<PAGE> 1
UNITED STATES
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) JULY 3, 1996
------------
PREFERRED NETWORKS, INC.
-------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 0-27658 58-1954892
- ---------------------------- ------------------------------ -----------------------------
<S> <C> <C>
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
</TABLE>
5300 OAKBROOK PARKWAY, SUITE 320, NORCROSS, GEORGIA 30093
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (770) 806-6970
-----------------
(NOT APPLICABLE)
- ---------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On July 3, 1996, Preferred Networks, Inc. ("PNI") acquired
Paging Services, Inc. ("PSI") pursuant to an Agreement and Plan of Merger of
the same date. The acquisition was accomplished through the merger of PSI
with and into Preferred Technical Services, Inc., a wholly-owned subsidiary of
PNI. In the merger, PSI shareholders received an aggregate of $500,000 of PNI
common stock and $250,000 in cash. The purchase price was determined based
upon arms-length negotiations between PNI and PSI, and a valuation of PSI
obtained by PNI from a third party.
PSI was engaged in the repair, maintenance, installation and
sale of paging-related equipment, and it provided contracted engineering
services and sold refurbished paging terminals. Michael J. Saner, President
and a director of PNI, and Eugene H. Kreeft, Executive Vice President of
Engineering of PNI, each owned approximately 45% of the capital stock of PSI
prior to the merger. PNI's purpose for the acquisition was to increase the
services provided to its customers and to reduce the cost of services and
assets provided by PSI to PNI.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
The audited financial statements of Paging Services,
Inc. as of and for the year ended December 31, 1995
and the unaudited financial statements as of March
31, 1996 and for the three months ended March 31, 1996
and 1995 are filed as part of this Current Report on
Form 8-K.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed consolidated balance
sheet of Preferred Networks, Inc. as of March 31, 1996,
and the unaudited pro forma condensed consolidated
statements of operations of Preferred Networks, Inc.
for the year ended December 31, 1995 and for the three
months ended March 31, 1996, are filed as part of this
Current Report on Form 8-K.
(c) Exhibits.
The following exhibits are filed as part of this
Current Report on Form 8-K:
2.1 Agreement and Plan of Merger, dated as of July
3, 1996, by and among Paging Services, Inc.,
Preferred Networks, Inc. and the shareholders of
Paging Services, Inc.*
- ----------------
* Filed as exhibit to Preferred Networks, Inc.'s Form 10-Q for the quarterly
period ended June 30, 1996 and hereby incorporated by reference herein.
-2-
<PAGE> 3
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 NETWORKS, INC.
Date: August 14, 1996 By: /s/ Kim Smith Hughes
------------------------------------
Kim Smith Hughes
Chief Financial Officer
-3-
<PAGE> 4
Report of Independent Auditors
The Board of Directors and Stockholders
Paging Services, Inc.
We have audited the balance sheet of Paging Services, Inc. as of December 31,
1995, and the related statements of income, changes in stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1995 financial statements referred to above present fairly,
in all material respects, the financial position of Paging Services, Inc. and
the results of its operations and its cash flows in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
June 28, 1996, except for Note 3
as to which the date is July 3, 1996
1
<PAGE> 5
Paging Services, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
-----------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 34,504 $ 34,073
Accounts receivable-affiliated 81,800 311,285
Accounts receivable-unaffiliated 16,616 70,639
Investments 29,508 29,508
Due from stockholder - 800
--------------------------
Total current assets 162,428 446,305
Equipment, net of accumulated depreciation of
$11,130, and $12,922, respectively 24,717 22,925
Due from stockholders 4,500 4,500
--------------------------
Total assets $191,645 $473,730
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ - $255,496
--------------------------
Total liabilities 255,496
Stockholders' equity:
Common stock, $1 par value;
authorized 100,000 shares; issued 555 shares 555 555
Paid-in capital 945 945
Retained earnings 190,145 216,734
--------------------------
Total stockholders' equity 191,645 218,234
--------------------------
$191,645 $473,730
==========================
</TABLE>
See accompanying notes.
2
<PAGE> 6
Paging Services, Inc.
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
----------------------------------------
(unaudited)
<S> <C> <C> <C>
Revenues:
Equipment-affiliated $ 650,863 $ 127,405 $ 305,770
Equipment-unaffiliated 216,767 87,826 32,585
Service-affiliated 182,131 35,025 46,005
Service-unaffiliated 179,129 79,406 142,108
-------------------------------------
1,228,890 329,662 526,468
Cost of revenues 581,294 96,622 323,471
-------------------------------------
647,596 233,040 202,997
Selling, general and administrative expenses 426,005 103,965 98,596
-------------------------------------
Net income $ 221,591 $ 129,075 $ 104,401
=====================================
</TABLE>
See accompanying notes.
3
<PAGE> 7
Paging Services, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON PAID IN RETAINED
STOCK CAPITAL EARNINGS
--------------------------------------
<S> <C> <C> <C>
Balances at January 1, 1995 $555 $945 $ 250,013
Net income - - 221,591
Distribution to stockholders - - (281,459)
-------------------------------------
Balances at December 31, 1995 $555 $945 $ 190,145
=====================================
</TABLE>
See accompanying notes.
4
<PAGE> 8
Paging Services, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1995 1995 1996
-----------------------------------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 221,591 $ 129,075 $ 104,401
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,982 1,136 1,792
Changes in operating assets and
liabilities:
Decrease (increase) in accounts receivable 77,061 38,195 (283,508)
Decrease (increase) in notes receivable 1,000 (800)
Increase in accounts payable - 43,570 255,496
---------------------------------
Net cash provided by operating activities 304,634 211,976 77,381
INVESTING ACTIVITIES
Purchase of equipment (13,025) - -
---------------------------------
Net cash flow used in financing activities (13,025) - -
FINANCING ACTIVITIES
Distribution to stockholders (281,459) (166,003) (77,812)
---------------------------------
Net cash flow used in financing activities (281,459) (166,003) (77,812)
Net increase (decrease) in cash 10,150 45,973 (431)
Cash at beginning of period 24,354 24,354 34,504
---------------------------------
Cash at end of period $ 34,504 $ 70,327 $ 34,073
=================================
</TABLE>
See accompanying notes.
5
<PAGE> 9
Paging Services, Inc.
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paging Services, Inc. (PSI or the Company) was formed in 1991 for the purpose
of providing repair, maintenance, installation, and equipment sales to paging
carriers and manufacturers of paging-related equipment throughout the United
States and Japan. In addition, PSI refurbishes paging terminals for resale,
and is a distributor for Glenayre paging equipment as well as the exclusive
repair facility in the United States for portions of the Glenayre terminal
product line.
CONCENTRATIONS
Approximately 68% of total 1995 revenue was derived from one customer,
Preferred Networks, Inc. (PNI). The stockholders of PSI are also minority
stockholders of PNI.
In addition, the Company has two unaffiliated vendors which provided
approximately 64% of 1995 cost of sales.
USE OF ESTIMATES
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 those estimates.
ACCOUNTS RECEIVABLE
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Payment is generally due
within 30 days from invoice. Credit losses have been consistent with
management's expectations.
INVESTMENTS
Investments are carried at cost, which approximate fair value. Fair value is
measured using quoted market prices.
6
<PAGE> 10
Paging Services, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT
Equipment is carried at cost. Depreciation is provided based on the asset's
estimated useful lives (5 years), principally on the straight-line method.
INCOME TAXES
The stockholders have elected under Subchapter S of the Internal Revenue Code
to include the Company's income in their personal income tax returns.
Accordingly, there is no provision for income taxes.
2. COMMITMENTS
The Company rents office space from PNI and incurred $18,000 in lease expense
in 1995. PSI has a sublease agreement for such space with PNI which requires
payment of $1,400 per month and expires in September 1999.
3. SUBSEQUENT EVENT
Effective July 3, 1996, a wholly-owned subsidiary of PNI acquired the stock of
the Company for approximately $250,000 in cash and 58,823 shares of PNI common
stock.
7
<PAGE> 11
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Financial Statements
March 31, 1996
(Unaudited)
The following unaudited pro forma condensed consolidated financial statements
of Preferred Networks, Inc. (PNI) and Paging Services, Inc. (PSI) are derived
from, and should be read in conjunction with the PSI audited financial
statements filed herein and the financial statements of PNI as previously filed
on Form S-1 with the Securities and Exchange Commission. The pro forma
condensed consolidated financial statements do not purport to be indicative of
the results of operations or financial position which would have actually been
reported had the acquisition been consummated on the dates indicated, or which
may be reported in the future.
The pro forma balance sheet reflects adjustments as if the acquisition had been
consummated on that date, March 31, 1996.
The pro forma statements of operations reflects adjustments as if the
acquisition had been consummated at the beginning of the period of the
statement (i.e., January 1, 1995 for the year ended statement and January 1,
1996 for the quarter ended statement.)
8
<PAGE> 12
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Balance Sheet
March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
PREFERRED PAGING PRO
NETWORKS, SERVICES, FORMA PRO
INC. INC. ADJUSTMENTS FORMA
--------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $33,317,219 $ 34,073 $ (284,073) (a)(b) $33,067,219
Investments - 29,508 (29,508) (a) -
Accounts receivable, net 960,158 70,639 (70,639) (a) 960,158
Receivables from related parties 74,263 311,285 (311,285) (a) 74,263
Pager inventory 1,530,453 - - 1,530,453
Prepaid expenses and other current assets 323,780 800 (800) (a) 323,780
--------------------------------------------------------
Total current assets 36,205,873 446,305 (696,305) 35,955,873
Property and equipment, net 8,986,260 22,925 - 9,009,185
Other assets, net 1,615,276 4,500 722,575 (a)(b) 2,342,351
--------------------------------------------------------
$46,807,409 $ 473,730 $ 26,270 $47,307,409
========================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 2,063,772 $ 255,496 $ (255,496) (a) $ 2,063,772
Accrued liabilities 287,772 - - 287,772
Payables to related parties 317,112 - - 317,112
Accrued salaries 274,736 - - 274,736
--------------------------------------------------------
Total current liabilities 2,943,392 255,496 (255,496) 2,943,392
Notes payable 520,291 - - 520,291
--------------------------------------------------------
Total liabilities 3,463,683 255,496 (255,496) 3,463,683
Stockholders' equity (deficit)
Preferred stock - - - -
Common stock 1,442 555 (549) (b) 1,448
Additional paid-in capital 50,374,654 945 499,049 (b) 50,874,648
Accumulated (deficit)/earnings (7,032,370) 216,734 (216,734) (b) (7,032,370)
-------------------------------------------------------
43,343,726 218,234 281,766 43,843,726
--------------------------------------------------------
$46,807,409 $ 473,730 $ 26,270 $46,307,409
========================================================
</TABLE>
See accompanying pro forma adjustments
9
<PAGE> 13
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
PREFERRED PAGING
NETWORKS, SERVICES, PRO FORMA PRO
INC. INC. ADJUSTMENTS FORMA
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Pager airtime $ 3,549,088 $ - $ - $ 3,549,088
Pager sales 3,651,018 - - 3,651,018
Maintenance and other 153,128 1,228,890 (832,994) (a) 549,024
-------------------------------------------------------------
7,353,234 1,228,890 (832,994) 7,749,130
Costs of revenues
Pager airtime 1,768,171 - - 1,768,171
Pager sales 4,557,813 - - 4,557,813
Other - 581,294 (548,779) (b) 32,515
-------------------------------------------------------------
1,027,250 647,596 (284,215) 1,390,631
Selling, general and administrative expenses 3,179,944 421,023 - 3,600,967
Depreciation and amortization 763,743 4,982 (35,067) (c) 733,658
-------------------------------------------------------------
Operating (loss)/income (2,916,437) 221,591 (249,148) (2,943,994)
Interest expense 317,160 - - 317,160
Interest income 363,837 - - 363,837
-------------------------------------------------------------
Net (loss)/income $(2,869,760) $ 221,591 $(249,148) $(2,897,317)
=============================================================
Pro forma net loss per share of Common Stock $ (0.29) - - $ (0.29)
=============================================================
Weighted average number of common shares
used in calculating pro forma net loss per
share of Common Stock 10,013,901 - - 10,072,724
=============================================================
Historical net loss per
share of Common Stock $ (0.48) - - $ (0.48)
=============================================================
Weighted average number of
common shares
used in calculating
historical net loss
per share of
Common Stock 9,158,397 - - 9,193,921
=============================================================
</TABLE>
See accompanying pro forma adjustments.
10
<PAGE> 14
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
PREFERRED PAGING
NETWORKS, SERVICES, PRO FORMA PRO
INC. INC. ADJUSTMENTS FORMA
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Pager airtime $ 1,299,196 $ - $ - $ 1,299,196
Pager sales 1,036,380 - - 1,036,380
Maintenance and other 32,957 526,468 (351,775) (a) 207,650
---------------------------------------------------
2,368,533 526,468 (351,775) 2,543,226
Costs of revenues
Pager airtime 741,559 - - 741,559
Pager sales 1,360,999 - - 1,360,999
Other - 323,471 (318,583) (b) 4,888
---------------------------------------------------
265,975 202,997 (33,192) 435,780
Selling, general and administrative expenses 1,459,711 97,351 - 1,557,062
Depreciation and amortization 363,376 1,245 (7,198) (c) 357,423
---------------------------------------------------
Operating (loss)/income (1,557,112) 104,401 (25,994) (1,478,705)
Interest expense 141,945 - - 141,945
Interest income 198,297 - - 198,297
---------------------------------------------------
Net (loss)/income $(1,500,760) $104,401 $ (25,994) $(1,422,353)
===================================================
Pro forma net loss per share of Common Stock $ (0.13) - - $ (0.12)
===================================================
Weighted average number of common shares
used in calculating pro forma net loss per
share of Common Stock 11,459,376 - - 11,518,199
===================================================
Historical net loss per
share of Common Stock $ (0.19) - - $ (0.18)
===================================================
Weighted average number
of common shares
used in calculating
historical net loss
per share of
Common Stock 10,858,366 - - 10,917,189
===================================================
</TABLE>
See accompanying pro forma adjustments.
11
<PAGE> 15
PREFERRED NETWORKS, INC.
Pro Forma Adjustments
(Unaudited)
Certain reclassifications have been made to PSI's financial statements to
conform to PNI's classifications.
BALANCE SHEET:
(a) To reflect the collections and payment of PSI assets and liabilities,
respectively, and the distribution of cash prior to the closing of the
transaction.
(b) To reflect the acquisition of PSI and the allocation of the purchase
price on the basis of the estimated fair values of the net assets
acquired. The components of the purchase price and its allocation to the
assets and liabilities are as follows:
<TABLE>
<S> <C>
Components of purchase price:
Cash $ 250,000
Stock 500,000
------------
Total purchase price $ 750,000
============
Allocation of purchase price:
Net book value of assets purchased $ 22,925
Goodwill 727,075
------------
Total purchase price allocation $ 750,000
============
</TABLE>
STATEMENT OF OPERATIONS
(a) To eliminate sales made to PNI during the period.
(b) To eliminate the cost of sales made to PNI during the period.
(c) To eliminate the depreciation attributable to intercompany profit on
equipment sold to PNI by PSI during the period.
No income tax expense was included in the pro forma statements of operations as
on a combined basis, PNI is in a net loss position.
See PNI's Form 10-Q for the three months ended March 31, 1996 for details of
loss per share calculations.
12
<PAGE> 16
INDEX TO EXHIBITS
(c) Exhibits.
The following exhibits are filed as part of this
Current Report on Form 8-K:
2.1 Agreement and Plan of Merger, dated as of July
3, 1996, by and among Paging Services, Inc.,
Preferred Networks, Inc. and the shareholders of
Paging Services, Inc.*
- ----------------
* Filed as exhibit to Preferred Networks, Inc.'s Form 10-Q for the quarterly
period ended June 30, 1996 and hereby incorporated by reference herein.
