<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1996
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)
DELAWARE 58-1954892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5300 Oakbrook Parkway, Suite 320, Norcross, GA 30093
(Address of principal executive offices)
(Zip Code)
(770) 806-6970
(Registrant's telephone number including area code)
(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 No X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 14,416,776 shares of common
stock, par value $.0001, as of May 1, 1996.
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PREFERRED NETWORKS, INC.
INDEX TO FORM 10-Q/A
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, March 31, 1996 (Unaudited)
and December 31, 1995 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995 (Unaudited) 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Deficit) for the three months ended March 31, 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
This Form 10-Q is being amended to reflect corrected and additional net loss
per share information. See pages 4, 8, and 11 and Exhibits 11.1, 11.2 and
11.3
2
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PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents .......................................... $33,317,219 $ 9,311,379
Accounts receivable, net............................................ 960,158 923,890
Receivables from related parties ................................... 74,263 66,425
Pager inventory .................................................... 1,530,453 1,068,970
Prepaid expenses and other current assets .......................... 323,780 386,648
----------- -----------
Total current assets ........................................... 36,205,873 11,757,312
Property and equipment, net ........................................... 8,986,260 6,885,022
Other assets, net ..................................................... 1,615,276 1,403,385
----------- -----------
$46,807,409 $20,045,719
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable .................................................. $ 2,063,772 $ 292,073
Accrued liabilities ............................................... 287,772 341,604
Payables to related parties ....................................... 317,112 500
Accrued salaries .................................................. 274,736 145,924
Current portion of notes payable .................................. -- 2,605,627
----------- -----------
Total current liabilities ..................................... 2,943,392 3,385,728
Notes payable, less current portion ................................... 520,291 2,807,398
Series A Redeemable Convertible Preferred Stock, $.01 par value,
$11 per share minimum redemption price; 159,377 shares authorized
in 1995; 159,377 shares issued and outstanding in 1995 ............ -- 2,437,890
Series B Redeemable Convertible Preferred Stock, $.01 par value, $1,000
per share minimum redemption price; 21,000 shares authorized
in 1995; 16,565 shares issued and outstanding in 1995 ............. -- 19,220,921
----------- -----------
Total liabilities and Redeemable Convertible Preferred Stock .. 3,463,683 27,851,937
Stockholders' equity (deficit)
Preferred stock, $.01 par value, 5,000,000 and 319,623 shares
authorized in 1996 and 1995, respectively; none issued
or outstanding ................................................ -- --
Common stock, $.0001 par value, 70,000,000 shares authorized,
14,416,776 and 4,138,496 shares issued and outstanding
in 1996 and 1995, respectively ................................ 1,442 414
Additional paid-in capital ........................................ 50,374,654 1,013,981
Accretion on Series A and Series B Redeemable Convertible
Preferred Stock ............................................... -- (3,289,003)
Accumulated deficit............................................ (7,032,370) (5,531,610)
----------- -----------
43,343,726 (7,806,218)
----------- -----------
$46,807,409 $20,045,719
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues
Pager airtime ........................................................ $ 1,299,196 $ 648,232
Pager sales .......................................................... 1,036,380 661,246
Maintenance and other ................................................ 32,957 22,517
----------- -----------
2,368,533 1,331,995
Costs of revenues
Pager airtime ........................................................ 741,559 311,758
Pager sales .......................................................... 1,360,999 832,366
----------- -----------
265,975 187,871
Selling, general and administrative expenses ............................ 1,459,711 471,856
Depreciation and amortization ........................................... 363,376 145,114
----------- -----------
Operating loss .................................................... (1,557,112) (429,099)
Interest expense ........................................................ 141,945 77,708
Interest income ......................................................... 198,297 17
----------- -----------
Net loss .......................................................... (1,500,760) (506,790)
Accretion of Series A and Series B Redeemable Convertible
Preferred Stock ...................................................... (1,121,316) --
Series B Redeemable Convertible Preferred Stock dividend
requirements ......................................................... (353,651) --
----------- -----------
Net loss attributable to Common Stock ................................ $(2,975,727) $ (506,790)
=========== ===========
Pro forma net loss per share of Common Stock ............................ $ (.13) $ (.05)
=========== ===========
Weighted average number of common shares used in calculating
pro forma net loss per share of Common Stock ......................... 11,459,376 10,013,901
=========== ===========
Historical net loss per share of Common Stock............................ $ (.19) $ (.06)
=========== ===========
Weighted average number of common shares used in calculating historical
net loss for share of Common Stock.................................... 10,858,366 9,158,409
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
Accretion of
Redeemable
Additional Convertible
Common Paid-in Preferred Accumulated
Stock Capital Stock (Deficit) Total
------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .. $ 414 $ 1,013,981 $(3,289,003) $(5,531,610) $(7,806,218)
Accretion of Series A and
Series B Redeemable
Convertible Preferred
Stock .................. -- -- (1,121,316) -- (1,121,316)
Dividends on Series B
Redeemable Convertible
Preferred Stock ........ -- (353,651) -- -- (353,651)
Issuance of Common Stock ... 345 31,160,364 -- -- 31,160,709
Conversion of Series A and
Series B Redeemable
Convertible Preferred
Stock .................. 683 18,546,627 4,410,319 -- 22,957,629
Non-cash stock option
compensation ........... -- 7,333 -- -- 7,333
Net loss ................... -- -- -- (1,500,760) (1,500,760)
------ ----------- ----------- ----------- -----------
Balance at March 31, 1996 ..... $1,442 $50,374,654 $ -- $(7,032,370) $43,343,726
====== =========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1996 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................................... $(1,500,760) $ (506,790)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 363,376 145,114
Bad debt expense .............................................. 48,903 13,859
Stock option compensation expense ............................. 7,333 --
Changes in operating assets and liabilities:
Accounts receivable ....................................... (85,172) 21,963
Receivables from related parties .......................... (7,838) 47,412
Pager inventory ........................................... (461,483) (89,935)
Prepaid expenses and other assets ......................... 62,878 (6,318)
Accounts payable .......................................... 1,771,699 (213,809)
Payables to related parties ............................... 316,612 (184,516)
Accrued liabilities ....................................... (53,832) (71,866)
Accrued salaries .......................................... 128,812 --
----------- ----------
Net cash provided by (used in) operating activities ............... 590,528 (844,886)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment ............................................ (1,554,713) (80,849)
Purchases of other assets ......................................... (266,219) (60,459)
----------- ----------
Net cash used in investing activities ............................. (1,820,932) (141,308)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings .......................................... -- 500,000
Payments of borrowings ............................................ (5,748,316) (93,055)
Issuance of Redeemable Convertible Preferred Stock ................ -- 597,861
Net proceeds from initial public offering of Common Stock ......... 31,160,709 --
Payment of Redeemable Convertible Preferred Stock dividends ....... (176,149) --
Issuance of Common Stock warrants ................................. -- 3,774
----------- ----------
Net cash provided by financing activities ......................... 25,236,244 1,008,580
----------- ----------
Net increase in cash and cash equivalents ......................... 24,005,840 22,386
Cash and cash equivalents, beginning of period .................... 9,311,379 221,255
----------- ----------
Cash and cash equivalents, end of period .......................... $33,317,219 $ 243,641
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. THE COMPANY
Preferred Networks, Inc. (the "Company") commenced operations in July 1991
and is a carrier's carrier of exclusively wholesale one-way paging network
services. The Company's networks are currently operational in the Southeast
and Mid-Atlantic regions, and the Company plans to expand its operations on
a nationwide basis to provide local and regional paging services, primarily
on a common frequency, in the 50 largest U.S. metropolitan markets and
adjacent areas. The Company's customers are organizations that offer the
Company's network services to their subscribers, including existing paging
carriers and resellers of paging services. As a carrier's carrier, the
Company does not market paging services directly to end users and therefore
does not compete with its customers.
In 1995, the Company formed a wholly-owned subsidiary 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, 1995, included in the Company's Registration Statement on Form
S-1 (No. 33-80507) with respect to the sale of the Company's Common Stock.
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.
Effective January 24, 1996, the Company amended its certificate of
incorporation to increase the authorized Common Stock to 70,000,000 shares,
to reduce Common Stock par value to $.0001, and to provide a 7.35-for-1
Common Stock split. The number of authorized shares of Preferred Stock was
increased to 5,000,000, with terms and rights to be determined. All common
share and per common share amounts have been adjusted for all periods to
reflect the stock split.
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 three months ended March 31, 1996 and 1995, were approximately
$105,000 and $89,000, respectively. There were no significant federal or
state income taxes paid or refunded for the three months ended March 31,
1996 and 1995.
4. INITIAL PUBLIC OFFERING (IPO)
On March 1, 1996, the Company issued 3,300,000 shares of Common Stock in a
public offering at a price to the public of $10.00 per share. 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.
7
<PAGE> 8
PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --- (CONTINUED)
(UNAUDITED)
4. INITIAL PUBLIC OFFERING (IPO) - (CONTINUED)
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 issued upon such conversion and such dividend payment
was 6,830,280 shares. All accretion previously accrued was eliminated upon
conversion to shares of Common Stock.
A portion of the proceeds of the IPO were used to repay all debt then
outstanding.
5. LOAN AGREEMENTS
All existing loan agreements were terminated and outstanding balances repaid
in March 1996, with funds received from the IPO.
In January 1996, the Company entered into a $12 million line of credit with
an equipment manufacturer, effective upon consummation of the IPO. Debt
outstanding under this agreement bears interest at the five-year U.S.
Treasury rate plus 6.5%, is payable in various monthly installments of
principal and interest with maturity dates through 2001 and is secured by
paging equipment. At March 31, 1996, borrowings were $520,000 at 12.10%
under this facility.
In March 1996, the Company entered into a $5 million line of credit with a
finance company. Interest on debt outstanding under this agreement is based
upon the prime rate plus 1.75%. This facility is payable in various monthly
installments of principal and interest, with maturity dates through 2001.
Borrowings under this agreement are secured by paging equipment. There were
no borrowings outstanding as of March 31, 1996.
6. LOSS PER SHARE
Pro forma net loss per share for periods prior to the IPO was computed
by dividing net loss by the weighted average number of shares of Common
Stock outstanding after giving retroactive effect to the mandatory
conversion of the Series A and the Series B into Common Stock, and the
related accrued dividends on the Series B through January 31, 1996, paid in
shares of Common Stock, which occurred upon the consummation of the IPO,
plus cheap stock as defined below. Pro forma net loss per share for
periods ending after the IPO is calculated as the sum of pro forma net loss
per share for the period from January 1, 1996 until the March 1, 1996 IPO
closing date plus historical net loss per share from the IPO until March 31,
1996.
Historical 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 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 Series B
divided by the weighted average number of shares of Common Stock
outstanding, plus cheap stock as defined below, up until the March 1, 1996
closing date of the IPO. The calculation excludes any antidilutive shares
during the period, other than cheap stock. After the IPO, historical and
pro forma net loss per share are identical and hence pro forma disclosures
are not included after the IPO. Loss per share is computed independently
for each of the quarters presented. Therefore, the sum of the quarterly
loss per share does not equal the year-to-date loss per share due to the
stock transactions in March 1996. See note 4.
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 of 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.
Supplemental loss per common share is calculated using the weighted average
number of common and common equivalent shares outstanding during the
respective periods assuming the same number of shares outstanding as
described above, and also considering the reduction in interest expense from
the repayment of long term debt of $5.6 million with proceeds of the IPO, as
if such shares had been issued and repayment had occurred at the beginning
of the period or later if the debt was not outstanding the entire period.
The computations of supplemental loss per share for the three months ended
March 31, 1996 are ($.18) for historical and ($.12) for pro forma.
Retroactive restatement has been made to all share, weighted average shares
and all loss per share calculations for the stock splits effected in January
1996.
The computation of fully diluted and historical net loss per share of Common
Stock was antidilutive in each of the periods presented; therefore the
amounts reported for primary and fully diluted are the same.
The unaudited pro forma net loss per share and the unaudited pro forma
supplemental net loss per share for 1995 as presented in the Company's
registration statement for its IPO should have been ($.29) and ($.25),
respectively, rather than ($.72) and ($.69), respectively as reported
therein.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Throughout 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 Condensed Consolidated
Statements of Operations as a percentage of total revenues for the three
months ended March 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
----- -----
<S> <C> <C>
Revenues
Pager airtime 54.9 % 48.7 %
Pager sales 43.8 49.6
Maintenance and other 1.3 1.7
----- -----
Total revenues 100.0 100.0
Cost of revenues
Pager airtime 31.3 23.4
Pager sales 57.5 62.5
----- -----
11.2 14.1
Selling, general & administrative 61.6 35.4
Depreciation and amortization 15.3 10.9
----- -----
Operating loss (65.7) (32.2)
Interest expense 6.0 5.8
Interest income 8.4 --
----- -----
Net loss (63.3)% (38.0)%
===== =====
EBITDA (50.4)% (21.3)%
</TABLE>
The table below provides information about the Company's units in service by
customer type and average revenue per unit ("ARPU"). 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.
<TABLE>
<CAPTION>
March 31, Percentage Increase
-------------- --------------------
1996 1995 1996 1995
------ ------ ---- ----
<S> <C> <C> <C> <C>
Units in service
Reseller units 139,194 66,220 110.2 % 82.2 %
Co-location/interconnection units 38,867 6,315 515.5 --
------- ------
Total units in service 178,061 72,535 145.5 % 82.2 %
======= ======
ARPU $2.59 $3.11 (16.7)% (8.0)%
</TABLE>
RESULTS OF OPERATIONS
Total revenues increased $1.0 million, or 77.8%, to $2.4 million for the
three-month period ended March 31, 1996, from $1.3 million for the three-month
period ended March 31, 1995. Total units in service increased by 105,526, or
145.5%, to 178,061 from 72,535 over the same period.
9
<PAGE> 10
Revenues from pager airtime increased by $651,000, or 100.4%, to $1.3 million
for the three-month period ended March 31, 1996, from $648,000 for the
three-month period ended March 31, 1995. The increase was attributable to the
growth in units in service and the associated recurring revenue stream, which
resulted from approximately 30,000 units from new reseller agreements
negotiated after the purchase of certain network assets from BellSouth
Telecommunications, Inc., expansion into new markets (Philadelphia, Pittsburgh,
Orlando, Jacksonville, Miami, Columbia, Savannah, and Knoxville) and the
continued growth in existing markets. The growth in units in service was
offset in part by declining ARPU due to a change in the mix of customer type
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. The ARPU was also lower on the units in service on certain purchased
network assets due to generally fewer paging service features available on
those networks.
Revenues from pager sales increased $375,000, or 56.7%, to $1.0 million for the
three-month period ended March 31, 1996, from $661,000 for the three-month
period ended March 31, 1995. The increase in the number of pagers sold was
attributable to continued expansion in existing markets and expansion into new
markets. In addition, the average selling price per pager declined as a result
of competitive pricing in the industry and the Company's marketing programs to
attract resellers to its networks.
Cost of pager airtime increased by $430,000, or 137.9%, to $742,000 for the
three-month period ended March 31, 1996, from $312,000 for the three-month
period ended March 31, 1995. The increase was primarily attributable to the
expansion into new markets and the increased number of units in service. Cost
of pager airtime as a percentage of pager airtime revenue was 57.1% for the
three-month period ended March 31, 1996, compared to 48.1% for the three-month
period ended March 31, 1995, reflecting the expansion into new markets and the
higher cost of airtime (i.e., telephone costs and transmission site rental)
with fewer units in service in those new markets.
Cost of pager sales increased by $529,000, or 63.5%, to $1.4 million for the
three-month period ended March 31, 1996, from $832,000 for the three-month
period ended March 31, 1995, due to the increased number of pagers sold, offset
in part by the decreasing cost to the Company of purchasing pagers. Cost as a
percentage of pager sales was 131.3% for the three-month period ended March
31, 1996, compared to 125.9% for the three-month period ended March 31, 1995,
reflecting the Company's marketing programs to attract customers to its
networks and the competitive nature of pricing in the industry.
Selling, general and administrative expenses increased by $988,000, or 209.4%,
to $1.5 million for the three-month period ended March 31, 1996, from $472,000
for the three-month period ended March 31, 1995, and increased as a percentage
of total revenues to 61.6% for the three-month period ended March 31, 1996,
from 35.4% for the three-month period ended March 31, 1995. The additional
costs reflect additional sales and administrative personnel to attract and
support the increasing number of customers and expansion into new markets.
Depreciation and amortization increased by $218,000, or 150.4%, to $363,000 for
the three-month period ended March 31, 1996, from $145,000 for the three-month
period ended March 31, 1995, due to additional assets in service resulting from
expansion into new markets. Depreciation and amortization increased as a
percentage of total revenues to 15.3% for the three-month period ended March
31, 1996, from 10.9% for the three-month period ended March 31, 1995.
Interest expense increased $64,000, or 82.7%, to $142,000 for the three-month
period ended March 31, 1996, from $78,000 for the three-month period ended
March 31, 1995. The increase was due to the financing of assets purchased for
expansion into new markets and those markets beginning commercial operation.
While markets are under construction, the interest associated with the
financing of the network assets in those markets is capitalized. The amount of
interest capitalized for the three-month period ended March 31, 1996, was
$24,000 compared to $20,000 capitalized during the same period in 1995. The
average level of indebtedness outstanding during the three-month period ended
March 31, 1996, was approximately $4.7 million compared to approximately $3.0
million outstanding during the three-month period ended March 31, 1995. All
outstanding debt was repaid with a portion of the proceeds of the IPO in March
1996.
Interest income increased to $198,000 for the three-month period ended March
31, 1996, from $17 for the three-month period ended March 31, 1995. The
increase represents interest income from the investment of the remainder of
funds received from the sale of the Series B, which was consummated in June
1995, and the net proceeds of the IPO, which was consummated in March 1996.
10
<PAGE> 11
The historical net loss per share of Common Stock for the three months ended
March 31, 1996 increased to ($.19) from ($.06) for the same three month period
in 1995, and the pro forma net loss per share of Common Stock increased to
($.13) in 1996 from ($.05) in 1995 for the same three month periods. The
increased losses per share result primarily from the additional losses of the
Company for the reasons described above.
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's net cash provided by operations was $591,000 for the three-month
period ended March 31, 1996, as compared to net cash used by operations of
$845,000 for the three-month period ended March 31, 1995. The increase in net
cash from operations was due primarily to timing of payments of accounts
payable.
Capital expenditures were $2.4 million for the three-months ended March 31,
1996, compared to $81,000 for the comparable period in 1995 reflecting the
rapid expansion of the Company's networks. As of March 31, 1996, the Company
was constructing networks in 11 new markets, including Technical Control
Centers (TCCs) in New York and Illinois and network expansions into New York,
Chicago, Boston, Richmond, Raleigh/Durham, Charlotte, Nashville, Orlando,
Tampa, Jacksonville, and Gainesville. As of May 1, 1996, the third TCC in
Poughkeepsie, New York is being tested for the commencement of commercial
operation. The Company anticipates making capital expenditures of
approximately $40.0 million during 1996 and 1997 (at least $10.0 million of
which will be paid from the net proceeds of the IPO) related to the nationwide
expansion of its networks, including purchases of network assets and related
equipment.
On March 1, 1996, the Company issued 3,300,000 shares of Common Stock in the
IPO at a price to the public of $10.00 per share. 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.
A portion of the net proceeds of the IPO was used to repay all debt then
outstanding which was approximately $5.6 million. The Company intends to use
the remaining net proceeds to finance the expansion of its network facilities
through the purchase of paging system equipment and possible network asset
purchases and for working capital and general corporate purposes.
Pursuant to their terms, upon consummation of the IPO all outstanding shares of
the Series A and 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 issued upon such conversion and such dividend
payment was 6,830,280 shares. All accretion previously accrued was eliminated
upon conversion to shares of Common Stock.
Upon the consummation of the IPO, all existing vendor financing commitments
terminated.
The Company has obtained a new secured credit facility for $12.0 million of
vendor financing which bears interest at the five-year U.S. Treasury rate plus
6.5%. This new credit facility contains various conditions, financial
covenants and restrictions and is secured by paging equipment.
11
<PAGE> 12
The Company has obtained a new $5.0 million secured line of credit from a
finance company for the purchase of Motorola paging system equipment which
bears interest at 1.75% over prime at the time of funding.
Management believes that cash and cash equivalents on hand together with the
new secured credit facilities in place, will be sufficient to meet the
Company's working capital and capital expenditure needs for the next 12 to 14
months without obtaining additional vendor or other financing. However, in
order to fully implement its nationwide expansion strategy on its anticipated
schedule, the Company believes it will need to raise additional funds after
this period in the form of equity, bank debt, or other debt financing. No
assurance can be given that such additional funds will be available on terms
acceptable to the Company, if at all. If such additional funds are not
obtained within such period, the Company would be required to slow its planned
nationwide network expansion, and the failure to obtain such additional funds
within such period could have a material adverse effect on the Company. In
addition, future acquisitions of paging network assets and licenses 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.
OTHER MATTERS
On February 8, 1996, the Federal Communications Commission (the "FCC") released
a notice of proposed rulemaking (the "NPRM") which, among other things,
provided that the FCC would accept no new applications for paging licenses
until it adopted an interim licensing procedure to be used during the pendency
of the rulemaking procedure. On April 22, 1996, the FCC adopted an Order in
which it eased the freeze on the acceptance of applications for licenses for
shared paging channels, including the channel primarily utilized by the Company
(157.740 MHz). Upon the effective date of the Order, the FCC will permit
applications to be filed for new sites on these channels if the applicant
certifies that the proposed site is within 40 miles of an operating
transmission site which was licensed to the same applicant on the same channel
prior to February 8, 1996. This licensing procedure will remain in effect
until final licensing rules are adopted in the rulemaking.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Effective in February 1996, prior to the IPO, the stockholders of the
Company, acting by unanimous consent in lieu of the Company's 1996 annual
meeting, unanimously approved the following matters:
1. amendment and restatement of the Company's Certificate of
Incorporation
2. amendment of the Company's bylaws to provide for a classified
Board of Directors
3. election of the following persons to serve as directors:
Mark H. Dunaway
Michael J. Saner
Robert Van Degna
Jeffrey H. Schutz
William H. Bang
Ronald W. White
4. amendment of the Company's June 21, 1995 Purchase Agreement
and Stockholders' Agreement
5. the Company's 1995 Stock Option Plan, 1995 Stock Option Plan
as amended, 1995 Employee Stock Purchase Plan and 1995 Non-Employee
Directors' Restricted Stock Award Plan
6. the Company's Indemnification Agreement for Directors
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description of Exhibits
------- -----------------------
3.2 Bylaws of the Company, as amended
10 Letter Confirming Line of Credit with Associates Capital
Services Corporation
11.1 Computation of Pro Forma Net Loss Per Share
11.2 Computation of Historical Net Loss Per Share
11.3 Computation of Supplemental Pro Forma and Supplemental
Historical Net Loss Per Share
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the three
months ended March 31, 1996.
13
<PAGE> 14
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, 1996 By: /s/ Mark H. Dunaway
----------------------------
Mark H. Dunaway
Chief Executive Officer
Date: August 14, 1996 By: /s/ Michael J. Saner
----------------------------
Michael J. Saner
President
Date: August 14, 1996 By: /s/ Kim Smith Hughes
----------------------------
Kim Smith Hughes
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<S> <C>
3.2 Bylaws of the Company, as amended
10 Letter Confirming Line of Credit with Associates
Capital Services Corporation
11.1 Computation of Pro Forma Net Loss per Share
11.2 Computation of Historical Net Loss per Share
11.3 Computation of Supplemental Pro Forma and
Supplemental Historical Net Loss per
Share
27 Financial Data Schedule (for SEC use only)
</TABLE>
15
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
PREFERRED NETWORKS, INC.
(As amended by the Board of Directors on
March 29, 1996)
ARTICLE I
Stockholders
Section 1. Annual Meeting. The annual meeting of the
stockholders shall be held on such date, at such time and at such place as
shall be set by the Board of Directors for the purpose of electing Directors
and for the transaction of such other business as may come before the meeting.
Section 2. Special Meetings. Special meetings of the
stockholders, for any purpose, unless otherwise prescribed by statute, may be
called by the Chairman of the Board, the President, the Board of Directors, and
by holders of outstanding stock having not less than seventy-five percent of
the votes entitled to be cast by all of the outstanding shares of the Company.
Section 3. Place of Meeting. The Board of Directors may
designate any place as the place for any annual meeting or for any special
meeting of stockholders. If no designation is made the place of the meeting
shall be the executive offices of the Company.
Section 4. Notice of Meeting. Written or printed notice stating
the place, day and hour of the meeting, and, in case of a special meeting, the
purpose for which the meeting is called, shall be delivered not less than ten
nor more than sixty days before the date of the meeting, either personally or
by mail, by or at the direction of the Chairman of the Board, the President, or
the Secretary to each stockholder of record entitled to vote at such meeting.
If mailed, the notice shall be deemed to be delivered when deposited in the
United States mail addressed to the stockholder at his address as it appears on
the stock transfer books of the Company, with postage thereon prepaid.
Section 5. Quorum. A majority of the shares outstanding of the
Company entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of stockholders. If less than a quorum is represented at a
meeting, the meeting may be adjourned without further notice if the time and
place thereof are announced at the meeting at which the adjournment is taken,
provided, however, that the period shall
<PAGE> 2
not exceed thirty days for any one adjournment. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally called.
If a quorum is present, the affirmative vote of a majority of the
shares represented at the meeting in person or by proxy and entitled to vote on
the subject matter shall be the act of the stockholders, unless the vote of a
greater number is required by law or the Company's Certificate of Incorporation
(the "Certificate of Incorporation").
Section 6. Proxies. At all meetings of stockholders, a
stockholder may vote by proxy authorized by the stockholder or his duly
authorized attorney in fact in the manner authorized by the Delaware General
Corporation Law. Such proxy shall be filed with the Secretary of the Company
before or at the time of the meeting. No proxy shall be valid after eleven
months from the date of its execution, unless otherwise provided in the proxy.
Section 7. Voting of Shares. Each outstanding share shall be
entitled to one vote, and each fractional share (if any) shall be entitled to a
corresponding fractional vote on each matter submitted to a vote at a meeting
of the stockholders except as otherwise provided in the Certificate of
Incorporation. In the election of Directors, each record holder of stock
entitled to vote at such election shall have the right to vote the number of
shares owned by him for as many persons as there are Directors to be elected,
and for whose election he has the right to vote. Cumulative voting shall not
be allowed.
Section 8. Action Without a Meeting. Unless otherwise provided
in the Certificate of Incorporation, any action required to be taken or which
may be taken at a meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by all of the stockholders
entitled to vote on such action.
ARTICLE II
Board of Directors
Section 1. Number and Election of Board. The Board of Directors
shall consist of such number of directors as fixed or changed from time to time
by the Board of Directors and shall be divided into three classes: Class I,
Class II and Class III, which shall be as nearly equal in number as possible.
Each director shall serve for a term ending on the date of the third annual
meeting of stockholders following the annual meeting at which such director was
elected; provided however, that each initial director in Class I shall hold
office until the first annual meeting of stockholders after the 1996 annual
meeting; each initial director in Class II shall hold office until the second
annual meeting of stockholders after the 1996 annual meeting; and each initial
director in Class
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<PAGE> 3
III shall hold office until the third annual meeting of stockholders after the
1996 annual meeting. Each director shall serve until his successor is elected
and qualified or until his earlier death, resignation or removal. The number
of directors may be increased or decreased from time to time by resolution of
the Board of Directors; provided, however, that the total number of directors
at any time shall not be less than three unless the Certificate of
Incorporation is amended to delete the classification of the Board of
Directors. Any vacancies in the Board of Directors for any reason, and any
directorships resulting from any increase in the authorized number of
directors, may be filled by the Board of Directors, acting by a majority of the
directors then in office, although less than a quorum, and any directors so
chosen shall hold office until the next election of the class for which such
directors shall have been chosen and until their successors shall be elected
and qualified. Notwithstanding the foregoing, and except as otherwise required
by law, whenever the holders of any one or more series of Preferred Stock shall
have the right, voting separately as a class, to elect one or more directors of
the Company, the terms of the director or directors elected by such holders
shall expire at the next succeeding annual meeting of stockholders. Subject to
the foregoing, at each annual meeting of stockholders the successors to the
class of directors whose term shall then expire shall be elected to hold office
for a term expiring at the third succeeding annual meeting.
Section 2. Resignation and Removal.
a. Any Director may resign at any time by giving written
notice to the Chairman of the Board, the President or to the Secretary of the
Company. Such resignation shall take effect at the time specified therein and,
unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
b. Any Director or the entire Board of Directors may be
removed at any time, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of Directors, except as otherwise
provided by law.
Section 3. Regular Meetings. A regular meeting of the Board of
Directors shall be held without notice immediately after and at the same place
as the annual meeting of stockholders. The Board of Directors may adopt a
resolution as to the time and place for the holding of additional regular
meetings without notice other than such resolution.
Section 4. Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the Chairman of the Board, the
President or any Director. The person or persons authorized to call special
meetings of the Board of Directors may fix any place as the place for holding
any special meeting of the Board of Directors called by him or them.
Section 5. Notice. Notice of any special meeting shall be given
at least two days prior thereto by written notice delivered personally or
mailed (first class mail) to each Director at his business address or by notice
given by telegraph or telecopy to such
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<PAGE> 4
address. If mailed, such notice shall be deemed to be delivered four days
following the deposit of such notice in the United States mail so addressed,
with postage thereon prepaid. If notice is given by telegram, such notice
shall be deemed to be delivered when the telegram is delivered to the telegraph
company. If notice is given by telecopy, such notice shall be deemed to be
delivered upon printed statement of receipt by the transmitting telecopier.
Any Director may waive notice of any meeting. The attendance of a Director at
a meeting shall constitute a waiver of notice of such meeting except where a
Director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at nor the purpose of any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
Section 6. Quorum. A majority of the total number of Directors
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors. But if less than a majority is present at a meeting, a
majority of the Directors present may adjourn the meeting from time to time
without further notice.
Section 7. Manner of Action. Except as otherwise provided in
the Certificate of Incorporation, the vote of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
Section 8. Expenses; Compensation. The Company shall pay the
actual out-of-pocket expenses incurred by each Director in connection with
attending the meetings of the Board and any committee thereof; provided, that
the Company shall not be obligated to pay for any of such expenses that are
significantly in excess of the customary out-of-pocket expenses that would
have been incurred for travel to such meetings from such Director's home or
office. In addition to the payment of each Director's expenses as provided in
the preceding sentence, each Director may, by resolution of the Board of
Directors, be paid a fixed sum for attendance at each meeting or a stated
annual amount or be provided other compensation in cash, stock or other
property for service as a Director. No Director shall be precluded from
serving the Company in any other capacity and receiving compensation therefor.
Section 9. Presumption of Assent. A Director of the Company who
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless his dissent shall be entered in the minutes of the meeting or
unless he files his written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the Secretary of the Company immediately
after the adjournment of the meeting. Such right to dissent shall not apply to
a Director who voted in favor of such action.
Section 10. Meeting by Conference Telephone. Members of the
Board of Directors or any committee designated by the Board may participate in
a meeting of the
-4-
<PAGE> 5
Board or committee by means of a conference telephone or similar communications
equipment by which all persons participating in a meeting can hear each other
at the same time. Such participation shall constitute presence in person at
the meeting.
Section 11. Action Without a Meeting. Any action required or
permitted to be taken at a meeting of the Board of Directors or any committee
designated by the Board may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the Directors or
all members of the committee entitled to vote with respect to the subject
matter thereof and filed with the minutes of the proceedings of the Board or
committee. Such consent shall have the same force and effect as a unanimous
vote of the Directors or of the committee.
Section 12. Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, appoint an executive
committee and any other committee of the Board of Directors, the composition of
each of which shall consist of one or more Directors of the Company, and may
delegate to any such committee any of the authority of the Board of Directors,
however conferred, other than the power or authority in reference to amending
the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Company's property and assets, recommending to
the stockholders a dissolution of the Company or a revocation of a dissolution,
or amending the Bylaws of the Company. No committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock or to adopt
a certificate of ownership and merger unless the resolution creating such
committee expressly so provides. Each such committee shall serve at the
pleasure of the Board of Directors. Any such committee shall keep written
minutes of its meetings and report the same to the Board of Directors at the
next regular meeting of the Board of Directors.
ARTICLE III
Officers and Agents
Section 1. General. The officers of the Company shall be a
Chairman of the Board and Chief Executive Officer, a President, one or more
Vice Presidents, a Secretary, and a Treasurer. The Board of Directors may
appoint such other officers, assistant officers and agents, including assistant
secretaries and assistant treasurers, as they may consider necessary, who shall
be chosen in such a manner and hold their offices for such terms and have such
authority and duties as from time to time may be determined by the Board of
Directors. The salaries for all the officers of the Company shall be fixed by
the Board of Directors. Any number of offices may be held by the same person.
In all cases where duties of any officer, agent or employee are not prescribed
by the Bylaws or by the Board of Directors, such officer, agent or employee
shall follow the orders and instructions of the President.
-5-
<PAGE> 6
Section 2. Election and Term of Office. The officers of the
Company shall be elected by the Board of Directors annually at the first
meeting of the Board held after each annual meeting of the stockholders. Each
officer shall hold office until his successor is elected and qualified or until
his earlier death, resignation or removal.
Section 3. Removal. Any officer or agent may be removed by the
Board of Directors whenever in its judgment the best interests of the Company
will be served thereby.
Section 4. Vacancies. A vacancy in any office, however
occurring, may be filled by the Board of Directors.
Section 5. Chairman of the Board and Chief Executive Officer.
The Chairman of the Board shall, subject to the direction and supervision of
the Board of Directors, be the Chief Executive Officer of the Company. He
shall preside at all meetings of stockholders and Directors, he shall have
general supervision of the affairs of the Company, and he may sign or
countersign all certificates of stock, contracts and other instruments of the
Company.
Section 6. President. The President shall assist the Chairman
of the Board and shall perform the duties as may be assigned to him by the
Chairman of the Board or the Board of Directors.
Section 7. Vice President. Each Vice President shall perform
such duties and exercise such powers as the Chairman of the Board, the
President or the Board of Directors shall request or delegate and, unless the
Chairman of the Board, the President or the Board of Directors otherwise
provides, shall perform such other duties as are generally performed by Vice
Presidents with equivalent restrictions, if any, on title. In the absence of
the President or in the event of his death or inability to act, the Vice
Presidents shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President; provided, however, that if there is more than one Vice President,
any Vice President shall have the authority to execute bonds, mortgages or
other contracts or agreements on behalf of the Company, subject to all the
restrictions upon the President relating to such functions, but all other
duties of the President shall be performed by the Vice President designated to
perform such duties at the time of his or her election, or in the absence of
any designation, then by the Vice President with the most seniority in office
(or if more than one Vice President is elected at the same meeting, by the Vice
President first listed in the resolution electing them), and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President.
Section 8. Secretary. The Secretary shall keep the minutes of
the proceedings of the stockholders and the Board of Directors, see that all
notices of the Company are duly given in accordance with the provisions of
these Bylaws or as required by law, be custodian of the corporate records and
of the seal of the Company and affix the seal to
-6-
<PAGE> 7
all documents when authorized by the Board of Directors, keep at the Company's
registered office or principal place of business a record containing the names
and addresses of all stockholders and the number and class of shares held by
each, unless such record shall be kept at the office of the Company's transfer
agent or registrar, have general charge of the stock transfer books of the
Company, unless the Company has a transfer agent and perform other duties
incident to the office of Secretary. The Secretary shall have such other
powers and perform such other duties as may be from time to time prescribed by
the Board of Directors, the Chairman of the Board or the President.
Section 9. Treasurer. The Treasurer shall be the principal
financial officer of the Company and shall have the care and custody of all
funds, securities, evidences of indebtedness and other personal property of the
Company and shall deposit the same in accordance with the instruction of the
Board of Directors. The Treasurer shall receive and give receipts and
acquittances for monies paid in an account of the Company, and shall pay out of
the funds on hand all bills, payrolls, and other just debts of the Company of
whatever nature upon maturity. The Treasurer shall perform all other duties
incident to the office of Treasurer, and upon request of the Board of
Directors, shall make such reports to it as may be required at any time. The
Treasurer shall, if required by the Board, give the Company a bond in such sums
and with such sureties as shall be satisfactory to the Board, conditioned upon
the faithful performance of his duties and for the restoration to the Company
of all books, papers, vouchers, money and other property of whatever kind in
his possession or under his control belonging to the Company. The Treasurer
shall have such other powers and perform such other duties as may be from time
to time prescribed by the Board of Directors, the Chairman of the Board or the
President.
ARTICLE IV
Stock
Section 1. Stock Certificates. Stock certificates shall be
issued in consecutive order and shall be in a form or forms prescribed by the
Board of Directors and shall be numbered in the order in which they are issued.
They shall be signed by the Chairman of the Board, the President or a Vice
President and the Secretary or an Assistant Secretary, and if there is a seal
of the Company, such seal (or a facsimile of it) shall be affixed to share
certificates. Signatures on a share certificate may be facsimiles but in such
case the certificate must be countersigned by a transfer agent or registered by
a registrar other than the Company or an employee of the Company.
Section 2. Transfers of Shares. Transfers of shares shall be
made in the share records of the Company upon surrender of the certificate for
such shares signed by the person in whose name the certificate is registered or
on his behalf by a person legally authorized so to sign (or accompanied by a
separate stock transfer power so signed) and
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<PAGE> 8
otherwise in accordance with applicable law, and subject to such other
requirements as may be imposed by the Company.
Section 3. Lost Certificates. The Company may issue a new stock
certificate in place of any certificate previously issued by the Company and
alleged to have been lost, stolen or destroyed upon the making of an affidavit
of that fact by the person claiming the certificate to be lost, stolen or
destroyed and, if the Company deems it appropriate, the delivery of a
commercial indemnity bond issued by a company approved by the Company in such
sum as the Company may direct as indemnity against any claim that may be made
against the Company with respect to the certificate alleged to have been lost,
stolen or destroyed. The Company may also authorize the Company's transfer
agent or registrar, if any, to issue replacement certificates on such terms and
conditions as the Company specifies.
Section 4. Regulations, Transfer Agents and Registrars. The
Board of Directors may make all such rules and regulations as it may deem
expedient concerning the issuance, transfer, conversion, registration and
cancellation of share certificates not inconsistent with applicable law, the
Certificate of Incorporation or the Bylaws of the Company. The Board of
Directors may appoint one or more transfer agents or registrars, or both, and
may require all share certificates to bear the signature of a transfer agent or
registrar or both.
ARTICLE V
Indemnification of Officers and Directors
Section 1. Coverage. Each person who was or is made a party or
is threatened to be made a party to or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she is or was a Director or
officer of the Company (which term shall include any predecessor corporation of
the Company) or is or was serving at the request of the Company as a Director,
officer, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans ("indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, officer,
employee, fiduciary or agent or in any other capacity while serving as a
Director, officer, employee, fiduciary or agent, shall be indemnified and held
harmless by the Company to the fullest extent authorized by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Company to provide broader indemnification rights
than said law permitted the Company to provide prior to such amendment),
against all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an
-8-
<PAGE> 9
indemnitee who has ceased to be a Director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided however, that, except as provided in Section 2 of this
Article V with respect to proceedings to enforce rights to indemnification, the
Company shall indemnify any such indemnitee in connection with a proceeding (or
part thereof) which has been initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors. The
right to indemnification conferred in this Article V shall be a contract right
and, subject to Section 2 hereof, shall include the right to be paid by the
Company the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that if the General Corporation Law
of the State of Delaware requires, the payment of such expenses incurred by a
Director or officer in his or her capacity as a Director or officer (and not in
any other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of a proceeding, shall be made only upon delivery to
the Company of an undertaking, by or on behalf of such indemnitee, to repay all
amounts so advanced if it ultimately is determined by final judicial decision
from which there is no further right to appeal that such indemnitee is not
entitled to be indemnified for such expenses under this Article V or otherwise.
Section 2. Claims. Any indemnification of a Director or officer
of the Company or advance of expenses under Section 1 of this Article V shall
be made promptly, and in any event within 30 days, upon the written request of
the Director or officer. If a determination by the Company that the Director
or officer is entitled to indemnification pursuant to this Article V is
required, and the Company fails to respond within thirty days to a written
request for indemnity, the Company shall be deemed to have approved the
request. If the Company denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within thirty days, the right to indemnification or
advances as granted by this Article V, if any, may be enforced by the Director
or officer in any court of competent jurisdiction. Such person's costs and
expenses incurred in connection with successfully establishing his or her right
to indemnification, in whole or in part, in any such action shall also be
indemnified by the Company. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending
any proceeding in advance of its final disposition where the required
undertaking, if any, has been tendered to the Company) that the claimant has
not met the standards of conduct which make it permissible under the General
Corporation Law of the State of Delaware for the Company to indemnify the
claimant for the amount claimed, but the burden of such defense shall be on the
Company.
Section 3. Rights Not Exclusive. The rights conferred on any
person by Sections 1 and 2 of this Article V shall not be exclusive of any
other rights which such person may have or hereafter acquire under these
Bylaws, any statute, the Certificate of Incorporation, any agreement, any vote
of stockholders or disinterested Directors or otherwise.
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<PAGE> 10
Section 4. Employees and Agents. Persons who are not covered by
the foregoing provisions of this Article V and who are or were employees or
agents of the Company may be indemnified and may have their expenses paid to
the extent and subject to such terms and conditions as may be authorized at any
time or from time to time by the Board of Directors.
Section 5. Insurance. The Company may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
Director, officer, employee, fiduciary or agent of the Company or is or was
serving at the request of the Company as a Director, officer, employee,
fiduciary or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as
such, whether or not the Company would have the power to indemnify such person
against such liability under this Article V.
Section 6. Contract Right. The provisions of this Article V
shall be deemed to be a contract right between the Company and each Director or
officer who serves in any such capacity at any time while this Article V and
the relevant provisions of the General Corporation Law of the State of Delaware
or other applicable law are in effect, and any repeal or modification of this
Article V or any such law shall not affect any rights or obligations then
existing with respect to any state of facts or proceeding then existing.
Section 7. Merger or Consolidation. For purposes of this
Article V, references to the Company shall include, in addition to the Company,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its Directors,
officers, and employees, fiduciaries or agents, so that any person who is or
was a Director, officer, employee, fiduciary or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a Director, officer, employee, fiduciary or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under this Article V with respect to the resulting or
surviving corporation as he or she would have with respect to such constituent
corporation if its separate existence had continued.
ARTICLE VI
Miscellaneous
Section 1. Waivers of Notice. Whenever notice is required by
law, by the Certificate of Incorporation or by these Bylaws, a waiver thereof
in writing signed by the Director, stockholder or other person entitled to said
notice, whether before, at or after the time stated therein, or his appearance
at such meeting in person or (in the case of a stockholders' meeting) by proxy,
shall be equivalent to such notice.
-10-
<PAGE> 11
Section 2. Amendments. The Board of Directors shall have the
power to adopt, amend and repeal the Bylaws of the Company at any regular
meeting of the Board of Directors or at any special meeting called for that
purpose.
* * * * *
-11-
<PAGE> 1
EXHIBIT 10
ASSOCIATES CAPITAL SERVICES CORPORATION
"QUALITY AND VALUE MIX IN '96"
March 12, 1996
Mr. Mark Dunaway
Preferred Networks, Inc.
5300 Oakbrook Parkway Suite 320
Norcross, Ga. 30093
Dear Mark:
This will confirm our telephone conversation today concerning the equipment
financing program approved by the Associates.
Amount -$5mm
Term -60 months max
Rate -1.75% over the Prime Rate as published in the Wall Street Journal.
Fixed at time of funding.
Vendor -Motorola
If any additional information is needed please don't hesitate to call. Thanks
again for this opportunity. We look forward to a long and successful
relationship.
Sincerely,
L. W. DeAngelis
Sr. Vice President
- --------------------------------------------------------------------------------
333 W. Pierce Rd. Suite 220 - Itasca, Il, 60143 - 708-875-2901 -
Fax: 708-875-2914
<PAGE> 1
EXHIBIT 11.1
PREFERRED NETWORKS, INC.
COMPUTATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Primary and fully diluted:
Weighted average common stock outstanding during
the period ..................................... 7,520,918 4,138,496
Series A Redeemable Convertible Preferred Stock and
Series B Redeemable Convertible Preferred Stock
dividends through January 31, 1996, converted
into Common Stock upon consummation of initial
public offering(1).............................. 601,010 855,492
Effect of Common Stock equivalents issued subsequent
to December 18, 1994 computed in accordance
with the treasury stock method as required
by the SEC(2)................................... 3,337,448 5,019,913
------------ ----------
Total ...................................... 11,459,376 10,013,901
============ ==========
Net loss ............................................... $ (1,500,760) $ (506,790)
============ ==========
Pro forma net loss per share of Common Stock ........... $ (.13) $ (.05)
============ ==========
</TABLE>
- ---------------------------
(1)Pro forma net loss per share reflects securities and dividends
converted into Common Stock upon consummation of the initial public offering
as if such conversion had occurred at the beginning of the fiscal year. A
portion of Series A Redeemable Convertible Preferred Stock and all of Series B
Redeemable Convertible Preferred Stock is excluded here but reflected below as
cheap stock.
(2)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 public offering have been included as outstanding for all
periods presented prior to the initial public offering.
<PAGE> 1
EXHIBIT 11.2
PREFERRED NETWORKS, INC.
COMPUTATION OF HISTORICAL NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Primary and fully diluted:
Weighted average common stock outstanding during
the period ..................................... 7,520,918 4,138,496
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)................................... 3,337,448 5,019,913
------------ ----------
Total ...................................... 10,858,366 9,158,409
============ ==========
Net loss ............................................... $ (1,500,760) $ (506,790)
Less: Accretion of Series A and Series B Redeemable
Convertible Preferred Stock(2) ........................ (202,235) --
Less: Series B Redeemable Convertible Preferred Stock
dividend requirements .............................. (353,651) --
------------ ----------
Net loss attributable to Common Stock and Common
Stock equivalents .................................. $ (2,056,646) $ (506,790)
============ ==========
Historical net loss per share of Common Stock........... $ (.19) $ (.06)
============ ==========
</TABLE>
- ---------------------------
(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 public offering have been included as
outstanding for all periods presented prior to the initial public
offering.
(2) Represents the portion of the accretion related to Series A Redeemable
Convertible Preferred Stock not treated as cheap stock.
<PAGE> 1
EXHIBIT 11.3
PREFERRED NETWORKS, INC.
COMPUTATION OF SUPPLEMENTAL PRO FORMA AND
SUPPLEMENTAL HISTORICAL NET LOSS PER SHARE
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
SUPPLEMENTAL SUPPLEMENTAL
PRO FORMA HISTORICAL
------------ ------------
<S> <C> <C>
Primary and fully diluted:
Weighted average common stock outstanding during the period . . . . . . . . . . 7,520,918 7,528,425
Series A Redeemable Convertible Preferred Stock converted into Common Stock
upon consummation of initial public offering(1) . . . . . . . . . . . . . . . 601,010 --
Effect of Common Stock equivalents issued subsequent to December 18, 1994
computed in accordance with the treasury stock method as required by the SEC(2) 3,337,448 3,337,448
----------- -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,459,376 10,865,873
=========== ===========
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,500,760) $(1,500,760)
Less: Accretion of Series A and Series B Redeemable Convertible Preferred Stock(3) . -- (202,235)
Less: Series B Redeemable Convertible Preferred Stock dividend requirements . . . . -- (353,651)
Plus: Reduction in interest expense from repayment of current and long-term notes
payable(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,000 112,000
----------- -----------
Net loss attributable for Common Stock and Common Stock equivalents . . . . . . . . $(1,388,760) $(1,944,646)
=========== ===========
Supplemental net loss per share of Common Stock(4) . . . . . . . . . . . . . . . . . $ (.12) $ (.18)
=========== ===========
</TABLE>
- -----------------------------
(1) Pro forma net loss per share reflects securities and dividends converted
into Common Stock upon consummation of the initial public offering as if
such conversion had occurred at the beginning of the fiscal year. A
portion of the Series A Redeemable Convertible Preferred Stock and all of
the Series B Redeemable Convertible Stock is excluded here but reflected
below as cheap stock.
(2) Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, Common Stock equivalents (including a portion of the
Series A Redeemable Convertible Preferred Stock and all of the Series B
Redeemable Convertible Preferred Stock) issued at prices equal to or below
the assumed 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 public offering have been
included as outstanding for all periods presented prior to the initial
public offering.
(3) Represents the portion of the accretion related to Series A Redeemable
Convertible Preferred Stock not treated as cheap stock.
(4) Supplemental loss per share reflects the number of shares of Common Stock
issued upon consummation of the initial public offering used to repay $5.6
million in current and long-term notes payable as if such issuance had
occurred at the beginning of 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM S-1 REGISTRATION STATEMENT FOR THE SALE OF
THE COMPANY'S COMMON STOCK.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,311,379
<SECURITIES> 0
<RECEIVABLES> 1,010,316
<ALLOWANCES> 86,426
<INVENTORY> 1,068,970
<CURRENT-ASSETS> 11,757,312
<PP&E> 8,438,832
<DEPRECIATION> 1,553,810
<TOTAL-ASSETS> 20,045,719
<CURRENT-LIABILITIES> 3,385,728
<BONDS> 2,807,398
21,658,811
0
<COMMON> 414
<OTHER-SE> (7,806,632)
<TOTAL-LIABILITY-AND-EQUITY> 20,045,719
<SALES> 3,651,018
<TOTAL-REVENUES> 7,353,234
<CGS> 4,557,813
<TOTAL-COSTS> 6,325,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 120,042
<INTEREST-EXPENSE> 317,160
<INCOME-PRETAX> (2,869,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,869,760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,869,760)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 243,641
<SECURITIES> 0
<RECEIVABLES> 525,064
<ALLOWANCES> 24,501
<INVENTORY> 452,768
<CURRENT-ASSETS> 1,271,633
<PP&E> 4,303,858
<DEPRECIATION> 989,401
<TOTAL-ASSETS> 4,681,152
<CURRENT-LIABILITIES> 1,630,621
<BONDS> 2,469,392
1,753,147
0
<COMMON> 414
<OTHER-SE> (1,172,422)
<TOTAL-LIABILITY-AND-EQUITY> 4,681,152
<SALES> 661,246
<TOTAL-REVENUES> 1,331,995
<CGS> 832,366
<TOTAL-COSTS> 1,144,124
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,859
<INTEREST-EXPENSE> 77,708
<INCOME-PRETAX> (506,790)
<INCOME-TAX> 0
<INCOME-CONTINUING> (506,790)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,790)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 33,317,219
<SECURITIES> 0
<RECEIVABLES> 1,064,812
<ALLOWANCES> 104,654
<INVENTORY> 1,530,453
<CURRENT-ASSETS> 36,205,873
<PP&E> 10,849,132
<DEPRECIATION> 1,862,872
<TOTAL-ASSETS> 46,807,409
<CURRENT-LIABILITIES> 2,943,392
<BONDS> 520,291
0
0
<COMMON> 1,442
<OTHER-SE> 43,342,284
<TOTAL-LIABILITY-AND-EQUITY> 46,807,409
<SALES> 1,036,380
<TOTAL-REVENUES> 2,368,533
<CGS> 1,360,999
<TOTAL-COSTS> 2,102,558
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48,903
<INTEREST-EXPENSE> 141,945
<INCOME-PRETAX> (1,500,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,500,760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,500,760)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
