<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: March 31, 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)
DELAWARE 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: 16,154,559 shares of common
stock, par value $.0001, as of May 9, 1997.
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PREFERRED NETWORKS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
NUMBER
------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, March 31, 1997
(Unaudited) and December 31, 1996............................. 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1996 (Unaudited)........ 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Deficit) for the three months ended March 31, 1997
(Unaudited)................................................... 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996 (Unaudited)........ 6
Notes to Condensed Consolidated Financial Statements.......... 7
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities......................................... 17
Item 6. Exhibits and Reports on Form 8-K.............................. 17
Signatures.................................................... 19
</TABLE>
2
<PAGE> 3
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................... $ 3,050,134 $ 21,645,354
Accounts receivable, net..................................... 4,723,118 2,909,379
Inventory.................................................... 5,167,993 5,630,478
Prepaid expenses and other current assets.................... 810,517 540,190
------------ ------------
Total current assets........................................ 13,751,762 30,725,401
Property and equipment, net.................................. 25,859,942 21,559,407
Goodwill, net................................................ 13,844,306 5,779,321
FCC licenses, net............................................ 9,606,697 4,601,792
Other assets, net............................................ 3,045,339 3,459,416
------------ ------------
$ 66,108,046 $ 66,125,337
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable............................................. $ 4,829,554 $ 5,017,467
Accrued liabilities.......................................... 1,866,843 2,878,573
Accrued salaries............................................. 403,697 621,493
Current portion of notes payable............................. 1,870,490 995,164
------------ ------------
Total current liabilities................................... 8,970,584 9,512,697
Notes payable, less current portion........................... 16,191,617 16,029,652
------------ ------------
Total liabilities........................................... 25,162,201 25,542,349
Stockholders' equity (deficit)
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued or outstanding.................................. - -
Common Stock, $.0001 par value, 70,000,000 shares authorized,
16,080,559 and 15,290,921 shares issued and outstanding in
1997 and 1996, respectively................................. 1,608 1,529
Additional paid-in capital................................... 61,399,653 56,312,399
Accumulated deficit.......................................... (20,455,416) (15,730,940)
------------ ------------
Total stockholders' equity.................................. 40,945,845 40,582,988
------------ ------------
$ 66,108,046 $ 66,125,337
============ ============
</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,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues
Network services........................... $ 2,565,588 $ 1,299,196
Product sales.............................. 2,933,325 1,036,380
Other services............................. 2,617,438 32,957
----------- -----------
Total revenues............................ 8,116,351 2,368,533
Costs of revenues
Network services........................... 1,908,208 741,559
Product sales.............................. 3,079,918 1,360,999
Other services............................. 2,026,161 -
----------- -----------
Total costs of revenues................... 7,014,287 2,102,558
----------- -----------
Gross margin................................ 1,102,064 265,975
Selling, general and administrative expenses 4,092,276 1,459,711
Depreciation and amortization............... 1,645,902 363,376
----------- -----------
Operating loss............................ (4,636,114) (1,557,112)
Interest expense............................ 226,798 141,945
Interest income............................. 138,436 198,297
----------- -----------
Net loss.................................. (4,724,476) (1,500,760)
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..... $(4,724,476) $(2,975,727)
=========== ===========
Net loss per share of Common Stock.......... $(.30) $ (.19)
=========== ===========
Weighted average number of common shares
used in calculating net loss per share of
Common Stock............................... 15,860,004 10,858,366
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.......... $ 1,529 $56,312,399 $(15,730,940) $40,582,988
Issuance of 789,638 shares of
Common Stock pursuant
to acquisitions..................... 79 5,079,921 - 5,080,000
Non-cash stock option
compensation........................ - 7,333 - 7,333
Net loss............................. - - (4,724,476) (4,724,476)
--------- ----------- ------------ -----------
Balance at March 31, 1997............. $ 1,608 $61,399,653 $(20,455,416) $40,945,845
========= =========== ============ ===========
</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,
-------------------------------------------
1997 1996
----------- -----------
<C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................... $ (4,724,476) $(1,500,760)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 1,645,902 363,376
Bad debt expense.......................................... 145,526 48,903
Stock option compensation expense......................... 7,333 7,333
Changes in operating assets and liabilities:
Accounts receivable...................................... (1,529,719) (93,010)
Pager inventory.......................................... 826,716 (461,483)
Prepaid expenses and other assets........................ (245,060) 62,878
Accounts payable......................................... (905,544) 2,088,311
Accrued liabilities...................................... (397,628) (53,832)
Accrued salaries......................................... (217,796) 128,812
------------ -----------
Net cash (used in) provided by operating activities........ (5,394,746) 590,528
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment..................................... (1,737,001) (1,554,713)
Purchases of other assets and FCC licenses................. 47,988 (266,219)
Payment for acquisitions, net of cash acquired............. (10,543,350) -
------------ ----------
Net cash used in investing activities...................... (12,232,363) (1,820,932)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings................................... - -
Payments of borrowings..................................... (968,111) (5,748,316)
Net proceeds from initial public offering of Common Stock.. - 31,160,709
Payment of Redeemable Convertible Preferred Stock dividends - (176,149)
------------ -----------
Net cash provided by financing activities.................. (968,111) 25,236,244
Net increase in cash and cash equivalents.................. (18,595,220) 24,005,840
Cash and cash equivalents, beginning of period............. 21,645,354 9,311,379
------------ -----------
Cash and cash equivalents, end of period................... $ 3,050,134 $33,317,219
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
6
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PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 the Company's network services and resell them 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, the Company
acquired Preferred Technical Services, Inc. ("PTS"), a provider of paging
network equipment installation, maintenance and engineering services. In
December, 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.
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.
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, 1997 and 1996, were approximately
$365,000 and $105,000, respectively. There were no significant federal or
state income taxes paid or refunded for the three months ended March 31,
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
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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.
A portion of the proceeds of the IPO was 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.
The Company has a secured credit facility for $12.0 million of vendor
financing bearing interest at a five-year U.S. Treasury rate plus 6.5%
payable in various monthly installments of principal and interest over 60
months, with maturity dates through 2001. This credit facility contains
various conditions, financial covenants and restrictions and is secured by
paging equipment. As of March 31, 1997, there was $4.8 million outstanding
under this facility with an additional $7.2 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 March 31, 1997, there was $3.6 million outstanding under this facility
with an additional $1.4 million 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
$15.0 million in debt or equity capital by July 1997 plus an additional $5.0
million by the end of January 1998, among other things. Availability under
this facility is based on a multiple of the positive EBITDA in certain
markets. As of March 31, 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 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 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 in 1998,
however, the effect has not been determined.
8
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PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. ACQUISITIONS
In September 1996, the Company acquired substantially all the assets of Big
Apple Paging Corporation ("Big Apple") for $3.8 million. Of this amount,
$1.4 million was paid in cash and $1.0 million was paid by the issuance of
125,598 shares of Company's Common Stock in September 1996. In January
1997, $1.1 million was paid by the issuance of 165,317 shares of Common
Stock and $130,000 was paid in cash. In April 1997, the remaining $250,000
was paid in cash. The transaction was accounted for as a purchase as of
September 13, 1996. Big Apple is a reseller-based paging carrier in the
states of New York, New Jersey, and Connecticut, and this acquisition
provided the Company with a base of customers upon opening its Northeast
TCC.
In December 1996, the Company acquired the stock of EPS Wireless, Inc.
("EPS") for approximately $4.8 million, and possible additional
consideration of up to an additional $5.0 million based on EPS's achievement
of targeted operating performance during the two year period ending December
31, 1998. Of the purchase price, $4.5 million was paid by the issuance of
673,524 shares of Common Stock with the remainder of $300,000 paid in cash
in February 1997. The transaction was accounted for as a purchase as of
December 1, 1996 and the excess purchase price over the fair value of the
assets acquired has been recorded as goodwill. Additional consideration, if
any, will be recorded as goodwill. The Chairman of the Company was a
minority stockholder and member of the Board of Directors of EPS prior to
the acquisition.
In January 1997, the Company acquired the stock of Mercury Paging &
Communications, Inc. ("Mercury") and its affiliated companies for
approximately $14.2 million of which approximately $10.3 million was paid in
cash and the remainder by the issuance of 624,321 shares of Common Stock,
156,080 of which were held in escrow until April 1997 then released to the
former Mercury shareholders after Mercury achieved certain revenue targets.
Proceeds from the Company's revolving credit facility which were drawn in
December 1996 were used to fund the majority of the cash portion of the
purchase price, with working capital being used to fund the remainder. The
transaction was accounted for as a purchase as of January 31, 1997. Mercury
is a reseller-based paging carrier in the states of New York, New Jersey and
Connecticut. Prior to closing, the Company earned revenues from Mercury
under an agency agreement.
8. PENDING STOCK ISSUANCE
The Company has a commitment from certain of its current stockholders for
the purchase of $15.0 million in Redeemable Preferred Stock issuable at a
price of $1.50 per share, which will accrue dividends at a rate of 10% per
annum. The Preferred Stock will be redeemable 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. In addition, each investor will be issued
1.15 warrants for each share of Preferred Stock. Each warrant will be
exercisable for five years following the issuance of the Preferred Stock and
will entitle the holder to purchase one share of Common Stock for $1.50 per
share subject to possible downward adjustment based on any private placement
of the Company's Preferred or Common Stock. The warrants will include
mandatory exercise and cancellation provisions in the event of redemption of
the Preferred Stock. The Company has granted the investors the option to
increase their commitment by or add additional investors for up to an
additional $5.0 million at substantially the same terms until July 31, 1997.
The issuance of the Preferred Stock and warrants is subject to shareholder
approval and execution of definitive documents and the first $15.0 million
is expected to close in June 1997.
In addition, the Company has a commitment for a bridge loan from these same
stockholders of up to $10.0 million bearing interest at 10% per annum to be
utilized prior to the closing of the sale of the preferred stock. In April
1997, the Company borrowed $5.0 million on the bridge loan.
9
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PREFERRED NETWORKS, INC.
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 Consolidated Statements of
Operations as a percentage of total revenues for the three months ended March
31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
----- -----
<S> <C> <C>
Revenues
Network services 31.6 % 54.9 %
Product sales 36.1 43.8
Other services 32.3 1.3
----- -----
Total revenues 100.0 100.0
Costs of revenues
Network services 23.5 31.3
Product sales 37.9 57.5
Other services 25.0 -
----- -----
Total cost of revenues 86.4 88.8
----- -----
Gross margin 13.6 11.2
Selling, general & administrative 50.4 61.6
Depreciation and amortization 20.3 15.3
----- -----
Operating loss (57.1) (65.7)
Interest expense 2.8 6.0
Interest income 1.7 8.4
----- -----
Net loss (58.2)% (63.3)%
===== =====
EBITDA (36.8)% (50.4)%
</TABLE>
The table below provides information about the Company's units in service by
customer type and average revenue per unit ("ARPU") for the three months ended
March 31. 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 (DECREASE)
------------------------ ------------------------------
1997 1996 1997 1996
-------- -------- ---- ----
<S> <C> <C> <C> <C>
Units in service
Reseller units 295,709 139,194 112.4 % 110.2 %
Co-location/interconnection units 97,458 38,867 150.7 515.5
-------- --------
Total 393,167 178,061 120.8 % 145.5 %
======== ========
ARPU $ 2.43 $ 2.59 (6.2)% (16.7)%
</TABLE>
10
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PREFERRED NETWORKS, INC.
RESULTS OF OPERATIONS
Total revenues increased $5.7 million, or 242.7%, to $8.1 million for the
three-month period ended March 31, 1997, from $2.4 million for the three-month
period ended March 31, 1996. Units in service increased by 215,106, or 120.8%,
to 393,167 at March 31, 1997, from 178,061 at March 31, 1996.
The Company operates networks in 23 markets as of March 31, 1997 as compared to
only 15 markets as of March 31, 1996. Revenues from network services increased
by $1.3 million, or 97.5%, to $2.6 million for the three-month period ended
March 31, 1997, from $1.3 million for the three-month period ended March 31,
1996. The increase was attributable to the growth in units in service and the
associated recurring revenue stream, which resulted from expansion into eight
new markets (New York, Chicago, Detroit, Boston, Albany NY, Richmond,
Raleigh/Durham, and Charlotte), continued growth in existing markets and from
the acquisition of substantially all of the paging assets of Big Apple Paging
Corporation ("Big Apple") and the acquisition of Mercury Paging &
Communications, Inc. and its affiliated companies ("Mercury"). The growth in
units in service was offset in part by declining ARPU due to competitive
pricing pressures in the industry, a continued shift to
co-location/interconnection customers which were 24.8% of total units in
service as of March 31, 1997 up from 21.8% as of March 31, 1996, and to a
lesser extent, unit volume and airtime usage discounts. Co-location and
interconnection customers generate lower ARPU to the Company because certain
operating expenses customarily incurred by the Company are borne by the
customer.
Revenues from product sales increased $1.9 million, or 183.0%, to $2.9
million for the three-month period ended March 31, 1997 from $1.0 million for
the three-month period ended March 31, 1996. The increase results from revenue
from the sourcing and sales of new, used and refurbished pager and cellular
products by EPS Wireless, Inc. ("EPS"), which was acquired in December 1996.
Other services revenues increased to $2.6 million for three-month period ended
March 31, 1997 from $33,000 for the three-month period ended March 31, 1996.
The increase was due to the revenues of Preferred Technical Services, Inc.
("PTS") (acquired by the Company in July, 1996) from paging network equipment
installation services, maintenance and engineering services and EPS's revenues
associated with repair and refurbishment of pager and cellular products,
inventory management and product fulfillment.
Cost of network services increased by $1.2 million, or 157.3%, to $1.9 million
for the three-month period ended March 31, 1997, from $742,000 for the
three-month period ended March 31, 1996. The increase was primarily
attributable to the expansion into eight new markets and the increased number
of units in service. Cost of network services as a percentage of network
services revenue was 74.4% for the three-month period ended March 31, 1997
compared to 57.1% for the three-month period ended March 31, 1996, reflecting
lower ARPU and expansion into new markets where there are currently fewer units
in service producing revenue, although the market bears fully-loaded network
cost.
Cost of product sales increased by $1.7 million, or 126.3%, to $3.1 million for
the three-month period ended March 31, 1997, from $1.4 million for the
three-month period ended March 31, 1996 due primarily to the cost of sourcing
and sales of new, used and refurbished pager and cellular products by EPS and
to a lesser extent due to costs of pager sales associated with network airtime.
Cost of product sales as a percentage of product sales was 105.0% for the
three-month period ended March 31, 1997, compared to 131.3% for the
three-month period ended March 31, 1996. The decrease in the percentage is due
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 its networks.
Cost of other services increased to $2.0 million for the three-month period
ended March 31, 1997 from $0 for the three-month period ended March 31, 1996.
The increase was due to PTS's costs associated with paging network equipment
installation services, maintenance and engineering services and EPS's costs
associated with repair and refurbishment of pager and cellular products,
inventory management and product fulfillment. Cost of other services as a
percentage of other services revenues was 77.4% for the three-month period
ended March 31, 1997.
SG&A increased by $2.6 million, or 180.4%, to $4.1 million for the three-month
period ended March 31, 1997, from $1.5 million for the three-month period ended
March 31, 1996, but decreased as a percentage of total revenues to 50.4% for
the three-month period ended March 31, 1997, from 61.6% for the three-month
period ended March 31, 1996. The increase in dollars reflects additional sales
and administrative cost to support the increasing number
11
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PREFERRED NETWORKS, INC.
RESULTS OF OPERATIONS - CONTINUED
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 $1.3 million, or 352.9%, to $1.6
million for the three-month period ended March 31, 1997, from $363,000 for the
three-month period ended March 31, 1996 primarily due to additional assets
purchased or constructed for expansion into new markets, increased amortization
of market entry costs as new markets begin to generate revenues and
amortization of goodwill related to the acquisition of EPS and PTS.
Depreciation and amortization increased as a percentage of total revenues to
20.3% for the three-month period ended March 31, 1997, from 15.3% for the
three-month period ended March 31, 1996.
Interest expense increased $85,000, or 59.8%, to $227,000 for the three-month
period ended March 31, 1997, from $142,000 for the three-month period ended
March 31, 1996. The increase was due to the financing of the network buildout
and borrowings related to the acquisition of Mercury on January 31, 1997. Also
contributing to the increase was the repayment of all outstanding debt with a
portion of the proceeds of the IPO in March 1996.
Interest income decreased $60,000, or 30.2%, to $138,000 for the three-month
period ended March 31, 1997, from $198,000 for the three-month period ended
March 31, 1996. The decrease is due to the higher level of investment in 1996
due to the proceeds of the IPO, which was consummated in March 1996.
Net loss for the three-month period ended March 31, 1997, as compared with the
three-month period ended March 31, 1996, increased to $4.7 million from $1.5
million primarily due to losses incurred on sales of pager product below cost
and substantial increases in SG&A, as described above.
The net loss per share of Common Stock for the three-month period ended March
31, 1997 increased to ($.30) from ($.19) for the same three month period ended
in 1996 due to the increased net loss in 1997 as compared to the net loss
attributable to common stockholders in 1996. Weighted average shares
outstanding includes cheap stock until the IPO date.
LIQUIDITY AND CAPITAL RESOURCES
The Company's expansion strategy will continue to require substantial funds to
finance the expansion of existing operations, the expansion into new markets as
part of the nationwide build-out of its networks, the purchase of network
assets and related FCC licenses, capital expenditures, debt service and general
corporate purposes.
The Company's net cash used in operations was $5,395,000 million for the
three-month period ended March 31, 1997, as compared to net cash provided by
operations of $591,000 for the three-month period ended March 31, 1996. The
primary reason for the increase in cash used in operations has been the rapid
expansion of the Company's networks and the associated increase in accounts
receivable and operating expenses to support a rapidly growing business.
Capital expenditures, excluding acquisitions, were $5.3 million for the
three-months ended March 31, 1997, compared to $2.4 million for the comparable
period in 1996, reflecting the rapid expansion of the Company's networks.
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 additional capacity and flexibility to
its customers. As of March 31, 1997, the Company was operating in 23 markets
with six Technical Control Centers (TCC's) in operation and was constructing
networks in 28 new markets, including a TCC in Southern California and network
expansions into Boston, Denver, Seattle, San Francisco, Los Angeles, Cleveland,
Indianapolis, and Minneapolis.
As of March 31, 1997, the Company had completed 23 network asset purchases
(network equipment and related licenses), resulting in the expansion of the
Company's 157.740 MHz networks into markets served by its Southeast, Northeast,
and Midwest TCC's, and the addition of network assets in the 450 MHz and 900
MHz bands in certain markets in the Southeast and Northeast United States. The
most recent of these was the acquisition of Mercury which closed in first
quarter of 1997 and added additional spectrum on a local basis on the radio
common carrier ("RCC") 931.3125 MHz frequency.
12
<PAGE> 13
PREFERRED NETWORKS, INC.
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
On March 1, 1996, the Company issued 3,300,000 shares of Common Stock in the
IPO. 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 used the
remaining net proceeds in 1996 and 1997 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 a secured credit facility for $12.0 million of vendor financing
bearing interest at a five-year U.S. Treasury rate plus 6.5% payable in various
monthly installments of principal and interest over 60 months, with maturity
dates through 2001. This credit facility contains various conditions,
financial covenants and restrictions and is secured by paging equipment. As of
March 31, 1997, there was $4.8 million outstanding under this facility with an
additional $7.2 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
March 31, 1997, there was $3.6 million outstanding under this facility with an
additional $1.4 million 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 $15.0
million in debt or equity capital by July 1997 plus an additional $5.0 million
by the end of January 1998, among other things. Availability under this
facility is based on a multiple of the positive EBITDA in certain markets. As
of March 31, 1997, there was $9.25 million outstanding under this facility with
no additional availability.
As of March 31, 1997, the Company had $2.6 million invested in short-term
investment grade securities at various interest rates.
Management believed that cash and cash equivalents on hand as of March 31,
1997, together with availability under the secured credit facilities mentioned
above, would be sufficient to meet the Company's working capital, capital
expenditure and debt covenant requirements until May 1997 without obtaining
additional financing.
The Company has a commitment for an additional $15.0 million in redeemable
preferred stock and warrants from certain of its stockholders and a commitment
for a bridge loan of up to $10.0 million to be utilized prior to the closing of
the sale of this equity capital. The Company has given the investors the
option to increase their commitment by or add additional investors for up to an
additional $5.0 million at substantially the same terms until July 31, 1997.
The issuance of the preferred stock and warrants is subject to shareholder
approval and execution of definitive documents and the first $15.0 million is
expected to close in June 1997. This issuance may constitute a change in
control of the Company. In April 1997, the Company borrowed $5.0 million under
the bridge loan.
13
<PAGE> 14
PREFERRED NETWORKS, INC.
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
The Company believes this $15.0 million in equity capital will be sufficient to
meet its working capital, capital expenditure and debt covenant requirements
for the balance of 1997. In addition to this $15.0 million, the Company is
required to raise an additional $5.0 million in equity or subordinated debt by
the end of January 1998 to meet the debt covenant requirements under its
revolving credit facility. The Company has no commitment for additional funds
in excess of $15.0 million. 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.
In addition to this $20.0 million, the Company may need additional funds in the
form of equity, bank debt, or other debt financing. The Company has no
commitment for funds in excess of $15.0 million, and no assurances can be given
that such additional 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. Of
this amount, $1.4 million was paid in cash in 1996, $1.0 million was paid by
the issuance of 125,598 shares of Common Stock in 1996, $1.1 million was paid
in January 1997 by the issuance of 165,317 shares of Common Stock, an
additional $130,000 was paid in cash in first quarter of 1997 and $250,000 was
paid in cash in April 1997. The transaction was accounted for as a purchase as
of September 13, 1996. Big Apple is a reseller-based paging carrier in the
states of New York, New Jersey, and Connecticut. Prior to closing, the Company
earned revenues from Big Apple under an agency agreement. The purchase of Big
Apple provided the Company with a base of customers upon opening its Northeast
TCC.
In December 1996, the Company acquired the stock of EPS Wireless, Inc. ("EPS")
for approximately $4.8 million and possible additional consideration of up to
an additional $5.0 million based on EPS's achievement of targeted operating
performance during the two year period ending December 31, 1998. The Company
issued 673,524 shares of Common Stock in 1996 and paid $300,000 in cash in
February 1997. The transaction was accounted for as a purchase as of December
1, 1996. Additional consideration, if any, will be recorded as goodwill. EPS
repairs or sells more than 70,000 product units per month. The acquisition of
EPS expands the Company's revenue sources to include paging companies that do
not currently buy network services from the Company due to geography or
frequency and also expands the Company's customer base to include cellular
companies. EPS will also provide the Company with a source of lower-cost pager
products.
In January 1997, the Company acquired the stock of Mercury Paging &
Communications, Inc. ("Mercury") and its affiliated companies for approximately
$14.2 million of which approximately $10.3 million was paid in cash and $3.9
million by the issuance of 624,321 shares of Common Stock, 156,080 of which
were held in escrow until April 1997 then were released to the former Mercury
shareholders after Mercury achieved certain revenue targets. Proceeds from
the Company's revolving credit facility which were drawn in December 1996 were
used to fund the majority of the cash portion of the purchase price, with
working capital being used to fund the remainder. Mercury is a reseller-based
paging carrier in the states of New York, New Jersey and Connecticut. Prior to
closing, the Company earned revenues from Mercury under an agency agreement.
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
14
<PAGE> 15
PREFERRED NETWORKS, INC.
FCC MATTERS - CONTINUED
guidance in connection with the continued licensing procedure of the
non-exclusive PCP channels. The Commission is concerned, in light of its
decision to license the exclusive paging channels on a geographic basis by
competitive bidding, that there is a potential for application fraud by
telemarketers for the non-exclusive PCP frequencies. It, therefore, seeks
comment on what methods could be used to eliminate or reduce the problem.
Primarily, the Commission proposes to modify the application form, but also
asks whether the frequency coordination process could be modified to reduce the
fraudulent or speculative applications.
The Commission also ordered that all non-mutually exclusive applications filed
with the Commission on or before July 31, 1996 will be processed. All mutually
exclusive applications which are pending regardless of when filed will be
dismissed. All applications (other than applications on nationwide and shared
channels) filed after July 31, 1996 will be dismissed. Finally, during the
pendency of the Further Notice, the Interim Licensing Procedure for the
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 and, upon the effective date of the rules adopted by the Paging
Second Report and Order, the Company will be able to file applications for new
sites whenever needed.
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.
OTHER MATTERS
The Company took certain cost reduction measures primarily in the area of SG&A
through a combination of attrition during the first part of the year and
employee terminations in April 1997 and reduced its workforce by
15
<PAGE> 16
PREFERRED NETWORKS, INC.
OTHER MATTERS - CONTINUED
approximately 40 employees. The salary and fringe benefit cost associated with
the reduction in force will result in monthly savings of approximately
$134,000. Severance costs of approximately $186,000 will be reflected in the
Company's financial statements for the quarter ended June 30, 1997. As a part
of the reduction in force, the Company modified the terms of the terminated
employees' stock options to purchase 117,318 shares of Common Stock to
immediately fully vest these options and to extend the exercise period to
twelve months from the date of separation. These changes resulted in $112,000
of severance costs which is included in the severance cost amount described
above.
In addition, the Company canceled certain of the outstanding stock options
granted to the Company's remaining employees, covering in the aggregate options
to purchase 485,493 shares of Common Stock with exercise prices ranging from
$2.87 to $10.61 per share and regranted an identical number of options at the
then current market price of $2.50 per share. The newly granted options vest
annually in equal amounts over a three year period beginning with the 1997 date
of grant.
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, financing sources and
availability and the effects of laws and regulations (including FCC
regulations) and competition. Such forward-looking information involves
important risks and uncertainties that could significantly effect anticipated
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to,
uncertainties affecting the paging and wireless industries generally, risks
relating to the Company's acquisition, construction and other business
development activities, risks relating to technological change in the paging
and wireless industries, risks relating to the ability of the Company to obtain
additional funds in the form of debt or equity, risks relating to the
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 2. CHANGES IN SECURITIES.
On January 31, 1997, the Company acquired all of the outstanding stock of
Mercury Paging & Communications, Inc. and its affiliated companies for
approximately $14.2 million. The Company paid approximately $10.3 million in
cash and issued 624,321 shares of Common Stock to four accredited investors.
This transaction was exempt from the Securities Act of 1933 by reason of
Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
<S> <C>
10.1 Second Amendment to Credit Agreement dated as of March 12, 1997, by
and among Preferred Networks, Inc., PNI Systems, LLC, and NationsBank,
N. A. (South) (1)
10.2 Commitment Letter dated April 9, 1997 between the Company,
Centennial Fund IV, L.P., Saugatuck Capital III, PNC Capital Corp.,
Fleet Equity Partners, and Primus Venture Fund III (1)
10.3 Third Amendment to Credit Agreement dated as of April 11, 1997, by
and among Preferred Networks, Inc., PNI Systems, LLC and NationsBank,
N.A. (South) (1)
11.1 Computation of Net Loss Per Share
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
During the quarter ended March 31, 1997, the Company filed two reports
on Form 8-K:
1. On February 14, 1997, the Company filed a Current Report on
Form 8-K/A dated December 3, 1996 with respect to the acquisition of
EPS Wireless, Inc. The following financial statements were filed as
part of this report:
The audited financial statements of EPS Wireless, Inc. as of and
for the year ended December 31, 1995 and the eleven months ended
November 30, 1996.
The unaudited pro forma condensed consolidated balance sheet of
Preferred Networks, Inc. as of September 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 nine months ended September 30, 1996.
</TABLE>
----------------------------
(1) Filed on April 15, 1997, as an exhibit to Preferred Networks, Inc.
Annual Report on Form 10-K (file no. 0-27658) for the year ended
December 31, 1996 and incorporated by reference herein.
17
<PAGE> 18
PREFERRED NETWORKS, INC.
(b) Reports on Form 8-K (Continued):
2. On February 18, 1997, the Company filed a Current Report on
Form 8-K dated January 31, 1997 reporting under Item 2 the
acquisition of Mercury Paging & Communications, Inc. and its
affiliated companies. The following financial statements were
filed as part of this report:
The audited financial statements of Mercury Paging &
Communications, Inc. and its affiliated companies as of and for
the years ended December 31, 1996 and 1995.
The unaudited pro forma condensed consolidated balance sheet of
Preferred Networks, Inc. as of December 31, 1996 and the unaudited
pro forma condensed consolidated statement of operations of
Preferred Networks, Inc. for the year ended December 31, 1996
were filed on Form 8-K/A on April 15, 1997.
18
<PAGE> 19
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: May 14, 1997 By: /s/ Mark H. Dunaway
---------------------------------------
Mark H. Dunaway
Chief Executive Officer
Date: May 14, 1997 By: /s/ Michael J. Saner
---------------------------------------
Michael J. Saner
President
Date: May 14, 1997 By: /s/ Kim Smith Hughes
---------------------------------------
Kim Smith Hughes
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
19
<PAGE> 20
PREFERRED NETWORKS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
<S> <C> <C>
10.1 Second Amendment to Credit Agreement dated as of March
12, 1997, by and among Preferred Networks, Inc., PNI
Systems, LLC, and NationsBank, N. A. (South) (1)
10.2 Commitment Letter dated April 9, 1997 between the
Company, Centennial Fund IV, L.P., Saugatuck Capital
III, PNC Capital Corp., Fleet Equity Partners, and
Primus Venture Fund III (1)
10.3 Third Amendment to Credit Agreement dated as of April
11, 1997, by and among Preferred Networks, Inc., PNI
Systems, LLC and NationsBank, N.A. (South) (1)
11.1 Computation of Net Loss Per Share
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ----------------------
(1) Filed on April 15, 1997, as an exhibit to Preferred Networks, Inc.
Annual Report on Form 10-K (file no. 0-27658) for the year ended
December 31, 1996 and incorporated by reference herein.
20
<PAGE> 1
PREFERRED NETWORKS, INC.
COMPUTATION OF NET LOSS PER SHARE
EXHIBIT 11.1
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
Primary and fully diluted:
Weighted average common stock outstanding
during the period......................................... 15,860,004 7,520,918
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
----------- -----------
Total.................................................... 15,860,004 10,858,366
=========== ===========
Net loss.................................................... $(4,724,476) $(1,500,760)
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.......................................... $(4,724,476) $(2,056,646)
=========== ===========
Net loss per share of Common Stock.......................... $ (.30) $ (.19)
=========== ===========
</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) Amount represents the portion of the accretion related to Series A
Redeemable Convertible Preferred Stock not treated as cheap stock.
21
<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,
1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,050,134
<SECURITIES> 0
<RECEIVABLES> 5,039,618
<ALLOWANCES> 316,500
<INVENTORY> 5,167,993
<CURRENT-ASSETS> 13,751,762
<PP&E> 30,139,567
<DEPRECIATION> 4,279,625
<TOTAL-ASSETS> 66,108,046
<CURRENT-LIABILITIES> 8,970,584
<BONDS> 16,191,617
0
0
<COMMON> 1,608
<OTHER-SE> 40,944,237
<TOTAL-LIABILITY-AND-EQUITY> 66,108,046
<SALES> 2,933,325
<TOTAL-REVENUES> 8,116,351
<CGS> 3,079,918
<TOTAL-COSTS> 7,014,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 145,526
<INTEREST-EXPENSE> 226,798
<INCOME-PRETAX> (4,724,476)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,724,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,724,476)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
