<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) September 13, 1996
------------------
PREFERRED NETWORKS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-27658 58-1954892
- ------------------------------- ---------------- -------------------
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation) Number) Identification No.)
850 Center Way, Norcross, Georgia 30071
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (770) 582-3500
---------------
5300 Oakbrook Parkway, Suite 320, Norcross, Georgia 30093
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
a) Financial Statements of Businesses Acquired.
The audited financial statements of Big Apple Paging Corporation as
of and for the year ended December 31, 1995 and the unaudited
financial statements as of June 30, 1996 and for the six months
ended June 30, 1996 and 1995 are filed as part of this Current
Report on Form 8-K/A.
b) Pro Forma Financial Information
The unaudited pro forma condensed consolidated balance sheet of
Preferred Networks, Inc. as of June 30, 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 six
months ended June 30, 1996, are filed as part of this Current
Report on Form 8-K/A.
c) Exhibits
The following exhibits are filed as part of this Current Report on
Form 8-K:
2.1 Asset Purchase Agreement dated as of June 19, 1996 and
amended as of September 5, 1996 and as of September 13,
1996, by and among Big Apple Paging Corporation, Preferred
Networks, Inc. and Gary Hencken--Filed on September 27, 1996
as an exhibit to Preferred Networks, Inc.'s Current Report
on Form 8-K (file no. 0-27658) dated September 13, 1996
and incorporated by reference herein,
23.1 Consent of Independent Auditors
<PAGE> 3
Item 7(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Report of Independent Auditors
The Stockholder
Big Apple Paging Corporation
We have audited the balance sheet of Big Apple Paging Corporation as of
December 31, 1995 and the related statements of operations, changes in
stockholder's equity (deficit), 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 financial statements referred to above present fairly, in
all material respects, the financial position of Big Apple Paging Corporation
at December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
October 15, 1996
<PAGE> 4
Big Apple Paging Corporation
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
---------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ - $ 26,713
Accounts receivable, less allowance for doubtful
accounts of $28,000 and $28,000 at
December 31, 1995 and June 30, 1996, respectively 48,065 19,406
Inventory 303,229 97,157
Prepaid expenses and other current assets 9,420 -
---------------------------
Total current assets 360,714 143,276
Furniture and equipment, net of accumulated
depreciation 101,613 111,901
Other assets, net 56,256 55,224
---------------------------
Total assets $ 518,583 $ 310,401
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Bank checks outstanding in
excess of cash on deposit $ 131,852 $ -
Accounts payable and accrued expenses 171,071 757,127
Note payable 22,000 8,000
Payable to stockholder 437,581 512,458
---------------------------
Total liabilities 762,504 1,277,585
Stockholder's equity (deficit):
Common stock, no par value;
200 shares authorized; 8 shares issued and
outstanding - -
Paid-in capital - -
Accumulated deficit (243,921) (967,184)
---------------------------
Total stockholder's equity (deficit) (243,921) (967,184)
---------------------------
Total liabilities and stockholder's equity (deficit) $ 518,583 $ 310,401
===========================
</TABLE>
See accompanying notes.
2
<PAGE> 5
Big Apple Paging Corporation
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 SIX MONTHS ENDED JUNE 30
1995 1995 1996
----------------------------------------
(unaudited)
<S> <C> <C> <C>
Revenues $ 1,154,231 $ 234,093 $ 794,805
Cost of revenues 1,160,567 264,063 1,116,464
----------------------------------------
(6,336) (29,970) (321,659)
Selling, general and administrative
expenses 184,292 28,939 388,050
Depreciation and amortization 16,383 4,895 13,554
----------------------------------------
Net loss $ (207,011) $ (63,804) $ (723,263)
========================================
</TABLE>
See accompanying notes.
3
<PAGE> 6
Big Apple Paging Corporation
Statement of Stockholder's Equity (Deficit)
<TABLE>
<CAPTION> TOTAL
COMMON PAID IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY (DEFICIT)
--------------------------------------------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 $ - $ - $ (36,910) $ (36,910)
Net loss for 1995 (207,011) (207,011)
--------------------------------------------------
Balances at December 31, 1995 $ - $ - $ (243,921) $ (243,921)
Net loss for the six months
ended June 30, 1996
(unaudited) - - (723,263) (723,263)
--------------------------------------------------
Balances at June 30, 1996
(unaudited) $ - $ - $ (967,184) $ (967,184)
==================================================
</TABLE>
See accompanying notes.
4
<PAGE> 7
Big Apple Paging Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED JUNE 30
1995 1995 1996
------------------------------------------
(unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (207,011) $ (63,804) $ (723,263)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 16,383 4,895 13,554
Changes in operating assets and
liabilities:
Increase in accounts receivable (42,920) (24,170) 28,659
Increase in inventory (301,544) (100,506) 206,072
Increase in prepaid expenses and
other current assets (9,420) (901) 9,420
Increase in bank checks outstanding
in excess of cash on deposit 131,852 - (131,852)
Increase in accounts payable and
accrued expenses 113,632 172,548 586,056
------------------------------------------
Net cash used in operating activities (299,028) (11,938) (11,354)
INVESTING ACTIVITIES
Purchase of furniture and equipment (53,301) (3,269) (21,118)
Purchase of other assets (26,227) (10,000) (1,692)
------------------------------------------
Net cash flow used in financing activities (79,528) (13,269) (22,810)
FINANCING ACTIVITIES
Increase in payable to stockholder 391,342 31,087 74,877
Repayments of note payable (24,000) (12,000) (14,000)
------------------------------------------
Net cash flow provided by financing
activities 367,342 19,087 60,877
Net increase (decrease) in cash (11,214) (6,120) 26,713
Cash at beginning of period 11,214 11,214 -
------------------------------------------
Cash at end of period $ - $ 5,094 $ 26,713
==========================================
</TABLE>
See accompanying notes.
5
<PAGE> 8
Big Apple Paging Corporation
Notes to Financial Statements
December 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Formed in 1985, Big Apple Paging Corporation (the "Company" or "Big Apple")
holds a frequency license and operates a paging reseller business in the New
York, New Jersey and Connecticut area. From inception through March 1994, the
Company was dormant or its operations were organizational in nature.
Operations since March 1994 consist of sales of pagers and paging airtime to
resellers.
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.
REVENUE RECOGNITION
The Company recognizes revenue on the sale of pager airtime when the service is
provided. Revenue from the sale of pagers is recognized when the product is
shipped.
ACCOUNTS RECEIVABLE
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Payment is generally due
upon shipment for pager sales and within 30 days from invoice for airtime
sales. Credit losses have been consistent with management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is computed on a
first-in, first-out basis.
The Company has one unaffiliated vendor of pager equipment which provided
approximately 50% of 1995 cost of sales.
6
<PAGE> 9
Big Apple Paging Corporation
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Depreciation is provided based on
the asset's estimated useful life (generally 5 to 7 years), principally using
the straight-line method. Accumulated depreciation totaled $16,688 at December
31, 1995.
OTHER ASSETS
Other assets include Federal Communications Commission ("FCC") licenses and
license application fees. The FCC license and license application fees are
amortized using the straight-line method over a period of 15 years. Accumulated
amortization totaled $5,300 at December 31, 1995.
INCOME TAXES
The stockholder has elected under Subchapter S of the Internal Revenue Code to
include the Company's income in his personal income tax return. Accordingly,
there is no provision for income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, notes payable, payable to stockholder, and accounts payable and
accrued expenses approximate their fair values.
2. COMMITMENTS
The Company rents office space and transmitter sites and incurred approximately
$79,000 in lease expense in 1995. Approximate minimum annual rental payments
required by these operating leases are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1996 $ 88,379
1997 104,194
1998 82,584
1999 75,686
2000 75,760
Thereafter 131,936
--------
$558,539
========
</TABLE>
7
<PAGE> 10
Big Apple Paging Corporation
Notes to Financial Statements (continued)
3. NOTE PAYABLE
The note payable is due in monthly installments of $2,000 through November,
1996. The note is non-interest bearing and arose as a part of purchasing
certain FCC licenses and channel rights in 1994. Certain assets and property
used to operate the FCC licenses collateralize the note payable.
4. PAYABLE TO STOCKHOLDER
The stockholder periodically advances the Company monies to finance the cash
flow needs of the Company. Depending on the cash flows of the Company,
repayments or additional advances are made. The net activity is recorded as
payable to stockholder. The advances are non-interest bearing.
5. SUBSEQUENT EVENT
Effective September 13, 1996, a wholly-owned subsidiary of Preferred Networks,
Inc. acquired the FCC licenses and certain other assets of the Company for $2.6
million plus certain additional consideration based on defined increases in the
Company's business through September 6, 1996. Such additional consideration is
estimated at approximately $1.3 million, subject to adjustments as described in
the asset purchase agreement.
8
<PAGE> 11
Item 7(b). Pro Forma Financial Statements
The following unaudited pro forma condensed consolidated financial statements
of Preferred Networks, Inc. ("PNI") and Big Apple Paging Corporation ("Big
Apple") are derived from, and should be read in conjunction with audited
financial statements of Big Apple filed herein and the audited financial
statements of PNI as previously filed on Form S-1 and unaudited interim
financial statements of PNI as previously filed on Form 10-Q 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, June 30, 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 six months ended statement.)
9
<PAGE> 12
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Balance Sheet
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
PREFERRED BIG APPLE PRO
NETWORKS, PAGING FORMA PRO
INC. CORPORATION ADJUSTMENTS FORMA
--------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $28,941,156 $ 26,713 $ (26,713)(a) $27,511,156
(1,430,000)(b)
Accounts receivable, net 879,195 19,406 (19,406)(a) 879,195
Receivables from related parties 40,512 - - 40,512
Pager inventory 1,419,911 97,157 (97,157)(a) 1,419,911
Prepaid expenses and other current assets 305,091 - - 305,091
--------------------------------------------------------------
Total current assets 31,585,865 143,276 (1,573,276) 30,155,865
Property and equipment, net 12,205,189 111,901 (17,232)(a)(b) 12,299,858
Other assets, net 2,873,720 55,224 3,450,107(a)(b) 6,379,051
--------------------------------------------------------------
$46,664,774 $ 310,401 $ 1,859,599 $48,834,774
==============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,503,731 $ 757,127 $ (757,127)(a) $ 1,503,731
Accrued liabilities 149,062 - 1,260,000(b) 1,409,062
Payables to related parties 3,650 512,458 (512,458)(a) 3,650
Accrued salaries 561,877 - - 561,877
Current portion of notes payable 6,358 8,000 (8,000)(a) 6,358
--------------------------------------------------------------
Total current liabilities 2,224,678 1,277,585 (17,585) 3,484,678
Notes payable, less current position 2,561,339 - - 2,561,339
--------------------------------------------------------------
Total liabilities 4,786,017 1,277,585 (17,585) 6,046,017
Stockholders' equity (deficit)
Preferred stock - - - -
Common stock 1,443 - 13(b) 1,456
Additional paid-in capital 50,387,612 - 909,987(b) 51,297,599
Accumulated (deficit)/earnings (8,510,298) (967,184) 967,184(a) (8,510,298)
--------------------------------------------------------------
41,878,757 (967,184) 1,877,184 42,788,757
--------------------------------------------------------------
$46,664,774 $ 310,401 $ 1,859,599 $48,834,774
==============================================================
</TABLE>
See accompanying pro forma adjustments
10
<PAGE> 13
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
PREFERRED BIG APPLE
NETWORKS, PAGING PRO FORMA PRO
INC. CORPORATION ADJUSTMENTS FORMA
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,353,234 $1,154,231 $ - $ 8,507,465
Costs of revenues 6,325,984 1,160,567 - 7,486,551
------------------------------------------------------
1,027,250 (6,336) - 1,020,914
Selling, general and administrative expenses 3,179,944 184,292 - 3,364,236
Depreciation and amortization 763,743 16,383 233,689(c) 1,013,815
------------------------------------------------------
Operating loss (2,916,437) (207,011) (233,689) (3,357,137)
Interest expense (317,160) - - (317,160)
Interest income 363,837 - - 363,837
------------------------------------------------------
Net loss $(2,869,760) $ (207,011) $(233,689) $(3,310,460)
======================================================
Pro forma net loss per share of common stock $ (0.29) $ (0.32)
Weighted average number of common shares =========== ===========
used in calculating pro forma net loss per
share of common stock 10,013,901 10,313,292
=========== ===========
Historical net loss per share of common stock $ (0.48) $ (0.35)
Weighted average number of common shares =========== ===========
used in calculating historical net loss per
share of common stock 9,158,397 9,457,788
=========== ===========
</TABLE>
See accompanying pro forma adjustments.
11
<PAGE> 14
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Statement of Operations
For the six months ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
PREFERRED BIG APPLE
NETWORKS, PAGING PRO FORMA PRO
INC. CORPORATION ADJUSTMENTS FORMA
-------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,863,180 $ 794,805 $ - $ 5,657,985
Costs of revenues 4,356,799 1,116,464 - 5,473,263
-------------------------------------------------------
506,381 (321,659) - 184,722
Selling, general and administrative expenses 3,139,846 388,050 - 3,527,896
Depreciation and amortization 762,701 13,554 116,844(c) 893,099
-------------------------------------------------------
Operating (loss) (3,396,166) (723,263) (116,844) (4,236,273)
Interest expense (155,182) - - (155,182)
Interest income 572,660 - - 572,660
-------------------------------------------------------
Net (loss) $(2,978,688) $ (723,263) $(116,844) $(3,818,795)
=======================================================
Pro forma net loss per share of common stock $ (0.23) $ (.29)
Weighted average number of common shares =========== ===========
used in calculating pro forma net loss per
share of common stock 12,938,554 13,237,945
=========== ===========
Historical net loss per share of common stock $ (0.28) $ (0.29)
Weighted average number of common shares used =========== ===========
in calculating historical net loss per share
of common stock 12,679,831 12,979,222
=========== ===========
</TABLE>
See accompanying pro forma adjustments.
12
<PAGE> 15
Certain reclassifications have been made to Big Apple's financial statements to
conform to PNI's classifications.
BALANCE SHEET:
(a) To remove the assets and liabilities of Big Apple which were not acquired.
(b) To reflect the acquisition of certain of Big Apple's assets 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:
Components of purchase price:
<TABLE>
<S> <C>
Cash $1,430,000
Stock (125,598 shares) 910,000
Balance of purchase price and estimate of
Additional Consideration (combination of cash
and stock) - - recorded as payable 1,260,000*
----------
Total estimated purchase price $3,600,000
==========
Allocation of purchase price:
Furniture and equipment purchased $ 94,669
FCC licenses 3,505,331
----------
Total purchase price allocation $3,600,000
==========
</TABLE>
STATEMENT OF OPERATIONS:
(c) To amortize FCC licenses recorded as a result of the Big Apple acquisition.
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 quarterly period ended June 30, 1996 for details of
loss per share calculations.
* These pro forma loss per share calculations assume the same price per share
($7.25) of PNI common stock as at the date of payment of the first 90% of the
purchase price. Therefore, the pro forma loss per share calculations assume
173,793 shares issued in satisfaction of the remaining purchase price and
estimated Additional Consideration. The amount of Additional Consideration is
not determinable until December 7, 1996 and then only 90% is payable. The 10%
remainder of the purchase price and 10% remainder of the Additional
Consideration are payable at a later date in cash or stock, at PNI's sole
discretion. The number of shares to be issued will be determined based on the
average closing price of PNI's common stock for the immediately preceding 20
trading days.
13
<PAGE> 16
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.
Date: November 27, 1996 PREFERRED NETWORKS, INC.
By: /S/Kim Smith Hughes
------------------------
Kim Smith Hughes
Chief Financial Officer
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibit Page No.
- ----------------------------------------------------------- -----------------
<S> <C>
2.1 Asset Purchase Agreement dated as of June 19, 1996 and
amended as of September 5, 1996 and as of September 13,
1996, by and among Big Apple Paging Corporation, Preferred
Networks, Inc. and Gary Hencken--Filed on September 27,
1996 as an exhibit to Preferred Networks, Inc.'s Current
Report on Form 8-K (file no. 0-27658) dated September 13, 1996
and incorporated by reference herein.
23.1 Consent of Independent Auditors
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-3962, Form S-8 No. 333-3824 and Form S-8 No. 333-3826) of
Preferred Networks, Inc. and in the related Prospectuses of our report dated
October 15, 1996 with respect to the financial statements of Big Apple Paging
Corporation included in this Form 8-K/A for the year ended December 31, 1995
and our report dated June 28, 1996 except for Note 3 as to which the date is
July 3, 1996 with respect to the financial statements of Paging Services, Inc.
in the Form 8-K dated July 3, 1996 for the year ended December 31, 1995.
/s/ ERNST & YOUNG LLP
November 26, 1996
