's customer base to include cellular companies. EPS also provides the Company with a source of lower-cost pager products. In January 1997, the Company acquired the stock of Mercury Paging & Communications, Inc. ("Mercury") and its affiliated companies for approximately $14.2 million of which approximately $10.3 million was paid in cash and $3.9 million by the issuance of 624,321 shares of Common Stock, 156,080 of which were held in escrow until April 1997 then released to the former Mercury shareholders after Mercury achieved certain revenue targets. Proceeds from the Company's revolving credit facility which were drawn in December 1996 were used to fund the majority of the cash portion of the purchase price, with working capital being used to fund the remainder. Mercury is a reseller-based paging carrier in the states of New York, New Jersey and Connecticut. Prior to closing, the Company earned revenues from Mercury under an agency agreement. In addition, in the second quarter of 1997 the Company purchased network assets and FCC licenses from two companies for a total purchase price of $100,000, paid by issuance of 38,975 shares of the Company's Common Stock. FCC MATTERS On February 19, 1997, the Federal Communications Commission (the "Commission" or the "FCC") adopted a Second Report and Order (the "Paging Second Report and Order") and Further Notice of Proposed Rulemaking (the "Further Notice") in which it declined to convert the non-exclusive Private Carrier Paging ("PCP") frequencies, including the 157.740 MHz frequency, to exclusive use frequencies. The Further Notice, however, seeks additional guidance in connection with the continued licensing procedure of the non-exclusive PCP channels. The Commission is concerned, in light of its decision to license the exclusive paging channels on a geographic basis by competitive bidding, that there is a potential for application fraud by telemarketers for the non-exclusive PCP frequencies. It, therefore, seeks comment on what methods could be used to eliminate or reduce the problem. Primarily, the Commission proposes to modify the application form, but also asks whether the frequency coordination process could be modified to reduce the fraudulent or speculative applications. The Commission also ordered that all non-mutually exclusive applications filed with the Commission on or before July 31, 1996 will be processed. All mutually exclusive applications which are pending regardless of when filed will be dismissed. All applications (other than applications on nationwide and shared channels) filed after July 31, 1996 will be dismissed. Finally, during the pendency of the Further Notice, the Interim Licensing Procedure for the 14 15 PREFERRED NETWORKS, INC. non-exclusive PCP channels will continue for incumbent licensees only allowing those incumbents to file for additional licenses anywhere. The Commission also will accept applications from new applicants for private, internal-use systems on the non-exclusive PCP channels, including the 157.740 MHz frequency. The Company, therefore, believes that its applications currently on file with the FCC, including its three applications with associated waiver requests, should be processed. Since May 12, 1997, the Company has been able to file applications for new sites to use the non-exclusive PCP channels, including the 157.740 MHz frequency. In addition, the Commission excluded PCP channels from being licensed on a geographic basis and declined to subject the non-exclusive PCP frequencies, including the 157.740 MHz frequency, to the competitive bidding process. The Company, therefore, will not be required to participate in a competitive bidding process to expand its paging systems operating on the 157.740 MHz frequency. The Commission, however, adopted a geographic licensing scheme and implemented a competitive bidding process for the exclusive RCC and PCP channels. Specifically, the FCC adopted geographic licensing for all 931 MHz and all exclusive 929 PCP paging channels based on Rand McNally's Major Trading Areas ("MTAs"). Licenses below 929 MHz will be geographically licensed based on the Department of Commerce's 172 Economic Areas. The FCC also excluded from its plan those channels that already have been assigned to single licensees on a nationwide basis under existing FCC rules. Consequently, the Company may be unable to expand its service areas for its exclusive 931 MHz systems or its other RCC systems unless it participates in a competitive bidding process or it can reach an agreement with the geographic licensee. In the Further Notice, the FCC proposed to permit a geographic licensee to either desegregate its spectrum, i.e., assign a discrete portion or "block" of spectrum licensed to a geographic licensee, or partition its licensed area, or both. The Commission has adopted, or proposed, a similar approach in other Commercial Mobile Radio Services ("CMRS"), such as the broadband Personal Communications Services and the Specialized Mobile Radio Services. Adoption of the disaggregation and partitioning proposals would permit the Company to acquire licensing rights to expand its current exclusive RCC frequencies or further supplement its operation on 157.740 MHz through agreement with a geographic licensee without requiring participation in a competitive bidding process. There is no guarantee that the Commission will adopt this initiative. The FCC further concluded that each existing paging licensee will be allowed to either (i) continue operating under existing authorizations or (ii) trade in its site-specific licenses for a single system-wide license. Geographic licensees will be required to afford incumbent constructed and operational stations protection from interference within their service areas. In the 931 MHz and 929 MHz band, the Commission adopted the existing co-channel interference protection standards used with respect to the 931 MHz band. The Commission will continue to use the current co-channel interference protection formulas for the RCC channels below 931 MHz. No incumbent licensees will be allowed to modify or expand their systems beyond their composite interference contour without the consent of the geographic licensee (unless the incumbent licensee is itself the geographic licensee for the relevant channel). The Company, therefore, may continue to operate the systems as currently authorized and may make minor modifications to the systems, including adding new sites to supplement coverage within the current composite contours of the particular system. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are or will be forward-looking, such as statements relating to acquisitions, construction and other business development activities, future capital expenditures, sufficiency of funds, financing sources and availability, monthly savings, and the effects of laws and regulations (including FCC regulations) and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, uncertainties affecting the paging and wireless industries generally, risks relating to the Company's acquisition, construction and other business development activities, risks relating to technological change in the paging and wireless industries, risks relating to the ability of the Company to obtain additional funds in the form of debt or equity, risks relating to the ability to control expenses, risks relating to 15 16 PREFERRED NETWORKS, INC. the availability of transmitters, terminals, network project management services and network engineering support, fluctuations in interest rates, and the existence of and changes to federal and state laws and regulations. 16 17 PREFERRED NETWORKS, INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES. (a) In June 1997, pursuant to a merger ( the "Merger") of Preferred Networks, Inc., a Delaware corporation, into a wholly-owned shell subsidiary incorporated in Georgia, Preferred Networks, Inc. reincorporated from Delaware to Georgia, increased the amount of its authorized Common Stock from 70,000,000 to 100,000,000 shares, increased the amount of its authorized Preferred Stock from 5,000,000 to 30,000,000 shares, and provided that all of its stock was without par value. As a result of the Merger, the rights of the shareholders of the Company are determined under Georgia rather than Delaware law. (b) As a result of the Preferred Stock and Warrant Issuance, 10,000,000 shares of the Company's Class A Redeemable Preferred Stock are outstanding, which have dividend, voting, redemption and liquidation rights which in some respects are superior to those of the Common Stock. (c) On June 17, 1997, the Company issued 10,000,000 shares of Class A Redeemable Preferred Stock and warrants to purchase 11,500,000 shares of Common Stock to seven accredited investors for an aggregate consideration of $15,000,000 in cash, a portion of which was paid by the cancellation of the Company's indebtedness under a $10,000,000 bridge loan made to the Company by these investors in April and May 1997. The transaction was exempt from the Securities Act of 1933 by reason of Section 4(2) thereof and Regulation D promulgated thereunder. The warrants are exercisable for five years and entitle the holder to purchase one share of Common Stock for $1.50 per share, subject to possible downward adjustment based on any private placement of the Company's Preferred or Common Stock. A portion of the warrants may be canceled by the Company in the event of an early redemption of the Class A Redeemable Preferred Stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On June 16, 1997, the Company held its Annual Meeting of Shareholders. The following were the results of the meeting: (a) The shareholders approved the issuance of the Company's Class A Redeemable Preferred Stock and warrants to acquire Common Stock. Votes Cast For 11,601,416 Votes Cast Against 19,725 Abstentions/Broker Non-Votes 7,220 (b) The shareholders approved the Company's 1995 Stock Option Plan, as amended. Votes Cast For 11,507,692 Votes Cast Against 21,125 Abstentions/Broker Non-Votes 99,544 (c) The shareholders approved an Agreement and Plan of Merger between the Company and PNI Merger Corp., a Georgia corporation and wholly-owned subsidiary of the 17 18 PREFERRED NETWORKS, INC. Company, and the merger of the Company with and into PNI Merger Corp. for the principal purpose of reincorporating the Company in Georgia. Votes Cast For 11,499,981 Votes Cast Against 23,825 Abstentions/Broker Non-Votes 104,555 (d) The shareholders elected William H. Bang, John J. Hurley and Ronald W. White as Class I directors until the annual meeting of shareholders in 2000 or until their successors are elected and shall have qualified.
Bang Hurley White ---- ------ ----- Votes Cast For 13,464,994 13,464,994 13,464,994 Abstentions/Broker Non Votes 720 720 720
In addition to Messrs. Bang, Hurley and White, the terms of directors Mark H. Dunaway, Michael J. Saner, Jeffrey H. Schutz and Robert Van Degna (who are Class II and III directors) continued after the Company's 1997 annual meeting of the shareholders. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits:
Exhibit Number Description of Exhibits 3.1 Articles of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 10.1 Commitment Letter dated April 9, 1997 between the Company, Centennial Fund IV, L.P., Saugatuck Capital III, PNC Capital Corp., Fleet Equity Partners, and Primus Venture Fund III (2) 10.2 Class A Redeemable Preferred Stock Purchase Agreement dated as of May 21, 1997, by and among the Company and Centennial Fund IV, L.P., Saugatuck Capital Company Limited Partnership III, PNC Capital Corp., Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm Partners II, L.P. and Primus Capital Fund III Limited Partnership (3) 10.3 Form of Common Stock Purchase Warrant (3) 10.4 Agreement and Plan of Merger, dated May 21, 1997, by and between Preferred Networks, Inc. and PNI Merger Corp. (3)
--------------------------- (1) Filed on June 30, 1997, as an exhibit to Preferred Networks, Inc.'s Current Report on Form 8-K (file no. 0-27658) dated June 16, 1997 and incorporated by reference herein. (2) Filed on April 15, 1997, as an exhibit to Preferred Networks, Inc.'s Annual Report on Form 10-K (file no. 0-27658) for the year ended December 31, 1996 and incorporated by reference herein. (3) Filed on May 21, 1997, as an exhibit to Preferred Networks, Inc.'s Proxy Statement (file no. 0-27658) with respect to the 1997 annual meeting of shareholders and incorporated by reference herein. 18 19 PREFERRED NETWORKS, INC. 11.1 Computation of Net Loss Per Share 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K: During the quarter ended June 30, 1997, the Company filed three reports on Form 8-K: 1. On April 16, 1997, the Company filed a Current Report on Form 8-K/A dated January 31, 1997 with respect to the acquisition of Mercury Paging & Communications, Inc. and its affiliated companies. The following financial statements were filed as part of this report: The audited combined financial statements of Mercury Paging & Communications, Inc. and its affiliated companies as of and for the years ended December 31, 1996 and 1995. The unaudited pro forma condensed consolidated balance sheet of Preferred Networks, Inc. as of December 31, 1996 and the unaudited pro forma condensed consolidated statement of operations of Preferred Networks, Inc. for the year ended December 31, 1996. 2. On April 23, 1997, the Company filed a Current Report on Form 8-K dated April 14, 1997 reporting under Item 1 the potential change of control of the Company at a subsequent date resulting from the sale of Class A Redeemable Preferred Stock and warrants to certain of its shareholders. There were no financial statements filed as part of this report. 3. On June 30, 1997, the Company filed a Current Report on Form 8-K dated June 16, 1997 reporting under Item 1 the merger of Preferred Networks, Inc., a Delaware corporation ("Old PNI") into Preferred Networks, Inc., a Georgia corporation (the "Company") on June 16, 1997 and the issuance for $15.0 million of Class A Redeemable Preferred Stock of the Company and warrants with certain of its shareholders and two affiliates of one of them on June 17, 1997, and under Item 5 the approval of the shareholders of Old PNI of the reincorporation of Old PNI from Delaware to Georgia by means of a merger with the Company. There were no financial statements filed as part of this report. 19 20 PREFERRED NETWORKS, INC. 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 NETWORKS, INC. Date: August 14, 1997 By: /s/ Mark H. Dunaway -------------------------------- Mark H. Dunaway Chief Executive Officer Date: August 14, 1997 By: /s/ Michael J. Saner -------------------------------- Michael J. Saner President Date: August 14, 1997 By: /s/ Kathryn Loev Putnam -------------------------------- Kathryn Loev Putnam Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 20 21 PREFERRED NETWORKS, INC. INDEX TO EXHIBITS
Exhibit Sequentially Number Description Numbered Page - ------ ----------- ------------- 3.1 Articles of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 10.1 Commitment Letter dated April 9, 1997 between the Company, Centennial Fund IV, L.P., Saugatuck Capital III, PNC Capital Corp., Fleet Equity Partners, and Primus Venture Fund III (2) 10.2 Class A Redeemable Preferred Stock Purchase Agreement dated as of May 21, 1997, by and among the Company and Centennial Fund IV, L.P., Saugatuck Capital Company Limited Partnership III, PNC Capital Corp., Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm Partners II, L.P. and Primus Capital Fund III Limited Partnership (3) 10.3 Form of Common Stock Purchase Warrant (3) 10.4 Agreement and Plan of Merger, dated May 21, 1997, by and between Preferred Networks, Inc. and PNI Merger Corp. (3) 11.1 Computation of Net Loss Per Share 27 Financial Data Schedule (for SEC use only)
--------------------------- (1) Filed on June 30, 1997, as an exhibit to Preferred Networks, Inc.'s Current Report on Form 8-K (file no. 0-27658) dated June 16, 1997 and incorporated by reference herein. (2) Filed on April 15, 1997, as an exhibit to Preferred Networks, Inc.'s Annual Report on Form 10-K (file no. 0-27658) for the year ended December 31, 1996 and incorporated by reference herein. (3) Filed on May 21, 1997, as an exhibit to Preferred Networks, Inc.'s Proxy Statement (file no. 0-27658) with respect to the 1997 annual meeting of shareholders and incorporated by reference herein. 21 EX-11.1 2 COMPUTATION OF NET LOSS PER SHARE 1 PREFERED NETWORKS, INC. COMPUTATION OF NET LOSS PER SHARE EXHIBIT 11.1
THREE MONTHS THREE MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Primary and fully diluted: Weighted average common stock outstanding during the period................................................. 16,148,065 14,417,732 Effect of Common Stock equivalents issued subsequent to December 18, 1994 computed in accordance with the treasury stock method as required by the SEC (1)........................................ - - ------------ ------------ Total........................................................... 16,148,065 14,417,732 ============ ============ Net loss .............................................................. $ (5,033,701) $ (1,477,928) Less: Accretion of Redeemable Preferred Stock (2) .................... (34,769) - Less: Redeemable Preferred Stock dividend requirements................ (58,333) - ------------ ------------ Net loss attributable to Common Stock and Common Stock equivalents................................................... $ (5,126,803) $ (1,477,928) ============ ============ Net loss per share of Common Stock..................................... $ (.32) $ (.10) ============ ============ SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Primary and fully diluted: Weighted average common stock outstanding during the period................................................. 16,004,034 10,969,325 Effect of Common Stock equivalents issued subsequent to December 18, 1994 computed in accordance with the treasury stock method - 1,710,506 as required by the SEC (1)........................................ ------------ ------------ Total........................................................... 16,004,034 12,679,831 ============ ============ Net loss .............................................................. $ (9,758,175) $ (2,978,688) Less: Accretion of Redeemable Preferred Stock (2) .................... (34,769) (202,235) Less: Redeemable Preferred Stock dividend requirements ............... (58,333) (353,651) ------------ ------------ Net loss attributable to Common Stock and Common Stock equivalents................................................... $ (9,851,277) $ (3,534,574) ============ ============ Net loss per share of Common Stock..................................... $ (.62) $ (.28) ============ ============
- ------------------------ (1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, Common Stock equivalents (including a portion of Series A Redeemable Convertible Preferred Stock and all of Series B Redeemable Convertible Preferred Stock) issued at prices equal to or below the initial public offering price per share ("cheap stock") during the twelve-month period immediately preceding the initial filing date of the Company's Registration Statement for its initial public offering have been included as outstanding for all periods presented prior to the initial public offering. (2) 1996 amount represents the portion of the accretion related to Series A Redeemable Convertible Preferred Stock not treated as cheap stock. 22 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED CONSOLIDATED BALANCE SHEET AND STATEMENT OF OEPRATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997. 1 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 12,919,194 0 4,936,757 296,275 4,549,728 22,955,189 32,190,840 5,235,581 76,367,090 8,635,139 16,667,167 12,977,666 0 61,680,039 (23,592,921) 76,367,090 6,406,433 17,705,189 6,638,724 15,127,191 0 265,695 606,383 (9,758,175) 0 (9,758,175) 0 0 0 (9,758,175) (.62) (.62)
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