<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 3, 1996
----------------
PREFERRED NETWORKS, INC.
---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-27658 58-1954892
----------- -------------- ----------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification No.)
850 Center Way, Norcross, Georgia 30071
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (770) 582-3500
--------------
- ----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
a) Financial Statements of Businesses Acquired.
The audited financial statements of EPS Wireless, Inc. as of and
for the year ended December 31, 1995 and the eleven months ended
November 30, 1996 are filed as part of this Current Report on
Form 8-K/A.
b) Pro Forma Financial Information
The unaudited pro forma condensed consolidated balance sheet of
Preferred Networks, Inc. as of 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, are filed as part of this Current Report on Form 8-K/A.
c) Exhibits
The following exhibits are filed as part of this current report
on Form 8-K:
2.1 Agreement and Plan of Merger dated November 13, 1996 by and
among Preferred Networks, Inc., EPS Acquisition Corp., EPS
Wireless, Inc. and the Shareholders of EPS Wireless, Inc. -
Filed on December 17, 1996 as an exhibit to Preferred
Networks, Inc.'s Current Report on Form 8-K (file no.
0-27658) dated December 3, 1996 and incorporated by
reference herein.
23.1 Consent of Independent Auditors
<PAGE> 3
Item 7(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Report of Independent Auditors
The Stockholders
EPS Wireless, Inc.
We have audited the balance sheets of EPS Wireless, Inc. as of December 31,
1995 and November 30, 1996 and the related statements of operations, changes in
redeemable common stock and stockholders' equity (deficit), and cash flows for
the year ended December 31, 1995 and the eleven months ended November 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EPS Wireless, Inc. at December
31, 1995 and November 30, 1996, and the results of its operations and its cash
flows for the year ended December 31, 1995 and the eleven months ended November
30, 1996 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
January 22, 1997
<PAGE> 4
EPS Wireless, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
---------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 47,946 $ 170,053
Accounts receivable, less allowance for doubtful
accounts of $9,000, and $29,000 at
December 31, 1995, and November 30, 1996 953,585 712,965
Inventory 431,160 801,997
Prepaid expenses and other current assets 28,293 26,011
-------------------------
Total current assets 1,460,984 1,711,026
Furniture and equipment, net of accumulated
depreciation 454,949 624,438
Other assets 28,666 28,666
-------------------------
Total assets $1,944,599 $2,364,130
=========================
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
-------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 791,467 $ 883,362
Accrued compensation 107,090 320,231
Other accrued expenses 36,727 76,843
Notes payable and capital lease obligations, current
portion 315,259 921,097
Notes payable to stockholders 91,024 125,497
-------------------------
Total current liabilities 1,341,567 2,327,030
Notes payable and capital lease obligations, less current
portion 94,684 113,001
Redeemable Common Stock, $1 par value, shares
authorized included below, 21,100, and 27,765 voting
shares issued and outstanding at December 31, 1995, and
November 30, 1996, respectively 100,830 73,000
Stockholders' equity (deficit):
Common stock, $1 par value;
1,000,000 shares, including redeemable common
stock, authorized; (500,000 voting and 500,000 non-
voting); 103,400, and 100,510 voting shares issued
and outstanding at December 31, 1995, and
November 30, 1996, respectively, no non-voting
shares outstanding 103,400 100,510
Paid-in capital 12,971 12,971
Accretion on Redeemable Common Stock (77,830) (47,510)
Retained earnings (accumulated deficit) 368,977 (214,872)
-------------------------
Total stockholders' equity (deficit) 407,518 (148,901)
-------------------------
Total liabilities and stockholders' equity (deficit) $1,944,599 $2,364,130
=========================
</TABLE>
See accompanying notes.
<PAGE> 6
EPS Wireless, Inc.
Statements of Operations
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------------------------
<S> <C> <C>
Revenues:
Product $3,190,917 $4,094,252
Repair service 3,585,285 5,690,821
------------------------------
6,776,202 9,785,073
Cost of revenues:
Product 2,228,761 2,856,303
Repair service 2,954,496 4,601,371
------------------------------
Gross margin 1,592,945 2,327,399
Selling, general and administrative expenses 1,512,079 2,638,853
Depreciation and amortization 106,815 135,131
------------------------------
Operating loss (25,949) (446,585)
Interest expense 13,512 80,601
------------------------------
Net loss $ (39,461) $ (527,186)
==============================
</TABLE>
See accompanying notes.
<PAGE> 7
EPS Wireless, Inc.
Statement of Redeemable Common Stock and Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------
ACCRETION ON RETAINED TOTAL
REDEEMABLE VOTING REDEEMABLE EARNINGS/ STOCKHOLDERS'
COMMON COMMON PAID IN COMMON (ACCUMULATED EQUITY
STOCK STOCK CAPITAL STOCK DEFICIT) (DEFICIT)
--------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1995 $ 101,829 $ 103,400 $ 12,971 $ (78,829) $ 484,470 $ 522,012
Dividends paid -- -- -- -- (76,032) (76,032)
Accretion on
redeemable common
stock (999) -- -- 999 -- 999
Net loss for 1995 -- -- -- -- (39,461) (39,461)
--------- ------------------------------------------------------------
Balances at
December 31, 1995 100,830 103,400 12,971 (77,830) 368,977 407,518
Dividends paid -- -- -- -- (32,763) (32,763)
Stock transfer 2,490 (2,490) -- -- -- (2,490)
Shares repurchased -- (400) -- -- (23,900) (24,300)
Accretion on
redeemable common
stock (30,320) -- -- 30,320 -- 30,320
Net loss for the eleven
months ended
November 30, 1996 -- -- -- -- (527,186) (527,186)
--------- ------------------------------------------------------------
Balances at
November 30, 1996 $ 73,000 $ 100,510 $ 12,971 $ (47,510) $(214,872) $(148,901)
========= ============================================================
</TABLE>
See accompanying notes.
<PAGE> 8
EPS Wireless, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (39,461) $ (527,186)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 106,815 135,131
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (703,417) 240,620
Increase in inventory (318,446) (370,837)
(Increase) decrease in prepaid expenses and other
current assets (26,767) 2,282
Increase in accounts payable 750,770 91,895
Increase in accrued liabilities 16,946 40,116
Increase in accrued compensation 84,029 213,141
-----------------------------
Net cash used in operating activities (129,531) (174,838)
INVESTING ACTIVITIES
Purchase of furniture and equipment (240,568) (275,465)
Increase in other assets (28,666) --
-----------------------------
Net cash used in financing activities (269,234) (275,465)
FINANCING ACTIVITIES
Increase in notes payable to stockholders 91,024 34,473
Proceeds from notes payable 375,000 895,000
Repayments of note payable (75,000) (300,000)
Dividends paid (76,032) (32,763)
Repurchase of stock -- (24,300)
-----------------------------
Net cash provided by financing activities 314,992 572,410
Net (decrease) increase in cash (83,773) 122,107
Cash at beginning of period 131,719 47,946
-----------------------------
Cash at end of period $ 47,946 $ 170,053
=============================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 13,512 $ 69,545
=============================
</TABLE>
See accompanying notes.
<PAGE> 9
EPS Wireless, Inc.
Notes to Financial Statements
November 30, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
EPS Wireless, Inc. (the "Company" or "EPS") is a national provider of paging
and cellular product repair services. EPS also offers product sourcing and
sales for refurbished paging products, inventory management and product
fulfillment. Prior to June 1995, the Company operated under the name
Electronic Paging Services, Inc.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue on the repair of pagers and cellular phones when
the service is complete and the refurbished units are shipped to the customer.
Revenue from the sale of refurbished pagers and cellular phones is recognized
when the product is shipped. The Company's sales are derived from a variety of
customers, however certain customers represented significant portions of the
Company's revenues. The Company derived approximately approximately 25% and
12% of its revenues from one customer in the eleven months ended November 30,
1996 and the year ended December 31, 1995, respectively.
ACCOUNTS RECEIVABLE
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Payment is generally due
upon shipment for pager and cellular phone sales and within 30 days from
invoice for repair sales. Credit losses have been consistent with management's
expectations.
<PAGE> 10
EPS Wireless, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories consist of unrefurbished pagers, cellular phones and related repair
parts and refurbished pagers and cellular telephones (finished goods), and are
stated at the lower of cost or market. Cost of repair parts is computed on a
first-in, first-out basis. Cost of unrefurbished and refurbished pagers and
cellular phones is computed on the specific identification basis.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Depreciation is provided based on
the asset's estimated useful life (generally 5 to 7 years), principally using
the straight-line method.
The detail of these assets follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
-----------------------------
<S> <C> <C>
Furniture and fixtures $ 51,847 $ 77,991
Computers 161,968 362,574
Repair equipment 490,991 548,428
Leasehold improvements 18,649 24,587
-----------------------------
723,455 1,013,580
Less accumulated depreciation (268,506) (389,142)
-----------------------------
Total $ 454,949 $ 624,438
=============================
</TABLE>
The carrying value of long-lived assets is periodically reviewed by the Company
for impairment, and losses are recognized as set forth in Financial Accounting
Standards Board Statement No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. There was no impact of
adoption in 1996.
INCOME TAXES
The stockholders have elected under Subchapter S of the Internal Revenue Code
to include the Company's income in their personal income tax returns.
Accordingly, there is no provision for income taxes.
The Company converted to Subchapter S from C corporation status effective
January 1, 1993. As such, the Company is subject to built-in gains tax on any
disposals of appreciated assets sold in the ten year period following the
conversion. The Company has assessed the likelihood of disposing such assets
and concluded that it is not necessary to record a deferred tax liability at
December 31, 1995 or November 30, 1996.
<PAGE> 11
EPS Wireless, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet at November 30, 1996 for
cash, accounts receivable, notes payable and capital leases, notes payable to
stockholders, and accounts payable and accrued expenses approximate their fair
values.
2. COMMITMENTS AND CONTINGENCIES
The Company rents office space and certain equipment. Rent expense incurred
was approximately $331,000 and $443,000 in 1995 and the eleven months ended
November 30, 1996, respectively. The office lease provides for additional rent
based on the operating expenses of the property. The Company continues to pay
rent pursuant to its lease on its former office space which is now vacated.
Such remaining payments, which total $32,340 at November 30, 1996, have been
accrued. Approximate minimum annual rental payments required by these
operating leases, excluding the operating expense allocations but including the
payments due under the lease for former office space, are as follows, as of
November 30, 1996:
<TABLE>
<S> <C>
Month ended December 31, 1996 $ 40,952
Year ending December 31, 1997 421,504
1998 343,992
1999 257,994
----------
$1,064,442
==========
</TABLE>
The Company is involved in litigation with a former employee who is seeking
approximately $31,000 in commissions from the Company. The Texas Workforce
Commission awarded this amount to the employee in its initial ruling. The
Company has appealed the decision; however at this time neither the Company nor
legal counsel can predict the outcome of the suit. None of the amount has been
accrued as of November 30, 1996.
<PAGE> 12
EPS Wireless, Inc.
Notes to Financial Statements (continued)
3. NOTES PAYABLE AND CAPITAL LEASES
The Company has notes payable and capital leases outstanding as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
--------------------------
<S> <C> <C>
Note payable to bank under revolving line of credit
agreement, maximum available $1,200,000; bearing
interest at prime plus 1% per annum (9 1/2%
at November 30, 1996), guaranteed by an officer of the
Company and secured by substantially all assets of the
Company. Note matures April 1998. The Company
was in default under this agreement at
November 30, 1996. Entire amount paid off in
December 1996 $ -- $ 895,000
Note payable to bank, maximum available $300,000,
bearing interest at prime plus 1% per annum, maturing
September 1, 1996. Entire amount paid off in
April 1996 300,000 --
Amounts due under various capital leases, due in various
monthly installments until 2001. Secured by the
related equipment 109,943 139,098
---------- ----------
Total 409,943 1,034,098
Less current portion (315,259) (921,097)
---------- ----------
$ 94,684 $ 113,001
========== ==========
</TABLE>
The revolving line of credit agreement contains various limitations on
borrowings based on eligible accounts receivable and inventory. In addition,
the note has various covenants restricting the Company's financial ratios,
tangible net worth and other financial activity.
<PAGE> 13
EPS Wireless, Inc.
Notes to Financial Statements (continued)
3. NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
Future minimum payments under capital leases, by year and in the aggregate,
consisted of the following at November 30, 1996:
<TABLE>
<S> <C>
One month ended December 31, 1996 $ 3,858
Year ending December 31, 1997 46,298
Year ending December 31, 1998 46,298
Year ending December 31, 1999 42,919
Year ending December 31, 2000 46,992
Year ending December 31, 2001 3,446
--------
Total minimum payments 189,811
Less amounts representing interest on capital leases (50,713)
--------
Present value of future minimum lease payments $139,098
========
</TABLE>
4. NOTES PAYABLE TO STOCKHOLDERS
The Company has notes payable to two of its stockholders, who are also officers
of the Company, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
--------------------------
<S> <C> <C>
Unsecured note payable to stockholder, bearing
interest at 12% per annum, unless prepaid upon
which minimum interest of $5,000 due. $ -- $ 75,000
Unsecured note payable to stockholder, bearing
interest at 10% per annum 91,024 50,497
--------------------------
$91,024 $125,497
==========================
</TABLE>
Interest expense in 1996 and 1995 includes approximately $14,000 and $3,000,
respectively, related to these stockholder loans.
<PAGE> 14
EPS Wireless, Inc.
Notes to Financial Statements (continued)
5. EMPLOYEE BENEFIT PLAN
Effective January 1, 1996, the Company established a 401(k) plan for
substantially all employees who have completed three months of service and are
at least 21 years of age. Participants may contribute a portion of their
salary, and the Company matches up to 10% of the first $1,000 of the
participant's contribution. Company contributions were insignificant in the
eleven months ended November 30, 1996. The Company expects to terminate this
separate plan and merge into its new parent's plan, upon consummation of the
transaction described in Note 7 below.
6. REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY
Two of the Company's stockholders have redemption rights whereby they can
require the Company to repurchase their shares of common stock at the greater
of the individual's cost or book value, at the end of the calendar quarter
preceding such request. These shares were accreted to book value at December
31,1995 and hence are stated at cost plus accretion at that date. At November
30, 1996, the individuals' cost exceeded book value, hence the shares are
stated at the individuals' cost at this date.
The stockholders of the Company have also agreed that no shares of the common
stock of the Company may be transferred without consent of 75% of the holders
of the issued and outstanding voting common stock. The Company also has the
right of first refusal to repurchase any shares offered for sale by a
stockholder. Upon death of a stockholder, the Company shall be obligated to
repurchase the stock at a formula-based price, to the extent the Company has
the funds legally available to so purchase. Upon the termination of a
stockholder-employee, the Company shall have the right of first refusal to
repurchase the stock. All of these agreements, including the redemption
features, terminated upon consummation of the transaction described in Note 7
below.
The Company had a stock option plan providing for grants to stockholders and
executives of the Company. Initially, 18,675 shares were authorized for grant
under the plan. Options under the plan vest on a pro-rata basis of one-third
on each of the first three anniversaries of the date of grant. Options granted
expire 5 years after date of grant if not exercised except in the event of
<PAGE> 15
EPS Wireless, Inc.
Notes to Financial Statements (continued)
6. REDEEMABLE COMMON STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
employee termination, at which time the employee has 90 days to exercise any
vested options. Exercises may occur only in the first three months of each
calendar year. Activity in the stock option plan during 1995 and through
November 30, 1996 follows:
<TABLE>
<CAPTION>
SHARES UNDER EXERCISE PRICE
OPTION PER SHARE
----------------------------
<S> <C> <C>
Balance at January 1, 1995
Grants 6,800 $12.05
-------
Balance at December 31, 1995 6,800 $12.05
Grants 6,225 $20.00
Exercises (6,225) $20.00
Forfeitures (4,500) $12.05
Repurchased by Company (2,300) $12.05
-------
Balance at November 30, 1996 --
=======
</TABLE>
In November 1996, the Company repurchased all of the then outstanding options
for $103,100, subject to consummation of the stock sale. Such amount has been
recorded as compensation expense in the accompanying statement of operations
for the period ended November 30, 1996. The stock option plan was terminated
upon consummation of the transaction described in Note 7 below.
7. SUBSEQUENT EVENT
On December 3, 1996, a wholly-owned subsidiary of Preferred Networks, Inc.
acquired by merger all of the outstanding common stock of the Company for
$300,000 in cash and 673,524 shares of Preferred Networks, Inc.'s $.0001 par
value common stock plus the potential right to receive certain additional
consideration based on the Company's financial performance for 1997 and 1998,
or, if certain events occur, during a specified period ending prior to December
31, 1998. Such additional consideration, if any, is limited to $5 million and
is payable in cash.
<PAGE> 16
Item 7(b). Pro Forma Financial Statements
The following unaudited pro forma condensed consolidated financial statements
of Preferred Networks, Inc. ("PNI") and EPS Wireless, Inc. ("EPS") are derived
from, and should be read in conjunction with audited financial statements of
EPS filed herein and the audited financial statements of PNI as previously
filed on Form S-1 and unaudited interim financial statements of PNI as
previously filed on Form 10-Q with the Securities and Exchange Commission. The
pro forma condensed consolidated financial statements do not purport to be
indicative of the results of operations or financial position which would have
actually been reported had the acquisition been consummated on the dates
indicated, or which may be reported in the future.
The pro forma balance sheet reflects adjustments as if the acquisition had been
consummated on that date, September 30, 1996.
The pro forma statements of operations reflects adjustments as if the
acquisition had been consummated at January 1, 1995.
<PAGE> 17
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Balance Sheet
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
PREFERRED PRO
NETWORKS, EPS WIRELESS, FORMA PRO
INC. INC. ADJUSTMENTS FORMA
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,883,718 $ 51,717 $ (300,000)(a) $ 20,635,435
Accounts receivable, net 1,738,330 859,331 -- 2,597,661
Receivables from related parties 83,030 -- -- 83,030
Pager inventory 2,033,544 706,288 -- 2,739,832
Prepaid expenses and other current assets 735,412 68,851 -- 804,263
-----------------------------------------------------------------
Total current assets 25,474,034 1,686,187 (300,000) 26,860,221
Property and equipment, net 17,467,119 590,373 18,057,492
Other assets, net 8,065,615 34,494 4,777,418(a) 12,877,527
-----------------------------------------------------------------
$ 51,006,768 $ 2,311,054 $ 4,477,418 $ 57,795,240
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,845,567 $ 972,784 $ 175,000(a) $ 2,993,351
Accrued liabilities 1,540,705 4,571 -- 1,545,276
Payables to related parties -- 50,497 -- 50,497
Accrued salaries 833,896 159,994 -- 993,890
Current portion of notes payable and capital
leases 609,138 820,388 -- 1,429,526
-----------------------------------------------------------------
Total current liabilities 4,829,306 2,008,234 175,000 7,012,540
Notes payable and capital leases, less current
position 5,393,601 105,238 -- 5,498,839
Redeemable Common Stock -- 73,000 (73,000)(a) --
-----------------------------------------------------------------
Total liabilities 10,222,907 2,186,472 102,000 12,511,379
Stockholders' equity (deficit)
Common stock 1,461 100,910 (100,910)(a) 2,135
674(a)
Additional paid-in capital 51,800,496 12,971 4,499,326(a) 56,299,822
(12,971)(a)
Accretion on Redeemable Common Stock -- (47,510) 47,510(a) --
Accumulated (deficit)/earnings (11,018,096) 58,211 (58,211)(a) (11,018,096)
-----------------------------------------------------------------
40,783,861 124,582 4,375,418 45,283,861
-----------------------------------------------------------------
$ 51,006,768 $ 2,311,054 $ 4,477,418 $ 57,795,240
=================================================================
</TABLE>
See accompanying pro forma adjustments
<PAGE> 18
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
PREFERRED PRO
NETWORKS, EPS WIRELESS, FORMA PRO
INC. INC. ADJUSTMENTS FORMA
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,353,234 $ 6,776,202 $ (3,531)(b) $ 14,125,905
Costs of revenues 6,325,984 5,183,257 (2,683)(b) 11,506,558
-----------------------------------------------------------------
1,027,250 1,592,945 (848) 2,619,347
Selling, general and administrative expenses 3,179,944 1,512,079 -- 4,692,023
Depreciation and amortization 763,743 106,815 336,180(c) 1,206,738
-----------------------------------------------------------------
Operating loss (2,916,437) (25,949) (337,028) (3,279,414)
Interest expense (317,160) (13,512) -- (330,672)
Interest income 363,837 -- -- 363,837
-----------------------------------------------------------------
Net loss $ (2,869,760) $ (39,461) $ (337,028) $ (3,246,249)
=================================================================
Pro forma net loss per share of common stock $ (0.29) $ (0.30)
============ ============
Weighted average number of common shares used
in calculating pro forma net loss per share of
common stock 10,013,901 10,687,425
============ ============
Historical net loss per share of common stock $ (0.48) $ (0.49)
============ ============
Weighted average number of common shares used
in calculating historical net loss per share of
common stock 9,158,397 9,831,921
============ ============
</TABLE>
See accompanying pro forma adjustments.
<PAGE> 19
PREFERRED NETWORKS, INC.
Pro Forma Condensed Consolidated Statement of Operations
For the nine months ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
PREFERRED PRO
NETWORKS, EPS WIRELESS, FORMA PRO
INC. INC. ADJUSTMENTS FORMA
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,999,129 $ 7,686,056 $ (1,463)(b) $15,683,722
Costs of revenues 7,337,586 5,639,683 (1,073)(b) 12,976,196
-----------------------------------------------------------------
661,543 2,046,373 (390) 2,707,526
Selling, general and administrative expenses 5,461,667 2,161,565 -- 7,623,232
Depreciation and amortization 1,398,489 97,496 252,135 (c) 1,748,120
-----------------------------------------------------------------
Operating loss (6,198,613) (212,688) (252,525) (6,663,826)
Interest expense (194,455) (65,315) -- (259,770)
Interest income 906,582 -- -- 906,582
-----------------------------------------------------------------
Net loss $ (5,486,486) $ (278,003) $(252,525) $ (6,017,014)
=================================================================
Pro forma net loss per share of common stock $ (0.41) $ (0.43)
============ ============
Weighted average number of common shares used
in calculating pro forma net loss per share of
common stock 13,452,111 14,125,635
============ ============
Historical net loss per share of common stock $ (0.46) $ (0.47)
============ ============
Weighted average number of common shares used
in calculating historical net loss per share of
common stock 13,251,775 13,925,299
============ ============
</TABLE>
See accompanying pro forma adjustments.
<PAGE> 20
BALANCE SHEET:
(a) To reflect the acquisition by merger of all the outstanding common stock
of EPS and the allocation of the purchase price on the basis of the
estimated fair values of the net assets acquired, assuming a September 30,
1996 purchase date. The components of the purchase price and its
preliminary allocation to the assets and liabilities are as follows:
<TABLE>
<S> <C>
Components of purchase price:
Cash $ 300,000
Stock (673,524 shares) 4,500,000
Other costs of acquisition 175,000
-----------
Total estimated purchase price, exclusive of
additional consideration, if any $ 4,975,000
===========
Preliminary allocation of purchase price:
Current assets $ 1,686,187
Property and equipment 590,373
Other assets 34,494
Current liabilities (2,008,234)
Capital lease obligations (105,238)
Goodwill 4,777,418
-----------
Total purchase price $ 4,975,000
===========
</TABLE>
PNI is in the process of determining the fair values of the assets acquired and
liabilities assumed and hence may make adjustments to the purchase price
allocation. The actual allocation will vary from the pro forma allocation due
to changes in the assets and liabilities of EPS at the actual date of
acquisition.
PNI has agreed to pay additional consideration based on EPS's financial
performance for 1997 and 1998, or if certain events occur, during a specified
period ending prior to December 31, 1998. Such additional consideration, if
any, is limited to $5 million and is payable in cash. Any such amounts would
be accounted for as additional goodwill amortized over 15 years.
STATEMENTS OF OPERATIONS:
(b) To eliminate intercompany sales
(c) To amortize actual goodwill recorded of $5,042,700 in connection with
acquisition of EPS, using a 15-year life and the straight-line method.
No income tax expense was included in the pro forma statements of operations as
on a combined basis, PNI is in a net loss position.
<PAGE> 21
LOSS PER SHARE
Pro forma net loss per share for periods prior to PNI's March 1, 1996 IPO (the
"IPO") was computed by dividing net loss by the weighted average number of
shares of Common Stock outstanding after giving retroactive effect to the
mandatory conversion of the Series A Redeemable Preferred Stock and the Series
B Redeemable Preferred Stock of PNI into Common Stock, and the related accrued
dividends on the Series B Redeemable Preferred Stock through January 31, 1996,
paid in shares of Common Stock, which occurred upon the consummation of the
IPO, plus cheap stock as defined below. Pro forma net loss per share for
periods ending after the IPO is calculated as the sum of pro forma net loss per
share for the period from January 1, 1996 until the March 1, 1996 IPO closing
date plus historical net loss per share from the IPO until September 30, 1996.
Historical net loss per share was computed using the requirements of Accounting
Principles Board Opinion No. 15 and SEC Staff Accounting Bulletin No. 83 and as
such equals the net loss increased by the portion of accretion of the Series A
Redeemable Preferred Stock which relates to shares which are not considered as
cheap stock, as defined below, and the dividends on Series B Redeemable
Preferred Stock divided by the weighted average number of shares of Common
Stock outstanding, plus cheap stock as defined below, up until the March 1,
1996 closing date of the IPO. The calculation excludes any antidilutive shares
during the period, other than cheap stock. After the IPO, historical and pro
forma net loss per share are identical and hence pro forma disclosures are not
included after the IPO.
Pursuant to SEC Staffing 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 PNI's registration statement
for the IPO have been included as if outstanding for all periods presented, up
until the March 1, 1996 closing date of the IPO (using the treasury stock
method at the IPO price) even though the effect is to reduce the loss per
share. A portion of the Series A Redeemable Preferred Stock,all of the Series
B Redeemable Preferred Stock and certain of the stock options and warrants have
been treated as cheap stock.
The computation of fully diluted historical net loss per share of Common Stock
was antidilutive in each of the periods presented; therefore the amounts
reported for primary and fully diluted are the same.
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: February 14, 1997 PREFERRED NETWORKS, INC.
By: /s/ Kim Smith Hughes
------------------------
Kim Smith Hughes
Chief Financial Officer
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE NO.
------------------------------------------- ----------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as of
November 13, 1996, by and among PNI, EPS
Acquisition Corp., EPS Wireless, Inc., and
the Shareholders of EPS -- Filed on
December 17, 1996 as an exhibit to
Preferred Networks, Inc.'s Current Report
on Form 8-K (file no. 0-27658) dated
December 3, 1996 and incorporated by
reference herein.
23.1 Consent of Independent Auditors
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-3962, Form S-8 No. 333-3824 and Form S-8 No. 333-3826) of
Preferred Networks, Inc. and in the related Prospectuses of our report dated
January 22, 1997 with respect to the financial statements of EPS Wireless, Inc.
for the year ended December 31, 1995 and the eleven months ended November 30,
1996 included in this Form 8-K/A.
/s/ ERNST & YOUNG LLP
February 14, 1997
