<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________to_____________________
Commission File Number: 0-27658
PREFERRED NETWORKS, INC.
(Exact name of Registrant as Specified in its Charter)
GEORGIA 58-1954892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
850 Center Way, Norcross, GA 30071
(Address of principal executive offices)
(Zip Code)
(770) 582-3500
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 16,200,552 shares of common
stock, no par value, as of November 5, 1997.
<PAGE> 2
PREFERRED NETWORKS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
NUMBER
------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, September 30, 1997
(Unaudited) and December 31, 1996..................................... 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 1997 and 1996
(Unaudited)........................................................... 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 1997 (Unaudited)....... 5
Condensed Consolidated Statements of Cash Flows for the three
months and nine months ended September 30, 1997 and 1996
(Unaudited)............................................................ 6
Notes to Condensed Consolidated Financial Statements (Unaudited)....... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 17
Item 2. Changes in Securities.................................................. 17
Item 3. Defaults under Senior Securities....................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................... 17
Item 5. Other Information...................................................... 17
Item 6.. Exhibits and Reports on Form 8-K....................................... 17
Signatures............................................................. 18
</TABLE>
2
<PAGE> 3
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents ................................................ $ 10,110,843 $ 21,645,354
Accounts receivable, net ................................................. 4,649,765 2,909,379
Inventory ................................................................ 4,002,282 5,630,478
Prepaid expenses and other current assets ................................ 382,575 540,190
------------ ------------
Total current assets ................................................... 19,145,465 30,725,401
Property and equipment, net ................................................. 26,622,027 21,559,407
Goodwill, net ............................................................... 13,473,634 5,779,321
FCC licenses, net ........................................................... 9,717,311 4,601,792
Other assets, net ........................................................... 2,928,487 3,459,416
------------ ------------
$ 71,886,924 $ 66,125,337
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ......................................................... $ 4,497,349 $ 5,017,467
Accrued liabilities ...................................................... 902,204 2,878,573
Accrued compensation ..................................................... 809,979 621,493
Current portion of notes payable and capital lease obligations ........... 11,251,517 995,164
------------ ------------
Total current liabilities .............................................. 17,461,049 9,512,697
Notes payable and capital lease obligations, less current portion ........... 8,352,647 16,029,652
Class A Redeemable Preferred Stock, no par value, $1.50 per
share redemption price; 13,500,000 shares authorized in 1997,
10,000,000 shares issued and outstanding in 1997 .......................... 13,458,462 --
------------ ------------
Total liabilities and Redeemable Preferred Stock ....................... 39,272,158 25,542,349
Stockholders' equity
Preferred stock, no par value, 30,000,000 shares authorized in
1997, no shares issued and outstanding in 1997 ......................... -- --
Preferred stock, $.01 par value, 5,000,000 shares authorized
in 1996, none issued and outstanding in 1996 ........................... -- --
Common Stock, no par value, 100,000,000 shares authorized
in 1997, 16,200,552 shares issued and outstanding in 1997 .............. 61,328,429 --
Common Stock, $.0001 par value, 70,000,000 shares authorized
in 1996, 15,290,921 shares issued and outstanding in 1996 .............. -- 1,529
Additional paid-in capital on $.0001 par value Common Stock .............. -- 56,312,399
Common Stock Purchase Warrants ........................................... 1,930,963 --
Accretion on Class A Redeemable Preferred Stock .......................... (140,566) --
Accumulated deficit ...................................................... (30,504,060) (15,730,940)
------------ ------------
32,614,766 40,582,988
============ ============
$ 71,886,924 $ 66,125,337
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Network services ..................................... $ 3,268,100 $ 1,553,602 $ 9,084,609 $ 4,297,648
Product sales ........................................ 3,117,006 1,239,083 9,523,439 3,325,260
Other services ....................................... 2,238,402 343,264 7,720,649 376,221
------------ ------------ ------------ ------------
Total revenues ................................... 8,623,508 3,135,949 26,328,697 7,999,129
Costs of revenues
Network services ..................................... 2,030,025 1,210,015 6,133,675 2,898,095
Product sales ........................................ 3,201,164 1,651,410 9,839,889 4,320,129
Other services ....................................... 2,413,007 119,362 6,797,824 119,362
------------ ------------ ------------ ------------
Total costs of revenues .......................... 7,644,196 2,980,787 22,771,388 7,337,586
------------ ------------ ------------ ------------
Gross margin ............................................ 979,312 155,162 3,557,309 661,543
Selling, general and administrative expenses ............ 3,961,669 2,321,821 12,181,624 5,461,667
Depreciation and amortization ........................... 1,845,949 635,788 5,295,665 1,398,489
Other expenses .......................................... -- -- 277,707 --
------------ ------------ ------------ ------------
Operating loss ................................... (4,828,306) (2,802,447) (14,197,687) (6,198,613)
Interest expense ........................................ (323,050) (39,273) (929,432) (194,455)
Interest income ......................................... 136,411 333,922 353,999 906,582
------------ ------------ ------------ ------------
Net loss ......................................... (5,014,945) (2,507,798) (14,773,120) (5,486,486)
Accretion of Redeemable Preferred Stock ................. (105,797) -- (140,566) (1,121,316)
Redeemable Preferred Stock dividend requirements ........ (375,000) -- (433,333) (353,651)
------------ ------------ ------------ ------------
Net loss attributable to Common Stock ............ $ (5,495,742) $ (2,507,798) $(15,347,019) $ (6,961,453)
============ ============ ============ ============
Net loss per share of Common Stock ...................... $ (.34) $ (.17) $ (.96) $ (.46)
============ ============ ============ ============
Weighted average number of common shares
used in calculating net loss per share of
Common Stock ......................................... 16,194,512 14,479,226 16,067,527 13,251,775
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON COMMON ACCRETION OF
STOCK ADDITIONAL COMMON STOCK REDEEMABLE
($.0001 PAID-IN STOCK PURCHASE PREFERRED ACCUMULATED
PAR) CAPITAL (NO PAR) WARRANTS STOCK DEFICIT TOTAL
------- ------------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 ....... $ 1,529 $ 56,312,399 $ -- $ -- $ -- $(15,730,940) $ 40,582,988
Corporate
reincorporation ....... (1,529) (56,312,399) 56,313,928 -- -- --
Issuance of 828,613
shares of Common
Stock pursuant
to acquisitions ....... -- -- 5,179,989 -- -- -- 5,179,989
Issuance of 74,000
shares of Common
Stock pursuant to
Directors' Restricted
Stock Award Plan ...... -- -- 95,703 -- -- -- 95,703
Issuance of Common
Stock Purchase
Warrants .............. -- -- -- 1,930,963 -- -- 1,930,963
Non-cash stock option
compensation .......... -- -- 165,334 -- -- -- 165,334
Accretion of Class A
Redeemable
Preferred Stock ....... -- -- -- -- (140,566) -- (140,566)
Undeclared dividends
on Class A
Redeemable
Preferred Stock ....... -- -- (433,333) -- -- -- (433,333)
Exercise of options ..... -- -- 6,808 -- -- -- 6,808
Net loss ................ -- -- -- -- -- (14,773,120) (14,773,120)
------- ------------ ----------- ---------- --------- ------------ ------------
Balance at September 30,
1997 ................ $ -- $ -- $61,328,429 $1,930,963 $(140,566) $(30,504,060) $ 32,614,766
======= ============ =========== ========== ========= ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER, 30
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................................... $(14,773,120) $ (5,486,486)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................. 5,291,601 1,398,489
Bad debt expense .............................................. 425,015 164,287
Stock option and restricted stock grant compensation expense .. 261,036 22,000
Changes in operating assets and liabilities:
Accounts receivable ......................................... (1,520,073) (995,332)
Inventory ................................................... 1,992,427 (964,574)
Prepaid expenses and other assets ........................... (15,663) (348,764)
Accounts payable ............................................ (562,360) 1,552,994
Accrued liabilities ......................................... (596,204) 299,101
Accrued compensation ........................................ 188,486 687,972
------------ ------------
Net cash used in operating activities ............................ (9,308,855) (3,670,313)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment ........................................... (3,556,756) (5,345,534)
Purchases of other assets and FCC licenses ....................... (1,244,584) (5,999,096)
Payment for acquisitions, net of cash acquired ................... (10,629,768) --
------------ ------------
Net cash used in investing activities ............................ (15,431,108) (11,344,630)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ......................................... 10,000,000 --
Payments of borrowings ........................................... (1,616,872) (5,808,472)
Net proceeds from initial public offering of Common Stock ........ -- 31,152,397
Net proceeds from issuance of Redeemable Preferred Stock ......... 2,884,553 --
Net proceeds from issuance of Common Stock Purchase Warrants ..... 1,930,963 --
Payment of Redeemable Convertible Preferred Stock dividends ...... -- (176,149)
Issuance of Common Stock upon exercise of stock options .......... 6,808 9,506
Issuance of Common Stock pursuant to acquisitions ................ -- 1,410,000
------------ ------------
Net cash provided by financing activities ........................ 13,205,452 26,587,282
------------ ------------
Net (decrease) increase in cash and cash equivalents ............. (11,534,511) 11,572,339
Cash and cash equivalents, beginning of period ................... 21,645,354 9,311,379
------------ ------------
Cash and cash equivalents, end of period ......................... $ 10,110,843 $ 20,883,718
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. THE COMPANY
Preferred Networks, Inc. (the "Company") provides outsourcing services to
the wireless industry. The Company commenced operations in 1991 as a
carrier's carrier of one-way paging networks, whereby the Company's
customers purchase wholesale network services and resell the services to
their subscribers. During the second half of 1996, the Company began to
broaden its service offerings and expand its customer base through two
acquisitions of businesses which provide non-network services. In July
1996, the Company acquired Preferred Technical Services, Inc. ("PTS"), a
provider of paging network equipment installation, maintenance and
engineering services. In December 1996, the Company acquired EPS Wireless,
Inc. ("EPS"), a national provider of paging and cellular product repair
services, sales of new, used and refurbished paging and cellular products
and inventory management services.
In June 1997, pursuant to a merger into a wholly-owned shell subsidiary,
the Company reincorporated from Delaware to Georgia, increased the amount
of its authorized Common Stock and Preferred Stock and provided that all of
its stock was without par value.
The Company has formed wholly-owned subsidiaries and limited liability
companies to execute certain business transactions. All significant
intercompany activity has been eliminated.
2. BASIS FOR PRESENTATION
The interim condensed consolidated financial information contained herein
has been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and include
in the opinion of management, all adjustments, which are of a normal
recurring nature necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes, however, that its disclosures are
adequate to make the information presented not misleading. These financial
statements and related notes should be read in conjunction with the
financial statements and notes as of December 31, 1996, included in the
Company's Annual Report on Form 10-K (File No. 0-27658). Results of
operations for the periods presented herein are not necessarily indicative
of results to be expected for the full year or any other interim period.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include investments in money market instruments,
which are carried at fair market value. Cash payments made for interest
during the nine months ended September 30, 1997 and 1996, were
approximately $1,476,000 and $266,000, respectively. There were no
significant federal or state income taxes paid or refunded for the nine
months ended September 30, 1997 and 1996.
4. INITIAL PUBLIC OFFERING (IPO)
On March 1, 1996, the Company issued 3,300,000 shares of Common Stock in a
public offering. The Company received net proceeds before offering expenses
of $30.7 million. In addition, on March 28, 1996, the underwriters
exercised their over-allotment option to purchase an additional 148,000
shares of Common Stock and the Company received additional net proceeds of
$1.4 million.
Pursuant to their terms, upon consummation of the IPO all outstanding
shares of Series A Redeemable Convertible Preferred Stock (the "Series A")
and Series B Redeemable Convertible Preferred Stock (the "Series B")
automatically converted into Common Stock. The Company elected to pay
accrued dividends on the Series B through January 31, 1996, in shares of
Common Stock and the remainder of the accrued dividends from February 1 to
March 1, 1996, in the amount of $176,000 in cash. The total number of
shares of Common Stock
7
<PAGE> 8
PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. INITIAL PUBLIC OFFERING (IPO) - (CONTINUED)
issued upon such conversion and such dividend payment was 6,860,280 shares.
All accretion previously accrued was eliminated upon conversion to shares
of Common Stock.
Approximately $5.6 million of the proceeds of the IPO was used to repay all
debt then outstanding and the balance was used to fund network expansion,
acquisitions, and operations.
5. LOAN AGREEMENTS
The Company has a secured credit facility for $12.0 million of vendor
financing bearing interest at a five-year U.S. Treasury rate plus 6.5%
payable in various monthly installments of principal and interest over 60
months, with maturity dates through 2002. This credit facility contains
various conditions, financial covenants and restrictions and is secured by
paging equipment. As of September 30, 1997, there was $5.6 million
outstanding under this facility with an additional $6.1 million available.
The Company also has a $5.0 million credit facility to finance paging
system equipment from a finance company bearing interest at 10% payable in
various monthly installments of principal and interest over 60 months, with
maturity dates through 2002. This credit facility contains various
conditions, financial covenants and restrictions and is secured by paging
equipment. As of September 30, 1997, there was $4.2 million outstanding
under this facility with an additional $89,000 available.
The Company has a $9.25 million revolving credit facility with a financial
institution, the majority of which is to be used to finance paging network
acquisitions and capital expenditures. The outstanding balance under this
facility bears interest at a rate of prime plus 1% or at a rate of LIBOR
plus 3.75%, at the Company's option. Interest only is payable monthly in
arrears with the entire principal due in full in August 1998. Borrowings
under this facility and the other two credit facilities are secured by
substantially all the assets of the Company. This credit facility contains
various conditions, financial covenants and restrictions related to debt
service, minimum net worth, acquisitions and future requirements for
raising $5.0 million in additional subordinated debt or equity capital by
the end of January 1998, among other things. Availability under this
facility is based on a multiple of the positive EBITDA (defined below) in
certain markets. As of September 30, 1997, there was $9.25 million
outstanding under this facility with no additional availability.
6. LOSS PER SHARE
Net loss per share was computed using the requirements of Accounting
Principles Board Opinion No. 15 and SEC Staff Accounting Bulletin No. 83
and as such equals the net loss increased by accretion on the Class A
Redeemable Preferred Stock (see Note 8) and the portion of accretion of the
Series A which relates to shares which are not considered as cheap stock,
as defined below, and the dividends on Class A Redeemable Preferred Stock
and the Series B divided by the weighted average number of shares of Common
Stock outstanding, plus cheap stock as defined below up to the March 1,
1996 closing date of the IPO. The calculation excludes any antidilutive
shares during the period, other than cheap stock.
Pursuant to SEC Staff Accounting Bulletin No. 83, common stock and common
stock equivalents (including preferred stock) issued at prices equal to or
below the IPO price per share ("cheap stock") during the twelve-month
period immediately preceding the initial filing date of the Company's
registration statement for the IPO have been included as if outstanding for
all periods presented, up until the March 1, 1996 closing date for the IPO
(using the treasury stock method at the IPO price) even though the effect
is to reduce the loss per share. A portion of the Series A, all of the
Series B and certain of the stock options and warrants have been treated as
cheap stock.
The computation of fully diluted net loss per share of Common Stock was
antidilutive in each of the periods presented; therefore the amounts
reported for primary and fully diluted are the same.
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share, which generally simplifies the calculation of earnings
per share. The Company will adopt the new accounting statement effective
for the fourth quarter of 1997 and the effect is not expected to be
material.
8
<PAGE> 9
PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. ACQUISITIONS
In September 1996, the Company acquired substantially all the assets of Big
Apple Paging Corporation ("Big Apple") for $3.8 million. The transaction
was accounted for as a purchase as of September 13, 1996. Big Apple was a
reseller-based paging carrier in the states of New York, New Jersey, and
Connecticut, and this acquisition provided the Company with a base of
customers upon opening its Northeast Technical Control Center ("TCC").
In December 1996, the Company acquired the stock of EPS Wireless, Inc.
("EPS") for approximately $4.8 million, and possible additional
consideration of up to an additional $5.0 million in cash based on EPS's
achievement of targeted operating performance during the two year period
ending December 31, 1998. The transaction was accounted for as a purchase
as of December 1, 1996 and the excess purchase price over the fair value of
the assets acquired has been recorded as goodwill. Additional
consideration, if any, will be recorded as goodwill. The Chairman of the
Company was a minority stockholder and member of the Board of Directors of
EPS prior to the acquisition.
In January 1997, the Company acquired the stock of Mercury Paging &
Communications, Inc. ("Mercury") and its affiliated companies for
approximately $14.2 million. The transaction was accounted for as a
purchase as of January 31, 1997. Mercury was a reseller-based paging
carrier in the states of New York, New Jersey and Connecticut. Prior to
closing, the Company earned revenues from Mercury under an agency
agreement.
8. ISSUANCE OF CLASS A REDEEMABLE PREFERRED STOCK AND COMMON STOCK PURCHASE
WARRANTS
On June 17, 1997, the Company issued to five of its shareholders and two
affiliates of one of them (collectively, the "Investors") 10.0 million
shares of Class A Redeemable Preferred Stock (the "Preferred Stock") which
will accrue dividends at the rate of 10% per annum and warrants to purchase
up to 11.5 million shares of Common Stock for a total purchase price of
$15.0 million. The Preferred Stock may be redeemed at any time at the
option of the Company at a price equal to $1.50 per share plus accrued
dividends and if the holder so demands, five years from the date of
issuance, the Preferred Stock must be redeemed by the Company at a price
equal to $1.50 per share plus accrued dividends. Each warrant is
exercisable for five years following the issuance of the Preferred Stock
and entitles the holder to purchase one share of Common Stock for $1.50 per
share subject to possible downward adjustment based on any private
placement of the Company's Preferred or Common Stock. A portion of the
warrants may be canceled by the Company in the event of an early redemption
of all of the Preferred Stock. The Preferred Stock is recorded at cost, net
of expenses, plus undeclared dividends and accretion. The Warrants are
recorded at cost, net of expenses.
In April 1997 and May 1997, the Company borrowed a total of $10.0 million
from the Investors under a 10% bridge loan. The Company's indebtedness
under the $10.0 million bridge loan was applied against the purchase price
of the Preferred Stock.
9
<PAGE> 10
PREFERRED NETWORKS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
In this section, the Company makes reference to "EBITDA" which represents
earnings before interest expense, interest income, taxes, depreciation and
amortization. EBITDA is a financial measure commonly used in the
telecommunications industry and should not be construed as an alternative to
operating income (as determined in accordance with generally accepted accounting
principles ("GAAP")), as an alternative to cash flows from operating activities
(as determined in accordance with GAAP), or as a measure of liquidity.
The following table presents certain items in the Consolidated Statements of
Operations as a percentage of total revenues for the three months and nine
months ended September 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
Revenues
Network services 37.9% 49.5% 34.5% 53.7%
Product sales 36.1 39.5 36.2 41.6
Other services 26.0 11.0 29.3 4.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Costs of revenues
Network services 23.5 38.6 23.3 36.2
Product sales 37.1 52.7 37.4 54.0
Other services 28.0 3.8 25.8 1.5
----- ----- ----- -----
Total cost of revenues 88.6 95.1 86.5 91.7
----- ----- ----- -----
Gross margin 11.4 4.9 13.5 8.3
Selling, general & administrative 45.9 74.0 46.3 68.3
Depreciation and amortization 21.4 20.3 20.1 17.5
Other -- -- 1.1 --
----- ----- ----- -----
Operating loss (56.0) (89.4) (53.9) (77.5)
Interest expense (3.7) (1.3) (3.5) (2.4)
Interest income 1.6 10.7 1.3 11.3
----- ----- ----- -----
Net loss (58.1)% (80.0)% (56.1)% (68.6)%
===== ===== ===== =====
EBITDA (34.6)% (69.1)% (33.8)% (60.0)%
</TABLE>
The table below provides information about the Company's units in service by
customer type and average revenue per unit ("ARPU") for the nine months ended
September 30. ARPU is calculated by dividing pager airtime revenues for the
month by the total units in service at month end. ARPU for periods greater than
one month equals the average of the monthly ARPUs during the period.
<TABLE>
<CAPTION>
SEPTEMBER 30, PERCENTAGE INCREASE (DECREASE)
------------------- -----------------------------
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Units in service
Reseller units 335,988 194,398 72.8% 68.8%
Co-location/interconnection units 121,639 54,913 121.5 207.9
-------- --------
Total 457,627 249,311 83.6 87.5
Units under agency agreement -- 63,959 (100.0) 100.0
-------- --------
Total units 457,627 313,270 46.1% 135.6%
======== ========
ARPU $ 2.49 $ 2.55 (2.4)% (15.6)%
</TABLE>
10
<PAGE> 11
PREFERRED NETWORKS, INC.
RESULTS OF OPERATIONS
Total revenues increased 175.0% to $8.6 million during the third quarter of
1997, from $3.1 million in the same period in 1996. Year to date revenue of
$26.3 million represented a 229.1% increase from the $8.0 million reported for
the comparable period in 1996 due primarily to significantly higher revenue from
Other Services, as well as increased revenue from Network Services and Product
Sales.
Revenues from Network Services increased by $1.7 million, or 110.4%, to $3.3
million for the three-month period ended September 30, 1997, from $1.6 million
for the three-month period ended September 30, 1996. Network Services revenue
increased by $4.8 million, or 111.4%, to $9.1 million for the nine-month period
ended September 30, 1997, from $4.3 million for the nine-month period ended
September 30, 1996. The Company operated networks in 27 markets as of September
30, 1997, compared to 23 markets as of June 30, 1997 and 17 markets as of
September 30, 1996. Reseller airtime revenue accounted for 81.9% of the year to
date increase of which 60.0% was due to the acquisition of Mercury Paging &
Communications, Inc. ("Mercury"), a reseller-based paging carrier acquired in
January 1997. Co-locate/interconnect airtime revenue increased 21.7% due to
higher growth in co-locate/interconnect services as compared to reseller
services. In general, the increases in revenues from Network Services were
attributable to the growth in units in service and the associated recurring
revenue stream, which resulted in part from the acquisition of Mercury and from
expansion into 10 new markets (Chicago, Detroit, Cleveland, Cincinnati, Columbus
OH, Boston, Albany NY, Richmond, Raleigh/Durham, and Charlotte). Also
contributing to the increases were continued growth in existing markets. Units
in service increased by 144,357, or 46.1%, to 457,627 at September 30, 1997,
from 313,270 at September 30, 1996. The continued growth in units in service was
offset in part by declining ARPU due to competitive pricing pressures in the
industry, shifting of reseller customers to co-locate/interconnect customers,
and to a lesser extent, discounting for unit volume and airtime usage.
Co-locate/interconnect services, which were 26.6% of total units in service as
of September 30, 1997 and 17.5% as of September 30, 1996, generate lower ARPU to
the Company because certain operating expenses customarily incurred by the
Company are borne by the customer.
Revenues from Product Sales increased by $1.9 million, or 151.6%, to $3.1
million for the three-month period ended September 30, 1997 from $1.2 million
for the three-month period ended September 30, 1996. Product Sales revenue
increased $6.2 million, or 186.4%, to $9.5 million for the nine-month period
ended September 30, 1997 from $3.3 million for the nine-month period ended
September 30, 1996. The majority of the increase resulted from revenues from the
sourcing and sales of new, used and refurbished pager and cellular products by
EPS Wireless, Inc. ("EPS"), which was acquired in December 1996. However, the
Company believes the United Parcel Service strike, which occurred during the
third quarter, adversely affected EPS's ability to receive and ship products,
and therefore, negatively impacted production volume and resulting Product Sales
revenue.
Other Services revenue increased to $2.2 million for the three-month period
ended September 30, 1997 from $343,000 for the three-month period ended
September 30, 1996. Other Services revenue increased to $7.7 million for the
nine-month period ended September 30, 1997 from $376,000 for the nine-month
period ended September 30, 1996. The increases were primarily due to revenues
associated with repair and refurbishment of pager and cellular products by EPS.
The Company believes the United Parcel Service strike discussed above also
negatively impacted Other Services revenue in the third quarter. Increased
revenues from paging network equipment installation services and maintenance and
engineering services provided by Preferred Technical Services, Inc. ("PTS"),
which was acquired by the Company in July 1996, also contributed to the
increases in revenue.
Cost of Network Services increased by $820,000, or 67.8%, to $2.0 million for
the three-month period ended September 30, 1997, from $1.2 million for the
three-month period ended September 30, 1996, but decreased as a percentage of
Network Services revenue to 62.1% from 77.9% for the same periods. As markets
generate increased revenue, the decrease in costs as a percentage of revenue is
expected due to the fixed nature of many of these expenses. Cost of Network
Services increased by $3.2 million, or 111.6%, to $6.1 million for the
nine-month period ended September 30, 1997, from $2.9 million for the nine-month
period ended September 30, 1996, and cost of Network Services as a percentage of
Network Services revenues remained unchanged at 67.5% for the nine-month periods
ended September 30, 1997 compared to 67.4% for the nine-month periods ended
September 30, 1996.
Cost of Product Sales increased by $1.5 million, or 93.8%, to $3.2 million for
the three-month period ended September 30, 1997, from $1.7 million for the
three-month period ended September 30, 1996, but decreased as a
11
<PAGE> 12
PREFERRED NETWORKS, INC.
percentage of product sales to 102.7% from 133.3% for the same periods. Cost of
Product Sales increased by $5.5 million, or 127.8%, to $9.8 million for the
nine-month period ended September 30, 1997, from $4.3 million for the nine-month
period ended September 30, 1996, but decreased as a percentage of sales to
103.3% from 129.9% for the same periods. The increases in costs were due
primarily to the sourcing and sales of new, used and refurbished pager and
cellular products by EPS, which was acquired in December 1996, and to a lesser
extent due to increased pager sales associated with network services. The
decreases in the percentages were due primarily to EPS's profits on product
sales. Due to the competitive nature of pricing in the industry, the overall
loss on product sales reflects the Company's marketing programs whereby pagers
are sold to resellers at a loss to attract customers to the Company's networks.
Cost of Other Services increased to $2.4 million for the three-month period
ended September 30, 1997 from $119,000 for the three-month period ended
September 30, 1996. Cost of Other Services increased to $6.8 million for the
nine-month period ended September 30, 1997 from $119,000 for the nine-month
period ended September 30, 1996. Cost of Other Services as a percentage of Other
Services revenues was 107.8% and 88.0% for the three-month and nine-month
periods ended September 30, 1997. The increases in costs were due primarily to
EPS's costs associated with repair and refurbishment of pager and cellular
products and inventory management and to PTS's costs associated with paging
network equipment installation services, maintenance and engineering services.
During the third quarter of 1997, EPS incurred costs in anticipation of volume
increases expected from several contracts under negotiation.
SG&A increased by $1.6 million, or 70.6%, to $4.0 million for the three-month
period ended September 30, 1997, from $2.3 million for the three-month period
ended September 30, 1996, but decreased as a percentage of total revenues to
45.9% for the three-month period ended September 30, 1997, from 74.0% for the
three-month period ended September 30, 1996. SG&A increased by $6.7 million, or
123.0%, to $12.2 million for the nine-month period ended September 30, 1997,
from $5.5 million for the nine-month period ended September 30, 1996, but
decreased as a percentage of total revenues to 46.3% for the nine-month period
ended September 30, 1997, from 68.3% for the nine-month period ended September
30, 1996. The decreases as a percentage of revenue are due to the efficiencies
generated by the Company's outsourcing platform. Because the Company does not
market directly to end-users, it does not incur subscriber-related acquisition
costs and accordingly, its SG&A expenses do not increase in direct proportion to
its revenue growth. The increases in revenue reflect additional sales and
administrative cost to support the increasing number of customers and expansion
into new markets associated with the Company's network services, and the
additional personnel and other SG&A costs associated with PTS and EPS.
Depreciation and amortization increased by $1.2 million, or 190.3%, to $1.8
million for the three-month period ended September 30, 1997, from $636,000 for
the three-month period ended September 30, 1996. Depreciation and amortization
increased by $3.9 million, or 278.7%, to $5.3 million for the nine-month period
ended September 30, 1997, from $1.4 million for the nine-month period ended
September 30, 1996. The increases were primarily due to additional assets
purchased or constructed for expansion into new markets, increased amortization
of market entry costs due to the Company operating in more markets, and
amortization of goodwill related to the acquisition of EPS, Mercury, and PTS.
Depreciation and amortization increased as a percentage of total revenues to
21.4% and 20.1% for the three-month and nine-month periods ended September 30,
1997, from 20.1% and 17.5% for the three-month and nine-month periods ended
September 30, 1996.
Other expenses were $0 and $278,000 for the three-month and nine-month periods
ended September 30, 1997, up from $0 for the three-month and nine-month periods
ended September 30, 1996 and represent certain non-recurring severance expenses.
The Company took certain cost reduction measures during the second quarter
primarily in the area of SG&A through employee terminations. As a part of the
reduction in force, the Company modified the terms of the terminated employees'
stock options to purchase 187,143 shares of Common Stock, to immediately fully
vest these options, and to extend the exercise period that the employees have to
exercise the options. These changes resulted in $138,000 of severance costs
which are included in the severance cost amount described above.
In addition, during the second quarter the Company canceled certain of the
outstanding stock options granted to the Company's remaining employees, covering
in the aggregate options to purchase 485,493 shares of Common Stock with
exercise prices ranging from $2.87 to $10.61 per share and regranted an
identical number of options at the then current market price of $2.50 per share.
The newly granted options vest annually in equal amounts over a three year
period beginning with the 1997 date of grant.
Interest expense increased $284,000, or 722.6%, to $323,000 for the three-month
period ended September 30, 1997,
12
<PAGE> 13
PREFERRED NETWORKS, INC.
from $39,000 for the three-month period ended September 30, 1996. Interest
expense increased $735,000, or 378.0%, to $929,000 for the nine-month period
ended September 30, 1997, from $194,000 for the nine-month period ended
September 30, 1996 due to increased debt levels in 1997. The increases were due
to the financing of the network buildout, borrowings related to the 1997
acquisition of Mercury, and the $10,000,000 bridge loan for the Class A
Redeemable Preferred Stock offering which was outstanding most of the second
quarter of 1997.
Interest income decreased $198,000, or 59.1%, to $136,000 for the three-month
period ended September 30, 1997, from $334,000 for the three-month period ended
September 30, 1996. Interest income decreased $553,000, or 61.0%, to $354,000
for the nine-month period ended September 30, 1997, from $907,000 for the
nine-month period ended September 30, 1996. The decreases were due to the higher
level of funds available for investment in 1996 due to the proceeds of the IPO,
which was consummated in March 1996.
Net loss for the three-month period ended September 30, 1997, as compared with
the three-month period ended September 30, 1996, increased to $5.0 million from
$2.5 million. Net loss for the nine-month period ended September 30, 1997, as
compared with the nine-month period ended September 30, 1996, increased to $14.8
million from $5.5 million. The increases were primarily due to substantial
increases in SG&A and depreciation and amortization, as described above.
The net loss per share of Common Stock for the three-month period ended
September 30, 1997 increased to ($.34) from ($.17) for the same three month
period ended in 1996. The net loss per share of Common Stock for the nine-month
period ended September 30, 1997 increased to ($.96) from ($.46) for the same
nine-month period ended in 1996. The increases in net loss per share were due to
the increased net loss attributable to common stockholders in 1997 as compared
to 1996 offset by the increased number of shares outstanding in 1997 due to
shares issued for acquisitions. Weighted average shares outstanding includes
cheap stock until the IPO date.
LIQUIDITY AND CAPITAL RESOURCES
The Company's expansion strategy has historically required substantial funds to
finance the expansion of existing operations, the expansion into new markets as
part of the nationwide build-out of its networks, and the purchase of network
assets and related FCC licenses. Since its IPO date, the Company has expended
$35.3 million in these endeavors, of which $24.2 million related to network
build-out. These network build-out expenditures have decreased during 1997 from
$5.3 million in the first quarter to $2.1 million in the second quarter to only
$360,000 in the third quarter. The Company has augmented its wide-area 157.740
MHz networks by purchasing and consolidating existing local network assets
licensed on the 150 MHz, 450 MHz and 900 MHz frequency bands to offer new
geographical markets, additional capacity and flexibility to its customers. As
of September 30, 1997, the Company was operating networks in 27 markets using 6
Technical Control Centers (TCC's) and was constructing networks in 25 additional
markets. The Company's strategy is to expand its networks on a nationwide basis
to the 50 largest U.S. metropolitan markets and adjacent areas. Cost and the
timing of the Company's construction of these remaining markets is dependent
upon market demand and capital availability.
The Company has two secured credit facilities totaling $17.0 million. As of
September 30, 1997, there was $9.8 million outstanding under these facilities
with an additional $6.2 million available for additional paging network
equipment purchases.
The Company also has a $9.25 million secured revolving credit facility with a
financial institution. This credit facility contains various conditions,
financial covenants and restrictions related to debt service, minimum net worth,
acquisitions and future requirements for raising $5.0 million additional
subordinated debt or equity capital by the end of January 1998, among other
things. The Company has no commitment for these additional funds. If additional
funds of $5.0 million are not obtained by the end of January 1998, the Company
would be required to seek an amendment to its debt covenants or refinance its
revolving credit facility and the failure to obtain such additional funds,
absent an amendment or refinancing, would have a material adverse effect on the
Company. Availability under this facility is based on a multiple of the positive
EBITDA in certain markets. As of September 30, 1997, there was $9.25 million
outstanding under this facility with no additional availability.
The revolving credit facility matures in August 1998.
In June 1997, the Company issued 10.0 million shares of Class A Redeemable
Preferred Stock (the "Preferred Stock") which accrue dividends at a rate of 10%
per annum and warrants to purchase up to 11.5 million shares of Common Stock to
five of its shareholders and two affiliates of one of them (collectively, the
"Investors") for a total purchase price of $15.0 million. In April 1997 and May
1997, the Company borrowed a total of $10.0 million from
13
<PAGE> 14
PREFERRED NETWORKS, INC.
the Investors under a 10% bridge loan. The Company's indebtedness under the
$10.0 million bridge loan was applied against the purchase price of the
Preferred Stock.
As of September 30, 1997, the Company had $8.8 million invested in short-term
investment grade securities at various interest rates. Management believes that
cash and cash equivalents on hand as of September 30, 1997, together with
availability under the secured credit facilities mentioned above, will be
sufficient to meet the Company's working capital, capital expenditure and debt
covenant requirements without obtaining additional financing until January 1998,
at which time the Company's debt covenants require it to raise an additional
$5.0 million.
In addition to the $5.0 million required to be raised per certain debt
agreements, the Company will need to seek financing to satisfy the $9.25 million
debt maturity in August 1998 and may need additional funds in the form of
equity, bank debt, or other debt financing to fund its operations or network
expansion. The Company has no commitment for any refinancing or additional
funds, and no assurances can be given that such additional refinancing or funds
will be available on terms acceptable to the Company, if at all; the failure to
obtain such funds could have a material adverse effect on the Company. In
addition, future acquisitions of paging network assets and licenses or other
assets or businesses or other events may change the Company's capital
requirements.
The market price of the Common Stock is likely to be highly volatile. Factors
such as delays by the Company in achieving its expansion goals, fluctuations in
the Company's operating results, announcements of new services offered by the
Company or its competitors, changes in earnings estimates of securities
analysts, regulatory changes and general market conditions, among other things,
could cause the market price of the Common Stock to fluctuate substantially.
Such market fluctuations could adversely affect the market price for the Common
Stock.
ACQUISITIONS
In September 1996, the Company completed the acquisition of substantially all
the assets of Big Apple Paging Corporation ("Big Apple") for $3.8 million. The
transaction was accounted for as a purchase as of September 13, 1996. Big Apple
was a reseller-based paging carrier in the states of New York, New Jersey, and
Connecticut. Prior to closing, the Company earned revenues from Big Apple under
an agency agreement. The purchase of Big Apple provided the Company with a base
of customers upon opening its Northeast TCC.
In December 1996, the Company acquired the stock of EPS Wireless, Inc. ("EPS")
for approximately $4.8 million and possible additional consideration of up to an
additional $5.0 million based on EPS's achievement of targeted operating
performance during the two year period ending December 31, 1998. The transaction
was accounted for as a purchase as of December 1, 1996. Additional
consideration, if any, will be recorded as goodwill. EPS repairs or sells more
than 80,000 product units per month. The acquisition of EPS expanded the
Company's revenue sources to include paging companies that do not currently buy
network services from the Company due to geography or frequency and also
expanded the Company's customer base to include cellular companies. EPS also
provides the Company with a source of lower-cost pager products.
In January 1997, the Company acquired the stock of Mercury Paging &
Communications, Inc. ("Mercury") and its affiliated companies for approximately
$14.2 million. Mercury was a reseller-based paging carrier in the states of New
York, New Jersey and Connecticut. Prior to closing, the Company earned revenues
from Mercury under an agency agreement.
FCC MATTERS
On February 19, 1997, the Federal Communications Commission (the "Commission" or
the "FCC") adopted a Second Report and Order (the "Paging Second Report and
Order") and Further Notice of Proposed Rulemaking (the "Further Notice") in
which it declined to convert the non-exclusive Private Carrier Paging ("PCP")
frequencies, including the 157.740 MHz frequency, to exclusive use frequencies.
The Further Notice, however, seeks additional guidance in connection with the
continued licensing procedure of the non-exclusive PCP channels. The Commission
is concerned, in light of its decision to license the exclusive paging channels
on a geographic basis by competitive bidding, that there is a potential for
application fraud by telemarketers for the non-exclusive PCP frequencies. It,
therefore, seeks comment on what methods could be used to eliminate or reduce
the problem. Primarily, the Commission proposes to modify the application form,
but also asks whether the frequency coordination process could be modified to
reduce the fraudulent or speculative applications.
14
<PAGE> 15
PREFERRED NETWORKS, INC.
The Commission also ordered that all non-mutually exclusive applications filed
with the Commission on or before July 31, 1996 will be processed. All mutually
exclusive applications which are pending regardless of when filed will be
dismissed. All applications (other than applications on nationwide and shared
channels) filed after July 31, 1996 will be dismissed. Finally, during the
pendency of the Further Notice, the Interim Licensing Procedure for the
non-exclusive PCP channels will continue for incumbent licensees only allowing
those incumbents to file for additional licenses anywhere. The Commission also
will accept applications from new applicants for private, internal-use systems
on the non-exclusive PCP channels, including the 157.740 MHz frequency. The
Company, therefore, believes that its applications currently on file with the
FCC, including its three applications with associated waiver requests, should be
processed. Since May 12, 1997, the Company has been able to file applications
for new sites to use the non-exclusive PCP channels, including the 157.740 MHz
frequency.
In addition, the Commission excluded PCP channels from being licensed on a
geographic basis and declined to subject the non-exclusive PCP frequencies,
including the 157.740 MHz frequency, to the competitive bidding process. The
Company, therefore, will not be required to participate in a competitive bidding
process to expand its paging systems operating on the 157.740 MHz frequency.
The Commission, however, adopted a geographic licensing scheme and implemented
a competitive bidding process for the exclusive RCC and PCP channels.
Specifically, the FCC adopted geographic licensing for all 931 MHz and all
exclusive 929 PCP paging channels based on Rand McNally's Major Trading Areas
("MTAs"). Licenses below 929 MHz will be geographically licensed based on the
Department of Commerce's 172 Economic Areas. The FCC also excluded from its plan
those channels that already have been assigned to single licensees on a
nationwide basis under existing FCC rules.
Consequently, the Company may be unable to expand its service areas for its
exclusive 931 MHz systems or its other RCC systems unless it participates in a
competitive bidding process or it can reach an agreement with the geographic
licensee. In the Further Notice, the FCC proposed to permit a geographic
licensee to either desegregate its spectrum, i.e., assign a discrete portion or
"block" of spectrum licensed to a geographic licensee, or partition its licensed
area, or both. The Commission has adopted, or proposed, a similar approach in
other Commercial Mobile Radio Services ("CMRS"), such as the broadband Personal
Communications Services and the Specialized Mobile Radio Services. Adoption of
the disaggregation and partitioning proposals would permit the Company to
acquire licensing rights to expand its current exclusive RCC frequencies or
further supplement its operation on 157.740 MHz through agreement with a
geographic licensee without requiring participation in a competitive bidding
process. There is no guarantee that the Commission will adopt this initiative.
The FCC further concluded that each existing paging licensee will be allowed to
either (i) continue operating under existing authorizations or (ii) trade in its
site-specific licenses for a single system-wide license. Geographic licensees
will be required to afford incumbent constructed and operational stations
protection from interference within their service areas. In the 931 MHz and 929
MHz band, the Commission adopted the existing co-channel interference protection
standards used with respect to the 931 MHz band. The Commission will continue to
use the current co-channel interference protection formulas for the RCC channels
below 931 MHz. No incumbent licensees will be allowed to modify or expand their
systems beyond their composite interference contour without the consent of the
geographic licensee (unless the incumbent licensee is itself the geographic
licensee for the relevant channel). The Company, therefore, may continue to
operate the systems as currently authorized and may make minor modifications to
the systems, including adding new sites to supplement coverage within the
current composite contours of the particular system.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report on Form 10-Q and other materials filed or to be filed by the Company with
the Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are or will be forward-looking, such as statements
relating to acquisitions, construction and other business development
activities, future capital expenditures, sufficiency of funds, financing sources
and availability, monthly savings, and the effects of laws and regulations
(including FCC regulations) and competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to,
uncertainties affecting the paging and wireless industries
15
<PAGE> 16
PREFERRED NETWORKS, INC.
generally, risks relating to the Company's acquisition, construction and other
business development activities, risks relating to technological change in the
paging and wireless industries, risks relating to the ability of the Company to
obtain additional funds in the form of debt or equity, risks relating to the
ability to control expenses, risks relating to the availability of transmitters,
terminals, network project management services and network engineering support,
fluctuations in interest rates, and the existence of and changes to federal and
state laws and regulations.
16
<PAGE> 17
PREFERRED NETWORKS, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11.1 Computation of 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 September 30, 1997.
17
<PAGE> 18
PREFERRED NETWORKS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED NETWORKS, INC.
Date: November 14, 1997 By: /s/ Mark H. Dunaway
-------------------------------------
Mark H. Dunaway
Chief Executive Officer
Date: November 14, 1997 By: /s/ Michael J. Saner
-------------------------------------
Michael J. Saner
President
Date: November 14, 1997 By: /s/ Kathryn Loev Putnam
-------------------------------------
Kathryn Loev Putnam
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
18
<PAGE> 1
EXHIBIT 11.1
PREFERRED NETWORKS, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Primary and fully diluted:
Weighted average common stock outstanding
during the period ....................................... 16,194,512 14,479,226
============ ============
Net loss ..................................................... $ (5,014,945) $ (2,507,798)
Less: Accretion of Redeemable Preferred Stock ............... (105,797) --
Less: Redeemable Preferred Stock dividend requirements ...... (375,000) --
------------ ------------
Net loss attributable to Common Stock and Common
Stock equivalents ....................................... $ (5,495,742) $ (2,507,798)
============ ============
Net loss per share of Common Stock ........................... $ (.34) $ (.17)
============ ============
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Primary and fully diluted:
Weighted average common stock outstanding
during the period ....................................... 16,067,527 12,139,292
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)................................ -- 1,112,483
------------ ------------
Total ................................................. 16,067,527 13,251,775
============ ============
Net loss ..................................................... $(14,773,122) $ (5,486,486)
Less: Accretion of Redeemable Preferred Stock (2) ........... (140,566) (202,235)
Less: Redeemable Preferred Stock dividend requirements ...... (433,333) (353,651)
------------ ------------
Net loss attributable to Common Stock and Common
Stock equivalents ......................................... $(15,347,021) $ (6,042,372)
============ ============
Net loss per share of Common Stock ........................... $ (.96) $ (.46)
============ ============
</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 initial public offering have been included
as outstanding for all periods presented prior to the initial public
offering.
(2) 1996 amount represents the portion of the accretion related to Series A
Redeemable Convertible Preferred Stock not treated as cheap stock.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF PREFERRED NETWORKS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 10,110,843
<SECURITIES> 0
<RECEIVABLES> 4,952,913
<ALLOWANCES> 303,147
<INVENTORY> 4,002,282
<CURRENT-ASSETS> 19,145,465
<PP&E> 32,877,275
<DEPRECIATION> 6,255,248
<TOTAL-ASSETS> 71,886,924
<CURRENT-LIABILITIES> 17,461,049
<BONDS> 8,352,647
13,458,462
0
<COMMON> 61,328,429
<OTHER-SE> (28,713,663)
<TOTAL-LIABILITY-AND-EQUITY> 71,886,924
<SALES> 9,523,439
<TOTAL-REVENUES> 26,328,696
<CGS> 9,839,888
<TOTAL-COSTS> 22,771,388
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 425,015
<INTEREST-EXPENSE> 929,435
<INCOME-PRETAX> (14,733,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,733,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,733,124)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
