<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED DECEMBER 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)
Georgia 58-1954892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
850 Center Way, Norcross, Georgia 30071
(Address of principal executive offices, including zip code)
(770) 582-3500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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 for 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
<PAGE> 2
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the closing sales price of the Registrant's Common Stock
on the Nasdaq Stock Market on March 23, 1998 was approximately $19.5 million. As
of March 23, 1998, 16,270,028 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on May 28, 1998 are incorporated by reference
in Part III.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
- ------
Item 1. Business................................................................... 4
2. Properties................................................................. 16
3. Legal Proceedings.......................................................... 16
4. Submission of Matters to a Vote of Security Holders........................ 16
Executive Officers of the Registrant....................................... 16
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................... 17
6. Selected Financial Data.................................................... 19
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 20
8. Financial Statements and Supplementary Data................................ 30
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................. 46
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant......................... 47
11. Executive Compensation..................................................... 47
12. Security Ownership of Certain Beneficial Owners and Management............. 47
13. Certain Relationships and Related Transactions............................. 47
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 48
</TABLE>
3
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
Preferred Networks, Inc. (the "Company") is a leading provider of
outsourcing services to the wireless marketplace and currently serves over 2,400
companies nationwide. The Company does not market its services directly to end
users and therefore does not compete with its customers for their subscribers.
The Company's outsourcing service offering consists of (i) one-way wireless
networks, whereby companies purchase non-branded, wholesale network services
from the Company for resale to their customers; (ii) network engineering and
maintenance services, supporting one-way and two-way wireless technologies
(through Preferred Technical Services, Inc. - "PTS", a wholly-owned subsidiary);
and (iii) pager and cellular product repair services, product sales and
inventory management and fulfillment (through EPS Wireless, Inc. - "EPS", a
wholly-owned subsidiary.) The Company provides its services to network carriers,
resellers, agents and manufacturers, and its customers include twelve of the
twenty largest paging companies, the two largest manufacturers of wireless
network infrastructure and one of the two largest cellular product
manufacturers. The five largest paging companies are currently customers of the
Company in all three of its service lines: network services, technical services
and product services.
The Company's strategy is to create customer value as a leading provider of
high-quality, cost-effective outsourcing solutions to companies in the wireless
marketplace. The Company's outsourcing services enable companies to offer
branded wireless products and services directly to their customers while
incurring associated costs on an as-needed basis. The Company is able to provide
high quality, cost effective outsourcing services due to: (i) the cost benefits
of providing its services to many companies with many subscriber bases rather
than to a single subscriber base; (ii) its reduced overhead costs as a result of
not having to support the cost of sales, marketing and customer support
organizations directed to subscribers; and (iii) the reduced operating costs
associated with its centralized network architecture and its primary use of a
low cost, high power paging frequency.
INDUSTRY BACKGROUND
The commercial mobile wireless communications industry began in 1949 when
the Federal Communications Commission (the "Commission" or the "FCC") allocated
a group of radio frequencies for use in providing one-way and two-way paging
services. Historically, the wireless industry has consisted of a highly
fragmented, large number of small operators, providing one-way paging services
principally to professional business segments. The paging industry has expanded
to serve an increasingly broad customer base as business customers and consumers
have become increasingly aware of the benefits of one-way and two-way wireless
services, including cellular telephone services, personal communication services
("PCS") and premium one-way paging services. According to industry sources, the
largest component of the wireless market today remains one-way signaling.
Industry sources estimate that the U.S. market for one-way, traditional paging
services has grown from approximately one million subscribers in 1980 to 43.1
million subscribers in 1996 and is estimated to reach 57.7 million subscribers
by 2000. Factors contributing to this growth include: (i) greater penetration of
paging services into mainstream consumer markets; (ii) reduced pager and service
costs to subscribers driven by technological improvements and competition; (iii)
wider area coverage; (iv) increased reliability of paging services; (v) enhanced
applications of one-way paging services, such as voice mail, Internet, facsimile
and other methods of data transmission; and (vi) the FCC auction process of new
spectrum for one-way paging services.
Historically, wireless companies held a license for a radio frequency,
constructed and maintained network facilities over which to deliver their
services ("carriers") and marketed products and services to subscribers through
direct sales forces. As the market for wireless services has expanded,
additional channels of distribution have evolved, including companies that do
not build and maintain their own networks but instead purchase network services
from carriers on a wholesale basis in order to resell wireless services to
subscribers ("resellers"). Many carriers also operate as resellers in certain
geographic markets where they outsource network services to another carrier to
expand their coverage and capacity without additional network infrastructure
investment.
Increased consumer demand for wireless services has resulted in greater
competition for subscribers and emphasis on direct sales and marketing to
non-commercial users, with retail distribution emerging as an effective sales
outlet for products. Expansion into consumer markets has also created
opportunities for direct marketing and customer billing organizations to bundle
services with other offerings and outsource the network and product support
requirements to
4
<PAGE> 5
companies such as the Company. Such potential distributors of branded wireless
services include utility companies, credit card companies, mail-order catalogs
and televised home shopping companies.
While the number of pagers in service has grown dramatically since the FCC
authorized additional paging channels in the 1980s, increased competition has
forced wireless carriers and resellers to lower their prices, with monthly
average revenue per unit ("ARPU") for one-way paging services steadily declining
from $16.92 in 1990 to $9.77 in 1996, according to industry sources. At the same
time, competition has caused high subscriber turnover (an average churn rate of
2.8% per month in 1996, according to industry sources), requiring companies to
incur a higher gross customer acquisition cost for every net subscriber added.
Furthermore, consumer demands for enhanced services are requiring carriers to
continually invest in expanding and upgrading their networks. The Company
believes that ARPU will remain low while competition will continue to increase,
requiring distribution channels to focus on cost reduction and increased
marketing of value-added products and services in order to achieve increased
cashflow per subscriber.
The Company believes these trends will result in growing demand for
outsourcing of fixed cost centers and capital intensive functions so that
companies selling branded wireless services can achieve revenue growth while
incurring costs on an as-needed basis. Outsourcing of network services has
emerged as the fastest growing method of fulfilling paging services, with the
reseller channel of distribution growing from 11% of total pagers in service in
1991 to 37% in 1996, according to industry sources. At the same time, high
subscriber churn rates have resulted in service providers selling subscriber
devices to their new customers below cost in order to add net recurring service
revenue, creating an active secondary market for used and refurbished products
and a need to reduce product costs. The Company believes that it is
well-positioned to benefit from the trends which are driving growth in the
wireless marketplace and that these trends will lead to increased outsourcing of
all of the services it offers.
OUTSOURCING SERVICES FOR THE WIRELESS MARKETPLACE
NETWORK SERVICES
The Company's one-way paging networks provide wide-area coverage and
flexible service options, enabling the Company's customers to offer competitive,
branded paging services to their subscribers, while incurring costs on an
as-needed basis. The Company currently owns and operates paging networks in five
regions of the United States, including the Southeast, Mid-Atlantic, Northeast,
Midwest and North Central regions. The Company offers unique engineering support
to its customers that enables carriers to directly connect their own terminal
switching equipment with the Company's networks ("colocation" and
"interconnection" services) in order to purchase network services from the
Company. As of December 31, 1997, the Company provided network services to more
than 1,500 companies, which collectively had 454,795 units in service on the
Company's networks. The Company's network services customers include ten of the
twenty largest paging companies in the U.S.
The Company employs an efficient network architecture utilizing regional
Technical Control Centers ("TCCs") that centrally control its networks in
multiple local markets within a wide geographic region. As of December 31, 1997,
the Company had six TCCs and operated paging networks in 27 markets. TCCs enable
the Company to rapidly open new markets and cost-efficiently operate multiple
local markets. The Company's network strategy is to provide local and regional
network services, primarily on a common frequency, in the 50 largest U.S.
metropolitan markets and adjacent areas. The Company's plan requires
construction of only one additional TCC to service the remaining markets in its
nationwide expansion strategy. In addition to supporting the Company's one-way
paging networks, the TCC platform can support multiple one-way and two-way
telecommunications networks. The timing and construction of the remaining TCC
will depend, among other things, on customer requirements and the timing and
availability of capital.
The Company is licensed to build and operate 157.740 MHz frequency networks
in numerous markets, which serves as the foundation for its local and regional
paging networks. In addition, the Company has augmented its 157.740 MHz networks
by purchasing and consolidating existing networks licensed on other frequencies
in order to offer additional capacity and flexibility to its customers. The
Company believes that its wholesale, centrally-operated network strategy enables
it to achieve greater cost and usage efficiency of existing networks by
consolidating them into its TCC platform.
5
<PAGE> 6
The Company believes that it is the largest carrier's carrier of exclusively
wholesale one-way paging network services in the United States, although the
number of units on the Company's networks currently represents only a small
percentage of the total number of paging subscribers industry-wide.
TECHNICAL SERVICES - PREFERRED TECHNICAL SERVICES, INC. ("PTS")
PTS provides network engineering and technical services, supporting one-way
and two-way wireless technologies. PTS's services include installation of
network equipment; maintenance of installed equipment and tower sites; sales of
network equipment; engineering site surveys; and network equipment repair. PTS's
services also include system design, Electromagnetic Energy ("EME") and
Environmental Safety Industrial & Hygiene ("ESIH") testing, and project
management. In 1997, PTS provided its services to over 60 companies in the U.S.
as well as in Japan. PTS's customers include ten of the twenty largest paging
companies, two operators of PCS services and two national network tower site
owners. PTS is also an authorized sales agent of network equipment for the two
largest manufacturers of wireless infrastructure.
Consumer demand for new wireless technologies has required carriers to make
on-going investments in network upgrades and expansion in order to remain
competitive. PTS provides cost and capital savings alternatives to companies by
enabling them to outsource their technical and engineering requirements by
utilizing PTS on an as-needed basis rather than by maintaining this expertise
in-house. PTS is able to maintain expertise in the latest wireless technologies
by providing its services to many carriers rather than exclusively to a single
carrier.
Established in 1991, PTS was acquired by the Company in July 1996. PTS's
engineering and technical expertise has enabled the Company to achieve internal
cost savings in its own one-way network operations and also provided a platform
to expand its offering of outsourcing services. At the time of its acquisition
by the Company, PTS operated exclusively in the Southeast region and was a
provider of its services primarily to the Company. PTS today operates from the
Company's TCC locations, as well as several independent locations across
the country. PTS intends to continue to expand nationwide by locating
engineering personnel in additional markets as customer contracts may require.
PRODUCT SERVICES - EPS WIRELESS, INC. ("EPS")
EPS provides paging and cellular product repair services, sales of new, used
and refurbished paging and cellular products and inventory management and
fulfillment services. The Company believes that EPS is one of the five largest
independent wireless product repair facilities in the U.S. Operating in a 57,000
square foot facility in Dallas, Texas, EPS serves more than 800 companies,
including nine of the twenty largest paging companies, and in 1997, processed
more than one million pager and cellular devices for its customers.
Increased competition for subscribers has resulted in service providers
selling new pager and cellular products to their customers below cost in order
to add recurring subscriber service revenue. With declining service ARPU and
subscriber churn requiring that the gross number of product units sold must be
greater than the number of net subscriber unit additions, companies require
cost-effective product solutions that enable the resulting service revenue
stream to be profitable. Subscriber churn combined with the continued
introduction of new product technologies has created a growing market for
recycled and refurbished product. This has created a significant opportunity for
EPS to repair and refurbish its customers' existing inventory as well as to
source, refurbish and sell products for its customers.
Established in 1987, EPS was acquired by the Company in December 1996. EPS
provided a further expansion of the Company's outsourcing services platform by
enabling it to provide product and inventory solutions to companies in the
wireless marketplace. Additionally, EPS's product sourcing capabilities, repair
services and inventory management and fulfillment expertise have enabled the
Company to offer expanded product services to its network customers and to
achieve overall internal product cost reductions.
STRATEGY AND CUSTOMERS
The Company's strategy is to create customer value as a leading provider of
high-quality, cost-effective outsourcing solutions to companies in the wireless
marketplace. The Company supports the growth of its customers by enabling them
to focus their capital resources on sales and marketing of value-added, branded
wireless services to subscribers, while purchasing network, technical and
product services from the Company on an as-needed basis. The Company believes
its strategy enables its customers to compete more effectively for subscribers
and to increase their cashflow contribution per subscriber.
6
<PAGE> 7
Consolidation in the paging industry has resulted in fewer, larger providers
of branded wireless services. The Company's strategy of providing multiple
outsourcing services has enabled it to increasingly serve large national
companies that seek sophisticated single-source solutions. Twelve of the twenty
largest paging companies currently purchase services from the Company, with each
of the five largest paging companies today purchasing all three of the Company's
services. The Company currently serves a total of over 2,400 companies,
including one-way and two-way wireless carriers, resellers and manufacturers.
NETWORK SERVICES
The Company's network customers and potential network customers include any
type of organization that offers or seeks to offer branded paging and other
wireless services. These organizations generally fall into one of four broad
categories:
- large carriers whose principal business is to sell paging services in
multiple markets;
- small, single market paging carriers and resellers;
- large telecommunications companies such as local exchange carriers, long
distance carriers, cable companies and cellular telephone companies, for
which paging is one of many services offered and not a principal
business; and
- non-traditional wireless service providers whose principal business is
not telecommunications, such as utility companies and distributors of
mass-market consumer products and services, that seek to bundle wireless
services with other offerings.
The Company believes that by enabling companies to purchase network services
on an as-needed basis, the Company's customers are able to focus more capital
resources on sales and marketing. Accordingly, the Company believes its
customers are able to compete more effectively and profitably for subscribers.
The Company groups its network customers into three principal categories
based on the nature of the services it provides: (i) traditional, or
non-facilities-based, resellers that purchase both airtime and switching
services from the Company on a fixed monthly per unit basis; (ii)
"colocation/interconnection" customers that utilize their own switching
equipment and purchase only airtime from the Company on a fixed monthly per unit
basis; and (iii) companies that utilize both switching and airtime services of
the Company to provide "caller pays" service, pursuant to which the initiator of
each page (the "caller") is charged on their telephone bill and the local
telephone exchange carrier in turn pays the Company a percentage of the amount
collected for the actual number of billable pages per month from the caller,
rather than a fixed monthly charge.
- TRADITIONAL RESELLERS. Traditional resellers do not own their own
terminal switching equipment or procure their own telephone numbers from
local exchange carriers. Traditional resellers route their subscriber
paging traffic through the Company's TCCs, utilize local telephone
numbers procured by the Company and purchase airtime on the Company's
networks from the Company. The Company charges its traditional reseller
customers a monthly fixed price per unit in service based on a number of
factors, including type of paging service, extent of coverage area, unit
volume and utilization of switch-based, value-added services such as
voice mail and custom prompts. These customers generally consist of
local and regional resellers.
- COLOCATION/INTERCONNECTION CUSTOMERS. Colocation/interconnection
customers own their own terminal switching equipment and procure their
own telephone numbers from local exchange carriers. These customers
purchase airtime and, in the case of colocation customers, terminal
equipment maintenance services from the Company. These customers either
locate their switching terminal equipment in the Company's TCC
facilities (colocation), or remotely connect their equipment to the
Company's TCC through a direct circuit, such as a telephone line or
satellite link (interconnection). By owning their own switching
equipment and procuring their own telephone numbers,
colocation/interconnection customers are able to maintain flexibility in
the design of their terminal-based service offerings, such as custom
prompts and voice mail services. The Company incurs minimal marginal
cost in supplying only airtime to its colocation/interconnection
customers and therefore charges these customers substantially less per
unit in service per month than it charges its traditional reseller
customers. Additionally, because colocation customers physically install
their terminal switching equipment at one of the Company's TCCs and
obtain terminal maintenance services from the Company, the Company
believes that these customers are able to
7
<PAGE> 8
reduce their own switch maintenance and facility costs.
Colocation/interconnection customers generally consist of larger
resellers and paging carriers.
- CALLER PAYS CUSTOMERS. The Company's caller pays customers interface
with the Company's TCCs in a similar fashion to that of traditional
resellers in that they utilize telephone numbers procured by the Company
from the local exchange carriers which are then routed through
Company-owned switching equipment. Consumers of caller pays service
purchase a pager unit from one of the Company's customers but do not
receive any monthly subscriber bill. Each time a call is sent to the
pager a charge appears on the caller's monthly telephone bills. The
Company is then paid by the local telephone exchange carrier based upon
a percentage of the amount collected for the actual monthly number of
billable pages on the Company's networks, rather than a fixed monthly
charge. The Company's caller pays customers include traditional
resellers as well as non-traditional distributors of paging services,
such as utility companies and distributors of mass-market consumer
products and services.
TECHNICAL SERVICES
The Company provides its technical services through PTS. PTS's services
include installation of network equipment; maintenance of installed equipment
and tower sites; sales of network equipment; engineering site surveys; and
network equipment repair. PTS's services support one-way and two-way paging
technologies, and PCS services, as well as network tower site owners.
PTS's customers consist of manufacturers, wireless carriers and network site
owners who contract with the Company to install equipment or maintain their
sites. PTS provides cost and capital savings alternatives to its customers by
enabling them to outsource technical requirements on an as-needed basis, which
the Company believes enables them to focus more capital resources on sales and
marketing of their respective customer products and services. PTS's customers
are also able to benefit from PTS's investments in maintaining state-of-the art
technology expertise and various regulatory certifications.
PTS serves many of the same carriers that purchase
colocation/interconnection network services from the Company. In addition,
because the Company's TCCs can support multiple one-way and two-way
telecommunications networks, PTS also provides maintenance to companies that
house terminals in one of the Company's TCCs in order to offer other wireless
services operating on their own networks. PTS's customers include ten of the
twenty largest paging carriers; two operators of PCS services; and two national
network tower site owners. PTS is the exclusive authorized repair facility for
the first generation wireless paging terminal manufactured by Glenayre
Electronics Inc. ("Glenayre"). PTS is also an authorized provider of repair and
maintenance of the Unipage terminal for Motorola, Inc. ("Motorola"). PTS
provides its engineering services to Glenayre under an annual maintenance
contract and typically contracts with other customers on a project-by-project
basis.
PRODUCT SERVICES
The Company provides its product services through EPS. EPS's customers
consist of carriers, resellers and agents that market branded wireless products
and services. The Company believes these customers are able to benefit from the
Company's sophisticated repair facilities, inventory management systems and
product fulfillment resources and therefore are able to offer expanded product
options to their subscribers and reduce their own product costs. EPS also
provides repair services directly to wireless equipment manufacturers.
EPS employs automated information management systems to track customer
inventory and is able to receive, service and ship thousands of pager and
cellular devices per day. Accordingly, EPS is well positioned to serve the needs
of large companies that provision and handle a significant daily volume of
product and are seeking cost reduction alternatives. In addition, EPS serves
many of the same customers that purchase pagers to add service units to the
Company's paging networks.
GROWTH STRATEGY
The rapid expansion of the wireless marketplace provides significant growth
opportunities for each of the Company's three lines of business: network
services, technical services and product services. Increasing consumer adoption
of wireless services and continued expansion of distribution channels is
resulting in greater competition for subscribers. The Company believes its
outsourcing service offering positions it to serve all of these companies by
providing cost reduction alternatives and enabling companies to invest more of
their capital in sales and marketing of
8
<PAGE> 9
branded products and services to their customers. The Company believes this
enables its customers to cost-effectively increase their revenue and cashflow
per subscriber.
SELL MULTIPLE SERVICES. The Company focuses on providing multiple services
to its customers and markets outsourcing programs to large companies that are
seeking single-source solutions. 1997 was the Company's first full year of
operations for PTS and EPS, which were acquired by the Company during July 1996
and December 1996, respectively. The Company's cross-selling efforts have
resulted in Company-wide customer relationships, with each of the five largest
paging companies purchasing all three of the Company's services.
EXECUTE REGIONAL AND NATIONAL CONTRACTS. The Company is focused on executing
regional and national contracts in each of its three business lines. The
Company's historical investments in network expansion have enabled it to execute
multi-market contracts to serve large carriers and resellers. In the case of
PTS, the Company is focused on establishing contracts with national companies
that provide increased revenue potential as PTS expands its number of service
locations to address its customers' needs in additional markets. Similarly, in
the case of EPS, the Company is focused on serving large companies that have
high unit volume requirements for repair, product fulfillment and inventory
management.
NETWORK FOCUS ON COLOCATION/INTERCONNECTION SERVICES. The Company is
primarily focused on building its colocation/interconnection customer base for
network services, which the Company believes tends to consist of larger
customers since they have invested in terminal switching equipment and related
equipment themselves, and are therefore more likely to enter into and maintain
longer term relationships with the Company. In addition, these larger companies
generally have additional outsourcing requirements and tend to purchase multiple
services from the Company. Generally colocation/interconnection accounts produce
lower revenues per unit in service, but the Company's costs associated with
servicing these accounts are lower.
COMPLETE NATIONWIDE BUILD-OUT OF NETWORKS. The Company intends to expand its
network operations on a nationwide basis to provide local and regional paging
network services in the 50 largest U.S. metropolitan markets and adjacent areas,
primarily on one or more common frequencies. As of December 31, 1997, the
Company operated paging networks in 27 markets in five major U.S. regions: the
Southeast, Mid-Atlantic, Northeast, Midwest and North Central. The Company
currently has six TCCs, which enable it to rapidly open new markets and
cost-efficiently operate multiple local markets. The Company believes its
nationwide expansion plan requires the addition of only one additional TCC. The
timing of constructing this final TCC and expansion into additional network
markets will depend, among other things, on customer requirements and the timing
and availability of capital.
MAKE SELECTED ACQUISITIONS. The Company has historically made selected
acquisitions of networks as well as acquisitions of additional outsourcing
services companies that have enabled the Company to expand its service offering
and customers served. In the case of its networks services business, the Company
has purchased existing paging networks and related licenses to supplement its
local and wide-area 157.740 MHz networks, which serve as the foundation for its
local and regional paging networks. By selling their network assets to the
Company, retaining their subscriber customers, and subsequently purchasing
network services from the Company, operators can focus their resources on sales
and marketing, enabling them to compete more effectively for subscribers. The
Company has also purchased networks in which the Company assumed the customer
bases, in instances where the purchased network served the reseller channel of
distribution. The Company has not purchased direct subscriber bases which would
result in its competing with its customers for subscribers.
As of December 31, 1997, the Company had completed 25 network purchases in
14 markets, 9 of which were on frequencies other than 157.740 MHz, including
152.60 MHz, 152.84 MHz, 158.10 MHz, 462.80 MHz, 462.825 MHz, 931.2625 MHz, and
931.3125 MHz. As of December 31, 1997, one additional network acquisition was
pending. The Company may continue to pursue such purchases in the future. In
addition to the purchase of network assets and related licenses, the Company
may also pursue the acquisition of FCC licenses on specific frequencies for
which a network has not yet been constructed. The Company may also make
selected non-network related acquisitions; however, there were no such
acquisitions pending at December 31, 1997.
9
<PAGE> 10
OPERATIONS
NETWORK DESIGN AND OPERATIONS
HUB AND SPOKE ARCHITECTURE. The Company controls its local and regional
networks from TCCs located centrally within wide geographic regions. Each TCC is
a switching center, housing paging terminals, satellite facilities, network
monitoring systems, local and long distance telephone lines, and emergency power
backup. Each TCC has the capability, via satellite transmission, to monitor any
other TCC operation. Furthermore, the Company's network operating expenses are
reduced by centralizing engineering, telephone access and technical and
maintenance support in the TCCs.
The TCCs are linked to each other via digital satellite channels, which
provide low-cost, flexible transmission. Each TCC is connected to Remote Points
of Presence ("R-POPs"), located in other cities, which house local telephone
lines, power back-ups and alarm systems. Each R-POP is connected to a TCC via a
dedicated T-1 circuit that transports local paging traffic from the R-POP city
to the TCC for central processing. The T-1 lines enable TCCs to process
telephone numbers that are local to the R-POP city. The T-1 connections between
TCCs make possible certain network redundancies and provide fully integrated
engineering, billing and customer support capabilities. The satellite up-link
station at each TCC transmits the paging traffic to other TCCs and to
satellite-controlled transmitters and networks, allowing the Company to extend
its network coverage beyond the metropolitan areas in which the TCCs and R-POPs
are located more rapidly and economically.
HIGH-POWER 157.740 MHZ FREQUENCY/MULTIPLE FREQUENCY UTILIZATION. In 1990,
the FCC authorized the 157.740 MHz frequency for high-power, wide-area paging
transmission on a non-exclusive basis. Historically, the 157.740 MHz frequency
was used for small paging networks to service local customers, such as hospitals
and small businesses. The Company is licensed to build and operate 157.740 MHz
frequency networks, which serves as the foundation for its local and regional
paging networks. Implementation of the Company's strategy, however, does not
depend on the exclusive use of the 157.740 MHz frequency. In those areas where
157.740 MHz networks are already operating, the Company intends either to
purchase those networks or to enter into co-channel sharing arrangements with
the paging carriers in accordance with FCC rules and regulations. The Company
has also selectively purchased and consolidated existing network assets and
acquired licenses on the 150 MHz, 450 MHz and 900 MHz bands to provide greater
customer flexibility in densely populated markets and may continue to do so in
the future.
The Company estimates that there are thousands of separately owned paging
networks in the United States. Many of these networks were built by small
carriers and special purpose operators (such as hospitals and universities) that
are unable to invest, or have elected not to invest, in upgraded network
facilities to meet current subscriber demand. By selling their network assets,
transferring their FCC licenses to the Company and purchasing network services
from the Company as a reseller, these operators can focus their resources on
increasing their subscriber units in service. Once purchased, these networks are
modified by the Company, as necessary, to ensure that they meet the Company's
standards, and are integrated into the Company's TCC operating platform.
PTS OPERATIONS
PTS operates from regional offices located throughout the United States,
including the Company's TCCs as well as several independent locations. Operating
from these offices, PTS provides engineering and technical services to its
customers on a project basis or through maintenance contracts.
PTS's multi-city operations enable it to serve national customers who seek a
single point of contact with consistent quality of service in multiple markets.
By establishing a local presence through regional offices, PTS has the
flexibility to be responsive to its customers' needs, allowing wireless carriers
and site owners to work directly with PTS field engineers and technical staff.
In instances where a customer requires additional resources for a large project
or for an emergency situation, PTS can draw personnel from its other locations
to fulfill the scope of work.
PTS invests in state-of-the-art tools and test equipment in order to provide
accurate analysis and service work to its customers. PTS's engineers and
technicians are available for on-call emergency services and are fully trained
and experienced in each of the services they provide. The Company believes that
this enables PTS to reduce the amount of down time a carrier or site owner may
have.
10
<PAGE> 11
EPS OPERATIONS
EPS operates three primary business units: pager and cellular product repair
services; pager and cellular product sales; and pager and cellular inventory
management and fulfillment. Each operating unit is supported by an automated
inventory production and tracking system which provides customers with detailed
invoicing and shipping information.
The Company believes EPS is able to achieve cost-efficient, high volume
repair production by utilizing a combination of automation, skilled technicians
and technical support staff. Additionally, the Company believes that EPS's
monthly unit volume enables it to achieve a lower cost of parts than many of its
smaller competitors. The Company believes that its efficiencies enable it to be
cost competitive in serving the high volume needs of large wireless companies.
EPS's product sales unit serves as a sourcing and placement arm for its
customers that are seeking to either sell excess pager or cellular inventory or
are in need of obtaining specific product. EPS's repair unit also provides
internal support to its product sales unit when repair or refurbishment of
product is required prior to its sale to a customer.
In addition to managing the daily inbound and outbound flow of product to
support its repair and product sales business units, EPS provides its customers
with an alternative solution for inventory management and distribution. These
solutions include housing, sorting and shipping its customers' own inventory by
stock keeping unit ("SKU"), shipping inventory to its customers' branch or
customer locations, and disposing of obsolete equipment.
SALES, MARKETING AND CUSTOMER SERVICE
As an outsourcing company, the Company does not market any of its services
directly to end users and therefore does not compete with its customers for
their subscribers. The Company provides selling, marketing and customer service
directly to relatively few network customers (currently approximately 1,500)
rather than directly to its customers' many subscribers who have units on the
Company's networks (454,795 at December 31, 1997) and therefore has relatively
fewer sales, marketing and customer service personnel. Additionally, although
EPS processed over one million subscriber devices in 1997, it provided these
services to approximately 800 companies, rather than directly to their
subscribers. Similarly, PTS provides its services to companies, rather than to
subscribers.
Each of the Company's three business lines employs sales personnel dedicated
to that business line. In addition to dedicated sales activity, as the Company
is increasingly providing multiple services to the same customers, the Company
is also establishing corporate-level sales and marketing efforts that are
focused on major customer account activity across each of the Company's business
lines.
NETWORK SERVICES
Network services sales personnel are geographically positioned in markets
within and adjacent to the Company's TCCs, with the Company's network customer
service group providing "home office" support. The Company's engineering
professionals also support sales and marketing efforts with the Company's
colocation and interconnection customers to address the technical requirements
associated with these customers' direct interfaces with the Company's networks.
TECHNICAL SERVICES
PTS markets its services primarily through referrals from other customers,
and through the business development efforts of its President and its staff
engineers that are located in field offices. In addition, PTS focuses on
establishing contracts with large national companies, so that by continuing to
expand its number of engineers and the markets in which it operates, it can
increase the amount of services it provides to existing as well as new
customers.
PRODUCT SERVICES
EPS markets its services primarily through the efforts of its sales
personnel and senior management. EPS participates as an exhibitor at industry
trade shows, advertises in trade magazines and solicits customer referrals to
generate new sales activity. EPS's sales personnel are focused specifically on
either cellular sales or pager sales and are also responsible for sourcing and
selling new, used and refurbished pager and cellular equipment. EPS markets its
repair and inventory management and fulfillment sales activities jointly, as the
Company believes that management and fulfillment of its customers' inventory is
a natural extension of its repair services. In addition, EPS employs a
11
<PAGE> 12
team of customer services representatives to respond to customer inquiries and
provide support to sales representatives for customer product repair and order
shipment status.
PRODUCTS AND EQUIPMENT
The Company does not manufacture any pagers, cellular telephones,
transmitters, paging terminals or other equipment used in the Company's
business. The Company purchases pagers, cellular telephones and network
equipment for sale to its customers. The Company currently purchases new pagers
from Motorola, NEC America, Inc. and Samsung Electronics Company Ltd., among
others, and achieves cost savings through volume purchases. EPS purchases new
pager and cellular inventory from both manufacturers and resellers who may have
excess supply, and purchases used product from resellers and other retailers,
then resells it to other companies on an "as is" or refurbished basis. PTS
purchases network equipment for the Company's own networks as well as for resale
to customers from Motorola and Glenayre. The Company anticipates that network
equipment, pagers and cellular telephones will continue to be available from
these suppliers in the foreseeable future.
COMPETITION
The wireless industry is highly competitive and has few barriers to entry.
Companies in the industry generally compete on the basis of price, and quality,
and in the case of network services, on the basis of coverage area, speed of
transmission, system reliability and service. Many of the Company's network
services competitors currently offer broader geographic coverage than that
provided by the Company's existing networks. Several companies offer national
paging services to their subscribers. By contrast, the Company markets network
services primarily on a local or regional level. The Company also competes with
numerous other local, regional and national paging companies. In addition, the
United States Congress and the FCC have authorized the use of newly-allocated
spectrum for mobile and portable radio communications services, including
specifically for narrowband PCS. Through its auction process, the FCC has issued
some narrowband PCS licenses, and the licensees are in the process of
constructing their facilities. Some of the primary uses envisioned by narrowband
PCS licensees are advanced voice paging and two-way acknowledgment paging. It is
expected that companies offering narrowband advanced paging will compete with
one-way paging companies. In addition, some companies may utilize their
broadband PCS licenses to offer paging services in conjunction with other
offerings. Additional competitors may enter markets served or proposed to be
served by the Company. PTS and EPS each compete with wireless equipment
manufacturers and independent providers of similar services, primarily on the
basis of quality, price, and service.
REGULATION
The Company's paging operations are subject to regulation by the FCC under
the Communications Act of 1934, as amended (the "Communications Act"). The FCC
permits the provision of paging services on a significant number of frequencies
under its regulatory authority. The majority of these frequencies are allocated
in low band (30-44 MHz), high band (150-170 MHz), UHF (450-470 MHz) or 900 MHz,
each of which has different propagation characteristics. Some of the frequencies
are available for one-way paging only, while paging is permitted on an ancillary
basis to the primary service on other channels. There also are differences in
the paging transmitter power levels permitted on different frequencies, which
affect the range and penetration capability of a paging system.
Historically, the FCC distinguished between Radio Common Carrier ("RCC")
paging, which was authorized under Part 22 of the FCC rules, and private paging
systems, including Private Carrier Paging ("PCP") systems, which were authorized
under Part 90 of the FCC rules. RCC systems were considered common carriers
under the Communications Act, and were subject to statutory and FCC common
carrier obligations, but were granted exclusive use of their authorized
frequencies within a defined geographic area. By contrast, private paging
systems, including PCPs, were not regulated as common carriers under the
Communications Act and were assigned paging frequencies on a shared,
non-exclusive basis. Under the PCP regulatory approach, multiple unrelated
licensees might be required to share the use of a frequency in a given
geographic area. Efficient shared channel use typically is accomplished by
sharing airtime using a single paging terminal, by physically linking the
co-channel systems, or by sharing airtime on a party-line basis. To date, under
this type of shared frequency usage, FCC licenses can be obtained relatively
easily for minimal frequency coordination and FCC filing fees.
The Company has FCC licenses, or licenses pending, to build and operate high
power PCP 157.740 MHz frequency networks in numerous markets. The FCC frequency
coordination process is an interim step imposed by the FCC on all PCP license
applications prior to filing with the FCC. In addition, the Company has FCC
licenses to
12
<PAGE> 13
operate nonexclusive PCP 462.825 MHz and 462.800 MHz frequency networks in the
Atlanta metropolitan area, exclusive RCC 158.10 MHz, 152.60 MHz and 152.840 MHz
frequency networks in certain areas in Florida, New York and Georgia, an
exclusive RCC 931.2625 MHz frequency network in Florida, and an exclusive RCC
931.3125 MHz frequency network in New York. The FCC licenses set forth the
technical parameters, such as signal strength and tower height, under which the
Company is authorized to use those frequencies.
In February 1993, the FCC proposed to permit PCPs to "earn" frequency
exclusivity on 929 MHz paging frequencies by building a prescribed number of
transmitters within a defined geographic area, and to authorize such systems on
either a local, regional or nationwide basis. Rules were adopted in November
1993 reflecting these changes, and a significant number of 929 MHz PCP licensees
either have already qualified for some level of geographic exclusivity based on
already operational facilities, or have acquired licenses for facilities which,
if constructed within the requisite time period, will entitle the PCP to claim
geographic exclusivity. On February 13, 1996, the FCC released a Memorandum
Opinion and Order generally affirming its rules governing paging licenses on the
929 MHz frequency.
In August 1993, Congress amended the Communications Act and redefined the
regulatory classifications for all land mobile services as either Commercial
Mobile Radio Services ("CMRS"), considered common carrier offerings, or Private
Mobile Radio Services ("PMRS"). Both RCC and PCP services were subsequently
classified by the FCC as CMRS. All RCC and PCP paging systems currently are
regulated as CMRS.
As a CMRS provider, the Company is subject to certain regulations as a
common carrier under the Communications Act, including the duty to offer service
on a non-discriminatory basis at just and reasonable rates. The Company is also
subject to the complaint process for violations of the Communications Act or FCC
rules. In addition, the Company must obtain FCC approval prior to consummating
any assignments of license or authorizations or any transfer of control of the
Company.
In the 1993 legislation, the Commission was given statutory authority to
award licenses by competitive bidding, or auction procedures, when there are
mutually exclusive applications from entities proposing to provide a commercial
service to subscribers. PCPs and RCCs fall within the definition of applications
subject to the FCC's auction authority. In conjunction with its enactment of a
CMRS/PMRS regulatory framework, Congress directed the FCC to review and revise
its regulations to develop comparable regulatory schemes for CMRS services
determined to be substantially similar to one another. In the proceeding in
which the FCC addressed this statutory directive, the FCC determined that RCC
and PCP services were substantially similar to one another and to other CMRS
services to the extent that they are offered on exclusive frequencies. The FCC
commenced a proceeding to align more closely the regulatory frameworks for RCC
(Part 22) services and PCP (Part 90) services.
On February 9, 1996, the FCC released the Notice of Proposed Rulemaking
("NPRM"), which addressed potential changes in the FCC's regulation and
licensing of the paging industry. Among other things, the FCC considered
converting some or all of the non-exclusive PCP frequencies, including the
157.740 MHz frequency, to exclusive use frequencies, in which event the Company
could be required to engage in competitive bidding to obtain additional paging
licenses. The NPRM also proposed several changes to the current system of
licensing in the paging industry, including potential geographic licensing and
competitive bidding for mutually exclusive applications.
During the pendency of this paging rulemaking proceeding, the FCC initially
suspended acceptance of all new applications for paging licenses except
applications for minor modifications of existing RCC and 929 PCP channels (the
"Application Freeze"). Under this initial order, as of February 8, 1996, the FCC
would not accept new applications for non-exclusive PCP channels. As of February
8, 1996, the Company had submitted 34 applications for non-exclusive 157.740 MHz
licenses to a licensing coordinator pursuant to the FCC's frequency coordination
process. The Company filed these applications to obtain new licenses for
locations as to which the Company held licenses that had expired, and as to
which the Company had not yet installed and activated radio transmitters,
including locations in two of the 50 largest U. S. metropolitan markets. On
February 8, 1996, the Company also had on file at the FCC five applications for
exclusive use licenses on the 931.2625 MHz frequency which were not considered
mutually exclusive with any other application.
On April 22, 1996, the FCC adopted an order (the "Interim Licensing
Procedure") in which it eased the Application Freeze on the acceptance of
applications for licenses for paging channels, including the shared channel
primarily utilized by the Company (157.740 MHz). Under the Interim Licensing
Procedure, the FCC allowed
13
<PAGE> 14
applications to be filed for new sites on these channels if the applicant
certified that the proposed site is within 40 miles of an operating transmission
site which was licensed to the same applicant on the same channel prior to
February 8, 1996. On June 11, 1996, by its own motion, the Commission modified
the Interim Licensing Procedure to allow incumbent licensees also to add sites
within 40 miles of an operating transmission site for which an application from
the same applicant on the same channel was pending at the FCC on or before
September 30, 1995. Additionally, the Commission stated that all non-mutually
exclusive paging applications received through July 31, 1996 would be processed
under the Interim Licensing Procedure. Applications received after July 31, 1996
and any application considered mutually exclusive would be subject to the final
rules adopted in the paging rulemaking proceeding.
Since the effective date of the Interim Licensing Procedure, the Company
filed for 83 additional licenses within the 40 miles of its operating
transmission sites prior to July 31, 1996. The Company also submitted three
applications which did not meet the Interim Licensing Procedure requirements and
sought a waiver of such requirements.
As a result of the NPRM and the subsequent actions of the FCC noted above,
the Company has been forced to modify its prior build-out schedule to install
transmitters on an expedited basis in areas where it has needed to protect its
license position. These unscheduled installations have delayed and may continue
to delay the Company's build-out of certain markets in the Company's planned
nationwide expansion.
On February 19, 1997, the Commission 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 PCP
frequencies, including the 157.740 MHz frequency, to exclusive use frequencies.
The Further Notice, however, seeks additional guidance in connection with the
continued licensing procedure of the non-exclusive PCP channels. The Commission
is concerned, in light of its decision to license the exclusive paging channels
on a geographic basis by competitive bidding, that there is a potential for
application fraud by telemarketers for the non-exclusive PCP frequencies. It,
therefore, seeks comment on what methods could be used to eliminate or reduce
the problem. Primarily, the Commission proposes to modify the application form,
but also asks whether the frequency coordination process could be modified to
reduce the fraudulent or speculative applications.
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 CMRS services, such as the broadband Personal Communications Services and
the Specialized Mobile Radio Services. Adoption of the
14
<PAGE> 15
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.
The FCC also has other various ongoing rulemaking proceedings which may
affect the Company such as resale and interconnections obligations in a
competitive paging marketplace and universal service obligations.
On June 12, 1996, the Commission adopted a First Report and Order which
became effective August 23, 1996 in which it declined to impose a resale
obligation on either RCC or PCP licensees. The Commission found that resale is
an established practice in the paging service and competition appears to be
vigorous.
On August 1, 1996, the FCC adopted both a First Report and Order and Second
Report and Order in FCC Docket No. 96-98 (the "Orders"), in which it adopted
rules implementing the local competition provisions of the 1996
Telecommunications Act. As adopted, the Orders would modify the charges imposed
on telecommunications carriers, including commercial mobile radio service
providers such as the Company, by local exchange carriers. Among other
provisions, the Orders required local exchange carriers to provide commercial
mobile radio service providers with reciprocal compensation for transport and
termination of local traffic and a "fresh look" at existing non-reciprocal
agreements. The Orders were expected to reduce the charges currently assessed by
local exchange carriers for providing local DID numbers, as well as for the
associated trunking charges, which are a significant portion of the Company's
cost of providing service. In addition, the Company was expected to become
eligible to receive revenue for terminating local exchange carriers' traffic on
its networks.
On October 15, 1996, the U.S. Court of Appeals for the Eighth Circuit
imposed a "stay" on certain provisions of the Orders. On November 1, 1996, the
same court, acting on an emergency motion filed by AirTouch Communications,
lifted the stay with respect to the reciprocal compensation and "fresh look"
provisions as they apply to commercial mobile radio service carriers.
On November 7, 1996, the Commission adopted the Recommended Decision on the
mandate for universal service set forth in the Telecommunications Act of 1996 by
the Federal-State Joint Board on Universal Service (the "Joint Board"). Under
the Joint Board's recommendation, all carriers that provide interstate
telecommunications services for a fee to the public would be required to
contribute to support the universal service fund. It had been recommended that
paging companies be exempted from such contribution because of their low profit
margin, but the Joint Board did not concur with such recommendations. The Joint
Board recommended that contributions be based on a carrier's gross
telecommunications revenues (both interstate and intrastate) net of payments to
other carriers. The Commission sought comments on the recommendations, but has
not adopted final rules concerning the universal service requirements. Should
the Commission require paging carriers to contribute to the universal service
fund, such contribution may adversely impact the Company's financial condition
or results of operations.
In addition to regulation by the FCC, paging systems are subject to certain
Federal Aviation Administration regulations with respect to the height,
location, construction, marking and lighting of towers and antennas.
State and local regulations may require the Company to submit for prior
approval the terms and conditions under which it plans to provide network
services. However, state and local regulators are preempted by Federal law from
regulating rates and approvals required to enter the market. There can be no
assurance that future Federal, state or local legislation or regulations would
not have a material adverse effect on the Company.
15
<PAGE> 16
Certain of the Company's operations are subject to state and Federal
environmental regulation, but the related cost to date of compliance has been
minimal.
EMPLOYEES
On December 31, 1997, the Company had 296 employees; 52 in administration,
53 in marketing and sales, 62 in engineering and operations and 129 in product
repair. The Company's employees are not unionized, and the Company believes that
its relations with its employees are good.
ITEM 2. PROPERTIES
The Company leases a total of approximately 43,000 square feet of office
space in two different locations, including Norcross, Georgia, and Syosset, New
York and 57,000 square feet of office and repair facility space in Dallas,
Texas. The Company also currently leases a total of approximately 36,000 square
feet at six different locations for its TCCs. The Company has approximately 554
site and tower leases for the operation of its network transmitters and other
equipment on commercial broadcast towers and at other fixed sites. These leases
expire at various dates from 1998 to 2007.
The Company believes that in general the terms of its leases are competitive
based on market conditions. The Company believes its facilities are suitable and
adequate for its purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company may become subject to various legal proceedings arising out of
its operations in the ordinary course of business. The Company is not currently
a party to, and no property of the Company is presently the subject of, any
pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company at March 23, 1998:
<TABLE>
<CAPTION>
NAME TITLE AGE
- ---- ----- ---
<S> <C> <C>
Mark H. Dunaway........................... Chairman of the Board of Directors, Chief Executive
Officer and Treasurer 52
Michael J. Saner.......................... President and Director 56
Kathryn Loev Putnam....................... Senior Vice President and Chief Financial Officer 33
Eugene H. Kreeft.......................... Executive Vice President of Engineering 48
Mark B. Jones............................. Vice President of Legal Affairs and Secretary 40
Gary E. Park.............................. Vice President of Sales 50
</TABLE>
Mark H. Dunaway, a founder of the Company, has been Chairman of the Board of
Directors and Chief Executive Officer of the Company since 1991. From 1986 to
1994, he served as the Chairman and Chief Executive Officer of The Beeper
Company of America, Inc., a company he founded. The Beeper Company of America,
Inc. provided paging services to more than 60,000 subscribers before it was sold
in 1994 to Arch Communications Group, Inc. During 1987, Mr. Dunaway founded
Dunaway Enterprises, Inc., a consulting company which supplied management
consulting services to British Telecom's paging operations in the United Kingdom
and other companies, and served as its Chief Executive Officer and Chairman from
1987 to 1994. Mr. Dunaway also served as President of British Telecom's paging
subsidiary in New York and Chairman of the Board of Directors of Metrocast Inc.
in San Diego, California, one of British Telecom's investments in the United
States. From 1982 to 1985, Mr. Dunaway served as President of A Beeper Company
Associates, a national paging and cellular service company which he founded,
which serviced more than 200,000 pagers and had more than $60 million in annual
sales in 1985. A Beeper Company Associates served as the sales and marketing
agent for paging services for 14 of the 22 domestic Bell operating companies and
as the cellular service reseller for all of the domestic Bell operating
companies, until its sale to Bell Atlantic Corporation in 1985. Mr. Dunaway has
served on a number of committees for the Personal Communications
16
<PAGE> 17
Industry Association ("PCIA"), the wireless industry trade association. Mr.
Dunaway was a minority shareholder and a director of EPS prior to its
acquisition by the Company in December 1996.
Michael J. Saner, a founder of the Company, has been President and a
director of the Company since 1991. From 1991 to 1993, Mr. Saner served as
President of Paging Services, Inc. ("PSI"), a paging-related repair,
maintenance, installation and sales company he founded and for which he served
as a director until 1996, which is a distributor for Glenayre and the exclusive
repair facility in the United States for portions of the Glenayre terminal
product line. PSI was acquired by the Company in July 1996 and is now known as
PTS. From 1988 to 1990, he was also President of IAX, Ltd., a computerized
automobile brokerage firm he founded. From 1984 to 1990, Mr. Saner served as
President of Message World, Inc., a voice mail and paging company he founded,
with offices in Atlanta, Baltimore, Houston, and Washington, D.C. In 1990, Mr.
Saner acquired the operating assets of Message World, Inc. and until 1997 served
as President of that business, which operated as Saner Communications Inc.
("SCI"). From 1980 to 1985, Mr. Saner was employed by BBL Industries, Inc., a
paging equipment manufacturer, as Executive Vice President of Sales and
Marketing and then as President and Chief Operating Officer. From 1971 to 1980,
he was employed by Motorola, eventually serving as district manager for the
utility market. From 1986 to 1988, Mr. Saner served as President of the Georgia
Association of Telemessaging Services, and served from 1992 to 1993 as a member
of the Board of Directors of the Association of Telemessaging Services
International.
Kathryn Loev Putnam has been Senior Vice President and Chief Financial
Officer of the Company since July 1997 and was Vice President of Corporate
Development of the Company from April 1996 to June 1997. From 1994 to March
1996, Ms. Putnam was employed by Legg Mason Wood Walker, Inc., an investment
banking and stock brokerage firm, where she served as Vice President in the
Corporate Finance Department. From 1991 to 1994, Ms. Putnam served as Assistant
Vice President in the Corporate Finance Department of Janney Montgomery Scott
Inc., an investment banking and stock brokerage firm.
Eugene H. Kreeft, a founder of the Company, has been Executive Vice
President of Engineering of the Company since 1992. From 1989 to 1992, Mr.
Kreeft served as Glenayre's Director of Technical Sales Support, U.S.
Operations. From 1981 to 1989, Mr. Kreeft was employed by BBL Industries, Inc.,
a paging equipment manufacturer, where he served as Vice President of
Applications/New Product Development from 1987 to 1989 and as Vice President of
Engineering and Manufacturing from 1985 to 1987. Mr. Kreeft has also held
management and engineering positions with Motorola, RAM Broadcasting Corp., AT&T
Corp. and Western Union Corporation. He has served on the Education Committee of
PCIA, and has been a contributing author to the publication "A Comprehensive
Guide to Paging."
Mark B. Jones has been the Vice President of Legal Affairs and Secretary of
the Company since October 1995. From 1989 to 1995, he was engaged in the private
practice of law with the law firm of Bodker, Ramsey & Andrews in Atlanta,
Georgia, focusing on corporate and tax matters. From 1982 until 1989, Mr. Jones,
who is a certified public accountant, was employed as a Tax Manager with Arthur
Andersen LLP.
Gary E. Park has served as Vice President of Sales of the Company since
December 1996. Before joining the Company, he was employed by Mtel's subsidiary
SkyTel, a nationwide paging company, from 1992 to 1996. While at SkyTel, Mr.
Park held the position of Vice President - General Sales from 1995 to November
1996, responsible for resellers, strategic partnerships, agents and new business
distribution within the United States and was Vice President - Major/National
Accounts from 1992 to 1995, establishing SkyTel's major/national accounts direct
sales organization. Prior to his employment with SkyTel, Mr. Park worked for
Sprint, a telecommunications company, from 1981 to 1992, serving as a Vice
President and General Manager of Business Services from 1988 to 1992 and
Regional Sales Director from 1986 to 1988.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET AND DIVIDEND INFORMATION
Since March 1, 1996, the Company's Common Stock has traded on the Nasdaq
Stock Market's National Market under the symbol "PFNT." Prior thereto, there was
no established public trading market for the Common Stock.
17
<PAGE> 18
Set forth below are the high and low sales prices for the shares of the
Company's Common Stock in 1996 from March 1, 1996, the date of the Offering
through the end of the first quarter of 1996, and for each full quarterly period
thereafter in 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31..................................... $ 10.25 $ 9.00 $ 6.25 $ 2.50
June 30...................................... 9.25 7.25 3.13 1.88
September 30................................. 9.25 5.75 3.00 1.88
December 31.................................. 9.00 5.75 2.38 1.00
</TABLE>
On March 23, 1998 there were approximately 1,100 stockholders of the
Company, based on the number of holders of record and an estimate of the number
of individual stockholders represented by securities position listings.
Since organization, the Company has not paid any cash dividends on its
Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of dividends paid with
respect to previously outstanding Redeemable Convertible Preferred Stock.
The Company instead intends to retain all working capital and earnings, if
any, to use in the Company's operations and the expansion of its business. Any
future determination with respect to the payment of dividends will be at the
discretion of the Board of Directors and will depend upon, among other things,
the Company's results of operations, financial condition and capital
requirements, the terms of any then existing indebtedness, general business
conditions and such other factors as the Board of Directors deems relevant.
The Company's credit facilities contain covenants which, among other things,
prohibit the payment of dividends.
RECENT SALES OF UNREGISTERED SECURITIES
In May 1997, the Company acquired substantially all the assets of Fast
Communications, Inc. for approximately $70,000. The Company issued 27,283 shares
of Common Stock to one accredited investor.
In May 1997, the Company acquired substantially all of the assets of Drexler
Corporation for $30,000. The Company issued 11,692 shares of Common Stock to one
accredited investor.
In June 1997, the Company received $15 million from the sale of 10 million
shares of Class A Redeemable Preferred Stock and warrants to purchase 11.5
million shares of Common Stock to seven accredited investors. The warrants are
exercisable at a price of $1.50 per share.
All of these transactions were exempt from the Securities Act of 1933 by
reason of Section 4(2) thereof and/or Rule 506 of Regulation D promulgated
thereunder.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and operating data as of and for each of
the five years in the period ended December 31, 1997 are derived from the
consolidated financial statements and other records of the Company. The data
should be read in conjunction with the consolidated financial statements and
related notes and other financial information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE, UNIT AND ARPU AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Network services ..................................... $ 937 $ 1,959 $ 3,549 $ 6,121 $ 12,456
Product sales ........................................ 1,412 2,097 3,651 5,818 13,603
Other services ....................................... 24 26 153 1,411 9,922
-------------------------------------------------------------
Total revenues ..................................... 2,373 4,082 7,353 13,350 35,981
-------------------------------------------------------------
Cost of revenues
Network services ..................................... 523 977 1,768 4,621 8,316
Product sales ........................................ 1,402 2,103 4,558 8,329 13,553
Other services ....................................... -- -- -- 662 9,140
-------------------------------------------------------------
Total cost of revenues ............................. 1,925 3,080 6,326 13,612 31,009
-------------------------------------------------------------
Gross margin ........................................... 448 1,002 1,027 (262) 4,972
Selling, general and administrative expenses ........... 868 1,506 3,180 8,338 16,030
Other expenses ......................................... -- -- -- -- 278
Depreciation and amortization .......................... 267 492 764 2,479 6,993
-------------------------------------------------------------
Operating loss ..................................... (687) (996) (2,917) (11,079) (18,329)
Interest expense ....................................... (158) (337) (317) (242) (1,277)
Interest income ........................................ -- 7 364 1,122 454
=============================================================
Net loss ........................................... $ (845) $ (1,326) $ (2,870) $ (10,199) $ (19,152)
=============================================================
Net loss per share of Common Stock (1) ................. $ (.24) $ (.32) $ (1.75) $ (.91) $ (1.26)
Weighted average number of common shares used in
calculating net loss per share of Common Stock (1) ... 3,493 4,088 4,138 12,815 16,060
OTHER NETWORK OPERATING DATA:
Reseller units (at end of period) ...................... 34,129 61,055 129,983 186,482 304,133
Colocation/interconnection units (at end of period) .... -- 3,393 23,918 89,236 150,662
-------------------------------------------------------------
Total units in service ............................. 34,129 64,448 153,901 275,718 454,795
Units under agency agreement (at end of period) ........ -- -- -- 86,763 --
=============================================================
Total units ........................................ 34,129 64,448 153,901 362,481 454,795
=============================================================
Average revenue per unit (ARPU)(2) ..................... $ 3.69 $ 3.38 $ 2.94 $ 2.48 $ 2.49
EBITDA(3) .............................................. $ (420) $ (504) $ (2,153) $ (8,600) $ (11,336)
Capital expenditures (including network asset purchases) 2,053 $ 1,166 $ 4,226 $ 16,495 $ 7,812
<CAPTION>
------------------------------------------------------------
DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets ......................................... $ 522 $ 1,236 $ 11,757 $ 30,725 $ 14,748
Property and equipment ................................. 2,699 3,375 6,885 21,559 25,569
Total assets ........................................... 3,235 4,650 20,046 66,125 66,233
Notes payable, including current portion ............... 2,379 2,998 5,413 17,025 19,782
Redeemable preferred stock ............................. -- 1,155 21,659 -- 13,956
Stockholders' equity ................................... 457 (669) (7,806) 40,583 27,773
</TABLE>
19
<PAGE> 20
(1) All net loss per share amounts were computed and restated, in the case of
1997 and prior periods, using the requirements of Statement of Financial
Accounting Standards No. 128, Earnings per Share, and SEC Staff Accounting
Bulletin No. 98. Basic and diluted amounts are identical. See note 1 to the
consolidated financial statements included elsewhere herein.
(2) "ARPU" represents average revenue per unit and is calculated by dividing
network service revenues for the month by total units in service at month
end. ARPU for periods greater than one month equals the average of the
monthly ARPUs during the period.
(3) "EBITDA" 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), as an alternative to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles), or as a measure of liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto.
OVERVIEW
The Company provides outsourcing services to the wireless industry and
currently provides services to more than 2,400 companies, including twelve of
the twenty largest paging companies, the two largest manufacturers of wireless
network infrastructure, and one of the two largest cellular product
manufacturers. The Company commenced operations in 1991 as a carrier's carrier
of one-way paging networks, whereby the Company's customers purchase and resell
airtime on the Company's networks to their subscribers. During the second half
of 1996, the Company broadened its service offerings and expanded its customer
base through two acquisitions of businesses which provide non-network based
services. In July 1996, the Company acquired PTS, a provider of network
equipment installation, maintenance and engineering services, supporting one-way
and two-way wireless technologies, including PCS services. In December 1996, the
Company acquired EPS, a national provider of paging and cellular product repair
services, sales of new, used and refurbished paging and cellular products and
inventory management and fulfillment services. 1997 was the first full year in
which the Company operated all three of its business lines: network services,
technical services and product services.
Historically, the Company's operating expenses and capital expenditures have
increased as it has pursued its nationwide expansion of networks, which require
upfront capital investment for the installation of paging equipment and network
facilities. Such investments and related operating expenses have resulted in net
losses, negative cash flows from operations and negative EBITDA, although the
Company has experienced positive cash flow from operations and positive EBITDA
in many of the local markets in which it operates. These losses and negative
cash flows have been offset in part in 1996 and in 1997 by the Company's
technical services offered through PTS and its product services offered through
EPS, which have not generally required the same upfront expenses and capital
investment as its network operations. The combination of the three business
lines, as well as the later stage of the Company's network build-out strategy,
resulted in a positive overall company gross margin of 13.8% in 1997 compared to
negative 2.0% in 1996. In addition, because the Company does not market directly
to end-users, it does not incur subscriber-related sales, marketing and customer
service expenses. Accordingly, its S,G&A expenses do not increase in direct
proportion to its revenue growth and the Company has experienced a reduction in
S,G&A expenses as a percentage of revenues to 44.6% in 1997 from 62.5% in 1996.
The ability to generate net income, positive cash flows from operations and
positive EBITDA will depend upon, among other things, the Company's ability to
operate efficiently and attract customers to its networks and its customers'
ability to add subscriber units to the Company's networks, and its ability to
increase revenues derived from EPS and PTS. The Company intends to construct
only one additional TCC and to construct additional network markets in the
future to complete its nationwide expansion. However, the timing and
construction of the TCC and additional markets will depend upon, among other
things, customer requirements and the timing and availability of capital.
NETWORK SERVICES. Because the Company sells network services exclusively on
a wholesale basis, the revenues and expenses that the Company generates from its
network operations are significantly different from those of a full-
20
<PAGE> 21
service vertically integrated paging carrier. The Company has lower revenues per
unit in service than full-service vertically integrated paging carriers, but
also has lower expenses per unit in service because the Company provides
selling, marketing and customer support services directly to relatively few
network services customers rather than directly to its customers' many
subscribers who have units on the Company's networks.
The Company derives its network services revenue principally from fixed
periodic (usually monthly) fees charged to its customers for network services
that its customers purchase in order to resell paging services to their
subscribers. As long as a customer maintains units in service on the Company's
networks, the Company's future operating results should benefit from the
recurring fees charged to the customer for those units in service with minimal
additional selling expenses to the Company. Although the Company is aware that
its customers experience turnover in their subscriber bases ("churn"), the
Company cannot accurately measure the churn rate among its customers'
subscribers because the Company's services are provided on a wholesale basis to
its customers.
The markets in which the Company and its network services customers operate
and plan to operate have numerous paging and other wireless service providers
that compete primarily on the basis of price, geographic coverage, and quality
of service. As a result, while the number of traditional one-way pagers in
service has increased industry-wide since the Company commenced operations,
monthly ARPU with respect to such services has declined for the Company as well
as the industry. The Company expects these trends to continue and plans to
mitigate the effects of declining monthly ARPU by continuing to increase the
number of units in service on its networks and achieving further operating
efficiencies through, among other things, its network design and economies of
scale. The Company believes that as long as it is able to increase the number of
customers it serves and the capacity of its networks, it will continue to
benefit from economies of scale. The sales of airtime and switching services are
classified as network services in the Company's financial statements.
OTHER SERVICES. Other services include technical services provided by PTS,
consisting of paging network equipment installation, maintenance and engineering
services, supporting one-way and two-way paging platforms. Other services also
include pager and cellular repair, refurbishment and inventory management and
fulfillment services provided by EPS. Accordingly, technical service revenues
and the associated cost of revenues and product repair, refurbishment and
inventory management and fulfillment services revenue and associated cost of
revenues are classified as other services in the Company's financial statements.
PRODUCT SALES. The Company sells pagers to its network customers primarily
as a benefit to its customers to facilitate their growth in subscribers, and not
as a profit center. The Company has not and does not intend to lease pagers to
its customers. As part of the Company's marketing programs to attract customers
to resell on its networks and due to the competitive pricing of pagers by the
industry, the Company sold pagers below its cost in 1996 and 1997. However,
during 1997, the Company reduced its pager discounting programs to network
customers. The Company anticipates that as its revenues from network services
grow, the percentage of its total revenues derived from the one-time sale of
pagers to its network customers will decrease. In addition, EPS generates
revenues from sales of new, used and refurbished paging and cellular products.
EPS generated a profit on its product sales in 1997, which offset, in part, the
losses incurred on sales of pagers to network customers. As a result, the
Company achieved a modest profit from product sales in 1997 compared to a loss
of $2.5 million in 1996. Sales by the Company of pager and cellular products and
the related cost of revenues are classified as product sales in the financial
statements.
During the year ended December 31, 1995, the Company derived approximately
13% of its consolidated revenues from Bailey's Communications, Inc.
("Bailey's"). Bailey's became a reseller customer of the Company following
the Company's purchase of network assets from Bailey's in 1993. During the year
ended December 31, 1996 Arch Communications Group, Inc. provided approximately
10% of the Company's consolidated revenues. During the year ended December 31,
1997, no customer of the Company provided greater than 10% of its revenues.
The following definitions are relevant to the discussion of the Company's
operating results.
- Customers on its networks: The Company groups its network customers
into two principal categories in its financial statements based on the
nature of the services it provides:
(i) non-facilities-based, resellers of paging services (consisting of
traditional resellers and caller pays customers) and
21
<PAGE> 22
(ii) customers that own their own switching terminals and equipment and
interconnect with the Company's TCC facilities to resell paging
services to their subscribers ("colocation/interconnection"
customers, generally consisting of carriers and large resellers).
- Reseller units: Pagers in service on the Company's networks which were
added by its customers that purchase airtime and switching services from
the Company and in the case of caller pays customers, units that utilize
both switching and airtime services of the Company for which the Company
is paid by the local telephone exchange carrier.
- Colocation/Interconnection units: Pagers in service on the Company's
networks which were added by its customers that own their own terminal
switching equipment and purchase airtime from the Company (carriers and
large resellers).
- Units in service: Pagers in service on the Company's networks.
- Units under agency agreement: Pagers in service on a network which the
Company later acquired. During the time between the signing of a
definitive agreement and the completion of certain acquisitions, the
Company provided certain services to the prospective seller under an
agency agreement related to pagers in service on the networks being
acquired.
- Subscribers: The end users who own or rent pagers and receive paging
services from the Company's customers. The Company does not sell or rent
pagers or paging services directly to end-user subscribers.
- Revenues:
(i) Network services: periodic (usually monthly) fees charged to
customers for network services (airtime and switching services)
which they purchase in order to resell paging services to their
subscribers, based on units in service at the beginning of each
month; or in the case of caller pays customers, based on actual
number of billable pages;
(ii) Product sales: revenues from the sale of paging and cellular
products to customers; and
(iii) Other services: repair and refurbishment services, inventory
management fees, product fulfillment fees, technical services,
maintenance fees charged to colocation customers for
terminal installation and maintenance services and agency fees.
- ARPU: The Company calculates average revenue per unit by dividing pager
airtime revenues for the month by total units in service at month end.
ARPU for periods greater than one month equals the average of the
monthly ARPUs during the period.
- Cost of revenues: Cost of revenues consists of:
(i) Cost of network services: the cost of operating technical
facilities, site rental, engineering personnel and
telecommunications charges, and the cost of providing terminal
maintenance services to colocation customers. The incremental
costs of entering a new geographic market are capitalized until
the Company begins to generate revenue from the sale of network
services to its customers;
(ii) Cost of product sales: paging and cellular products; and
(iii) Cost of other services: cost of repair and refurbishment of paging
and cellular products, inventory management services, product
fulfillment, technical services and other.
- S,G&A: Selling, general and administrative expenses include salaries,
commissions and administrative costs incurred by the Company relating to
sales personnel and related marketing expenses, executive management,
accounting, office telephone, rents, maintenance, information services
and employee benefits.
- EBITDA: Earnings before interest expense, interest income, taxes,
depreciation and amortization 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.
- Depreciation and amortization: The Company's network equipment, computer
equipment, other equipment, furniture, fixtures, vehicles and leasehold
improvements are depreciated over their estimated useful lives ranging
from five to seven years. FCC license application fees, goodwill, market
entry costs, and other intangible assets are amortized over 15 months to
15 years. Since the Company does not lease pagers to its customers,
there is no depreciation expense on pagers.
22
<PAGE> 23
The table below provides the components of the Company's consolidated
statements of operations and EBITDA for each of the three years ended December
31, 1995, 1996 and 1997, as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Network services ................................................... 48.3% 45.8% 34.6%
Product sales ...................................................... 49.6 43.6 37.8
Other services ..................................................... 2.1 10.6 27.6
------------ ------------ ------------
Total revenues ................................................... 100.0 100.0 100.0
------------ ------------ ------------
Cost of revenues
Network services ................................................... 24.0 34.6 23.1
Products sales ..................................................... 62.0 62.5 37.7
Other services ..................................................... 0.0 5.0 25.4
------------ ------------ ------------
Total cost of revenues ........................................... 86.0 102.0 86.2
------------ ------------ ------------
Gross margin ......................................................... 14.0 (2.0) 13.8
Selling, general and administrative expenses ......................... 43.2 62.5 44.6
Other expenses ....................................................... 0.0 0.0 0.8
Depreciation and amortization ........................................ 10.4 18.6 19.4
------------ ------------ ------------
Operating loss ................................................... (39.7) (83.0) (50.9)
Interest expense ..................................................... (4.3) (1.8) (3.6)
Interest income ...................................................... 4.9 8.4 1.3
------------ ------------ ------------
Net loss ......................................................... (39.0)% (76.4)% (53.2)%
============ ============ ============
EBITDA ............................................................... (29.3)% (64.4)% (31.5)%
</TABLE>
The table below provides information about the Company's units in service on
the Company's networks by customer type.
<TABLE>
<CAPTION>
DECEMBER 31, PERCENTAGE INCREASE IN
------------------------------------- --------------------------------
1995 1996 1997 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Units in service
Reseller units ..................... 129,983 186,482 304,133 112.9% 43.5% 63.1%
Colocation/interconnection units ... 23,918 89,236 150,662 604.9% 273.1% 68.8%
------- ------- -------
Total units in service ............. 153,901 275,718 454,795 138.8% 79.2% 64.9%
Units under agency agreement ......... -- 86,763 -- -- 100.0% (100.0)%
------- ------- -------
Total units ........................ 153,901 362,481 454,795 138.8% 135.5% 25.5%
======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues increased by $22.6 million, or 170.0%, to $36.0 million for
the year ended December 31, 1997 from $13.4 million for the year ended December
31, 1996 due to increased revenue from all three of the Company's revenue
categories: network services, product sales and other services.
Revenues from network services increased by $6.3 million, or 103.5%, to
$12.5 million for the year ended December 31, 1997 from $6.1 million for the
year ended December 31, 1996. The Company has experienced an increase in
network services revenue as unit growth and the associated recurring revenue
stream have continued both in existing markets and in new markets as well as
from the acquisition of Mercury Paging & Communications, Inc. ("Mercury"), a
reseller-based paging carrier acquired in January 1997. During 1997, the
Company expanded into six new markets including Charlotte, Richmond, Boston,
Albany, Indianapolis, and Cleveland, for a total of 27 markets operating at
December 31, 1997. Total units increased by
23
<PAGE> 24
92,314, or 25.5%, to 454,795 from 362,481 over the prior year. Units associated
with the Mercury acquisition were already included in the Company's December 31,
1996 total units in service via an agency agreement, and accordingly, these
units do not impact the overall increase during 1997. ARPU increased by only
$0.01 for 1997 compared to 1996. However, the Company believes that due to an
anticipated increase in units in service from colocation/interconnection
customers as a percentage of total units in service, its ARPU will decline in
the future. The Company incurs minimal marginal cost in supplying only airtime
to its colocation/interconnection customers and therefore charges these
customers substantially less per unit in service per month than it charges its
reseller customers.
Revenues from product sales increased by $7.8 million, or 133.8%, to $13.6
million for the year ended December 31, 1997 from $5.8 million for the year
ended December 31, 1996. The majority of the increase is due to the inclusion of
a full year of revenues in 1997 from EPS, which was acquired in December 1996.
The increase in revenues from product sales also resulted from growth during
1997 of sales of new, used and refurbished pager and cellular products.
Other services revenues increased by $8.5 million, or 603.0%, to $9.9
million for the year ended December 31, 1997 from $1.4 million for the year
ended December 31, 1996. The majority of the increase was due to the inclusion
of a full year of revenues associated with repair and refurbishment of pager and
cellular products, inventory management and product fulfillment resulting from
the purchase of EPS in December 1996. Also contributing to the increase in
revenue is the inclusion of a full year of revenues from PTS, which was acquired
in July 1996 and provides network equipment installation services and
maintenance and engineering services.
Cost of network services increased by $3.7 million, or 80.0%, to $8.3
million for the year ended December 31, 1997 from $4.6 million for the year
ended December 31, 1996, but decreased as a percentage of network services
revenue to 66.8% for the year ended December 31, 1997 from 75.5% for the year
ended December 31, 1996. As markets generate increased revenue, the decrease in
costs as a percentage of revenue is expected due to the fixed nature of many of
these expenses.
Cost of product sales increased by $5.2 million, or 62.7%, to $13.6 million
for the year ended December 31, 1997 from $8.3 million for the year ended
December 31, 1996. The majority of the increase was due primarily to the
inclusion of a full year of cost associated with sales of pager and cellular
products by EPS. Cost of product sales as a percentage of product sales
decreased to 99.6% for the year ended December 31, 1997 from 143.2% for the year
ended December 31, 1996 due primarily to EPS's profits on product sales, and to
a lesser extent due to decreasing cost to the Company of purchasing pagers for
resale to its network customers. The Company also reduced the carrying cost of
its inventory by $332,000 as of December 31, 1997 to the lower of cost or market
compared to $787,000 as of December 31, 1996.
Cost of other services increased by $8.5 million, or 1280.0% to $9.1 million
for the year ended December 31, 1997 from $662,000 for the year ended December
31, 1996. The increase in costs were due to the inclusion of a full year of
costs associated with repair and refurbishment of pager and cellular products
and inventory management provided by EPS and paging network equipment
installation services, maintenance and engineering services provided by PTS.
S,G&A increased by $7.7 million, or 92.3%, to $16.0 million for the year
ended December 31, 1997 from $8.3 million for the year ended December 31, 1996,
but decreased as a percentage of total revenues to 44.6% for the year ended
December 31, 1997 from 62.5% for the year ended December 31, 1996. Because the
Company does not market directly to end-users, it does not incur
subscriber-related acquisition costs and accordingly, its S,G&A expenses do not
increase in direct proportion to its revenue growth. The increases in S,G&A
reflect additional sales and administrative cost to support the increasing
number of customers and expansion into new markets associated with the Company's
network services, and the additional personnel and other S,G&A costs associated
with PTS and EPS.
Other expenses were $278,000 for the year ended December 31, 1997 compared
to $0 for the year ended December 31, 1996, and represent certain non-recurring
severance expenses. The Company took certain cost reduction measures during
the second quarter of 1997 primarily in the area of S,G&A through employee
terminations.
Depreciation and amortization increased by $4.5 million, or 182.1%, to $7.0
million for the year ended December 31, 1997 from $2.5 million for the year
ended December 31, 1996 due to additional assets purchased or constructed for
expansion into new markets, increased amortization of market entry costs as the
Company opens new markets and they generate revenue, and amortization of
goodwill related to the acquisitions of EPS, Mercury, and PTS. Depreciation and
amortization increased as a percentage of total revenues to 19.4% for the year
ended December 31, 1997 from 18.6% for the year ended December 31, 1996.
24
<PAGE> 25
Interest expense, net of capitalized amounts, increased by $1.0 million, or
427.1%, to $1.3 million for the year ended December 31, 1997 from $242,000 for
the year ended December 31, 1996 due to the financing of the network buildout,
borrowings related to the January 1997 acquisition of Mercury, and the interest
associated with a $10,000,000 bridge loan which converted in full into Class A
Redeemable Preferred Stock at the end of the second quarter but which was
outstanding during most of the second quarter of 1997.
Interest income decreased by $667,000 or 59.5% to $455,000 for the year
ended December 31, 1997 from $1.1 million for the year ended December 31, 1996
due to the higher level of funds available for investment in 1996 due to the
proceeds of the Company's IPO.
Net loss for the year ended December 31, 1997 as compared to the year ended
December 31, 1996 increased to $19.2 million from $10.2 million due to
substantial increases in S,G&A and depreciation and amortization, as described
above. The net loss attributable to common stock increased due to the increased
net loss, offset by less accretion but higher dividends on the Class A
Preferred Stock as compared to the Company's previously outstanding Series A and
Series B Preferred Stock.
The net loss per share of Common Stock for the year ended December 31, 1997
increased to $1.26 from $0.91 for the year ended December 31, 1996, due to the
increased net loss offset by reduced amounts of accretion on its stock. All net
loss per share amounts have been restated to conform to Statement of Financial
Accounting Standards No. 128 and Staff Accounting Bulletin No. 98.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased by $6.0 million, or 81.6%, to $13.4 million for the
year ended December 31, 1996 from $7.4 million for the year ended December 31,
1995. The increase was due primarily to an increase in network services revenue
as revenues from PTS and EPS were included for only six months and one month of
1996, respectively. Units in service increased by 121,817, or 79.2%, to 275,718
from 153,901 over the same period. Total units, including units under agency
agreement, increased by 208,580, or 135.5%, to 362,481 from 153,901 over the
same period.
Revenues from network services increased by $2.6 million, or 72.5%, to $6.1
million for the year ended December 31, 1996 from $3.5 million for the year
ended December 31, 1995. 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, Knoxville,
Columbia, Savannah, Raleigh/Durham, and Richmond), continued growth in existing
markets and from the acquisition of substantially all of the paging assets of
Big Apple Paging Corporation ("Big Apple") which resulted in approximately
27,000 units from reseller relationships. 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 colocation/interconnection customers which were
32% of total units in service as of December 31, 1996 up from 16% as of December
31, 1995, and to a lesser extent, unit volume and airtime usage discounts.
Colocation 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 by $2.2 million, or 59.4%, to $5.8
million for the year ended December 31, 1996 from $3.7 million for the year
ended December 31, 1995. The increase in the number of pagers sold was
attributable to continued expansion in existing markets and expansion into new
markets. In addition, the average selling price per pager declined as a result
of competitive pricing in the industry and the Company's marketing programs to
attract resellers to its networks. Revenues from product sales in 1996 also
included sales of new and refurbished pager and cellular products from EPS for
the month of December.
Other services revenues increased by $1.3 million, or 821.8%, to $1.4
million for the year ended December 31, 1996 from $153,000 for the year ended
December 31, 1995. The increase was primarily due to revenues associated with
paging network equipment installation services, maintenance and engineering
services resulting from the purchase of PTS in July 1996 and revenues associated
with repair and refurbishment of pager and cellular products, inventory
management and product fulfillment resulting from the purchase of EPS in
December 1996.
25
<PAGE> 26
Cost of network services increased by $2.9 million, or 161.4%, to $4.6
million for the year ended December 31, 1996 from $1.8 million for the year
ended December 31, 1995. 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 75.5%
for the year ended December 31, 1996 compared to 49.8% for the year ended
December 31, 1995, due primarily to expansion into new markets where there are
fewer units in service producing revenue, while the market bears fully-loaded
upfront network cost.
Cost of product sales increased by $3.8 million, or 82.7%, to $8.3 million
for the year ended December 31, 1996 from $4.6 million for the year ended
December 31, 1995 due to the increased number of pagers sold. Cost of product
sales as a percentage of product sales was 143.2% for the year ended December
31, 1996 compared to 124.8% for the year ended December 31, 1995 reflecting the
Company's marketing programs to attract customers to its networks and the
competitive nature of pricing in the industry. The Company also reduced the
carrying cost of its inventory by $787,000 as of December 31, 1996 to the lower
of cost or market compared to $129,000 as of December 31, 1995. The cost of
product sales also includes the cost of sales of new and refurbished pager and
cellular products of EPS for the month of December.
Cost of other services increased to $662,000 for the year ended December 31,
1996 from $0 for the year ended December 31, 1995. The increase was due to the
costs associated with network equipment installation, maintenance and
engineering services resulting from the purchase of PTS and costs associated
with repair of pager and cellular products, inventory management and product
fulfillment resulting from the purchase of EPS.
S,G&A increased by $5.2 million, or 162.2%, to $8.3 million for the year
ended December 31, 1996 from $3.2 million for the year ended December 31, 1995,
and increased as a percentage of total revenues to 62.5% for the year ended
December 31, 1996 from 43.2% for the year ended December 31, 1995. The increase
reflects additional sales and administrative costs to support the increasing
number of customers and expansion into new markets associated with the Company's
network services, and the additional personnel associated with PTS and EPS.
Depreciation and amortization increased by $1.7 million, or 224.6%, to $2.5
million for the year ended December 31, 1996 from $764,000 for the year ended
December 31, 1995 primarily due to additional assets purchased or constructed
for expansion into new markets and increased amortization of market entry costs
as new markets begin to generate revenues. Depreciation and amortization
increased as a percentage of total revenues to 18.6% for the year ended December
31, 1996 from 10.4% for the year ended December 31, 1995.
Interest expense decreased by $75,000, or 23.6%, to $242,000 for the year
ended December 31, 1996 from $317,000 for the year ended December 31, 1995. The
decrease was due to increased capitalization of interest in the amount of
$196,000 on paging assets under construction in 1996. Capital expenditures were
$16.5 million for the year ended December 31, 1996 compared to $4.2 million for
the year ended December 31, 1995.
Interest income increased by $758,000 or 208.3% to $1.1 million for the year
ended December 31, 1996 from $364,000 for the year ended December 31, 1995. The
increase represents interest income from the investment of the funds received
from the IPO in March 1996.
Net loss for the year ended December 31, 1996 as compared to the year ended
December 31, 1995 increased to $10.2 million from $2.9 million primarily due to
losses incurred on sales of pager products below cost and substantial increases
in S,G&A, as described above. The net loss attributable to common stock
increased due to the net loss offset by less accretion and lower dividends due
to the March 1996 conversion of the Series A and Series B Preferred Stock.
The net loss per share of Common Stock for the year ended December 31, 1996
decreased to $0.91 from $1.75 for the year ended December 31, 1995, due to the
increased number of Common Stock shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's expansion strategy has historically required substantial funds
to finance the expansion of existing operations, the expansion into new markets
as part of the nationwide build-out of its networks, the purchase of network
assets and related FCC licenses, capital expenditures, debt service and general
corporate purposes. Because the Company's network expansion is in its later
stages, the Company expects that its capital expenditures in 1998 will be
reduced compared to 1996 and 1997.
26
<PAGE> 27
The Company's net cash used in operations was $3.9 million, $6.3 million,
and $11.1 million for the years ended December 31, 1995, 1996, and 1997,
respectively. The primary reason for the increase in 1997 was the increase in
accounts receivable and operating expenses associated with supporting a rapidly
growing business.
Capital expenditures were $4.2 million, $16.5 million, and $7.8 million for
the years ended December 31, 1995, 1996, and 1997, respectively, reflecting
expansions of the Company's networks. The Company has funded its expansion in
the past by equity infusions, bank and finance company debt, loans from
stockholders, and vendor and seller financing.
The Company has expanded and augmented its local and 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. The timing and construction of the final TCC
and additional markets will depend, among other things, on customer requirements
and the timing and availability of capital. As of December 31, 1997 the Company
had completed 25 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 and Northeast TCCs, and the addition of network
assets in the 150 MHz, 450 MHz and 900 MHz bands in certain markets in the
Southeast and Northeast United States. Three of the most significant of these
were the purchase of network assets in Georgia and Florida from BellSouth
Telecommunications, Inc. in the third quarter of 1995; the purchase of network
assets in New York, New Jersey, and Connecticut from Big Apple in the third
quarter of 1996; and the purchase of Mercury in the first quarter of 1997. As a
result, the Company added additional spectrum on a local basis on radio common
carrier 152.84 MHz, 152.60 MHz, 158.10 MHz, 931.2625 MHz and 931.3125 MHz
frequencies. After the 1995, 1996 and 1997 purchases, the Company was successful
in negotiating contracts with the resellers of paging services, resulting in the
addition of over 30,000, 27,000 and 60,000 units in service, respectively, on
these networks.
In the second quarter of 1997, the Company received a bridge loan of $10.0
million from certain of its stockholders that accrued an interest rate of 10.0%
per annum. The Company sold $15 million of Class A Redeemable Preferred Stock
(the "Class A Preferred") with warrants to certain stockholders, into which the
bridge loan plus accrued interest was converted in full. The Class A Preferred
accrues cumulative dividends at a rate of 10.0% of its original principal value
per annum. The holders of the Class A Preferred were issued warrants to purchase
11.5 million shares of Common Stock at an exercise price of $1.50 per share.
In March 1998, the Company sold $8.0 million of Class B Senior Redeemable
Preferred Stock (the "Class B Preferred") with warrants to one institutional
investor and certain of its existing stockholders. The Class B Preferred accrues
cumulative dividends at a rate of 15.0% of its liquidation value, compounded
annually. The holders of the Class B Preferred were issued warrants to purchase
5.4 million shares of Common Stock at an exercise price of $1.50 per share.
The Company has a secured credit facility for $12.0 million of vendor
financing bearing interest at the five-year U.S. Treasury rate plus 6.5% payable
in various monthly installments of principal and interest over 60 months. This
credit facility contains various conditions, financial covenants and
restrictions and is secured by paging equipment. As of December 31, 1997, there
was $5.9 million outstanding under this facility with $5.7 million available.
The Company has a secured credit facility for $5.0 million to finance paging
system equipment from a finance company bearing interest between 10% and 11%
payable in various monthly installments of principal and interest over 60
months. This credit facility contains various conditions, financial covenants
and restrictions and is secured by paging equipment. As of December 31, 1997,
there was $4.1 million outstanding under this facility with no additional
availability.
As of December 31, 1997, the Company had 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 either of (i) 1% plus the higher of
the Federal Funds Rate for each day plus 1/2% or prime, or (ii) LIBOR plus
3.75%, at the Company's option. Interest only was payable monthly in arrears
with the entire principal due in full in August 1998. Borrowings under this
facility 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 and acquisitions, among other things.
The amount outstanding under this facility as of December 31, 1997 was $9.25
million and there was no additional availability. The Company amended this
credit
27
<PAGE> 28
facility in March 1998 to increase its availability for working capital purposes
by $1.75 million, bringing the total facility to $11.0 million. The amendment
also extended the maturity of the facility with monthly installments of
principal of approximately $120,800 beginning in February 1999, with the
remaining principal balance due in July 2000. The amendment also contained
certain revisions to its financial covenants, including but not limited to a
requirement to maintain a minimum cash balance of $4 million at all times.
At December 31, 1997, the Company had $5.4 million invested in short-term
investment grade securities at various interest rates.
Management believes that cash and cash equivalents on hand together with the
secured credit facilities described above, will be sufficient to meet the
Company's working capital, capital expenditure and debt covenant requirements
for at least the next 12 months without requiring additional vendor or other
financing. The Company may need additional funds in the form of equity, bank
debt or other debt financing in the future to execute its business plan.
However, no assurances can be given that if additional funds are required, such
funds will be available on terms acceptable to the Company, if at all, and the
failure to obtain such funds could have a material adverse effect on the
Company.
ACQUISITIONS
In January 1997, the Company acquired the stock of Mercury and its
affiliated companies for a total purchase price of $14.2 million. The
transaction was accounted for as a purchase as of January 31, 1997. Of this
amount, the Company paid $10.3 million in cash and issued 624,321 shares of
Common Stock. Mercury was a reseller-based paging carrier in the states of New
York, New Jersey and Connecticut. Prior to closing, the Company earned revenues
from Mercury under an agency agreement.
In December 1996, the Company acquired the stock of EPS for approximately
$4.8 million. Of this amount, the Company paid $300,000 in cash and issued
673,524 shares of Common Stock. The transaction was accounted for as a purchase
as of December 1, 1996. The Company may pay possible additional consideration of
up to $5.0 million based on EPS's achievement of targeted operating performance
during the two year period ending December 31, 1998. Additional consideration,
if any, will be recorded as goodwill.
In September 1996, the Company acquired substantially all the assets of Big
Apple for approximately $3.8 million. Of this amount, the Company paid $1.8
million in cash and issued 290,915 shares of Common Stock. The transaction was
accounted for as a purchase as of September 13, 1996. Big Apple was a
reseller-based paging carrier in the states of New York, New Jersey, and
Connecticut. Prior to closing, the Company earned revenues from Big Apple under
an agency agreement.
In July 1996, the Company acquired the stock of Paging Services, Inc.
("PSI") for $750,000, paid by the issuance of 58,823 shares of Common Stock and
$250,000 in cash. The name of PSI was changed to Preferred Technical Services,
Inc., and PTS operates as a wholly-owned subsidiary of the Company. The
transaction was accounted for as a purchase as of July 1, 1996.
EFFECT OF INFLATION AND SEASONALITY
Inflation is not a material factor affecting the Company's business. The
cost to the Company of purchasing pagers has declined significantly in recent
years, and this reduction in cost has been reflected in lower prices charged to
the Company's customers and lower cost of product to the Company as a percentage
of its product sales. General operating expenses such as salaries, employee
benefits, and occupancy costs are subject to normal inflationary pressures.
Seasonality is not a material factor affecting the Company's business
although pager sales are generally higher in the fourth quarter of the year due
to higher demand from the Company's customers' subscribers during the holiday
season. Also in certain regions, weather delays may be a factor in PTS's
revenues from network equipment installation and in the construction of the
Company's networks.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report on Form 10-K 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
28
<PAGE> 29
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 leverage and debt service
(including availability of financing terms acceptable to the Company), risks
relating to the ability of the Company to obtain additional funds in the form of
debt or equity 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.
YEAR 2000 COMPUTER ISSUE
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00." This may cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken.
The Company utilizes software and related computer technologies essential to
its operations that will be affected by the Year 2000 issue. Although the
Company's evaluation is not yet complete, the Company currently believes that
most of its software is already Year 2000 compliant and the cost, if any, of
modifying its remaining software will not be material, or require extensive
time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
29
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
PREFERRED NETWORKS, INC.
We have audited the consolidated balance sheets of Preferred Networks, Inc.
as of December 31, 1996 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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 consolidated financial position of Preferred
Networks, Inc. as of December 31, 1996 and 1997 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Atlanta, Georgia
March 23, 1998
30
<PAGE> 31
PREFERRED NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............................................ $21,645,354 $ 7,562,978
Accounts receivable, less allowance for doubtful accounts of
$254,990 and $661,300 in 1996 and 1997, respectively ............... 2,623,741 3,969,026
Receivables from related parties ..................................... 93,397 --
Inventory ............................................................ 5,630,478 2,890,647
Prepaid expenses and other current assets ............................ 732,431 325,130
----------- -----------
Total current assets .......................................... 30,725,401 14,747,781
Property and equipment, net ............................................ 21,559,407 25,569,209
Goodwill, net .......................................................... 5,779,321 13,396,459
FCC licenses, net ...................................................... 4,601,792 9,544,622
Other assets, net ...................................................... 3,459,416 2,974,409
=========== ===========
$66,125,337 $66,232,480
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ..................................................... $ 5,017,467 $ 3,091,994
Accrued liabilities .................................................. 2,878,573 832,656
Accrued salaries ..................................................... 621,493 797,302
Current portion of notes payable and capital lease obligations ....... 995,164 2,123,248
----------- -----------
Total current liabilities ..................................... 9,512,697 6,845,200
Notes payable and capital lease obligations, less current portion ...... 16,029,652 17,658,608
Class A Redeemable Preferred Stock, no par value, $1.50 per share
liquidation preference and redemption price; 13,500,000 shares
authorized in 1997, 10,000,000 shares issued and outstanding in 1997 . -- 13,956,123
----------- -----------
Total liabilities and Redeemable Preferred Stock .............. 25,542,349 38,459,931
Stockholders' equity
Preferred stock, no par value, 16,500,000 shares authorized in
1997, none issued and outstanding in 1997 .......................... -- --
Common Stock, no par value, 100,000,000 shares authorized in 1997,
16,200,552 shares issued and outstanding in 1997 ................... -- 62,900,973
Common Stock, $.0001 par value, 70,000,000 shares authorized in
1996, 15,290,921 shares issued and outstanding in 1996 ............. 1,529 --
Additional paid-in capital ........................................... 56,312,399 --
Accretion on Class A Redeemable Preferred Stock ...................... -- (245,726)
Accumulated deficit .................................................. (15,730,940) (34,882,698)
----------- -----------
40,582,988 27,772,549
----------- -----------
$66,125,337 $66,232,480
=========== ===========
</TABLE>
See accompanying notes.
31
<PAGE> 32
PREFERRED NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Network services ........................................ $ 3,549,088 $ 6,121,127 $ 12,456,481
Product sales ........................................... 3,651,018 5,818,074 13,603,312
Other services .......................................... 153,128 1,411,471 9,921,763
----------- ------------ ------------
Total revenues ................................. 7,353,234 13,350,672 35,981,556
Costs of revenues
Network services ........................................ 1,768,171 4,621,126 8,315,721
Product sales ........................................... 4,557,813 8,328,771 13,552,874
Other services .......................................... -- 662,310 9,140,428
----------- ------------ ------------
Total costs of revenues ........................ 6,325,984 13,612,207 31,009,023
----------- ------------ ------------
Gross margin ................................................ 1,027,250 (261,535) 4,972,533
Selling, general and administrative expenses ................ 3,179,944 8,337,963 16,030,595
Other expenses .............................................. -- -- 277,707
Depreciation and amortization ............................... 763,743 2,479,080 6,993,116
----------- ------------ ------------
Operating loss ................................. (2,916,437) (11,078,578) (18,328,885)
Interest expense ............................................ (317,160) (242,337) (1,277,478)
Interest income ............................................. 363,837 1,121,585 454,605
----------- ------------ ------------
Net loss ....................................... (2,869,760) (10,199,330) (19,151,758)
Accretion of Redeemable Preferred Stock ..................... (3,289,003) (1,121,316) (245,726)
Redeemable Preferred Stock dividend requirements ............ (1,069,548) (353,651) (808,333)
----------- ------------ ------------
Net loss attributable to Common Stock .......... $(7,228,311) $(11,674,297) $(20,205,817)
=========== ============ ============
Net loss per share of Common Stock .......................... $ (1.75) $ (0.91) $ (1.26)
=========== ============ ============
Weighted average number of common shares
used in calculating net loss per share of
Common Stock .............................................. 4,138,496 12,814,579 16,059,637
=========== ============ ============
</TABLE>
See accompanying notes.
32
<PAGE> 33
PREFERRED NETWORKS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ACCRETION OF
STOCK ADDITIONAL COMMON REDEEMABLE
($.0001 PAID-IN STOCK PREFERRED ACCUMULATED
PAR) CAPITAL (NO PAR) STOCK DEFICIT TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ............. $ 414 $ 1,992,445 $ -- $ -- $ (2,661,850) $ (668,991)
Issuance of Common Stock warrants ....... -- 83,750 -- -- -- 83,750
Accretion of Series A and Series B
Redeemable Convertible Preferred Stock . -- -- -- (3,289,003) -- (3,289,003)
Undeclared dividends on Series B
Redeemable Convertible Preferred Stock
($64.57 per share) ..................... -- (1,069,548) -- -- -- (1,069,548)
Non-cash stock option compensation ...... -- 7,334 -- -- -- 7,334
Net loss ................................ -- -- -- -- (2,869,760) (2,869,760)
------------------------------------------------------------------------------------
Balance at December 31, 1995 ............. 414 1,013,981 -- (3,289,003) (5,531,610) (7,806,218)
Accretion of Series A and Series B
Redeemable Convertible Preferred Stock . -- -- -- (1,121,316) -- (1,121,316)
Dividends on Series B Redeemable
Convertible Preferred Stock ($21.35
per share) ............................. -- (353,651) -- -- -- (353,651)
Issuance of Common Stock upon Initial
Public Offering ........................ 345 31,152,052 -- -- -- 31,152,397
Conversion of Series A and Series B
Redeemable Convertible Preferred Stock . 683 18,546,627 -- 4,410,319 -- 22,957,629
Issuance of Common Stock upon exercise
of stock options ....................... 1 14,142 -- -- -- 14,143
Issuance of Common Stock pursuant to
acquisitions ........................... 86 5,909,914 -- -- -- 5,910,000
Non-cash stock option compensation ...... -- 29,334 -- -- -- 29,334
Net loss ................................ -- -- -- -- (10,199,330) (10,199,330)
------------------------------------------------------------------------------------
Balance at December 31, 1996 ............. 1,529 56,312,399 -- -- (15,730,940) 40,582,988
Corporate reincorporation ............... (1,529) (56,312,399) 56,313,928 -- -- --
Issuance of 828,613 shares of Common
Stock pursuant to acquisitions ......... -- -- 5,179,989 -- -- 5,179,989
Issuance of 74,000 shares of Common
Stock pursuant to Directors' Restricted
Stock Award Plan ....................... -- -- 95,703 -- -- 95,703
Issuance of Common Stock Warrants ....... -- -- 1,930,963 -- -- 1,930,963
Non-cash stock option compensation ...... -- -- 181,915 -- -- 181,915
Accretion of Class A Redeemable
Preferred Stock ........................ -- -- -- (245,726) -- (245,726)
Undeclared dividends on Class A
Redeemable Preferred Stock ($0.08 per
share) ................................. -- -- (808,333) -- -- (808,333)
Exercise of options ..................... -- -- 6,808 -- -- 6,808
Net loss ................................ -- -- -- -- (19,151,758) (19,151,758)
------------------------------------------------------------------------------------
Balance at December 31, 1997 ............. $ -- $ -- $62,900,973 $ (245,726) $(34,882,698) $ 27,772,549
====================================================================================
</TABLE>
See accompanying notes.
33
<PAGE> 34
PREFERRED NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................ $ (2,869,760) $(10,199,330) $(19,151,758)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................. 763,743 2,479,080 6,993,116
Loss on disposal of property and equipment ..................... 7,380 -- 33,193
Bad debt expense ............................................... 120,042 248,362 805,022
Stock option compensation expense .............................. 7,334 29,334 277,618
Changes in operating assets and liabilities:
Accounts receivable ........................................... (507,547) (1,415,629) (1,731,406)
Receivables from related parties .............................. (1,425) (26,972) 93,397
Inventory ..................................................... (706,137) (3,759,481) 3,104,062
Prepaid expenses and other current assets ..................... (335,893) (109,048) 427,476
Accounts payable .............................................. (744,028) 3,784,690 (994,399)
Accrued liabilities ........................................... 213,016 2,518,175 (1,126,951)
Accrued salaries .............................................. 145,924 160,910 175,809
------------ ------------ ------------
Net cash used in operating activities ........................... (3,907,351) (6,289,909) (11,094,821)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment .......................................... (3,104,513) (8,174,943) (3,856,095)
Purchase of other assets and FCC licenses ....................... (1,421,158) (6,568,426) (1,599,876)
Payment for acquisitions, net of cash acquired .................. -- (379,947) (10,509,544)
------------ ------------ ------------
Net cash used in investing activities ........................... (4,525,671) (15,123,316) (15,965,515)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ........................................ 3,463,681 10,000,000 10,000,000
Payments of borrowings .......................................... (1,869,650) (7,243,191) (1,861,875)
Issuance of Redeemable Convertible Preferred Stock .............. 15,845,365 -- 2,902,064
Payment of Redeemable Convertible Preferred Stock Dividends ..... -- (176,149) --
Issuance of Common Stock upon exercise of stock options ......... -- 14,143 --
Issuance of Common Stock ........................................ -- 31,152,397 6,808
Issuance of Common Stock warrants ............................... 83,750 -- 1,930,963
------------ ------------ ------------
Net cash provided by financing activities ....................... 17,523,146 33,747,200 12,977,960
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ............ 9,090,124 12,333,975 (14,082,376)
Cash and cash equivalents, beginning of year .................... 221,255 9,311,379 21,645,354
============ ============ ============
Cash and cash equivalents, end of year .......................... $ 9,311,379 $ 21,645,354 $ 7,562,978
============ ============ ============
</TABLE>
See accompanying notes.
34
<PAGE> 35
PREFERRED NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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 and
resell the Company's network services to their subscribers. During the second
half of 1996, the Company began to broaden its service offerings and expand its
customer base through two acquisitions of businesses which provide non-network
services. In July 1996, the Company acquired Preferred Technical Services, Inc.
("PTS"), a provider of wireless network equipment installation, maintenance and
engineering services. In December 1996, the Company acquired EPS Wireless, Inc.
("EPS"), a national provider of paging and cellular product repair services,
sales of new, used and refurbished paging and cellular products and inventory
management services.
In June 1997, pursuant to a merger into a wholly-owned shell subsidiary, the
Company reincorporated from Delaware to Georgia, increased the amount of its
authorized Common Stock and Preferred Stock and provided that all of its stock
was without par value.
The Company has formed wholly-owned subsidiaries and limited liability
companies to execute certain business transactions. All significant intercompany
activity has been eliminated.
INITIAL PUBLIC OFFERING
In March 1996, the Company issued 3,448,000 shares of Common Stock in an
initial public offering ("IPO") and received net proceeds of $32.1 million.
Pursuant to their terms, upon consummation of the IPO all outstanding shares
of Series A and Series B Redeemable Convertible Preferred Stock ("Series A" and
"Series B", respectively) 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.
SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as follows:
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 network services when the service is
provided. Revenue from the sale of pagers and cellular products is recognized
when the product is shipped. Other service revenue consists of revenues
generated from repair, maintenance and installation services which the Company
recognizes when the services are
35
<PAGE> 36
provided. Sales to one customer approximated a total of 13% and 10%,
respectively, of total sales during 1995 and 1996. No one customer provided more
than 10% of sales during 1997.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with original maturity dates of
90 days or less at date of purchase to be cash equivalents. Short-term
investments are carried at cost plus accrued interest, which approximates fair
market value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and accounts receivable.
Cash equivalents are held with two financial institutions. Accounts receivable
represent trade receivables and are unsecured. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral to support customer receivables. The Company provides an
allowance for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends, and other information.
INVENTORY
Inventory includes new and refurbished pagers and cellular phones and
related repair parts. The amounts are stated at the lower of cost or market,
with cost of new product and repair parts being determined under the first-in,
first-out (FIFO) method and the cost of refurbished products being determined
principally by use of the specific identification method. Inventory has been
reduced to market value at both December 31, 1996 and 1997.
PROPERTY AND EQUIPMENT
Property and equipment, including items financed through notes payable and
capital leases, is stated at cost including capitalized interest on eligible
assets. Interest capitalized in 1995, 1996 and 1997 totaled $84,288, $280,749
and $781,381, respectively. The Company depreciates its property and equipment
over their estimated useful lives using the straight-line method for financial
reporting purposes and accelerated methods for tax reporting purposes. Estimated
useful lives range from five to seven years.
FCC LICENSES
Federal Communications Commission ("FCC") licenses consist of costs
associated with the purchase of licenses and license application fees. These
amounts are being amortized over a 15 year period, using the straight-line
method. Accumulated amortization at December 31, 1996 and 1997 totaled $235,967
and $864,058, respectively.
OTHER ASSETS
Other assets include deposits with creditors and market entry costs. The
Company capitalizes the incremental costs of entering a new geographical market
until the Company begins to generate revenues from the sale of network services
to its customers in that market. These costs include salaries, rent and the cost
of telecommunications services. Such capitalized amounts are amortized over a 15
month period, which approximates the Company's estimated market stabilization
period. The Company capitalized $280,212 in 1995, $2,407,346 in 1996 and
$2,082,021 in 1997. Accumulated amortization for other assets at December 31,
1996 and 1997 totaled $415,735 and $1,969,359, respectively.
GOODWILL
Goodwill represents the excess purchase price over the fair value of the
assets acquired in various acquisitions. Goodwill is amortized using the
straight-line method over 15 years. At December 31, 1996 and 1997, accumulated
amortization was $25,334 and $968,115, respectively.
36
<PAGE> 37
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. No impairment losses have been recorded in 1996 or 1997.
ADVERTISING EXPENSES
The Company expenses all advertising expenses as incurred. Advertising
expense for the years 1995, 1996, and 1997 was approximately $14,000, $29,000,
and $218,000, respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of measuring and recording
compensation expense, if any, related to stock-based compensation. See Note 6
related to pro forma disclosures using the fair value method, as required by
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation ("FAS 123").
NET LOSS PER SHARE
Net loss per share was computed and restated, in the case of periods prior
to the fourth quarter of 1997, using the requirements of Statement of Financial
Accounting Standards No. 128, Earnings per Share, and Staff Accounting Bulletin
No. 98. Net loss per share-basic was computed by dividing net loss attributable
to common stock by the weighted average number of shares of common stock
outstanding during the period excluding unvested shares of restricted stock. The
denominator for net loss per share-diluted also considers the dilutive effect of
outstanding stock options, warrants, and convertible preferred stock. Due to the
Company's net loss, the amounts reported for basic and diluted are the same. The
following securities could potentially dilute basic earnings per share in the
future and were not included in the computation of diluted EPS because they
would have been antidilutive for the period presented:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------------------
<S> <C> <C> <C>
Common Stock Options 780,723 1,151,753 1,705,989
Common Stock Warrants 422,353 422,353 11,922,353
Convertible Preferred Stock 6,830,280 -- --
Unvested Restricted Stock -- -- 60,000
----------------------------------------
Total 8,033,356 1,574,106 13,688,342
========================================
</TABLE>
STATEMENTS OF CASH FLOWS
The Company paid interest, net of amounts capitalized, of approximately
$402,000, $569,000, and $1,199,000, during the years ended December 31, 1995,
1996 and 1997, respectively.
During 1995, 1996 and 1997, the Company purchased property and equipment of
approximately $1,121,000 and $7,695,000 and $3,248,000, respectively, through
the issuance of notes payable and under capital leases.
During 1995, the Company issued 300 shares of Series B Redeemable Preferred
Stock in satisfaction of $300,000 owed to officers of the Company for
compensation and repayment of advances to the Company from the officers.
In 1997, the Company borrowed a total of $10.0 million from the Class A
Redeemable Preferred stockholders under a 10% bridge loan. The Company's
indebtedness under the $10.0 million bridge loan was applied against the
purchase price of the Class A Preferred Stock. See note 5.
37
<PAGE> 38
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131 Disclosures about Segments of an Enterprise and Related Information ("FAS
131"), which establishes standards for the way public business enterprises
report information about operating segments in its financial statements. FAS 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. FAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company will adopt
FAS 131 in 1998 and does not expect the effect of adoption to be material to its
consolidated financial statements but additional disclosures may be required.
2. ACQUISITIONS
In July 1996, the Company acquired the stock of Paging Services, Inc. for
$750,000, paid by the issuance of 58,823 shares of the Company's Common Stock
and $250,000 in cash. Its name was changed to Preferred Technical Services, Inc.
("PTS"), and PTS now operates as a wholly-owned subsidiary of the Company. The
transaction was accounted for as a purchase as of July 1, 1996, and the excess
purchase price over the fair value of the assets acquired has been recorded as
goodwill. The President and another officer of the Company were majority
stockholders of PTS prior to the acquisition.
In September 1996, the Company acquired substantially all the assets of Big
Apple Paging Corporation ("Big Apple") for approximately $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 the Company's Common Stock in September 1996. In 1997, $1.1
million was paid by the issuance of 165,317 shares of Common Stock and an
additional $380,000 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
operating in the states of New York, New Jersey, and Connecticut.
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
the Company's 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. No additional amounts have been paid or accrued. 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 &
Communication, Inc. ("Mercury") and its affiliated companies for approximately
$14.2 million of which approximately $10.0 million was paid in cash and the
remainder by the issuance of 624,321 shares of Common Stock. 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.
38
<PAGE> 39
The following unaudited pro forma summary presents the consolidated results of
operations as if all of the 1996 acquisitions described above had occurred on
January 1, 1995 and the 1997 acquisition described above had occurred on January
1, 1996, and does not purport to be indicative of what would have occurred had
the acquisitions been made as of that date or of results which may occur in the
future:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------------------
1995 1996 1997
--------------------------------------------
<S> <C> <C> <C>
Net revenues ........................... $ 15,676,032 $ 29,898,405 $ 36,427,428
============ ============ ============
Net loss ............................... $ (3,714,506) $(13,634,307) $(19,174,424)
============ ============ ============
Net loss per common share .............. $ (1.95) $ (1.12) $ (1.26)
============ ============ ============
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Network services equipment ............. $ 14,654,212 $ 19,794,707
Computer equipment ..................... 2,461,159 2,726,232
Other equipment ........................ 318,107 999,937
Vehicles ............................... 484,220 817,186
Furniture and fixtures ................. 470,249 808,572
Construction in progress ............... 5,991,977 6,602,000
Leasehold improvements ................. 553,826 997,356
------------ ------------
24,933,750 32,745,990
Less accumulated depreciation .......... (3,374,343) (7,176,781)
------------ ------------
$ 21,559,407 $ 25,569,209
============ ============
</TABLE>
At December 31, 1996 and 1997 substantially all property and equipment is
pledged as collateral under various notes payable and capital lease obligations.
Depreciation expense was approximately $708,000, $1,820,000 and $3,856,886 for
the years ended December 31, 1995, 1996 and 1997, respectively.
39
<PAGE> 40
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Revolving credit facility with a financial institution; maximum borrowings
of $11,000,000, bearing interest either at (1) 1% plus the higher of the
Funds Rate for each day plus 1/2% or prime or (2) LIBOR plus 3.75%, at the
Company's option. No additional amounts were available at December 31,
1997. Payable in monthly interest installments and monthly principal
installments of $120,800 beginning in February 1999, balance due July
30, 2000; secured by substantially all the assets of the Company (a) ........ $ 10,000,000 $ 9,247,045
Line of credit with equipment manufacturers, maximum borrowings of
$12,000,000 at December 31, 1997, bearing interest at the five-year
U.S. Treasury rate plus 6.5% in 1996 and 1997. At December 31, 1997,
$5.7 million was available and borrowings are payable in various monthly
installments of principal and interest, with maturity dates through 2002;
secured by paging equipment ................................................. 3,595,810 5,921,648
Notes payable to finance company bearing interest at rates between 10% and 11%
payable in various monthly installments of principal and interest with
maturity dates through 2002; secured by paging equipment. No additional
amounts were available at December 31, 1997 ................................. 3,011,512 4,089,016
Amounts due under capital leases, due in various monthly installments
until 2001; secured by the related equipment ................................ 417,494 524,147
------------ ------------
17,024,816 19,781,856
Less current portion ......................................................... (995,164) (2,123,248)
------------ ------------
Long-term debt ............................................................... $ 16,029,652 $ 17,658,608
============ ============
</TABLE>
(a) In March 1998, the Company amended its revolving credit facility to
increase its availability for working capital purposes for a total facility of
$11.0 million and to extend the maturity, with monthly installments of principal
of approximately $120,800 beginning in February 1999, with the remaining
principal balance due in July 2000. Accordingly, as of December 31, 1997, the
outstanding amount of $9.25 million has been classified as long term. Certain
other covenants were also modified such that the Company is required to maintain
minimum cash balances of $4 million at all times and various other conditions,
financial covenants and restrictions related to debt service, minimum net worth
and acquisitions. Availability under this facility is based on a multiple of
positive EBITDA of certain network markets, eligible receivables and inventory
of the Company.
Approximate future principal maturities of notes payable and capital lease
obligations for each of the next five years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1998 ............................................. $ 2,123,248
1999 ............................................. 3,930,341
2000 ............................................. 10,826,725
2001 ............................................. 2,323,907
2002 ............................................. 577,635
-----------
$19,781,856
</TABLE>
40
<PAGE> 41
5. STOCKHOLDERS' EQUITY
COMMON STOCK SPLITS
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 Board of Directors and stockholders also approved an amendment
to increase the number of authorized shares of Preferred Stock to 5,000,000,
which was effective upon consummation of the IPO. All common share and per
common share amounts have been adjusted for all periods presented to reflect the
stock split.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In 1994, the Company authorized the issuance of 500,000 shares of Preferred
Stock, $.01 par value per share. A total of 159,377 of these shares of Preferred
Stock were previously designated as Series A Redeemable Convertible Preferred
Stock ("Series A") and a total of 159,377 shares were issued in 1995. All of the
outstanding shares of Series A converted to Common Stock upon the IPO.
The Series A was redeemable, if no Series B was outstanding, any time on or
after June 20, 2001, at the option of the holders of 51% of the outstanding
shares, at the greater of $11.00 per share or fair market value. Each share of
Series A was also convertible into 7.35 shares of Common Stock (subject to
adjustment) at any time at the option of the holders and automatically converted
in the event of certain transactions, including a qualified public offering, as
defined. The Company's IPO triggered the automatic conversion. The number of
shares of Common Stock to which the holders of Series A were entitled was
determined by dividing $11.00 by the "Conversion Price" (originally $11.00, with
subsequent adjustments as provided) applicable to such shares at the date of
conversion. Each holder of Series A was entitled to the number of votes equal to
the number of shares of Common Stock into which such shares of Series A could be
converted. The holders of Series A were entitled to receive, as, when, and if
declared by the Board of Directors, cumulative preferred dividends at the rate
of $0.88 per share as adjusted for any stock dividends, combinations or splits
with respect to such shares) per annum, payable out of funds legally available.
Such preferred dividends were to begin to accrue on October 1, 1996. The Series
A had liquidation preference over the Common Stock (at the greater of (i) $11.00
plus accrued or declared and unpaid dividends or (ii) such amount per share as
would be available to the holders of Common Stock assuming conversion of all
then-outstanding Series A to Common Stock), but ranked in parity with all other
Preferred Stock.
The Series A was being accreted to its estimated redemption value (the
greater of $11.00 per share or fair value) over the period until the holders
could demand redemption.
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1995, the Company designated 21,000 of its then authorized shares of
Preferred Stock as Series B and issued 16,565 shares of Series B Redeemable
Convertible Preferred Stock ("Series B"). All of the outstanding shares of
Series B converted to Common Stock upon the IPO. Dividends on the Series B
accrued at the rate of 12% of the liquidation value per annum, compounded
quarterly. The Series B had a liquidation value of $1,000 per share, had
priority over all other capital stock of the Company with respect to dividends
and liquidation and voted together with the Common Stock on an as-converted
basis (i.e., each share of Series B converted into 334.09 shares of Common
Stock). The Series B could be converted into shares of Common Stock at any time
at the option of the holder and was subject to mandatory conversion upon a
qualified public offering, as defined. The Company had the option of paying any
unpaid dividends upon conversion in cash or shares of Common Stock. The Company
paid all Series B dividends through January 31, 1996 in shares of Common Stock,
and from that date to the IPO in cash.
Upon certain triggering dates or events including the sale of the Company,
Series B holders had the right to require the Company to redeem the Series B and
underlying Common Stock resulting from any conversion, at a price equal to (i)
for the Series B, the greater of the liquidation value per share (plus accrued
and unpaid dividends) or its fair market value per share and (ii) for the
underlying Common Stock, the greater of $2.99 per share or its fair market value
per share. In January 1996, the shareholders approved the deletion of the
redemption feature on the underlying Common Stock upon the completion of the
IPO.
The Company had the right to call all of the Series B at any time, at a
price equal to its liquidation value per share, plus accrued and unpaid
dividends.
41
<PAGE> 42
In conjunction with the issuance of the Series B, the holders of the Series
A agreed to subordinate certain of their rights to those of the Series B. As a
result, the number of authorized shares of Series A was reduced to equal the
number of shares of Series A then outstanding and the Series A could not be
redeemed until the redemption or conversion of the Series B.
The difference between redemption value of the Series B (the greater of
$1,000 per share or fair value) and carrying value (excluding accrued dividends)
was being accreted over five years, the period until the holders could demand
redemption.
CLASS A REDEEMABLE PREFERRED STOCK
In June 1997, the Company issued 10.0 million shares of Class A Redeemable
Preferred Stock (the "Class A Preferred") and warrants to purchase up to 11.5
million shares of Common Stock for a total purchase price of $15.0 million.
Dividends accrue at the rate of 10% per annum, are cumulative and compound
annually. The Class A Preferred may be redeemed at any time at the option of the
Company at a price equal to $1.50 per share plus accrued dividends. If the
holder so demands and after redemption of the Class B Senior Redeemable
Preferred Stock described below, five years from the date of issuance, the Class
A Preferred must be redeemed by the Company at a price equal to $1.50 per share
plus accrued dividends. Each warrant is exercisable for five years following the
issuance of the Class A Preferred and entitles the holder to purchase one share
of Common Stock for $1.50 per share subject to possible downward adjustment
based on any private placement of the Company's Preferred or Common Stock for
less than $1.50 per share. A portion of the warrants may be canceled by the
Company in the event of an early redemption of all of the Class A Preferred. The
Class A Preferred is recorded at cost, net of expenses, plus undeclared
dividends and accretion.
CLASS B SENIOR REDEEMABLE PREFERRED STOCK
In March 1998, the Company issued 5,333,336 shares of Class B Senior
Redeemable Preferred Stock (the "Class B Preferred") and warrants to purchase up
to 5.4 million shares of Common Stock for a total purchase price of $8 million.
Dividends accrue at the rate of 15% per annum, are cumulative and compound
annually. The Class B Preferred may be redeemed at any time at the option of the
Company at a price equal to $1.50 per share plus accrued dividends and if the
holder so demands, five years from the date of issuance, the Class B Preferred
must be redeemed by the Company at a price equal to $1.50 per share plus accrued
dividends. In the event of redemption of the Class A Preferred, the Company must
simultaneously redeem the Class B Preferred. Each warrant is exercisable for
five years following the issuance of the Class B Preferred and entitles the
holder to purchase one share of Common Stock for $1.50 per share subject to
possible downward adjustment based on any private placement of the Company's
Preferred or Common Stock for less than $1.50 per share.
COMMON STOCK WARRANTS
In addition to the warrants issued in conjunction with the Class A Preferred
and Class B Preferred described above, the Company has other warrants
outstanding.
At December 31, 1997 the Company had outstanding warrants to purchase up to
183,750 shares of Common Stock at $1.50 per share, exercisable until November
15, 2009 and warrants to purchase 238,603 shares of Common Stock at $4.24 per
share, exercisable until June 2005.
RESTRICTED STOCK
The Company has a Non-Employee Directors' Restricted Stock Award Plan which
provides for awards of Common Stock to the non-employee directors every five
years. In 1997, 74,000 shares were issued to these directors. The Company is
recognizing the expense related to this issuance over the vesting period, which
ends in 2001. In 1997, the related expense recognized was $95,000. At December
31, 1997, 60,000 shares were unvested.
6. STOCK PLANS
As of December 31, 1997, the Company has five stock plans (the 1992, 1994,
and 1995 Stock Option Plans, the 1995 Employee Stock Purchase Plan, and the 1995
Non-Employee Directors' Restricted Stock Award Plan). In 1994, the Board of
Directors voted to discontinue the granting of any additional options under the
1992 Stock Option Plan.
42
<PAGE> 43
The Company has both incentive stock options and nonqualified stock options
outstanding, with varying vesting schedules. As of December 31, 1997, 3,506,387
shares of Common Stock were reserved for issuance under the five plans, of which
1,800,398 were available for future option grants and restricted stock awards. A
summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
Weighted
Range of Average
Number of Shares Exercise Prices Exercise Price
Underlying Options Per Share Per Share
------------------ --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 670,667 $ 0.97-$1.50 $ 1.37
Granted ..................... 162,784 $1.50-$10.61 $ 5.71
Forfeited ................... (52,728) $ 0.97-$1.50 $ 1.34
----------------- ---------------
Outstanding at December 31, 1995 780,723 $0.97-$10.61 $ 2.27
Granted ..................... 412,549 $ 5.75-$8.62 $ 7.38
Exercised ................... (14,589) $ 0.97 $ 0.97
Forfeited ................... (26,930) $0.97-$10.61 $ 5.56
----------------- ---------------
Outstanding at December 31, 1996 1,151,753 $0.97-$10.61 $ 3.99
Granted ..................... 1,366,626 $ 2.25-$6.50 $ 2.83
Exercised ................... (7,018) $ 0.97 $ 0.97
Forfeited ................... (304,886) $0.97-$10.61 $ 4.71
Canceled .................... (500,486) $6.00-$10.61 $ 7.31
----------------- ---------------
Outstanding at December 31, 1997 1,705,989 $0.97-$10.61 $ 1.97
================= ===============
Exercisable at December 31, 1995 146,267 $ 0.97-$1.50 $ 1.01
================= ===============
Exercisable at December 31, 1996 152,896 $ 0.97-$1.50 $ 1.05
================= ===============
Exercisable at December 31, 1997 369,833 $0.97-$10.61 $ 1.36
================= ===============
</TABLE>
Additional information regarding stock options by range of exercise prices
as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------
Exercise Price No. of Weighted Average Weighted Average No. of Weighted Average
-------------- Options Exercise Price Contract Life Options Exercise Price
------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$0.97-$ 1.50 634,063 $1.39 4.94 364,090 $1.32
$2.25-$10.61 1,071,926 $2.32 9.65 5,743 $4.73
--------- --------
Total or Average 1,705,989 $1.97 7.90 369,833 $1.36
</TABLE>
As a part of certain employee terminations in 1997, the Company modified the
terms of the terminated employees' stock options to purchase 187,143 shares of
Common Stock, to immediately fully vest these options and to extend the exercise
period that the terminated employees have to exercise the options.
PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a minimum value
option valuation method for options granted prior to the IPO and a Black-Scholes
option valuation model for options granted after the IPO with the following
weighted-average assumptions for 1995, 1996, and 1997, respectively: a risk-free
interest rate of 5.77%, 6.15%, and 6.20%; a dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of 0, 0.57,
and 0.78; and a weighted-average expected life of the option of 4 years.
43
<PAGE> 44
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
The weighted average fair value of options granted in 1995, 1996, and 1997
is $1.73, $3.68, and $1.75 per share, respectively. The weighted average fair
value of warrants issued in 1995 and 1997 is $0 and $0.17 per warrant,
respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options and warrants is amortized to expense over the options' vesting period.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Pro forma net loss........................................... $ (2,891,281) $(10,451,264) $(19,297,820)
Pro forma net loss per share of common stock................. $ (1.75) (0.93) (1.27)
</TABLE>
7. INCOME TAXES
The Company has incurred operating losses since inception; accordingly, no
provision for income taxes has been recorded. As of December 31, 1997, the
Company has net operating loss carryforwards of approximately $42 million for
federal income tax purposes. Such carryforwards, which expire at various dates
through 2012, could be available to reduce future federal taxable income subject
to limitations resulting from substantial changes in the Company's ownership.
The significant components of the Company's deferred tax assets and liabilities
are:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards ................... $ 6,216,889 $ 15,839,671
Accounts receivable allowance ...................... 96,794 251,029
Inventory reserves ................................. 307,046 134,328
Vacation accrual ................................... 89,920 117,754
Other .............................................. 21,519 90,566
------------ ------------
6,732,168 16,433,348
Valuation allowance ................................... (5,949,032) (14,027,641)
Deferred tax liabilities
Accumulated depreciation ........................... (783,136) (1,348,711)
Market entry costs ................................. -- (1,056,996)
------------ ------------
Net deferred assets ........................... $ -- $ --
============ ============
</TABLE>
The net change in the valuation allowance for deferred tax assets was an
increase of $1,260,604, $3,921,240 and $8,078,609 during 1995, 1996 and 1997,
respectively, due mostly to the increase in net operating loss carryforwards.
44
<PAGE> 45
The reconciliation of income tax attributable to operations computed at the
U.S. Federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Tax at federal statutory rate ................................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal tax benefit ......................... (4.0) (4.0) (4.0)
Nondeductible expenses .......................................... 1.0 -- 1.0
Effect of valuation allowance ................................... 37.0 38.0 37.0
----- ----- -----
-- % -- % -- %
===== ===== =====
</TABLE>
8. COMMITMENTS
The Company leases sites and other facilities for its transmitters,
terminals and other equipment and also leases office space under noncancelable
operating leases which expire at various dates. Approximate minimum annual
rental payments required by these operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, TOTAL
------------------------ -----------
<S> <C>
1998 .................................................. $ 3,938,430
1999 .................................................. 2,959,259
2000 .................................................. 2,255,930
2001 .................................................. 1,684,924
2002 .................................................. 830,531
Thereafter ............................................ 2,374,236
-----------
$14,043,310
===========
</TABLE>
Rental expense for the years ended December 31, 1995, 1996 and 1997, was
approximately $674,000, $2.0 million and $4.4 million, respectively.
As of December 31, 1997, the Company had two letters of credit outstanding
for $163,000 in connection with certain lease agreements. One of the letters of
credit expires in 1998 and the other at declining balances through 2006.
9. RELATED PARTY TRANSACTIONS
During 1995, 1996 and 1997, the Company recognized revenues of approximately
$484,000, $560,000 and $5,553, respectively, from network services and product
sales, from entities owned by its stockholders. During 1995, 1996 and 1997, the
Company expensed $924,000, $850,000 and $104,000, respectively, for services
purchased (including purchase, installation and maintenance costs and site lease
expense) from entities owned by related parties.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the accompanying consolidated balance
sheets for cash and cash equivalents, accounts receivable, receivables from
related parties, accounts payable, accrued expenses, payables to related parties
and notes payable and capital lease obligations approximate their fair value.
The fair values of the Company's notes payable and capital lease obligations
were estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of borrowing arrangements.
11. EMPLOYEE BENEFIT PLANS
The Company and one of its subsidiaries provide 401(k) plans that cover
substantially all employees 21 years of age with at least 90 days of continuous
service. Depending on the subsidiary, the Company is required to contribute an
amount not to exceed 1% of the first 10% of the employee contributions or may
make contributions at the discretion of the Board of Directors. The Company's
contributions were not material in 1996 or 1997.
45
<PAGE> 46
12. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for each of the two years ended December 31,
1996 and 1997 is summarized below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
- ----
Revenues
Network services ..................... $ 2,565,588 $ 3,250,921 $ 3,268,099 $ 3,371,873
Product sales ........................ 2,933,325 3,473,108 3,117,006 4,079,874
Other services ....................... 2,617,438 2,864,809 2,238,402 2,201,113
----------- ----------- ----------- -----------
Total revenues ......................... 8,116,351 9,588,838 8,623,507 9,652,860
Net loss ............................... (4,724,476) (5,033,701) (5,014,947) (4,378,633)
Net loss attributable to Common Stock .. (4,724,476) (5,126,803) (5,495,742) (4,858,797)
Net loss per share ..................... (.30) (.32) (.34) (.30)
1996
- ----
Revenues
Network services ..................... $ 1,299,196 $ 1,444,850 $ 1,553,602 $ 1,823,479
Product sales ........................ 1,036,380 1,049,797 1,239,083 2,492,814
Other services ....................... 32,957 -- 343,264 1,035,250
----------- ----------- ----------- -----------
Total revenues ......................... 2,368,533 2,494,647 3,135,949 5,351,543
Net loss ............................... (1,500,760) (1,477,928) (2,507,798) (4,712,844)
Net loss attributable to Common Stock .. (2,975,727) (1,477,928) (2,507,798) (4,712,844)
Net loss per share ..................... (.40) (.10) (.17) (.32)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
46
<PAGE> 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the directors of the Company will be set forth under
the captions "Proposal 1 --Election of Directors--Information Regarding Nominees
and Continuing Directors" in the Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement"). Such information is incorporated
herein by reference. Information relating to the executive officers of the
Company is set forth in Part I, Item 4 of this report under the caption
"Executive Officers of the Registrant," Such information is incorporated herein
by reference. Information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, by directors and executive officers
of the Company and beneficial owners of more than 10% of the Company's Common
Stock will be set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the 1998 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation will be set forth under the
captions "Proposal 1 -- Election of Directors --Director Compensation" and
"--Executive Compensation" in the 1998 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding ownership of the Company's Common Stock by certain
persons will be set forth under the caption "Stock Ownership" in the 1998 Proxy
Statement. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the
Company and certain persons will be set forth under the captions "Proposal
1--Election of Directors--Director Compensation and "--Compensation Committee
Interlocks and Insider Participation" and "--Certain Transactions" in the 1998
Proxy Statement. Such information is incorporated herein by reference.
47
<PAGE> 48
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
The following financial statements of the Company and Reports of
Independent Auditors are filed as part of this Report pursuant to
Item 8.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended December
31, 1995, 1996 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule of the Company and Report
of Independent Auditors is filed as a part of this Report pursuant to
Item 8:
Schedule II - Valuation and qualifying accounts
Report of Independent Auditors
All other schedules have been omitted since the required information
is not present or is not present in amounts sufficient to require
submission of the schedules, or because the information required is
included in the consolidated financial statements, including the
notes thereto.
3. Index to Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Articles of Incorporation of the Company (incorporated by reference
to Exhibit 3.1 to the Current Report on Form 8-K, No. 0-27658, filed
on June 30, 1997)
3.2 Articles of Amendment to Articles of Incorporation of the Company
(creating Class B Senior Redeemable Preferred Stock) (incorporated
by reference to Exhibit C of Exhibit 10.35 below)
3.3 Bylaws of the Company, as amended (incorporated by reference to
Exhibit 3.2 to the Quarterly Current Report on Form 8-K, No.
0-27658, filed on June 30, 1997)
4.1 Reference is hereby made to Exhibits 3.1 and 3.2 and 3.3
10.1 Preferred Networks, Inc. 1994 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the Registration Statement filed on
Form S-1, No. 33-80507)
10.2* Preferred Networks, Inc. 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.2 to the Registration Statement filed on
Form S-1, No. 33-80507)
10.3* Preferred Networks, Inc. 1995 Stock Option Plan, as amended
(incorporated by reference to Exhibit B to the Company's definitive
Proxy Statement on Form 14A filed on May 22, 1997)
10.4* Preferred Networks, Inc. 1995 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.4 to the Registration
Statement filed on Form S-1, No. 33-80507)
10.5* Preferred Networks, Inc. 1995 Non-Employee Directors' Restricted
Stock Award Plan (incorporated by reference to Exhibit 10.5 to the
Registration Statement filed on Form S-1, No. 33-80507)
10.6 Purchase Agreement dated June 21, 1995, among the Company, Fleet
Equity Partners VI, L.P., Fleet Venture Resources, Inc., Chisholm
Partners II, L.P., Centennial Fund IV, L.P., Saugatuck Capital
Company Limited Partnership III, Primus Capital Fund III Limited
Partnership, PNC Capital Corp. and certain of the Company's
stockholders (incorporated by reference to Exhibit 10.6 to the
Registration Statement filed on Form S-1, No. 33-80507)
10.7 Stockholders Agreement dated June 21, 1995 among the Company, Fleet
Equity Partners VI, L.P., Fleet Venture Resources, Inc., Chisholm
Partners II, L.P., Centennial Fund IV, L.P., Saugatuck Capital
Company Limited Partnership III, Primus Capital Fund III Limited
Partnership, PNC Capital Corp.
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C>
and certain of the Company's stockholders (incorporated by reference
to Exhibit 10.7 to the Registration Statement filed on Form S-1, No.
33-80507)
10.8 Registration Rights Agreement dated June 21, 1995 among the Company,
Fleet Equity Partners VI, L.P., Fleet Venture Resources, Inc.,
Chisholm Partners II, L.P., Centennial Fund IV, L.P., Saugatuck
Capital Company Limited Partnership III, Primus Capital Fund III
Limited Partnership, PNC Capital Corp. and certain of the Company's
stockholders (incorporated by reference to Exhibit 10.8 to the
Registration Statement filed on Form S-1, No. 33-80507)
10.9 Warrant to Purchase Common Stock dated June 22, 1995 issued to Legg
Mason Wood Walker, Incorporated (incorporated by reference to
Exhibit 10.9 to the Registration Statement filed on Form S-1, No.
33-80507)
10.10 Promissory Note and Credit Agreement dated April 1, 1995, between
the Company and Glenayre Electronics, Inc. as amended (incorporated
by reference to Exhibit 10.10 to the Registration Statement filed on
Form S-1, No. 33-80507)
10.11 Credit Agreement and Promissory Note, each dated June 16, 1995,
between the Company and Motorola, Inc. (incorporated by reference to
Exhibit 10.11 to the Registration Statement filed on Form S-1, No.
33-80507)
10.12 Sublease Agreement, dated May 8, 1995, between the Company and The
Carter Group for office space in Oakbrook Research Center, Norcross,
Georgia (incorporated by reference to Exhibit 10.12 to the
Registration Statement filed on Form S-1, No. 33-80507)
10.13 Lease Agreement and Addendum, dated October 14, 1992, between the
Company and Connecticut Mutual Life Insurance Company for office
space at Goshen Springs Road, Norcross, Georgia, as amended
(incorporated by reference to Exhibit 10.13 to the Registration
Statement filed on Form S-1, No. 33-80507)
10.14* Management Employment Agreement, dated July 8, 1995, between the
Company and Mark H. Dunaway (incorporated by reference to Exhibit
10.14 to the Registration Statement filed on Form S-1, No. 33-80507)
10.15* Management Employment Agreement, dated July 7, 1995, between the
Company and Michael J. Saner (incorporated by reference to Exhibit
10.15 to the Registration Statement filed on Form S-1, No. 33-80507)
10.16* Management Employment Agreement, dated August 16, 1995, between the
Company and Eugene H. Kreeft (incorporated by reference to Exhibit
10.16 to the Registration Statement filed on Form S-1, No. 33-80507)
10.17 Amendment No. 1, dated as of December 12, 1995, to Purchase
Agreement dated June 21, 1995 among the Company, Fleet Equity
Partners VI, L.P., Fleet Venture Resources, Inc., Chisholm Partners
II, L.P., Centennial Fund IV, L.P., Saugatuck Capital Company
Limited Partnership III, Primus Capital Fund III Limited
Partnership, PNC Capital Corp. and certain of the Company's
stockholders (incorporated by reference to Exhibit 10.17 to the
Registration Statement filed on Form S-1, No. 33-80507)
10.18 Amendment No. 1, dated as of December 12, 1995, to Stockholders
Agreement dated June 21, 1995 among the Company, Fleet Equity
Partners VI, L.P., Fleet Venture Resources, Inc., Chisholm Partners
II, L.P., Centennial Fund IV, L.P., Saugatuck Capital Company
Limited Partnership III, Primus Capital Fund III Limited
Partnership, PNC Capital Corp. and certain of the Company's
stockholders (incorporated by reference to Exhibit 10.18 to the
Registration Statement filed on Form S-1, No. 33-80507)
10.19 Lease Agreement, dated August 4, 1993, between Alamac Limited
Partnership and the Company, as amended (incorporated by reference
to Exhibit 10.19 to the Registration Statement filed on Form S-1,
No. 33-80507)
10.20 Sub-Lease Agreement, dated as of December 18, 1995 between PSB
Building Corp. and the Company (incorporated by reference to Exhibit
10.20 to the Registration Statement filed on Form S-1, No. 33-80507)
10.21 Commercial Lease Contract, dated December 6, 1995, between Lantrac
Investments, LLC and the Company (incorporated by reference to
Exhibit 10.21 to the Registration Statement filed on Form S-1 No.
33-80507)
10.22 Promissory Note and Credit Agreement, dated January 26, 1996,
between the Company and Glenayre
</TABLE>
49
<PAGE> 50
<TABLE>
<S> <C>
Electronics, Inc. (incorporated by reference to Exhibit 10.22 to the
Registration Statement filed on Form S-1, No. 33-80507)
10.23 Letter Confirming Line of Credit with Associates Capital Services
Corporation (incorporated by reference to Exhibit 10 to the
Quarterly Report filed on Form 10-Q, No. 0-27658, for the quarter
ended March 31, 1996)
10.24 Agreement and Plan of Merger, dated July 3, 1996, by and among
Paging Services, Inc., Preferred Networks, Inc., and the
shareholders of Paging Services, Inc. (incorporated by reference to
Exhibit 10.1 to the Quarterly Report filed on Form 10-Q, No.
0-27658, for the quarter ended June 30, 1996)
10.25 Credit Agreement dated August 8, 1996, by and among Preferred
Networks, Inc., PNI Systems, LLC, and NationsBank, N. A. (South)
(incorporated by reference to Exhibit 10.2 to the Quarterly Report
filed on Form 10-Q, No. 0-27658, for the quarter ended June 30,
1996)
10.26 Asset Purchase Agreement, dated as of June 19, 1996 and amended as
of September 5, 1996 and as of September 13, 1996, by and among Big
Apple Paging Corporation, Preferred Networks, Inc. and Gary Hencken
(incorporated by reference to the exhibit to the Current Report
filed on Form 8-K, No. 0-27658, dated September 27, 1996)
10.27 Stock Purchase Agreement by and among Preferred Networks, Inc.,
Mercury Paging & Communications, Inc., HTB Communication, Inc.,
Custom Page, Inc., and M.P.C. Distributors Inc. (collectively,
"Sellers") and the Shareholders of Sellers dated September 30, 1996
(incorporated by reference to Exhibit 10.3 to the Quarterly Report
filed on Form 10-Q, No. 0-27658, for the quarter ended September 30,
1996)
10.28 Agreement and Plan of Merger by and among Preferred Networks, Inc.,
EPS Acquisition Corp., EPS Wireless, Inc. and the Shareholders of
EPS Wireless, Inc. (incorporated by reference to Exhibit 2.1 to the
Current Report on Form 8-K, No. 0-27658, filed December 17, 1996).
10.29 First Amendment to Credit Agreement dated as of December 20, 1996,
by and among Preferred Networks, Inc., PNI Systems, LLC, and
NationsBank, N.A. (South) (incorporated by reference to Exhibit
10.29 to the Annual Report on Form 10-K, No. 0-276548, filed on
April 15, 1997)
10.30 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) (incorporated by reference to Exhibit
10.30 to the Annual Report on Form 10-K, No. 0-276548, filed on
April 15, 1997)
10.31 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 (incorporated by
reference to Exhibit 10.31 to the Annual Report on Form 10-K, No.
0-276548, filed on April 15, 1997)
10.32 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) (incorporated by reference to Exhibit
10.31 to the Annual Report on Form 10-K, No. 0-276548, filed on
April 15, 1997)
10.33 Class A Redeemable Preferred Stock Purchase Agreement dated as of
May 21, 1997, by and among the Company and Centennial Fund IV, L.P.,
Saugatuck Capital Company Limited Partnership III, PNC Capital
Corp., Fleet Venture Resources, Inc., Fleet Equity Partners VI,
L.P., Chisholm Partners II, L.P. and Primus Capital Fund III Limited
Partnership (incorporated by reference to Exhibit A to the Company's
definitive Proxy Statement on Schedule 14A, filed May 22, 1997).
10.34 Agreement and Plan of Merger, dated May 21, 1997, by and between
Preferred Networks, Inc. and PNI Merger Corp. (incorporated by
reference to Exhibit B to the Company's definitive Proxy Statement
on Schedule 14A, filed May 22, 1997.)
10.35 Class B Senior Redeemable Stock Purchase Agreement dated as of March
17, 1998, by and among the Company, Alta Communications VI, L.P.,
Alta Comm S By S, LLC, Centennial Fund IV, L.P., PNC Capital Corp.,
Saugatuck Capital Company Limited Partnership III, Primus Capital
Fund III Limited Partnership, Fleet Equity Partners VI, L.P., Fleet
Venture Resources, Inc., T/W Alfred W. Putnam GST Exempt, Anne L.
Putnam, Edward B. Putnam, Custodian for Fitzgerald B. Putnam Under
the Uniform Transfers to Minor Act, Pennsylvania, Webbmont
Holdings, L.P., Spotted Dog Farm, L.P., RTM, Inc., Mark H. and
Marcia M. Dunaway, and John J. and Sylvia Hurley.
10.36 Fourth Amendment to Credit Agreement dated as of March 19, 1998, by
and among the Company, PNI Systems, LLC, and NATIONSBANK, N.A., as
successor to NationsBank, N.A. (South)
10.37 Amendment to Registration Rights Agreement dated as of June 16, 1997
(incorporated by reference to Exhibit E of Exhibit A to the
Company's definitive Proxy Statement on Schedule 14A, filed on May
22, 1997)
10.38 Second Amendment to Registration Rights Agreement dated as of March
17, 1998 (incorporated by reference to Exhibit D of Exhibit 10.35
above)
21 Subsidiaries of the Company
</TABLE>
50
<PAGE> 51
<TABLE>
<S> <C>
23.1 Consent of Ernst & Young LLP
27.397 Financial Data Schedule Year to Date for the three months ended March 31, 1997 (for SEC use only)
27.697 Financial Data Schedule Year to Date for the six months ended June 30, 1997 (for SEC use only)
27.997 Financial Data Schedule Year to Date for the nine months ended September 30, 1997 (for SEC use only)
27.1297 Financial Data Schedule Year to Date for the twelve months ended December 31, 1997 (for SEC use only)
27.996 Financial Data Schedule Quarterly for the three months ended September 30 1996 (for SEC use only)
27.696 Financial Data Schedule Quarterly for the three months ended June 30, 1996 (for SEC use only)
27.396 Financial Data Schedule Year to Date for the three months ended March 31, 1996 (for SEC use only)
27.6961 Financial Data Schedule Year to Date for the six months ended June 30, 1996 (for SEC use only)
27.9961 Financial Data Schedule Year to Date for the nine months ended September 30, 1996 (for SEC use only)
27.1296 Financial Data Schedule Year to Date for the twelve months ended December 31, 1996 (for SEC use only)
27.395 Financial Data Schedule Year to Date for the three months ended March 31, 1995 (for SEC use only)
27.695 Financial Data Schedule Quarterly for the three months ended June 30, 1995 (for SEC use only)
27.1295 Financial Data Schedule Year to Date for the twelve months ended December 31, 1995 (for SEC use only)
27.9951 Financial Data Schedule Year to Date for the nine months ended September 30, 1995 (for SEC use only)
27.6951 Financial Data Schedule Year to Date for the six months ended June 30, 1995 (for SEC use only)
27.995 Financial Data Schedule Quarterly for the three months ended September 30, 1995 (for SEC use only)
</TABLE>
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-K.
The registrant did not file any reports on Form 8-K during the three
months ended December 31, 1997.
51
<PAGE> 52
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD
--------- -------- ------------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Reserve and allowance deducted from
asset accounts
Allowance for doubtful accounts $ 254,990 $ 805,022 $ 398,712 $ 661,300
Valuation allowance for deferred taxes 5,949,032 8,078,609 -- 14,027,641
YEAR ENDED DECEMBER 31, 1996:
Reserve and allowance deducted from
asset accounts
Allowance for doubtful accounts $ 86,426 $ 393,063 $(224,499) $ 254,990
Valuation allowance for deferred taxes 2,027,792 3,921,240 -- 5,949,032
YEAR ENDED DECEMBER 31, 1995:
Reserve and allowance deducted from
asset accounts
Allowance for doubtful accounts 35,000 193,664 (142,238) 86,426
Valuation allowance for deferred taxes 767,188 1,260,604 -- 2,027,792
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
52
<PAGE> 53
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Preferred Networks, Inc.
We have audited the consolidated financial statements of Preferred Networks,
Inc. as of December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1997, and have issued our report thereon dated March
23, 1998. Our audits also included the financial statement schedule listed in
Item 14 (b) of this Annual Report on Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
March 23, 1998
53
<PAGE> 54
Pursuant to the requirements of Section 13 or 15(d) 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: March 27, 1998 By: /s/ Mark H. Dunaway
-------------------------------------
Mark H. Dunaway
Chief Executive Officer (Principal
Executive Officer)
Date: March 27, 1998 By: /s/ Michael J. Saner
-------------------------------------
Michael J. Saner
President
Date: March 27, 1998 By: /s/ Kathryn Loev Putnam
-------------------------------------
Kathryn Loev Putnam
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following per persons on behalf of the registrant
and in the capacities and on the dates indicated.
Date: March 27, 1998 By: /s/ Mark H. Dunaway
-------------------------------------
Mark H. Dunaway
Chairman of the Board of Directors,
Chief Executive Officer and Director
Date: March 27, 1998 By: /s/ Michael J. Saner
-------------------------------------
Michael J. Saner
President and Director
Date: March 27, 1998 By: /s/ William H. Bang
-------------------------------------
William H. Bang
Director
Date: March 27, 1998 By: /s/ John J. Hurley
-------------------------------------
John J. Hurley
Director
Date: March 27, 1998 By: /s/ Jeffrey H. Schutz
-------------------------------------
Jeffrey H. Schutz
Director
Date: March 27, 1998 By: /s/ Robert Van Degna
-------------------------------------
Robert Van Degna
Director
Date: March 27, 1998 By: /s/ Ronald W. White
-------------------------------------
Ronald W. White
Director
54
<PAGE> 55
Date: March 27, 1998 By: /s/ Richard P. Campbell
-------------------------------------
Richard P. Campbell
Director
Date: March 27, 1998 By: /s/ Robert F. Benbow
-------------------------------------
Robert F. Benbow
Director
PREFERRED NETWORKS, INC.
55
<PAGE> 1
EXHIBIT 10.35
PREFERRED NETWORKS, INC.
CLASS B SENIOR REDEEMABLE PREFERRED STOCK PURCHASE AGREEMENT
MARCH 17, 1998
This CLASS B SENIOR REDEEMABLE PREFERRED STOCK PURCHASE AGREEMENT
dated as of March 17, 1998 (together with the Exhibits and Schedules attached
hereto, the "AGREEMENT") is entered into by and among Preferred Networks, Inc.,
a Georgia corporation, with its current principal place of business at 850
Center Way, Norcross, GA 30071 (the "COMPANY"), and the persons and entities
named in the Schedule of Investors designated as Exhibit A hereto (collectively
referred to as the "INVESTORS" and individually referred to as an "INVESTOR").
1. PURCHASE, SALE AND TERMS OF PURCHASED SHARES.
1.1. The Purchased Shares and Warrants. The Company has duly
authorized the issuance and sale to the Investors for an aggregate purchase
price of $8,000,004 of (a) an aggregate of 5,333,336 shares (the "PURCHASED
SHARES") of its authorized Class B Senior Redeemable Preferred Stock (the
"CLASS B PREFERRED STOCK") and (b) the issuance of common stock purchase
warrants (the "WARRANTS") to be in substantially the form of Exhibit B attached
hereto for the purchase of an aggregate of 5,400,000 shares of the Company's
common stock, no par value (the "COMMON STOCK"). The designations, rights and
preferences and other terms and conditions relating to the Class B Preferred
Stock are as set forth in Exhibit C attached hereto. The Purchased Shares and
the Warrants are collectively referred to herein as the "SECURITIES".
1.2 Purchase and Sale of the Purchased Shares and the Warrants.
The Company agrees to issue and sell to the Investors, and, subject to and in
reliance upon the representations, warranties, terms and conditions of this
Agreement, the Investors, severally but not jointly, agree to purchase that
number of Purchased Shares and Warrants for the purchase price (the "PURCHASE
PRICE") set forth opposite their respective names in Exhibit A hereto under the
respective headings "PURCHASED SHARES" "WARRANTS" and "AGGREGATE PURCHASE PRICE
FOR SECURITIES." The Purchase Price shall be paid in immediately available
funds.
1.3 Closing. The consummation of the purchase and sale (the
"CLOSING") shall occur concurrently herewith (the "CLOSING DATE"). At the
Closing, the Company shall deliver to each Investor a certificate for that
number of Purchased Shares and a Warrant exercisable into that number of shares
of Common Stock set forth opposite such Investor's name in Exhibit A hereto,
against delivery to the Company of the Purchase Price.
<PAGE> 2
1.4 Use of Proceeds. The Company agrees to use the proceeds from
the sale of the Purchased Shares and the Warrants for construction of the
Company's paging system networks and for general working capital purposes for
the Company and its Subsidiaries.
1.5 Covenants of the Company Prior to Closing. The Company shall
do all things necessary to fulfill the conditions to purchase set forth in
Sections 2 and 3 of this Agreement, including, without limitation, holding such
meetings of shareholders as are required to obtain the required shareholder
approvals and taking all actions necessary to comply with the applicable
federal and state securities laws in connection with obtaining such approvals.
2. CONDITIONS OF PURCHASE.
The obligations of each Investor under Article 1 of this Agreement are
subject to the compliance by the Company with its agreements herein contained
and to the fulfillment on or before the Closing of the following conditions:
2.1 Opinion of Counsel. The Investors shall have received from
Sutherland, Asbill & Brennan, counsel for the Company, its favorable opinion,
dated the Closing Date, in form and substance reasonably acceptable to the
Investors and the Investors' counsel.
2.2 Authorization; Consents. The Board of Directors of the
Company and an independent committee of the Board of Directors shall have duly
adopted resolutions in form satisfactory to the Investors and shall have
received all necessary approvals of shareholders of the Company authorizing the
Company to consummate the transactions contemplated hereby in accordance with
the terms hereof, and the Investors shall have received a duly executed
certificate of the Secretary or an Assistant Secretary of the Company dated the
Closing Date setting forth a copy of such resolutions and such other matters as
may be requested by the Investors. The Company shall have obtained any and all
other consents, permits and waivers and made all filings necessary or
appropriate for consummation of the transactions contemplated by this
Agreement.
2.3 Articles of Incorporation; Certificate of Amendment. The
Company shall have duly filed with the Secretary of State of Georgia a
Certificate of Amendment in the form as set forth in Exhibit C attached hereto
amending the Company's Articles of Incorporation, which amendment shall have
become effective for all purposes on or before and shall remain effective
through the Closing Date.
2.4 Board of Directors. Effective as of the Closing, an
individual to be selected by the Investors shall have been elected to the
Company's Board of Directors as the representative of the Investors.
2.5 Expenses. The Company shall have paid the expenses set forth
in Section 18 hereof.
2.6 Secretary's Certificates; Good Standing Certificates. Each of
the Company and the Subsidiaries shall have delivered to the Investors true and
correct copies of its Articles of
- 2 -
<PAGE> 3
Incorporation, Bylaws and other charter documents, all as amended through the
Closing Date and each certified by its respective corporate Secretary or
Assistant Secretary.
2.7 SBIC Matters. The Company shall have duly completed and
executed for the Investors that are small business investment companies (each
individually, an "SBIC HOLDER"), Small Business Administration Forms 480 and
652 together with a written statement from the Company regarding its intended
use of proceeds from the financing.
2.8 Amendment to Registration Rights Agreement. The Registration
Rights Agreement dated as of June 21, 1995 (as heretofore amended) among the
Company, the Investors and the other parties thereto shall have been amended as
provided in the Second Amendment to Registration Rights Agreement in the form
attached hereto as Exhibit D (such Registration Rights Agreement, as heretofore
amended and as amended by such Second Amendment is hereinafter referred to as
the "REGISTRATION RIGHTS AGREEMENT").
2.9 All Proceedings Satisfactory. All corporate and other
proceedings taken prior to or at the Closing in connection with the
transactions contemplated by this Agreement, and all documents and evidences
incident thereto, shall be reasonably satisfactory in form and substance to the
Investors, and the Investors shall receive such copies thereof and other
materials (certified, if requested) as they may reasonably request in
connection therewith.
3. CONDITIONS OF SALE.
The Company's obligation to issue and sell the Purchased Shares and
the Warrants hereunder shall be subject to compliance by the Investors in all
material respects with their agreements herein contained and to the fulfillment
on or before and at the Closing of the following conditions:
3.1. Representations and Warranties. If the Closing occurs other
than on the date hereof, the representations and warranties of the Investors
contained in Section 6 of this Agreement shall be true and correct in all
material respects with the same force and effect as though such representations
and warranties had been made on and as of the Closing Date, and the Company
shall receive a certificate to such effect executed by a duly authorized
representative of each of the Investors.
3.2. Authorization; Consents. The Board of Directors of the
Company (including the independent board committee) shall have duly adopted
resolutions in form satisfactory to the Investors and shall have received all
necessary approvals of shareholders of the Company authorizing the Company to
consummate the transactions contemplated hereby in accordance with the terms
hereof, and the Investors shall have received a duly executed certificate of
the Secretary or an Assistant Secretary of the Company dated the Closing Date
setting forth a copy of such resolutions and such other matters as may be
requested by the Investors. The Company shall have obtained any and all other
consents, permits and waivers and made all filings necessary or appropriate for
consummation of the transactions contemplated by this Agreement.
- 3 -
<PAGE> 4
4. REPRESENTATIONS AND WARRANTIES.
As a material inducement to the Investors to enter into this Agreement
and to purchase the Purchased Shares and Warrants as contemplated hereby the
Company represents and warrants to the Investors as follows:
4.1. Organization, Corporate Power and Authority, etc. Each of the
Company and the Subsidiaries (as defined below) is a corporation or limited
liability company duly organized, validly existing and in good standing under
the laws of its state of incorporation and has full corporate power and
authority to own and hold its properties and to carry on its business as
presently conducted. Each of the Company and the Subsidiaries is duly licensed
or qualified and in good standing as a foreign corporation or limited liability
company authorized to do business in all jurisdictions in which the character
of property owned or leased, or the nature of the activities conducted by it,
makes such licensing or qualification necessary, except where the failure to so
qualify would not have a Material Adverse Effect. The attached Schedule 4.1
contains a list of all entities of which the Company owns or controls, directly
or indirectly through one or more other Persons, a majority of the voting stock
or limited liability company interests (each a "SUBSIDIARY" and collectively,
"SUBSIDIARIES"). Except for such Subsidiaries, neither the Company nor any
Subsidiary owns of record or beneficially any shares of capital stock or
securities convertible into capital stock of, or any other proprietary interest
in, any Person.
4.2 Validity and Enforceability. The Company has all necessary
corporate power and authority, and has taken all corporate action required to
execute, deliver and perform this Agreement, to issue, sell and deliver the
Purchased Shares and the Warrants and to issue the Common Stock issuable upon
exercise of the Warrants. This Agreement and all other documents and
instruments executed by the Company pursuant hereto, when delivered, are and
will be duly authorized, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and equitable principles limiting rights to specific
performance. The sale of the Preferred Shares and the Warrants by the Company
in accordance herewith is not subject to preemptive or other preferential
rights or similar statutory or contract rights that have not heretofore been
waived and does not give rise to any "anti-dilution" provisions either arising
pursuant to any agreement or instrument to which the Company is a party or
which are otherwise binding on the Company. Without limitation of the
foregoing, the Company and the Investors who hold Class A Warrants (as such
term is defined in Exhibit B) hereby represent and warrant that the "Exercise
Price" for purposes of the Class A Warrants is as of the date hereof $1.50 per
share and shall not be adjusted by reason of the issuance of the Securities as
contemplated hereby. Upon the issuance, sale and delivery of the Securities in
accordance with the terms hereof, the Securities will be validly issued, fully
paid and non-assessable and will be free and clear of all liens, security
interests, charges, restrictions, claims and Encumbrances of any nature
whatsoever (each a "LIEN"), subject to applicable restrictions on transfer
under Federal and state securities laws and any Liens created by the Investors.
4.3 Capitalization; Status of Capital Stock. (a) The Company has
a total authorized capitalization consisting of 30,000,000 shares of Preferred
Stock (of which 13,500,000 shares are
- 4 -
<PAGE> 5
designated as Class A Redeemable Preferred Stock and 5,500,000 shares are
designated as Class B Senior Redeemable Preferred Stock), and 100,000,000
shares of Common Stock. All issued and outstanding shares of capital stock of
the Company and each Subsidiary have been duly authorized and validly issued,
are fully paid and non-assessable, and were issued in compliance with all
applicable state and Federal securities laws.
(b) The Preferred Shares and the Warrants which are being issued
hereunder have been duly and validly authorized and, when issued and delivered
in accordance with the terms hereof for the consideration provided herein, will
be validly issued, fully paid and nonassessable and will not be subject to any
Lien. On or prior to Closing, the Company will have authorized and reserved,
and covenants to continue to reserve, a sufficient number of shares of Common
Stock for issuance upon the exercise of the Warrants. The shares of Common
Stock that will be issued upon exercise of the Warrants will be validly issued,
fully paid and nonassessable and will not be subject to any Lien, subject to
applicable restrictions on transfer under Federal and state securities laws and
any Liens created by the Investors. No further approval or authorization of the
shareholders or the directors of the Company or any successor or other Person
is or will be required for the issuance of the Common Stock upon exercise of
the Warrants.
(c) Except as set forth on Schedule 4.3: (a) neither the Company
nor any Subsidiary has any subscription, warrant, option, convertible security
or other options or rights (contingent or otherwise) to purchase shares of
capital stock, or securities convertible into shares of capital stock,
authorized, issued or outstanding, nor is the Company or any Subsidiary
obligated in any manner to issue shares of its capital stock or securities
convertible into or evidencing any right to acquire shares of its capital
stock, or to distribute to holders of any of its capital stock any evidence of
indebtedness or assets; (b) no Person has any preemptive right, right of first
refusal or similar right to acquire additional shares of capital stock of the
Company or any Subsidiary in connection with the sale and purchase of the
Securities pursuant to this Agreement or otherwise; (c) there are no
restrictions on the transfer of the shares of capital stock of the Company,
other than (i) those imposed by relevant state and Federal securities laws,
(ii) as set forth in Section 6.5 hereto; and (iii) certain restrictions on
transfers of shares issued in connection with certain acquisitions made by the
Company, (d) no Person has any right to cause the Company to effect the
registration under the Securities Act of any shares of capital stock or any
other securities (including debt securities) of the Company other than as set
forth in the Registration Rights Agreement and the registration rights
agreements executed by the Company in connection with the acquisitions of Big
Apple Paging Corp. and Mercury Paging & Communications, Inc.; (e) neither the
Company nor any Subsidiary has any obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interests therein, or to pay any dividend or make any other distribution in
respect thereto; and (f) there are no voting trusts, shareholders' agreements,
or proxies relating to any securities of the Company or any Subsidiary. A
complete and correct schedule of the number of shares of issued and outstanding
capital stock and of any subscription, warrant, option, convertible security or
other options or rights (contingent or otherwise) to purchase shares of capital
stock, or securities convertible into shares of capital stock of the Company
and each Subsidiary immediately prior to the Closing is set forth in Schedule
4.3.
4.4 Governmental and Other Consents, etc. No authorization,
consent, approval, license, exemption of or filing or registration with any
court or governmental department,
- 5 -
<PAGE> 6
commission, board, bureau, agency or instrumentality, domestic or foreign, or
any third party, the absence of which would have a Material Adverse Effect is
or will be necessary for, or in connection with, the offer, issuance, sale,
execution or delivery by the Company, or for the performance by it of its
obligations, under this Agreement except such, if any, as may be required under
any applicable state securities laws that have been complied with on or prior
to the Closing Date.
4.5 Compliance with Securities Laws. (a) Subject to the accuracy
of the representations of the Investors set forth in Section 6 below, the
Company has complied and will comply with all applicable United States Federal
and state securities laws in connection with the offer, issuance and sale of
the Securities in compliance with Section 1.5 of this Agreement. The Company
has not, either directly or through any agent, offered any securities to, or
otherwise approached, negotiated or communicated in respect of any securities
with, any Person so as thereby to require that the offer or sale of the
Securities be registered pursuant to the provisions of Section 5 of the
Securities Act. Subject to the accuracy of the representations of the Investors
set forth in Section 6 below, the offer, sale and issuance of the Purchased
Shares and the Warrants (and of the Common Stock issuable upon the exercise of
the Warrants) in conformity with the terms of this Agreement are exempt from
the registration requirements of Section 5 of the Securities Act and all
applicable state securities laws.
(b) The Company's Annual Reports on Form 10-K for the fiscal year
ended December 31, 1996, and all other reports, registration statements, proxy
statements or information statements filed or to be filed by it or any of its
Subsidiaries subsequent to March 1, 1996 under the Securities Act or the
Exchange Act, in the form filed with the Commission (collectively, "SEC
DOCUMENTS"), as of the date filed, (1) complied as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may be,
and (2) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any of the Company's SEC Documents (including
the related notes and schedules thereto) fairly presents the financial position
of the Company and its Subsidiaries as of its date, and each of the statements
of income and changes in shareholders' equity and cash flows or equivalent
statements in the Company's SEC Documents (including any related notes and
schedules thereto) fairly presents the results of operations, changes in
shareholders' equity and changes in cash flows, as the case may be, of the
Company and its Subsidiaries for the periods to which they relate, in each
case, in compliance with applicable accounting requirements and with the
published rules of the SEC with respect thereto and in accordance with
generally accepted accounting principles consistently applied during the
periods involved, except, in each case, as may be noted therein, subject to
normal year-end audit adjustments (which are not expected to be material) in
the case of unaudited statements.
(c) Since December 31, 1997, the Company and its Subsidiaries
have not incurred any material liability other than in the ordinary course of
business consistent with past practice.
(d) Since December 31, 1997, (1) the Company and its Subsidiaries
have conducted their respective businesses in the ordinary and usual course
consistent with past practice (excluding the incurrence of expenses related to
this Agreement and the transactions
- 6 -
<PAGE> 7
contemplated hereby) and (2) no event has occurred or fact or circumstance
arisen that, individually or taken together with all other facts, circumstances
and events has had or is reasonably likely to have a Material Adverse Effect.
4.6 Financial Statements. The Company's audited financial
statements as of December 31, 1996 (the "AUDITED FINANCIAL STATEMENTS") and
unaudited financial statements as of September 30, 1997 (such unaudited
financial statements, together with the Audited Financial Statements being
referred to collectively as the "FINANCIAL STATEMENTS") have been previously
provided to the Investors. The Financial Statements present fairly the
financial position of the Company as at the dates thereof and for the periods
covered thereby and have been prepared in accordance with generally accepted
accounting principles consistently applied (except in the case of unaudited
financial statements for footnotes otherwise required by generally accepted
accounting principles and normal year adjustments that are not material in
amount). Neither the Company nor any Subsidiary has any liability, contingent
or otherwise, not disclosed in the Financial Statements or in the notes
thereto, that could together with all such other liabilities, have a Material
Adverse Effect. Since December 31, 1996, (i) there has been no material adverse
change in the business, assets or condition, financial or otherwise, or
operations of the Company or any Subsidiary; (ii) neither the business,
condition, financial or otherwise, or operations of the Company or any
Subsidiary nor any of its properties or assets has been materially adversely
affected by any event or occurrence of any type, whether or not insured
against; (iii) except as set forth on Schedule 4.6 hereto or in the Company's
filings under the Exchange Act, and except as entered into in the ordinary
course of business, neither the Company nor any Subsidiary has incurred any
liabilities or obligations in excess of $50,000; and (iv) neither the Company
nor any Subsidiary has entered into any transaction that would have a Material
Adverse Effect.
4.7. Taxes. Each of the Company and the Subsidiaries has
accurately prepared and timely filed all Federal, state and other tax returns
that are required to be filed by it and has paid or made provision for the
payment of all taxes that have become due pursuant to such returns and all
other taxes, assessments and governmental charges that have become due and
payable, including, without limitation, all taxes that the Company or any
Subsidiary is obligated to withhold from amounts owing to employees, creditors
and third parties. There are no tax Liens upon any asset of the Company or any
Subsidiary except statutory liens arising by operation of law for taxes not yet
due. Except as set forth on Schedule 4.7, neither the Company nor any of its
shareholders has ever filed (a) an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended (the "CODE"), that the Company be
taxed as an S corporation or (b) a consent pursuant to Section 341(f) of the
Code, relating to collapsible corporations.
4.8. Litigation. Except as set forth on Schedule 4.8, there is no
action, suit, proceeding or investigation pending or, to the Company's
knowledge, threatened against or affecting the Company or any Subsidiary that
might result, either in any case or in the aggregate, in any material adverse
change in the business, assets or condition, financial or otherwise, or
operations of the Company or any Subsidiary, or that might call into question
the validity of, or hinder the enforceability or performance of, this Agreement
or the Securities, or any action taken or to be taken pursuant hereto or
thereto; nor, to the Company's knowledge, has there occurred any event nor does
there exist any condition making likely the institution of any such litigation,
proceeding or investigation. Neither the Company nor any Subsidiary is in
default with respect to any order,
- 7 -
<PAGE> 8
writ, injunction, decree, ruling or decision of any court, commission, board or
other government agency by which the Company or any Subsidiary is bound that
might result, either in any case or in the aggregate, in any material adverse
change in the Company's business, assets or condition, financial or otherwise,
or operations.
4.9. ERISA. Except as described on Schedule 4.9, neither the
Company nor any Subsidiary maintains or operates any Employee Benefit Plan or
has any such Employee Benefit Plan been maintained or operated during the past
three years. Neither the Company nor any Subsidiary maintains or contributes to
any Guaranteed Pension Plan or Multiemployer Plan. With respect to each
Employee Benefit Plan listed on Schedule 4.9, to the extent applicable, the
following is true:
(a) Each such Employee Benefit Plan has been maintained and
operated in all material respects in compliance with its terms and with all
applicable provisions of ERISA, the Code and all applicable regulations,
rulings and other authority issued thereunder;
(b) All contributions required by law to have been made under
each such Employee Benefit Plan (without regard to any waivers granted under
Section 412 of the Code) to any fund or trust established thereunder or in
connection therewith have been made by the due date thereof;
(c) Each such Employee Benefit Plan intended to qualify under
Section 401(a) of the Code is the subject of a favorable unrevoked
determination letter issued by the Internal Revenue Service as to its qualified
status under the Code, which determination letter may still be relied upon as
to such tax qualified status, and no circumstances have occurred that would
adversely affect qualified status of any such Employee Benefit Plan;
(d) No Employee Benefit Plan is subject to Title IV of ERISA;
(e) None of such Employee Benefit Plans that are "employee
welfare benefit plans" as defined in Section 3(1) of ERISA provides for
continuing benefits or coverage for any participant or beneficiary of a
participant after such participant's termination of employment, except as
required by applicable law, including section 4980B of the Code or Section 601
of ERISA; and
(f) Neither the Company nor any trade or business (whether or not
incorporated) under common control with the Company within the meaning of
Section 4001 of ERISA has, or at any time has had, any obligation to contribute
to any "multiemployer plan" as defined in Section 3(37) of ERISA.
4.10. No Violations. The execution, delivery and performance by the
Company of this Agreement and any documents or instruments delivered, executed
and performed in connection therewith, the consummation of the transactions
contemplated hereby (including the issuance, sale and delivery of the Purchased
Shares and the Warrants and upon exercise of the Warrants, the issuance and
delivery of the Common Stock issuable in connection therewith), and compliance
with the provisions hereof, will not violate any provision of law, the Articles
of Incorporation or Bylaws, as amended, of the Company or violate any order of
any court or other
- 8 -
<PAGE> 9
agency of government or indenture, agreement or other instrument to which the
Company or any Subsidiary is bound, or conflict with, result in the breach of
or constitute (with due notice or lapse of time or both) a default under, any
such indenture, agreement or other instrument, or result in the creation or
imposition of any Lien upon any of the properties or assets of the Company or
any Subsidiary.
4.11. Other Agreements. Neither the Company nor any Subsidiary is a
party to or bound by any agreement, contract or commitment or subject to any
charter, bylaw or other corporate restriction that materially adversely affects
its business, assets or condition, financial or otherwise, or operations.
Neither the Company nor any Subsidiary is in default under any provision of its
Articles of Incorporation, Bylaws or other charter documents, each as amended
and in effect on the date hereof.
4.12. Other Agreements of Officers, etc. No officer or Key Employee
of the Company is a party to or bound by any agreement, contract or commitment,
or subject to any restriction that materially and adversely affects, or that in
the future has a reasonable possibility of materially and adversely affecting,
the business, assets or condition, financial or otherwise, or operations of the
Company or the right of any such Person to participate in the affairs of the
Company. To the Company's knowledge, no Key Employee has any present intention
of terminating his employment with the Company, and the Company does not have
any present intention of terminating any such employment. This Section 4.12
shall not be deemed to constitute an employment contract nor to grant any right
in favor of any Person other than the Investors.
4.13. Transactions with Affiliates. Except as set forth on Schedule
4.13 or in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, there are no loans, advances, leases or other continuing transactions
between the Company and any shareholder owning more than 1% of the capital
stock of the Company or any director or officer of the Company or any
Subsidiary, or any member of such officer's, director's or shareholder's
immediate family, or any Person controlled by any such officer, director or
shareholder or member of such officer's, director's or shareholder's immediate
family.
4.14. Compliance with Law. Except with regard to environmental
matters, securities matters, and FCC matters covered in other Sections of this
Agreement, each of the Company and the Subsidiaries is currently in compliance
in all respects with all Federal and state laws, rules, regulations and orders
applicable to its business, operations, properties, assets, products and
services, and has obtained and possesses all necessary certificates of need,
permits, licenses and other authorizations required to conduct its business as
presently conducted except where a failure so to comply to or to obtain and
possess the same would not have a Material Adverse Effect. There is no Federal
or state governmental inquiry, investigation, lawsuit or proceeding pending or,
to the Company's knowledge, threatened against or affecting the Company or any
Key Employee, the effect of which may lead to or result in the suspension or
revocation of any governmental license or approval held by the Company, and, to
the Company's knowledge, there is no basis for any of the foregoing.
4.15. Material Contracts. Except as set forth on Schedule 4.15, the
Company, each Subsidiary and, to the Company's and each Subsidiary's knowledge,
each other party thereto,
- 9 -
<PAGE> 10
have in all material respects performed all the obligations required to be
performed by them to date, have not received any notice of default, and are not
in default, under any lease, agreement or contract now in effect to which the
Company or any Subsidiary is a party or by which the Company, any Subsidiary or
their respective property may be bound, which defaults would have singularly or
in the aggregate a Material Adverse Effect. Neither the Company nor any
Subsidiary has any present expectation or intention of not fully performing all
of its obligations under each such lease, contract or other agreement to which
it is a party or by which it is bound, and neither any Company nor any
Subsidiary has any knowledge of any breach or anticipated breach by the other
party to any contract or commitment to which the Company or any Subsidiary is a
party.
4.16. Title to Assets. (a) Each of the Company and the Subsidiaries
has good and marketable title to, and is the owner of, or holds a valid
leasehold interest in or license rights to, all properties and assets necessary
to conduct its business as presently conducted. There are no Liens on or
outstanding against any of the Company's or any Subsidiary's properties and
assets except as set forth on Schedule 4.16, and except for statutory Liens,
such as mechanic's, materialman's, warehouseman's, carrier's or other like
Liens, incurred in good faith in the ordinary course of business, provided that
the underlying obligations relating to such Liens are paid in the ordinary
course of business, or are being contested diligently and in good faith by
appropriate proceedings and as to which the Company has set aside adequate
reserves on its books. All material leases pursuant to which the Company or any
Subsidiary leases personal property are in good standing and are valid and
effective in accordance with their respective terms and there exists no default
or other occurrence or condition that could result in a default or termination
thereof, except for default or other occurrence that would not have a Material
Adverse Effect.
(b) The properties and assets owned, leased by or licensed to the
Company and each Subsidiary, if applicable, and reflected in the Financial
Statements constitute all of the real and personal properties, tangible and
intangible, that are necessary, used or useful in the conduct of its business
in the manner and to the extent presently conducted or as presently
contemplated to be conducted. No other material real or personal properties are
required for the conduct of the business of the Company or any Subsidiary as
presently conducted. All such tangible properties and assets are in good
working order and repair, ordinary wear and tear excepted.
4.17. Real Property. Neither the Company nor any Subsidiary owns
any real property. The Company and each Subsidiary has the right to quiet
enjoyment of all real property in which it holds a leasehold interest for the
full term thereof, including all renewal terms, of the lease or similar
agreement relating thereto.
4.18. Environmental Compliance; No Liability. (a) The Company and
each Subsidiary has operated its business and each parcel of real property
owned or leased by it (the "REAL PROPERTY") in compliance in all material
respects with all applicable Environmental Laws. No notice of any violation,
citation, summons or order has been received, no complaint has been filed, no
penalty has been assessed and, to the knowledge of the Company and each
Subsidiary, no investigation or review is pending or has been threatened by any
governmental entity or other person that could require the Company or any
Subsidiary to expend money, or abide by conditions contained in consent
decrees, settlement agreements or orders, in each case with
- 10 -
<PAGE> 11
regard to (i) any violation or alleged violation of any Environmental Law, or
(ii) any failure or alleged failure to comply with any Environmental Permit, or
(iii) any use, possession, generation, treatment, storage, recycling,
transportation, disposal or release of a Regulated Material.
(b) Compliance with Permits. There are no environmental permits,
certificates, licenses, approvals, registrations, and authorizations required
for the operation of its business and the Real Property (the "ENVIRONMENTAL
PERMITS").
(c) Treatment; CERCLIS. Neither the Company nor any Subsidiary
has treated, stored, recycled or disposed of any Regulated Material on any real
property, and, to the Company's knowledge, no other Person has treated, stored,
recycled or disposed of any Regulated Material on any part of the Real Property
except in material compliance with applicable Environmental Laws. There has
been no unremedied release of, and there is not present any Regulated Material
at, on or under any Real Property except such Regulated Material as is used or
stored at, on, or under any Real Property in material compliance with
Environmental Laws. None of the Real Property is listed or, to the knowledge of
the Company, proposed for listing on the National Priorities List pursuant to
Superfund, CERCLIS or any state or local list of sites requiring investigation
or cleanup.
(d) Notices; Existing Claims; Certain Regulated Materials;
Storage Tanks. Neither the Company nor any Subsidiary has received any request
for information, notice of claim, demand or other notification that it is or
may be potentially responsible with respect to any investigation, abatement or
cleanup of any threatened or actual release of any Regulated Material. Neither
the Company nor any Subsidiary is required to place any notice or restriction
relating to the presence of any Regulated Material at any Real Property or in
any deed to any Real Property. There has been no past, and there is no pending
or contemplated, claim by the Company or any Subsidiary under any Environmental
Law based on actions of others that may have impacted on the Real Property, and
the Company has not entered into any agreement with any Person regarding any
claim pursuant to any Environmental Law. All underground storage tanks located
on the Real Property are disclosed on Schedule 4.18, and all such tanks and
associated piping are in sound condition and are not leaking and have not
leaked. All underground storage tanks are in material compliance with all
Environmental Laws and if no longer in use or being operated have been closed
or removed materially in accordance with all Environmental Laws.
(e) PCBs; Asbestos, etc. To the knowledge of the Company, no
polychlorinated biphenyls ("PCBs"), asbestos containing material ("ACM's"),
radon, or urea formaldehyde are present at any property now owned or leased by
the Company or any Subsidiary.
(f) Environmental Liens. There are no environmental Liens on any
of the assets of the Company or any Subsidiary or Real Property and no action
by a governmental entity has been taken or is in the process, or to the
knowledge of the Company, pending or threatened that could subject any of such
assets or Real Property to any such Liens.
4.19. Foreign Investment in Real Property Tax Act. The Company is
not now and has never been a "United States real property holding corporation"
for purposes of Section 897(c)(2) of the Code and the Treasury Regulations
thereunder.
- 11 -
<PAGE> 12
4.20. FCC Matters. (a) The FCC has issued to the Company, and the
Company holds all material licenses (the "FCC LICENSES") necessary to conduct
its business as such business is currently conducted and proposed to be
conducted, and such FCC Licenses are valid and in full force and effect. For
the two-year period prior to the date hereof, the Company has filed all
statements, reports and information required by the FCC and duly performed in
all respects all of its obligations under such FCC Licenses and the
Communications Act.
(b) The Company is in compliance in all material respects with
the Communications Act governing the ownership and operation of the paging
systems owned, permitted, licensed, being constructed and/or operated pursuant
to the FCC Licenses. There is not now pending or, to the Company's or any
Subsidiary's knowledge, threatened any litigation, proceeding or investigation
before the FCC that might result in a termination of any of the FCC Licenses.
The Company has constructed all of its material facilities operating under the
FCC Licenses within the construction period provided under the Communications
Act.
(c) No event has occurred (including any notice issued by the
FCC), and no agreement has been entered into by the Company (including this
Agreement), that now or after notice or lapse of time or both, might reasonably
be expected to permit cancellation, revocation or termination of the FCC
Licenses, or would result in any FCC action that could reasonably be expected
to have a Material Adverse Effect, and there is not, to the Company's
knowledge, pending or threatened any action or matter that would suggest that
the FCC Licenses will not be renewed in the ordinary course.
(d) There is not pending any application, petition, objection or
other pleading filed with the FCC or any federal entity with jurisdiction to
review administrative orders of the FCC, that questions the validity of or
contests any of the FCC Licenses.
(e) No consents, approvals or actions by the FCC are required to
permit the consummation of the transactions contemplated hereby, and such
consummation will not result in a violation of the Communications Act and will
not cause any forfeiture or impairment of the FCC Licenses.
4.21. Disclosure. Neither this Agreement nor any certificate, list,
exhibit, letter or other written statement furnished by the Company to the
Investors or their special counsel in connection herewith (including, without
limitation, in response to any request for information made by any Investor or
its agent to the Company) contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they are or were made. There exists no fact or circumstance that
materially and adversely affects the business, assets or condition, financial
or otherwise, or operations of the Company, that has not been specifically set
forth in financial statements of the Company heretofore delivered to the
Investors or set forth in this Agreement or the Exhibits and Schedules hereto
or a certificate furnished to the Investors by the Company at the Closing.
- 12 -
<PAGE> 13
4.22. Margin Stock. Neither the Company nor any Subsidiary owns or
has any present intention of acquiring any "margin stock" within the meaning of
Regulation U (12 CFR Part 221), of the Board of Governors of the Federal
Reserve System.
4.23 Investment Company. The Company is not an "investment
company", or a company "controlled" by an "investment company", as such terms
are defined in the Investment Company Act of 1940, as amended.
4.24 Boycott. Neither the Company nor any Subsidiary has at any
time has participated in, and is not currently participating in, an anti-Israel
boycott within the scope of Chapter 7 of Part 2 of Division 4 of Title 2 of the
California Government Code.
4.25 Registration Rights. (a) Except for (i) the Registration
Rights Agreement, (ii) the Registration Rights Agreement dated as of September
13, 1996 between the Company and Big Apple Paging Corporation (the "BIG APPLE
AGREEMENT") and (iii) the Registration Rights Agreement dated as of January 31,
1997 among the Company and stockholders of Mercury Paging and Communications,
Inc. (the "MERCURY AGREEMENT"), the Company is not party to any agreement or
otherwise obligated to register under the Securities Act or include in any
underwritten offering of its securities any shares of its capital stock,
whether now outstanding or subject to issuance upon the exercise of any warrant
or option for shares of the Company's capital stock.
(b) The initial public offering of the Company's Common Stock on
March 1, 1996 constituted a "Qualified Public Offering" for all purposes of the
Registration Rights Agreement and the Stockholders Agreement dated as of June
21, 1995 among the Company and certain of its shareholders at such time, as
heretofore amended (the "STOCKHOLDERS AGREEMENT").
(c) The rights of the "Secondary Holders" (as defined in the
Registration Rights Agreement) to "Demand Registrations" (as defined in the
Registration Rights Agreement) have terminated in accordance with Section 1(g)
of the Registration Rights Agreement (as amended by the Amendment thereto dated
as of June 3, 1997); provided, however, that the following Secondary Holders
continue to have as of the date hereof rights to "Secondary Demand
Registrations" (as defined in the Registration Rights Agreement) in accordance
with the terms of the Registration Rights Agreement: Advanced Technology
Development Fund II, Mark H. Dunaway, Marcia M. Dunaway, Michael J. Saner,
Saner Communications, Inc. and Eugene H. Kreeft.
(d) The Company covenants not to effect any registration of its
securities requested under either the Big Apple Agreement or the Mercury
Agreement if, in the opinion of the Company's counsel, such registration is not
required for the immediate transfer of all of the shares subject to such
agreements, as the case may be, pursuant to Rule 144 or other available
exemption from registration under the Securities Act.
4.26 Investments in United States Real Property Interest. The
Company's capital stock does not constitute a United States real property
interest as that term is defined in Section 897(c)(1)(A)(ii) of the Internal
Revenue Code of 1986, as amended (the "CODE"). The preceding representation is
based on a determination by the Company that the Company is not
- 13 -
<PAGE> 14
and has not been a United States real property holding corporation (as that
term is defined in Section 897(c)(2) of the Code) during the five (5) year
period preceding the date of this Agreement. The Company shall use its best
efforts to ensure that it does not at any time in the future become a United
States real property holding corporation ("USRPHC") and from time to time, upon
request of any Investor that is acquiring more than $100,000 of Securities
hereunder, shall make a determination as to its status as a USRPHC. If at any
time in the future the Company should become a United States real property
holding corporation, the Company shall, as promptly as possible, notify each
Investor of such change in status.
5. COVENANTS OF THE COMPANY.
Until the such time as no Purchased Shares are outstanding, the
Company will comply with the following covenants:
5.1 Board of Directors Meetings. (a) The Company shall use its
best efforts to fix the number of directors of the Company at not more than
nine (9) and to cause one (1) nominee of the Investors to be recommended to the
shareholders for election as a director at all meetings of shareholders, or
consents in lieu thereof, for such purpose. The Company will reimburse all
direct out-of-pocket expenses reasonably incurred by such director of the
Company in attending meetings of the Board of Directors and all other
out-of-pocket expenses reasonably incurred by such director in connection with
such director's serving on the Board of Directors and fulfilling such
director's responsibilities as a director of the Company. The Company shall
ensure that meetings of its full Board of Directors are held at least four
times each year and at intervals of not more than four (4) months. The
Company's Articles of Incorporation and Bylaws shall provide for
indemnification and exculpation of directors from personal liability, to the
fullest extent permitted under applicable state law. The Company shall at all
times maintain, at the Company's expense, directors and officers liability
insurance for its directors and officers.
(b) Board Visitation and Materials. The Company shall deliver to
each Investor investing at least $1,500,000 pursuant to this Agreement (each a
"PRINCIPAL HOLDER") a copy of all materials distributed at or prior to all
meetings of the Board of Directors of the Company or any committee thereof,
(which shall include the minutes of the previous meeting) and shall thereafter
promptly deliver to each Principal Holder any revised minutes as are adopted at
such or any subsequent meeting. The Company shall (a) permit a representative
of each Principal Holder to attend all meetings of the Company's Board of
Directors, and of the Company's shareholders, (b) provide to such designees not
less than 5 calendar days' prior actual notice of all meetings (or as required
by the bylaws, if the meeting is an emergency meeting and the matters to be
discussed or voted on would not in any way adversely affect the Investor or its
interest or rights) of the Company's Board of Directors and of the Company's
shareholders and an agenda for the meetings and other materials related
thereto, (c) permit each such designee to attend such meetings as a non-voting
observer, (d) provide to each such designee a copy of all materials distributed
at such meetings and (e) reimburse all direct out-of-pocket expenses reasonably
incurred by such designee in attending such meetings.
5.2 Consultations and Advice. The Company shall allow each
Investor purchasing more than $100,000 of Securities hereunder to consult with
and advise management of the Company on significant business issues, including
management's proposed annual operating
- 14 -
<PAGE> 15
plans, and cause its management to meet with each such Investor regularly
during each year at the Company's facilities at mutually agreeable times for
such consultation and advice and to review progress in achieving said plans.
5.3. Right of First Offer on Company Sales. Each Investor shall
have a right of first offer with respect to future sales in a private placement
by the Company of its capital stock or securities convertible into or
exercisable or exchangeable for shares of such capital stock. Each time the
Company proposes to offer any such securities in a private offering, the
Company shall first offer such securities to the Investors and the holders of
Class A Redeemable Preferred Stock, who shall each be entitled to purchase its
pro rata share (on a fully-diluted basis as measured by their respective
holdings of Common Stock and Common Stock issuable upon the exercise of
Warrants and Class A Warrants) of such securities, before it offers to sell
such securities to other Persons. This Section 5.3 shall not apply to stock
issued in connection with acquisitions.
5.4. Maintenance of Existence; Compliance with Law. The Company
shall and shall cause each Subsidiary to keep in full force and effect its
corporate existence, except where the failure to do so will not have a Material
Adverse Effect, and will comply in all material respects with all applicable
laws and regulations in the conduct of its business except those being
contested in good faith by appropriate procedures and will file with the
Commission in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act.
5.5 Rule 144 Requirements. The Company shall comply with the
requirements of Rule 144(c) under the Securities Act with respect to current
public information about the Company and will furnish to any holder of
Securities upon request such reports and documents of the Company as such
holder may reasonable request to avail itself of any similar rule or regulation
of the Commission allowing it to sell any such securities without registration.
5.6 Insurance. The Company shall keep the insurable properties
owned by it and by the Subsidiaries insured by financially sound and reputable
insurers against the perils of liability, casualty, fire and extended coverage
in amounts of coverage at least equal to those customarily maintained by
companies in the same or a similar business of similar size. The Company shall
also maintain with such insurers workers' compensation insurance and insurance
against hazards and risks and liability to persons and property to the extent
and in the manner customary for corporations engaged in the same or a similar
business of similar size.
5.7 Key Man Insurance. The Company shall maintain and continue to
pay the premiums on a key-man term life insurance policy on the life of (i)
Mark H. Dunaway in the amount of not less than $9,500,000, (ii) Michael J.
Saner in the amount of not less than $4,500,000 and (iii) Eugene H. Kreeft in
the amount of not less than $2,000,000, in each case naming the Company as the
beneficiary. The life insurance proceeds received by the Company shall be used
for valid business purposes of the Company as approved by the Board of
Directors of the Company.
- 15 -
<PAGE> 16
5.8. Maintenance of Properties. The Company shall and shall cause
each Subsidiary to maintain all properties used in the conduct of its business
in good repair, working order and condition as necessary to permit such
business to be properly and advantageously conducted.
5.9. Affiliated Transactions. All transactions by and between the
Company or any Subsidiary and any officer, Key Employee, director or
shareholder of the Company or any Subsidiary or Persons controlled by or
affiliated with such officer, Key Employee, director or shareholder, shall be
conducted on an arms-length basis, shall be on terms and conditions no less
favorable to the Company or Subsidiary than could be obtained from non-related
Persons and shall be approved in advance by a majority of disinterested
Directors after full disclosure of the terms thereof.
5.10. Management Compensation. Compensation paid by the Company or
any Subsidiary to its management shall be reasonably comparable to compensation
paid to management in companies of similar size, of similar maturity, of
similar profitability and in similar industries.
5.11 Inspection. The Company shall permit and shall cause each
Subsidiary to permit authorized representatives of the Principal Holders to
visit and inspect any of the properties of the Company and its Subsidiaries,
including its books of account, and to make copies thereof at the expense of
the Principal Holders and to discuss its affairs, finances and accounts with
its officers, administrative employees and independent accountants, all at such
reasonable times with reasonable notice as may be reasonably requested but in
no event more than one time in any calendar month and all in a manner that does
not interfere with the business operations of the Company and its Subsidiaries;
provided that all such information provided to the Investors by the Company
will be maintained as confidential by the Investors and not be disclosed to
third parties and provided, further that, subject to the foregoing, each
Investor may provide summaries of such information to affiliates of such
Investor in connection with reports provided by the Investor to its affiliates
in its fiduciary capacity. The Company shall permit and shall cause each
Subsidiary to permit examiners of the Small Business Administration to visit
and inspect the books and records of the Company and its Subsidiaries for the
purpose of verifying the certifications made by the Company to the Small
Business Administration.
5.12 Restrictive Provisions. Until such time as no Purchased
Shares are outstanding, without the written consent of holders of not less than
two-thirds (66.67%) of the then outstanding Purchased Shares, the Company shall
not:
(a) take any action that amends, alters or repeals the
preferences, special rights or other powers of the Class B Preferred Stock, so
as to affect adversely the Class B Preferred Stock (including, without limiting
the generality of the foregoing, the authorization, creation or issuance of any
shares of capital stock or other securities with preference or priority equal
or superior to the Class B Preferred Stock or on a parity with the Class B
Preferred Stock in any regard, including, without limitation, redemption rights
and the right to receive either dividends or amounts distributable upon
liquidation, dissolution or winding up of the company) or that increases the
authorized number of shares of Class B Preferred Stock;
- 16 -
<PAGE> 17
(b) cause the issuance of any authorized but unissued shares of
Class B Preferred Stock;
(c) redeem, purchase or otherwise acquire for consideration any
shares of its capital stock (or rights, options or warrants to purchase such
shares), other than the Securities in accordance with their terms;
(d) approve any material change in the line of business of the
Company or any Subsidiary;
(e) enter into any merger, consolidation or amalgamation, or any
recapitalization, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution) or convey, sell, lease, assign, transfer or
otherwise dispose of all or substantially all of its business, assets or
property;
(f) amend its Articles of Incorporation or Bylaws, if such
amendment would (i) change any material rights, preferences, privileges or
limitations provided to the holders of Class B Preferred Stock therein, (ii)
change the size of the Board of Directors or the procedures for meetings of the
Board of Directors and shareholders, including without limitation, notice and
quorum requirements; or (iii) increase the dividend rate applicable to the
Company's Class A Redeemable Preferred Stock, permit Class A Redeemable
Preferred Stock to be converted into Common Stock or any other equity or debt
security or instrument of the Company or otherwise change the rights, powers or
preferences of the Class A Redeemable Preferred Stock in a manner that
adversely affects the holders of Class B Preferred Stock;
(g) enter into any acquisition or series of related acquisitions
involving an aggregate transaction value equal to or greater than $5,000,000;
or
(h) increase its indebtedness for borrowed money in one or more
transactions, whether or not related, in an aggregate amount of $5,000,000 in
excess of the amount of the Company's existing indebtedness and availability
under existing credit facilities immediately preceding the Closing.
6. REPRESENTATIONS WARRANTIES AND
COVENANT OF THE INVESTORS.
In order to induce the Company to enter into this Agreement, each
Investor, severally and not jointly, represents and warrants as follows:
6.1 Accredited Investor. The Investor is an "accredited investor"
as that term is defined in Regulation D under the Securities Act.
6.2 Address, Etc. The address, state of organization and state
of headquarters of the Investor are as set forth on Schedule A attached hereto.
6.3 Understanding of Nature of Securities. The Investor
understands that:
- 17 -
<PAGE> 18
(i) The Securities and the Common Stock issued upon the
exercise of the Warrants (the "Shares")have not been registered under the
Securities Act or any state securities laws (the "STATE ACTS") and are being
issued and sold in reliance upon certain of the exemptions contained in the Act
and the State Acts, and the representations and warranties of the Investors
contained herein are essential to the claim of exemption by the Company under
the Act and the State Acts;
(ii) The Securities and the Shares are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act;
(iii) The Securities and the Shares cannot be sold or
transferred without registration under the Act and any applicable State Acts or
exemption therefrom;
(iv) The Securities and the Shares and any certificates
issued in replacement therefor shall bear the following legend, in addition to
any other legend required by law or otherwise;
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act") or any state securities
acts and may not be sold, transferred or otherwise disposed of unless a
registration statement under the Act and any applicable state securities acts
with respect to such securities is effective or unless the Company is in
receipt of an opinion of counsel satisfactory to it to the effect that such
securities may be sold without registration under the Act and such acts."
(v) Only the Company can register the Securities and the
Shares under the Securities Act and any of the State Acts;
(vi) Except as set forth in this Agreement and in the
Registration Rights Agreement, the Company has not made any representations to
the Investor that the Company will register the Securities or the Shares under
the Securities Act or any of the State Acts, or with respect to compliance with
any exemption therefrom;
(vii) There are stringent conditions for Investor's
obtaining an exemption for the resale of the Securities or the Shares under the
Securities Act and any State Acts; and
(viii) The Company may from time to time make stop transfer
notations in its transfer records to ensure compliance with the Securities Act
and any State Acts.
6.4 Investment Intent. The Investor is acquiring the Securities
and the Shares for the Investor's own account and not on behalf of any person.
The Investor is acquiring the Securities and the Shares for investment and not
with a view to or for sale in connection with any distribution of the
Securities or the Shares or with the intent to divide the Investor's
participation with others or resell or otherwise participate in a distribution
of the Securities or the Shares, directly or indirectly. Neither the Investor
nor anyone acting on the Investor's behalf has or will pay any commission or
other remuneration to any person in connection with the purchase of the
Securities or the Shares.
- 18 -
<PAGE> 19
6.5 Transfer Restriction. The Investor agrees not to effect any
public sale or distribution (including sales pursuant to Rule 144 under the
Securities Act) of any Common Stock during the seven days prior to, and during
the 90-day period beginning on the effective date of, any underwritten Demand
Registration or any underwritten Piggyback Registration (as such terms are
defined in the Registration Rights Agreement) unless the underwriters managing
such registered public offering otherwise agree; provided, however, that the
Investor may sell shares of Common Stock in any such registered public offering
as part of such offering in accordance with the Registration Rights Agreement.
7. MATTERS RELATING TO THE WARRANTS.
7.1 Mandatory Exercise of Warrants. All but not less than all of
the Warrants must be exercised by the holders thereof at the request of the
Company at the then applicable exercise price if and only if (i) the average
closing bid price for shares of Common Stock during the ninety (90) calendar
days prior to the date of such exercise, as well as for each of the ten (10)
calendar days prior to such date, exceeds ten dollars ($10) per share, as
appropriately adjusted for stock dividends, splits, recapitalizations and any
similar occurrence; (ii) the Company has taken all actions necessary to cause
all shares of Common Stock issued upon such exercise to be registered
immediately upon issue, whether through registration on a Form S-3 or
otherwise, so as to be freely tradable immediately upon their issuance and
(iii) the Company simultaneously redeems all outstanding Class B Preferred
Stock.
8. BROKERS' FEE.
The Company represents and warrants that no liabilities for brokerage
commissions, finders' fees and the like have been incurred by the Company in
connection with the financing described in this Agreement. The Company hereby
agrees to indemnify and hold the Investors harmless against and in respect of
any claim for brokerage commissions, finders' fees or the like relating to this
Agreement or the transactions contemplated hereby arising out of arrangements
made by the Company.
9. REMEDIES.
(a) The Company agrees to indemnify each holder of any Security
(including such holder's respective directors, officers, partners, employees
and agents) and each person who controls such holder within the meaning of
Section 15 of the Securities Act (collectively the "INDEMNITEES" and
individually an "INDEMNITEE") to the full extent permitted by law against all
claims, losses, damages, expenses and liabilities, including any amount paid in
settlement of any action, suit, claim or proceeding and all legal and other
expenses reasonably incurred in investigating or defending against the same
(other than losses arising solely from a diminution in the value of the
Preferred Stock, the Warrants or the Common Stock held by the Indemnitees)
("LOSSES"), arising out of any breach of any representation, warranty, covenant
or agreement made by the Company herein.
(b) In addition, the Company agrees to indemnify each Indemnitee
from and against any and all Losses or actions in respect thereof (including in
such Indemnitee's capacity, if any, as a director, controlling person or
representative of the Company) as a result of or arising out of,
- 19 -
<PAGE> 20
or relating to, (i) the execution, delivery, performance, or enforcement of
this Agreement or any other instrument, document or agreement executed by any
Indemnitee pursuant to this Agreement; (ii) the solicitation of shareholder
approval (including liabilities under the Exchange Act) pursuant to Section 1.5
of this Agreement or periodic reporting by the Company of transactions
contemplated by this Agreement under the Exchange Act; or (iii) any transaction
financed or to be financed in whole in part, directly or indirectly, with the
proceeds of the issuance of the Securities, except in each such case for Losses
arising out of any Indemnitee's gross negligence, willful misconduct or bad
faith.
(c) If the indemnification provided for in Section 9(b) above for
any reason is held by a court of competent jurisdiction to be unavailable to an
Indemnitee in respect of any Losses, then the Company, in lieu of indemnifying
such Indemnitee thereunder, shall contribute to the amount paid or payable by
such Indemnitee as a result of such losses, claims, damages, expenses or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Investors, or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Investors in connection with the action or inaction which resulted in such
Losses, as well as any other relevant equitable consideration.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 9, such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing promptly after
such indemnified party has actual knowledge of any claim as to which indemnity
may be sought; provided, however, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 9. In case any such proceeding shall be brought
against any Indemnified Party and it shall notify the Indemnifying Party of the
commencement thereof, the Indemnifying Party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
Indemnifying Party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such Indemnified Party and shall pay as
incurred the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any Indemnified Party shall have the right to retain
its own counsel at its own expense. Notwithstanding the foregoing, the
Indemnifying Party shall pay as incurred the fees and expenses of the counsel
retained by the Indemnified Party in the event (i) the Indemnifying Party and
the Indemnified Party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the Indemnifying Party and the Indemnified
Party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them as
expressed by opinion of counsel. The Indemnifying Party shall not be liable for
any settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff,
the Indemnifying Party agrees to indemnify the Indemnified Party from and
against any loss or liability by reason of such settlement or judgment.
(e) In the event indemnification arises hereunder as a result of
a third party claim against the Indemnified Party, no indemnification shall be
made pursuant to this Section 9 until
- 20 -
<PAGE> 21
such time as the Indemnifying Party shall have been finally adjudicated
(including the exhaustion of all appeals that are undertaken with respect to
any adjudication) or otherwise bound to be liable hereunder to such third
party; provided, however, that all legal and other expenses reasonably incurred
in investigating or defending such claim shall be paid by the Indemnifying
Party at the time incurred by the Indemnified Party.
(f) The indemnification and contribution provided for in this
Section 9 will remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnitee or any officer, director, employee,
agent or controlling person of the Indemnitee.
(g) Each party hereto acknowledges that the other parties hereto
shall not have an adequate remedy in the event that this Agreement is breached
and that the non-breaching parties may suffer irreparable damage and injury in
such event, and that, in addition to any other available rights and remedies,
the non-breaching parties shall be entitled to an injunction restricting the
breaching party or parties, as the case may be, from committing or continuing
any violation of this Agreement. The indemnification provided for herein is in
addition to and not in lieu of any other rights and remedies that the Investors
may have in law or equity.
10. AMENDMENTS AND WAIVERS.
For the purposes of this Agreement and all agreements, documents and
instruments executed pursuant hereto or thereto, except as otherwise
specifically set forth herein or therein, no course of dealing between the
Company and the Investors and no delay on the part of any party hereto in
exercising any rights hereunder or thereunder shall operate as a waiver of the
rights hereof and thereof. No covenant or other provision hereof or thereof may
be waived or amended otherwise than by a written instrument signed by the party
so waiving or amending such covenant or other provision; provided, however,
that except as otherwise provided herein or therein, amendments to this
Agreement shall require and shall be effective upon the receipt of the written
consent of (a) the Company and (b) Investors holding Warrants that upon the
exercise thereof represent not less than 75% of the Common Stock issuable upon
the exercise of all of the Warrants. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Securities at the time outstanding, each future holder of all such Securities,
and the Company. Notwithstanding any of the above, the conditions to Closing
set forth in Section 2 of this Agreement may only be waived by each Investor
itself.
11. SURVIVAL OF COVENANTS; ASSIGNABILITY OF RIGHTS.
(a) All covenants, agreements, representations and warranties of
the Company made herein and in the certificates, lists, exhibits, schedules or
other written information delivered or furnished in connection therewith and
herewith shall be deemed material and to have been relied upon by the
Investors, and shall survive the delivery of the Securities and shall bind the
Company's successors and assigns, whether so expressed or not, and all such
covenants, agreements, representations and warranties shall inure to the
benefit of each Investor's successors and assigns and to transferees of the
Securities, whether so expressed or not.
(b) The representations and warranties of the Investors made in
Section 6 herein shall be deemed material and to have been relied upon by the
Company and shall survive the delivery
- 21 -
<PAGE> 22
of the Securities and shall bind each Investor's successors and assigns,
whether so expressed or not and all such covenants, agreements, representations
and warranties shall inure to the benefit of the Company's successors and
assigns whether so expressed or not.
(c) The Investors may transfer the Securities only in compliance
with Federal and state securities laws.
12. GOVERNING LAW.
(a) This Agreement shall be deemed to be a contract made under,
and shall be construed in accordance with, the laws of the State of Georgia,
without giving effect to any choice of law provision or rule (whether of the
State of Georgia or any other jurisdiction) that would cause the application of
the domestic substantive laws of any jurisdiction other than the State of
Georgia.
(b) The Company and each of the Investors that holds Class A
Warrants hereby agrees that the Class A Warrants, together with the Class A
Redeemable Preferred Stock Purchase Agreement dated as of May 21, 1997 (the
"CLASS A PURCHASE AGREEMENT") pursuant to which the Class A Warrants were
issued, shall, notwithstanding anything to the contrary set forth in the Class
A Warrants or such Purchase Agreement, from and after the date hereof be deemed
to be a contract made under, and shall be construed in accordance with, the
laws of the State of Georgia, without giving effect to any choice of law
provision or rule (whether of the State of Georgia or any other jurisdiction)
that would cause the application of the domestic substantive laws of any
jurisdiction other than the State of Georgia.
13. SECTION HEADINGS.
The descriptive headings in this Agreement have been inserted for
convenience only and shall not be deemed to limit or otherwise affect the
construction of any provision hereof.
14. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts, each of which when so executed and delivered shall be taken to be
an original; but such counterparts shall together constitute but one and the
same document.
15. NOTICES AND DEMANDS.
Any notice or demand which, by any provision of this Agreement or any
agreement, document or instrument executed pursuant hereto or thereto, except
as otherwise provided therein, is required or provided to be given shall be
deemed to have been sufficiently given or served for all purposes three days
after being sent by first class mail, postage and charges prepaid, hand
delivery, or FedEx or similar courier service to the following addresses: if to
the Company, at its mailing address set out above, or at any other address
designated by the Company to the Investors in writing; if to any Investor at
its mailing address set forth in Schedule A, or at any other address (or
facsimile number) designated by such Investor to the
- 22-
<PAGE> 23
Company. Any notice given by facsimile pursuant to this Section 15 shall be
followed by written notice delivered by FedEx or similar courier service.
16. SEVERABILITY.
Whenever possible, each provision of this Agreement shall be
interpreted in such a manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be deemed prohibited or invalid
under such applicable law, such provision shall be ineffective to the extent of
such prohibition or invalidity, and such prohibition or invalidity shall not
invalidate the remainder of such provision or the other provisions of this
Agreement.
17. DEFINITIONS OF TERMS.
As used in this Agreement, the following terms have the following
meanings or the meanings ascribed to them elsewhere in this Agreement:
<TABLE>
<CAPTION>
DEFINITION SECTION
- ---------- -------
<S> <C>
Agreement.............................................. Preamble
Purchase Shares........................................ 1.1
Class B Preferred Stock................................ 1.1
Common Stock........................................... 1.1
Purchase Price......................................... 1.2
Closing Date........................................... 1.3
Registration Rights Agreement.......................... 2.8
SEC Documents.......................................... 4.5
Audited Financial Statements........................... 4.6
Financial Statements................................... 4.6
Real Property.......................................... 4.17
FCC Licenses........................................... 4.20
Big Apple Agreement.................................... 4.25
Mercury Agreement...................................... 4.25
Stockholders Agreement................................. 4.25
Code................................................... 4.26
Principal Holder....................................... 5.1
Indemnified Party...................................... 9
Indemnifying Party..................................... 9
Class A Purchase Agreement............................. 12
</TABLE>
Commission. The term "COMMISSION" means the Securities and Exchange
Commission, or any other federal agency at the time administering the
Securities Act.
Communications Act. The term "COMMUNICATIONS ACT" means the
Communications Act of 1934, as amended, or any similar law then in force, and
the rules, regulations and policies thereunder.
- 23 -
<PAGE> 24
Employee Benefit Plan. The term "EMPLOYEE BENEFIT PLAN" means any
employee benefit plan within the meaning of ss.3(3) of ERISA maintained or
contributed to by the Company or any ERISA Affiliate, other than a
Multiemployer Plan.
Encumbrance. The term "ENCUMBRANCE" means any mortgage, deed of trust,
pledge, security interest, encumbrance, option, right of first refusal,
agreement of sale, adverse claim, encroachment, right-of-way, burden or charge
of any kind or nature whatsoever or any item similar or related to the
foregoing.
Environmental Law. The term "ENVIRONMENTAL LAW" means the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, the Resources Conservation and Recovery Act of 1976, as amended,
and any applicable laws (whether or not statutory), statutes, regulations,
rules, ordinances, codes, licenses, permits, orders, approvals, plans,
authorizations, concessions, and similar items of all governmental authorities
and all applicable judicial, administrative and regulatory decrees, judgments
and orders, any of which relate to the protection of human health or the
environment from the effects of Regulated Material, including, but not limited
to, those pertaining to reporting, licensing, permitting, investigating and
remediating emissions, discharges, releases or threatened releases of Regulated
Material into the air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Regulated Material.
ERISA. The term "ERISA" means the Employee Retirement Income Security
Act of 1974, any successor statute of similar import, and the rules and
regulations thereunder, collectively, and from time to time amended and in
effect.
ERISA Affiliate. The term "ERISA AFFILIATE" means any Person that is
treated as a single employer with the Company under ss.414 of the Code.
Exchange Act. The term "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
FCC. The term "FCC" means the Federal Communications Commission, or
any other federal agency at the time administering the Communications Act.
Guaranteed Pension Plan. The term "GUARANTEED PENSION PLAN" means any
employee pension benefit plan within the meaning of ss.3(2) of ERISA maintained
or contributed to by the Company or any ERISA Affiliate the benefits of which
are guaranteed on termination in full or in part by the Pension Benefit
Guaranty Corporation (or any Person succeeding to the functions thereof).
Key Employees. The term "KEY EMPLOYEES" means the Chairman, the
President, any Vice President and the Treasurer of the Company, or any person
who is not an officer of the Company but is in charge of one or more of the
following functions: sales, business development or operations.
- 24 -
<PAGE> 25
Knowledge. The terms "KNOWLEDGE" or similar terms (whether or not
capitalized herein) when applied to the Company, means the knowledge of its Key
Employees, officers or directors of the Company or any Subsidiary after
reasonable inquiry.
Material Adverse Effect. The term "MATERIAL ADVERSE EFFECT" means any
event, occurrence or condition, if the result thereof, either singly or in the
aggregate would have a material and adverse effect upon the business,
operations, properties, assets, prospects, profitability or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole.
Multiemployer Plan. The term "MULTIEMPLOYER PLAN" means a
multiemployer plan within the meaning of ss.3(37) of ERISA.
Person. The term "PERSON" means any corporation, association,
partnership, joint venture, organization, business or individual.
Regulated Material. The term "REGULATED MATERIAL" means substances
that are defined or listed in, or otherwise classified pursuant to, any
applicable Environmental Laws as "hazardous substances," "hazardous materials"
"hazardous wastes" or "toxic substances," or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, radioactivity, carcinogenicity,
reproductive toxicity or "EP toxicity," and petroleum and drilling fluids,
produced waters and other wastes associated with the exploration, development,
or production of crude oil, natural gas or geothermal energy.
Rule 144. The term "RULE 144" means Rule 144 promulgated under the
Securities Act.
Securities Act. The term "SECURITIES ACT" means the Securities Act of
1933, as amended.
18. EXPENSES.
The Company shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. The Company shall reimburse the Investors for (i) their reasonable
travel and out-of-pocket expenses incurred in connection with the transactions
contemplated hereby, including, without limitation, all reasonable audit,
consulting and other professional expenses incurred as part of the Investors'
due diligence with respect to the Company and the transactions contemplated
hereby, (ii) the reasonable legal fees, expenses and disbursements of special
counsel for the Investors (including both Edwards & Angell and Paul, Hastings,
Janosfsky & Walker LLP) incurred in connection with the negotiation, execution,
delivery and performance of this Agreement and the other agreements and
documents contemplated hereby and in connection with any proposed amendments,
waivers or consents to or to be provided in connection with this Agreement and
any such other agreements and documents or the transactions contemplated hereby
or thereby, and the negotiation, preparation and delivery thereof.
- 25 -
<PAGE> 26
19. ENTIRE AGREEMENT.
This Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with respect to the subjects hereof and thereof, including without limitation
all term sheets heretofore circulated and discussed among the Company and the
Investors.
- 26 -
<PAGE> 27
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
Preferred Networks, Inc.
By: /s/ Michael J. Saner
--------------------------------------------
Name: /s/ Michael J. Saner
------------------------------------------
ALTA COMMUNICATIONS VI, L.P.
By: Alta Communications VI Management
Partners, L.P., its General Partner
By: /s/ Robert F. Benbow
--------------------------------------------
Robert F. Benbow, General Partner
ALTA COMM S BY S, LLC
By: /s/ Robert F. Benbow
--------------------------------------------
Robert F. Benbow, Member
By: /s/ Eileen McCarthy
--------------------------------------------
Eileen McCarthy, Member
CENTENNIAL FUND IV, L.P.
By: Centennial Fund V, L.P.,
its General Partner
By: /s/ Jeffrey H. Schutz
-------------------------------------------
Jeffrey H. Schutz
SAUGATUCK CAPITAL COMPANY LIMITED PARTNERSHIP III
By: /s/ Richard Campbell
-------------------------------------------
Richard Campbell
FLEET VENTURE RESOURCES, INC.
By: /s/ Robert M. VanDegna
--------------------------------------------
Robert M. VanDegna
Chairman and CEO
- 27 -
<PAGE> 28
PNC CAPITAL CORP.
By: /s/ David Hillman, EVP
--------------------------------------------
David Hillman
FLEET EQUITY PARTNERS, VI, L.P.
By: Fleet Growth Resources, Inc.,
its Corporate General Partner
By: /s/ Robert M. VanDegna
--------------------------------------------
Robert M. VanDegna
Chairman and CEO
PRIMUS CAPITAL FUND III LIMITED PARTNERSHIP
By: /s/ Kevin McGinty
--------------------------------------------
Kevin McGinty
T/W ALFRED W. PUTNAM GST EXEMPT
By: /s/ Edward B. Putnam
--------------------------------------------
Trustee
By: /s/ Anne L. Putnam
--------------------------------------------
Trustee
/s/ Anne L. Putnam
- -----------------------------------------------
Anne L. Putnam
/s/ Edward B. Putnam
- -----------------------------------------------
Edward B. Putnam, Custodian for
Fitzgerald B. Putnam Under the Uniform
Transfers to Minors Act, Pennsylvania
WEBBMONT HOLDINGS L.P.
By: /s/ Robert W. Fisher
--------------------------------------------
Name: Robert W. Fisher
Title: President, Woodcrest Associates Ltd.
General Partner
- 28 -
<PAGE> 29
SPOTTED DOG FARM, L.P.
By: /s/ Richard H. Stewart
--------------------------------------------
Name: Richard H. Stewart
Title: General Partner
RTM, INC.
By: /s/ Doug Benham
--------------------------------------------
Name: Doug Benham
Title: SVP
/s/ Mark H. Dunaway
- -----------------------------------------------
Mark H. Dunaway
/s/ Marcia M. Dunaway
- -----------------------------------------------
Marcia M. Dunaway
/s/ John J. Hurley
- -----------------------------------------------
John J. Hurley
/s/ Sylvia Hurley
- -----------------------------------------------
Sylvia Hurley
- 29 -
<PAGE> 30
SCHEDULES
4.1 -- Subsidiaries
4.3 -- Capitalization
4.6 -- Financial Statements
4.7 -- Taxes
4.8 -- Litigation
4.9 -- ERISA
4.15 -- Material Contracts
4.16 -- Title to Assets
4.18 -- Environmental
EXHIBITS
Exhibit A -- Schedule of Investors
Exhibit B -- Form of Warrant
Exhibit C -- Certificate of Amendment
Exhibit D -- Second Amendment to Registration Rights Agreement
- 30 -
<PAGE> 31
Exhibit A
<TABLE>
<CAPTION>
Aggregate Purchase
Investor Price for Securities Purchased Shares Warrants
- -------- -------------------- ---------------- ---------
<S> <C> <C> <C>
1. Alta Communications VI, L.P. $5,377,590.00 3,585,060 3,629,873
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Attention: Robert F. Benbow
Facsimile: (415) 362-6178
2. Alta Comm S By S, LLC $ 122,410.50 81,607 82,627
One Embarcadero Center
Suite 4050
San Francisco, CA 94111
Attention: Robert F. Benbow
Facsimile: (415) 362-6178
3. Centennial Fund IV, L.P. $ 169,000.50 112,667 114,075
1428 Fifteenth Street
Denver, CO 80202
Attention: Jeffrey H. Schutz
Facsimile: (303) 405-7575
4. PNC Capital Corp. $ 232,273.50 154,849 156,785
One PNC Plaza
249 5th Ave. & Wood Street
Pittsburgh, PA 15222
Attention: David Hillman
Facsimile: (412) 762-6233
5. Saugatuck Capital Company $ 579,307.50 386,205 391,032
Limited Partnership III
One Canterbury Green
Stamford, CT 06901
Attention: Richard P. Campbell
Facsimile: (203) 324-6995
6. Primus Capital Fund III $ 290,112.00 193,408 195,826
Limited Partnership
5900 Landerbrook Drive
Cleveland, OH 44124
Attention: Kevin J. McGinty
Facsimile: (440) 684-7342
</TABLE>
- 31 -
<PAGE> 32
<TABLE>
<CAPTION>
Aggregate Purchase
Investor Price for securities Purchased Shares Warrants
- -------- -------------------- ---------------- --------
<S> <C> <C> <C>
7. Fleet Equity Partners VI, L.P. $ 173,791.50 115,861 117,310
50 Kennedy Plaza
Providence, RI 02903
Attention: Robert Van Degna
Facsimile: (401) 278-6387
8. Fleet Venture Resources, Inc. $ 405,516.00 270,344 273,722
50 Kennedy Plaza
Providence, RI 02903
Attention: Robert Van Degna
Facsimile: (401) 278-6387
9. T/W Alfred W. Putnam GST $ 60,000.00 40,000 40,500
Exempt
PNC Bank
P.O. Box 7648
Philadelphia, PA 19101
Attention: Tom Melcher
10. Anne L. Putnam $ 25,000.50 16,667 16,875
717 Wyndmoor Avenue
Glenside, PA 19038
11. Edward B. Putnam, $ 15,000.00 10,000 10,125
Custodian for Fitzgerald B.
Putnam Under the Uniform
Transfers to Minors Act,
Pennsylania
8201 St. Martins Lane
Philadelphia, PA 19118
12. Webbmount Holdings L.P. $ 150,000.00 100,000 101,250
1355 Peachtree Street
Suite 1100
Atlanta, GA 30309
Attention: Robert W. Fisher
Facsimile: (404) 853-3501
</TABLE>
- 32 -
<PAGE> 33
<TABLE>
<CAPTION>
Aggregate Purchase
Investor Price for Securities Purchased Shares Warrants
- -------- -------------------- ---------------- --------
<S> <C> <C> <C>
13. Spotted Dog Farm, L.P. $ 100,000.50 66,667 67,500
77 E. Crossville Road
Suite 310
Roswell, GA 30075
Attention: Richard Stewart
Facsimile: (770) 643-8479
14. RTM, Inc. $ 100,000.50 66,667 67,500
5995 Barfield Road
Atlanta, GA 30328
Attention: Douglas Benham
Facsimile: (404) 847-0183
15. Mark H. and Marcia M. $ 100,000.50 66,667 67,500
Dunaway
850 Center Way
Norcross, GA 30071
16. John J. and Sylvia Hurley $ 100,000.50 66,667 67,500
4000 Doves Roost Court
Charlotte, NC 28211
--------------- ----------- ---------
TOTALS: $ 8,000,004.00 5,333,336 5,400,000
</TABLE>
- 33 -
<PAGE> 34
Exhibit B
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY
APPLICABLE STATE SECURITIES ACTS. THESE SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
PREFERRED NETWORKS, INC.
COMMON STOCK PURCHASE WARRANT
Date of Issuance: March [ ], 1998 Certificate No. W - B[ ]
FOR VALUE RECEIVED, Preferred Networks, Inc., a Georgia
corporation (the "Company"), hereby grants [ ] or its registered assigns (the
"Registered Holder") the right to purchase from the Company during the Exercise
Period (as defined below) up to a number of shares of the Company's Warrant
Stock equal to [ ] shares of Warrant Stock at a price per share of $1.50 (as
adjusted from time to time hereunder, the "Exercise Price"). This Warrant is
one of several warrants (collectively, the "Warrants") issued by the Company to
certain investors pursuant to the Class B Senior Redeemable Preferred Stock
Purchase Agreement dated as of March [ ], 1998 (the "Purchase Agreement").
Certain capitalized terms used herein are defined in Section 6 hereof. The
amount and kind of securities obtainable pursuant to the rights granted
hereunder and the Exercise Price for such securities are subject to adjustment
pursuant to the provisions contained in this Warrant.
This Warrant is subject to the following provisions:
1. EXERCISE OF WARRANT.
1.1. Exercise Period. The Registered Holder may exercise, in whole
or in part (but not as to a fractional share of Warrant Stock), the purchase
rights represented by this Warrant at any time and from time to time after the
Date of issuance of this Warrant to and including the fifth anniversary of the
Date of Issuance of this Warrant (the "Exercise Period"). The Company shall
give the Registered Holder written notice of the expiration of the rights
hereunder at least 30 days but not more than 90 days prior to the end of the
Exercise Period.
1.2. EXERCISE PROCEDURE.
(i) This Warrant shall be deemed to have been exercised when
the Company has received all of the following items (the "Exercise Time"):
(a) a completed Exercise Agreement, as described in paragraph
1.3 below, executed by the Person exercising all or part of the
purchase rights represented by this Warrant (the "Purchaser");
(b) this Warrant;
<PAGE> 35
(c) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth in
Exhibit II hereto evidencing the assignment of this Warrant to the
Purchaser, in which case the Registered Holder shall have complied
with the provisions set forth in Section 9 hereof; and
(d) either (1) a check payable to the Company in an amount
equal to the product of the Exercise Price multiplied by the number of
shares of Warrant Stock being purchased upon such exercise.(the
"Aggregate Exercise Price"), (2) the surrender to the Company of debt
or equity securities of the Company having a Market Price equal to the
Aggregate Exercise Price of the Warrant Stock being purchased upon
such exercise (provided that for purposes of this subparagraph, the
Market Price of any note or other debt security or any preferred
stock, unless it is publicly traded, shall be deemed to be equal to
the aggregate outstanding principal amount or liquidation value
thereof plus all accrued and unpaid interest thereon or accrued or
declared and unpaid dividends thereon) or (3) a written notice to the
Company that the Purchaser is exercising the Warrant (or a portion
thereof) by authorizing the Company to withhold from issuance a number
of shares of Warrant Stock issuable upon such exercise of the Warrant
which, when multiplied by the Market Price of the Warrant Stock, is
equal to the Aggregate Exercise Price (and such withheld shares shall
no longer be issuable under this Warrant).
(ii) Certificates for shares of Warrant Stock purchased upon
exercise of this Warrant shall be delivered by the Company to the Purchaser
within five business days after the date of the Exercise Time. Unless this
Warrant has expired or all of the purchase rights represented hereby have been
exercised, the Company shall prepare a new Warrant, substantially identical
hereto, representing the rights formerly represented by this Warrant which have
not expired or been exercised and shall within such five-day period, deliver
such new Warrant to the Person designated for delivery in the Exercise
Agreement.
(iii) The Warrant Stock issuable upon the exercise of this
Warrant shall be deemed to have been issued to the Purchaser and outstanding,
and the Purchaser shall be deemed for all purposes to have become the record
holder of such Warrant Stock, at the Exercise Time.
(iv) The issuance of certificates for shares of Warrant
Stock upon exercise of this Warrant shall be made without charge to the
Registered Holder or the Purchaser for any issuance tax in respect thereof or
other cost incurred by the Company in connection with such exercise and the
related issuance of shares of Warrant Stock. Each share of Warrant Stock
issuable upon exercise of this Warrant shall, upon payment of the Exercise
Price therefor, be fully paid and nonassessable and free from all liens and
charges with respect to the issuance thereof.
(v) The Company shall not close its books against the
transfer of this Warrant or of any share of Warrant Stock issued or issuable
upon the exercise of this Warrant in any manner which interferes with the
timely exercise of this Warrant. The Company shall from time to time take all
such action as may be necessary to assure that the par value per share of the
unissued Warrant Stock acquirable upon exercise of this Warrant is at all times
equal to or less than the Exercise Price then in effect.
(vi) The Company shall assist and cooperate with any
Registered Holder or Purchaser required to make any governmental filings or
obtain any governmental approvals prior
- 2 -
<PAGE> 36
to or in connection with any exercise of this warrant (including, without
limitation, making any filings required to be made by the Company).
(vii) Notwithstanding any other provision hereof, if an
exercise of any portion of this Warrant is to be made in connection with a
registered public offering of the Company's capital stock or the sale of the
Company, the exercise of any portion of this Warrant may, at the election of
the holder hereof, be conditioned upon the consummation of the public offering
or sale of the Company, in which case such exercise shall not be deemed to be
effective until the consummation of such transaction.
(viii) The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Warrant Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Warrant Stock issuable upon the exercise of all outstanding Warrants.
All shares of Warrant Stock which are so issuable shall, when issued, be duly
and validly issued, fully paid and nonassessable and free from all taxes, liens
and charges. The Company shall take all such actions as may be necessary to
assure that all such shares of Warrant Stock may be so issued without violation
of any applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Warrant Stock may be listed
(except for official notice of issuance, which shall be immediately delivered
by the Company upon each such issuance). The Company shall not take any action
that would cause the number of authorized but unissued shares of Warrant Stock
to be less than the number of such shares required to be reserved hereunder for
issuance upon exercise of all of the outstanding Warrants.
(ix) Any certificate for shares of Warrant Stock issued upon
the exercise of this Warrant shall contain a legend in substantially the form
of the legend set forth on the first page of this Warrant except if such
exercise is effected in connection with a registered public offering of the
Company's capital stock and the Warrant Stock issuable upon the exercise of
this Warrant are included in such registered offering.
1.3. EXERCISE AGREEMENT. Upon any exercise of this Warrant, the
Exercise Agreement shall be substantially in the form set forth in Exhibit I
hereto, except that if the shares of Warrant Stock are not to be issued in the
name of the Person in whose name this Warrant is registered, the Exercise
Agreement shall also state the name of the Person to whom the certificates for
the shares of Warrant Stock are to be issued, and if the number of shares of
Warrant Stock to be issued does not include all the shares of Warrant Stock
purchasable hereunder, it shall also state the name of the Person to whom a new
Warrant for the unexercised portion of the rights hereunder is to be delivered.
Such Exercise Agreement shall be dated the actual date of execution thereof
1.4. FRACTIONAL SHARES. If a fractional share of Warrant Stock
would, but for the provisions of paragraph 1.1, be issuable upon exercise of
the rights represented by this Warrant, in lieu of issuing such fractional
share, the Company shall, within five business days after the date of the
Exercise Time, deliver to the Purchaser's order the Company's check payable to
the Purchaser in an amount equal to the difference between the Market Price of
such fractional share as of the date of the Exercise Time and the Exercise
Price of such fractional share.
2. ADJUSTMENT OF EXERCISE PRICE. In order to prevent dilution of the
rights granted under this Warrant, the Exercise Price shall be subject to
adjustment from time to time as provided in this Section 2.
- 3 -
<PAGE> 37
2.1. ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF COMMON STOCK.
(i) If and whenever after the date of this Warrant, the Company issues or sells
in a private placement (including in connection with any acquisition of any
interest in, or any entry into a joint venture with, any business or company),
or in accordance with paragraph 2.2 is deemed to have issued or sold, any share
of Common Stock for a consideration per share less than the Exercise Price in
effect immediately prior to such time, then immediately upon such issue or sale
or deemed issue or sale, the Exercise Price shall be reduced to the lowest
price paid by the purchaser per share at which such share of Common Stock has
been issued or sold or is deemed to have been issued or sold. Notwithstanding
the foregoing, if the Company inadvertently issues or sells, or is deemed to
have issued or sold, any share of Common Stock for a consideration per share
less than the Exercise Price in effect immediately prior to such time, the
Exercise Price shall not be reduced if the Company is able to rescind or
appropriately modify the transaction within a reasonable time after it became
aware of the reduction in the Exercise Price that would otherwise occur.
(ii) Notwithstanding the foregoing and Section 2.2,
there shall be no adjustment to the Exercise Price or the number of shares of
Warrant Stock obtainable upon exercise of this Warrant with respect to (i)
issuance of Common Stock by the Company to co-channel licensees in lieu of cash
owed, not to exceed 350,000 shares of Common Stock in the aggregate, (ii)
issuance of up to 675,994 shares of Common Stock pursuant to options granted by
the Company prior to 1996 to purchase common stock at various prices between
$.97 and $1.50, or (iii) stock issued by the Company to the seller of stock or
assets in an arms length transaction consummated in accordance with the terms
of Section 5. 12 of the Purchase Agreement. Notwithstanding anything to the
contrary set forth herein, in no event shall the Exercise Price at any time be
an amount that is higher than the "Exercise Price" provided for in the Common
Stock Purchase Warrants issued by the Company pursuant to the Class A
Redeemable Preferred Stock Purchase Agreement dated as of May 21, 1997 among
the Company, Fleet Equity Partners, VI, L.P., Centennial Fund IV, L.P. and
certain other persons (such warrants are referred to as the "Class A
Warrants"); and if the "Exercise Price" of the Class A Warrants is adjusted in
accordance with the terms thereof by reason of the issuance of the Warrants,
then the Exercise Price of the Warrants shall initially be the price to which
the "Exercise Price" of the Class A Warrants is so adjusted.
2.2. EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of
determining the adjusted Exercise Price under paragraph 2.1, the following
shall be applicable:
(i) Issuance of Rights or Options. If the Company in any
manner grants or sells any Options and the lowest price per share for which any
one share of Common Stock is issuable upon the exercise of any such Option, or
upon conversion or exchange of any Convertible Security issuable upon exercise
of such Option, is less than the Exercise Price in effect immediately prior to
the time of the granting or sale of such Option, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at such time for such lower price per share. For purposes of this
paragraph, the "lowest price per share for which any one share of Common Stock
is issuable" shall be equal to the sum of the lowest amount of consideration
(if any) paid or payable by the option holder with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option and upon conversion or exchange of the Convertible Security. No further
adjustment of the Exercise Price shall be made upon the actual issue of such
Common Stock or of such Convertible Security upon the exercise of such Options
or upon the actual issue of such Common Stock upon conversion or exchange of
such Convertible Security.
- 4 -
<PAGE> 38
(ii) Issuance of Convertible Securities. If the Company in
any manner issues or sells any Convertible Security and the lowest price per
share for which any one share of Common Stock is issuable upon conversion or
exchange thereof is less than the Exercise Price in effect immediately prior to
the time of such issue or sale, then such share or shares of Common Stock shall
be deemed to be outstanding and to have been issued and sold by the Company at
such time for such lower price per share. For the purposes of this paragraph,
the "lowest price per share for which any one share of Common Stock is
issuable" shall be equal to the sum of the lowest amount of consideration (if
any) paid or payable by the holder of the Convertible Security with respect to
any one share of Common Stock upon the issuance or sale of the Convertible
Security and upon the conversion or exchange of such Convertible Security. No
further adjustment of the Exercise Price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of any Convertible Security, and
if any such issue or sale of such Convertible Security is made upon exercise of
any Options for which adjustments of the Exercise Price had been or are to be
made pursuant to other provisions of this Section 2, no further adjustment of
the Exercise Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock changes at any time, the Exercise Price
in effect at the time of such change shall be adjusted immediately to the
Exercise Price that would have been in effect at such time had such Options or
Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this paragraph 2.2, if the
terms of any Option or Convertible Security that was outstanding as of the Date
of Issuance of this Warrant are changed in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change; provided
that no such change shall at any time cause the Exercise Price to be increased
to an amount in excess of the Exercise Price in effect immediately upon the
issuance of this Warrant.
(iv) Treatment of Expired Options and Unexercised
Convertible Securities. Upon the expiration of any Option or the termination of
any right to convert or exchange any Convertible Securities without the
exercise of such Option or right, the Exercise Price then in effect shall be
adjusted immediately to the Exercise Price that would have been in effect at
the time of such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such expiration or
termination, never been issued; provided that if such expiration or termination
would result in an increase in the Exercise Price then in effect, such increase
shall not be effective until 30 days after written notice thereof has been
given to all holders of the Warrants. For purposes of this paragraph 2.2, the
expiration or termination of any Option or Convertible Security that was
outstanding as of the Date of Issuance of this Warrant shall not cause the
Exercise Price hereunder to be adjusted unless, and only to the extent that, a
change in the terms of such Option or Convertible Security caused it to be
deemed to have been issued after the Date of Issuance of this Warrant.
(v) Calculation of Consideration Received. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor shall be
deemed to be the amount paid by the holder to the Company for such security
(including discounts, commissions and related expenses paid to
- 5 -
<PAGE> 39
independent third parties). In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash (including in
connection with acquisitions), the amount of the consideration other than cash
paid by the holder shall be the fair value of such consideration, except where
such consideration consists of securities, in which case the amount of
consideration received by the Company shall be the Market Price thereof as of
the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving corporation, the amount
of consideration therefor shall be deemed to be the fair value of such portion
of the net assets and business of the non-surviving entity as is attributable
to such Common Stock, Options or Convertible Securities, as the case may be.
The fair value of any consideration other than cash or securities shall be
determined jointly by the Company and the Registered Holders of Warrants
representing a majority of the shares of Warrant Stock obtainable upon exercise
of such Warrants. If such parties are unable to reach agreement within a
reasonable period of time, such fair value shall be determined by an appraiser
jointly selected by the Company and the Registered Holders of Warrants
representing a majority of the shares of Warrant Stock obtainable upon exercise
of such Warrants. The determination of such appraiser shall be final and
binding on the Company and the Registered Holders of the Warrants, and the fees
and expenses of such appraiser shall be paid by the Company.
(vi) Integrated Transactions. In case any Option is issued
in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
shall be deemed to have been issued for a consideration of $.01.
(vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (B) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be
the date of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
2.3. SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to
such subdivision shall be proportionately reduced and the number of shares of
Warrant Stock obtainable upon exercise of this Warrant shall be proportionately
increased. If the Company at any time combines (by reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased and the number of shares of
Warrant Stock obtainable upon exercise of this Warrant shall be proportionately
decreased.
2.4. REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE. Prior to the consummation of any Organic Change, the Company shall make
appropriate provision (in form
- 6 -
<PAGE> 40
and substance satisfactory to the Registered Holders of the Warrants
representing a majority of the Warrant Stock obtainable upon exercise of all
Warrants then outstanding) to ensure that each of the Registered Holders of the
Warrants shall thereafter have the right to acquire and receive, in lieu of or
addition to (as the case may be) the shares of Warrant Stock immediately
theretofore acquirable and receivable upon the exercise of such holder's
Warrant, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for the number of shares of Warrant Stock
immediately theretofore acquirable and receivable upon exercise of such
holder's Warrant had such Organic Change not taken place. In any such case, the
Company shall make appropriate provision (in form and substance satisfactory to
the Registered Holders of the Warrants representing a majority of the Warrant
Stock obtainable upon exercise of all Warrants then outstanding) with respect
to such holders' rights and interests to ensure that the provisions of this
Section 2 and Sections 5 and 6 hereof shall thereafter be applicable to the
Warrants (including, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Exercise Price to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Warrant Stock
acquirable and receivable upon exercise of the Warrants, if the value so
reflected is less than the Exercise Price in effect immediately prior to such
consolidation, merger or sale). The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form and substance satisfactory to the Registered Holders of Warrants
representing a majority of the Warrant Stock obtainable upon exercise of all of
the Warrants then outstanding), the obligation to deliver to each such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
2.5. CERTAIN EVENTS. If any event occurs of the type contemplated
by the provisions of this Section 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
Exercise Price and the number of shares of Warrant Stock obtainable upon
exercise of this Warrant so as to protect the rights of the holders of the
Warrants; provided that no such adjustment shall increase the Exercise Price or
decrease the number of shares of Warrant Stock obtainable as otherwise
determined pursuant to this Section 2.
2.6. NOTICES.
(i) Immediately upon any adjustment of the Exercise Price,
the Company shall give written notice thereof to the Registered Holder, setting
forth in reasonable detail and certifying the calculation of such adjustment.
(ii) The Company shall give written notice to the Registered
Holder at least 20 days prior to the date on which the Company closes its books
or takes a record (A) with respect to any dividend or distribution upon the
Common Stock, (B) with respect to any pro rata subscription offer to holders of
Common Stock or (C) for determining rights to vote with respect to any Organic
Change, dissolution or liquidation.
(iii) The Company shall also give written notice to the
Registered Holders at least 20 days prior to the date on which any Organic
Change, dissolution or liquidation shall take place.
- 7 -
<PAGE> 41
3. MANDATORY EXERCISE OF WARRANT. Upon the occurrence of certain events,
the holder hereof may be required to exercise its right to purchase all but not
less than all of the shares of Common Stock obtainable upon exercise of this
Warrant in accordance with the provisions of Section 7.1 of the Purchase
Agreement.
4. DIVIDENDS. If the Company declares or pays a Dividend, then the
Company shall set aside such Dividend for payment upon exercise of this Warrant
to the Registered Holder of this Warrant the Dividend that would have been paid
to such Registered Holder on the Warrant Stock had this Warrant been fully
exercised immediately prior to the date on which a record is taken for such
Dividend, or, if no record is taken, the date as of which the record holders of
Common Stock entitled to such dividends are to be determined.
5. PURCHASE RIGHTS. If at any time the Company grants, issues or sells
any Purchase Rights, then the Registered Holder of this Warrant shall be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such Holder could have acquired if such Holder
had held the number of shares of Warrant Stock acquirable upon complete
exercise of this Warrant immediately before the date on which a record is taken
for the grant, issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.
6. DEFINITIONS. The following terms have meanings set forth below:
"Common Stock" means the Company's Common Stock, no par value
per share, and except for purposes of the shares obtainable upon exercise of
this Warrant, any capital stock of any class of the Company hereafter
authorized that is not limited to a fixed sum or percentage of par or stated
value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company.
"Convertible Securities" means any stock or securities
(directly or indirectly) convertible into or exchangeable for Common Stock.
"Dividend" means any dividend or other distribution upon the
Common Stock except for a stock dividend payable in shares of Common Stock.
"Market Price" means, as to any security, the average of the
closing prices of such security's sales on all domestic securities exchanges on
which such security may at the time be listed, or, if there have been no sales
on any such exchange on any day, the average of the highest bid and lowest
asked prices on all such exchanges at the end of such day, or, if on any day
such security is not so listed, the average of the representative bid and asked
prices quoted in the NASDAQ System as of 4:00 P.M., New York time, on such day,
or, if on any day such security is not quoted in the NASDAQ System, the average
of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which "Market Price" is
being determined and the 20 consecutive business days prior to such day;
provided that if such security is listed on any domestic securities exchange
the term "business days" as used in this sentence means business days on which
such exchange is open for trading. If at any time such security is not listed
on any domestic securities exchange or quoted in the NASDAQ System or the
domestic over-the-
- 8 -
<PAGE> 42
counter market, the "Market Price" shall be the fair value thereof determined
jointly by the Company and the Registered Holders of Warrants representing a
majority of the Warrant Stock purchasable upon exercise of all the Warrants
then outstanding; provided that if such parties are unable to reach agreement
within a reasonable period of time, such fair value shall be determined by an
appraiser jointly selected by the Company and the Registered Holders of
Warrants representing a majority of the Warrant Stock purchasable upon exercise
of all the Warrants then outstanding. The determination of such appraiser shall
be final and binding on the Company and the Registered Holders of the Warrants,
an. d the fees and expenses of such appraiser shall be paid by the Company.
"Options" means any rights or options to subscribe for or
purchase Common Stock or Convertible Securities.
"Organic Change" means any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of
the Company's assets or other transaction, in each case, which is effected in
such a way that the holders of Common Stock are entitled to receive (either
directly or upon subsequent liquidation) stock, securities or assets with
respect to or in exchange for Common Stock.
"Person" means an individual, a partnership, a joint venture,
a corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
"Purchase Rights" means any Options, Convertible Securities
or rights to purchase stock, warrants, securities or other property pro rata to
the record holders of any class of Common Stock.
"Warrant Stock" means shares of the Company's Common Stock;
provided that if there is a change such that the securities issuable upon
exercise of the Warrant are issued by an entity other than the Company or there
is a change in the type or class of securities so issuable, then the term
"Warrant Stock" shall mean one share of the security issuable upon exercise of
the Warrant if such security is issuable in shares, or shall mean the smallest
unit in which such security is issuable if such security is not issuable in
shares.
Other capitalized terms used in this Warrant but not defined
herein shall have the meanings set forth in the Purchase Agreement.
7. NO VOTING RIGHTS; LIMITATIONS OF LIABILITY. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision hereof, in the absence of affirmative action by
the Registered Holder to purchase Common Stock, and no enumeration herein of
the rights or privileges of the Registered Holder shall give rise to any
liability of such holder for the Exercise Price of Common Stock acquirable by
exercise hereof or as a stockholder of the Company.
8. WARRANT TRANSFERABLE. Subject to the transfer conditions referred to
in the legend endorsed hereon, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Warrant with a properly executed Assignment (in the form
of Exhibit II hereto) at the principal office of the Company.
- 9 -
<PAGE> 43
9. WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is
exchangeable, upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Warrants of like tenor representing in
the aggregate the rights hereunder, and each of such new Warrants shall
represent such portion of such rights as is designated by the Registered Holder
at the time of such surrender. The date the Company initially issues this
Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the
number of times new certificates representing the unexpired and unexercised
rights formerly represented by this Warrant shall be issued. All Warrants
representing portions of the rights hereunder are referred to herein as the
"Warrants."
10. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the
Company (an affidavit of the Registered Holder shall be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the holder is a financial institution or other institutional
investor with capital and surplus in excess of three times the value of the
Common Stock that can be purchased upon exercise of this Warrant, such holder's
agreement shall be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the Company shall (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the same rights represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
11. NOTICES. Except as otherwise expressly provided herein, all notices
referred to in this Warrant shall be in writing and shall be delivered
personally, sent by reputable overnight courier service (charges prepaid) or
sent by registered or certified mail, return receipt requested, postage prepaid
and shall be deemed to have been given when so delivered, sent or deposited in
the U.S. Mail (i) to the Company, at its principal executive offices and (ii)
to the Registered Holder of this Warrant, at such holder's address as it
appears in the records of the Company (unless otherwise indicated by any such
holder).
12. AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the Registered
Holders of Warrants representing at least 66-2/3% of the shares of Warrant
Stock obtainable upon exercise of the Warrants; provided that no such action
may change the Exercise Price of the Warrants or the number of shares or class
of stock obtainable upon exercise of each Warrant without the written consent
of the Registered Holders of Warrants representing at least 85% of the shares
of Warrant Stock obtainable upon exercise of the Warrants.
13. DESCRIPTIVE HEADINGS; GOVERNING LAW. The descriptive headings of the
several Sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. All issues and questions
concerning the construction, validity, enforcement and interpretation of this
Warrant shall be governed by, and construed in accordance with, the laws of the
State of Georgia, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Georgia or any other jurisdiction)
that would cause the application of the domestic substantive laws of any
jurisdiction other than the State of Georgia.
- 10 -
<PAGE> 44
IN WITNESS Whereof, the Company has caused this Warrant to be signed and
attested by its duly authorized officers under its corporate seal and to be
dated the Date of Issuance hereof
PREFERRED NETWORKS, INC.
By
-----------------------------
Its
----------------------------
[Corporate Seal]
Attest:
- -----------------------------------
Title:
-----------------------------
- 11 -
<PAGE> 45
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
The undersigned, pursuant to the provisions set forth in the
attached Warrant (Certificate No. W-B[ ]), hereby agrees to subscribe for the
purchase of___________ shares of the Common Stock covered by such Warrant and
makes payment herewith in full therefor at the price per share provided by such
Warrant.
Payment shall be made by (check one of the following):
_____ 1. Delivery of $________ transmitted hereby by check.
_____ 2. Delivery of stock certificate no(s). ____________
and surrender of____ shares of the Company's _________ stock evidenced thereby
having a Market Price on the date hereof of $_______ (computed in accordance
with the definition of Market Price set forth in Section 7 of the Warrant)(i.e.
a "cashless" exercise).
_____ 3. Delivery of the Company's _______ Note in the
aggregate principal amount of $_______ and surrender of $_______ in principal
amount thereof, plus accrued and unpaid interest in the amount of $________
having a Market Price on the date hereof of $___________ (computed in
accordance with the definition of Market Price set forth in Section
7 of the Warrant)(i.e. a "cashless" exercise).
_____ 4. Surrender of_________ shares of Warrant Stock,
exerciseable under Warrant No. having a Market Price on the date hereof of
$_________ (computed in accordance with the definition of Market Price set
forth in Section 6 of the Warrant)(i.e., a net issuance exercise).
Signature
-------------------------
Address
---------------------------
- 12 -
<PAGE> 46
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED, _____________________________ hereby
sells, assigns and transfers all of the rights of the undersigned under the
attached Warrant (Certificate No. W-B[ ]) with respect to the number of shares
of the Common Stock covered thereby set forth below, unto:
Names of Assignee Address No. of Shares
Signature
----------------------
----------------------
Witness
------------------------
- 13 -
<PAGE> 47
Exhibit C
ARTICLES OF AMENDMENT
OF
PREFERRED NETWORKS, INC.
I.
The name of the corporation, which was organized under the Georgia
Business Corporation Code, is "Preferred Networks, Inc."
II.
The amendment adopted is to amend Article III of the Articles of
Incorporation of the Corporation to create a new series of Preferred Stock of
the Corporation, designated as Class B Senior Redeemable Preferred Stock, by
adding the following to the existing Article III:
The Board of Directors of the Corporation hereby authorizes
the issuance of up to 5,500,000 shares of Preferred Stock, designated
Class B Senior Redeemable Preferred Stock (the "Class B Preferred
Stock"), which shall have the following rights, preferences, powers,
privileges, restrictions, qualifications, and limitations:
1. DIVIDENDS. The holders of the Class B Preferred
Stock shall be entitled to receive, out of funds legally available
therefor, dividends at a rate per annum of fifteen percent (15%) on
the liquidation value of $1.50 per share (as calculated in accordance
with the provisions of this Section 1, the "Accruing Dividends").
Accruing Dividends shall accrue from day to day, beginning on the date
of issuance of the Class B Preferred Stock and continue through the
date the Liquidation Preference Payments (as defined below) on the
Class B Preferred Stock are paid in full in cash. Accruing Dividends
shall accrue whether or not declared, and whether or not there are
profits, surplus or other funds of the Corporation legally available
for the payment of dividends, shall be cumulative, and shall be
compounded annually. The Corporation shall not be obligated to declare
or pay Accruing Dividends except as set forth in Sections 2 and 4
herein.
2. LIQUIDATION, DISSOLUTION OR WINDING UP; CERTAIN
MERGERS, CONSOLIDATIONS AND ASSET SALES. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution
to shareholders shall be paid out, prior to and in preference over any
payment in respect of the shares of Common Stock or shares of the
Corporation's Class A Redeemable Preferred Stock (the "Class A
Preferred Stock") then outstanding, as follows: each holder of Class B
Preferred Stock shall be entitled to be paid in full in cash the sum
of (i) one dollar and fifty cents ($1.50) per share of Class B
Preferred Stock held by such holder plus (ii) all Accruing Dividends
unpaid thereon (whether or not declared) and any other dividends, if
any, declared but unpaid thereon, calculated to the date payment
thereof is made (such sum payable with respect to each
<PAGE> 48
share of Class B Preferred Stock being sometimes referred to as the
"Liquidation Preference Payments"). If upon such liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed among the holders of the
Class B Preferred Stock shall be insufficient to permit payment in
full to the holders of Class B Preferred Stock of the Liquidation
Preference Payments, then the entire assets of the Corporation to be
so distributed shall be distributed ratably among the holders of Class
B Preferred Stock. Upon any such liquidation, dissolution or winding
up of the Corporation, immediately after the holders of Class B
Preferred Stock shall have been paid in full the Liquidation
Preference Payments, the remaining net assets of the Corporation
available for distribution shall be distributed first, ratably among
the holders of Class A Preferred Stock until the holders of Class A
Preferred Stock shall have received an amount equal to the
"Liquidation Preference Payments" on account of the Class A Preferred
Stock as provided in Section 2 of the Class A Terms (as defined in
Section 4.2 below), plus interest, if any, pursuant to Section 4.5 of
the Class A Terms, and second, ratably among the holders of Common
Stock. Written notice of such liquidation, dissolution or winding up,
stating a payment date, the amount of the Liquidation Preference
Payments and the place where the Liquidation Preference Payments shall
be payable, shall be delivered in person, mailed by certified or
registered mail, return receipt requested, or sent by telecopier or
telex, not less than 20 days prior to the payment date stated therein,
to the holders of record of Class B Preferred Stock, such notice to be
addressed to each such holder at its address as shown by the records
of the Corporation. The consolidation or merger of the Corporation
into or with any other entity or entities that results in the exchange
of outstanding shares of the Corporation for securities or other
consideration issued or paid or caused to be issued or paid by any
such entity or affiliate thereof (other than a merger the sole purpose
of which is to reincorporate the Corporation in a different
jurisdiction) and the sale, lease, abandonment, transfer or other
disposition by the Corporation of all or substantially all its assets
shall, unless otherwise provided in a notice signed by the holders of
not less than seventy-five percent (75%) of the then issued and
outstanding Class B Preferred Stock delivered to the Corporation on or
prior to the date of any such transaction, be deemed to be a
liquidation, dissolution or winding up of the Corporation within the
meaning of the provisions of this Section 2.
3. VOTING. 3.1 Voting. Each holder of outstanding
shares of Class B Preferred Stock shall be entitled to one vote with
respect to any and all matters presented to the shareholders of the
Corporation for their action or consideration and shall be entitled to
notice of any shareholder meetings in accordance with the
Corporation's bylaws. Except as provided by law, by the provisions of
Subsections 3.2 and 3.3 below or by the provisions establishing any
other series of Preferred Stock, holders of Class B Preferred Stock
and of any other outstanding series of Preferred Stock shall vote
together with the holders of Common Stock as a single class.
-2-
<PAGE> 49
3.2 Directors. The holders of the Class B Preferred
Stock, voting as a separate class, shall be entitled to elect one (1)
director of the Corporation.
3.3 Restrictive Provisions. Except as expressly provided
herein or as required by law, so long as any shares of Class B
Preferred Stock remain outstanding, the Corporation shall not without
the vote of or written consent by the holders of at least two-thirds
of the then outstanding shares of Class B Preferred Stock voting as a
class:
(a) take any action that (i) directly or
indirectly amends, alters or repeals the preferences, special rights
or other powers of the Class B Preferred Stock, so as to affect
adversely the Class B Preferred Stock, including, without limiting the
generality of the foregoing, the authorization, creation or issuance
of any shares of capital stock or other securities (other than Common
Stock) with preference or priority equal or superior to the Class B
Preferred Stock or on a parity with the Class B Preferred Stock in any
regard, including, without limitation, redemption rights and the right
to receive either dividends or amounts distributable upon liquidation,
dissolution or winding up of the Corporation, or (ii) increases the
authorized number of shares of Class B Preferred Stock or (iii) causes
the issuance of any authorized but unissued shares of Class B
Preferred Stock;
(b) redeem, purchase or otherwise acquire for
consideration any shares of its capital stock (or rights, options or
warrants to purchase such shares), other than, in accordance with the
priority set forth herein with respect to the redemption of Class A
Preferred Stock and Class B Preferred Stock, (i) the Securities as
defined in the Class A Redeemable Preferred Stock Purchase Agreement
dated as of May 21, 1997 entered into between the Corporation and the
Investors set forth therein and (ii) the Class B Preferred Stock as
provided for herein;
(c) approve any material change in the line of
business of the Corporation or any Subsidiary;
(d) enter into any merger, consolidation or
amalgamation, or any recapitalization, or liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution) or convey,
sell, lease, assign, transfer or otherwise dispose of all or
substantially all of its business, assets or property;
(e) amend its Articles of Incorporation or
Bylaws, if such amendment would directly or indirectly change any
material rights, preferences, privileges or limitations provided to
the holders of Class B Preferred Stock therein, or change the size of
the Board of Directors or the procedures for meetings of the Board of
Directors and shareholders, including without limitation, notice and
quorum requirements;
-3-
<PAGE> 50
(f) increase the dividend rate applicable to
the Class A Preferred Stock, permit Class A Preferred Stock to be
converted into Common Stock or any other equity or debt security or
instrument of the Corporation or otherwise change, directly or
indirectly, the rights, powers or preferences of the Class A Preferred
Stock in a manner that adversely affects the holders of Class B
Preferred Stock;
(g) enter into any acquisition or series of
related acquisitions involving an aggregate transaction value equal to
or greater than $5,000,000; or
(h) increase its indebtedness for borrowed
money in one or more transactions, whether or not related, in an
aggregate amount of $5,000,000 in excess of the amount of the
Corporation's existing indebtedness and availability under existing
credit facilities immediately preceding the date of initial issuance
of the Class B Preferred Stock.
4. REDEMPTION. 4.1 Voluntary Redemption. The
Corporation, at its option, may at any time redeem all but not less
than all of the Class B Preferred Stock for an amount per share equal
to the Liquidation Preference Payments on the Class B Preferred Stock
as of the date such amount is paid in full in cash.
4.2 Mandatory Redemption. On the earlier of (i) March
17, 2003 or (ii) the date as of which the Corporation proposes to
effect the redemption of the Class A Preferred Stock at the election
of the Corporation pursuant to notice given by the Corporation to the
holders of Class A Preferred Stock pursuant to Section 4.1 of the
Articles of Amendment filed June 16, 1997 creating the Class A
Preferred Stock (the "Class A Terms") or (iii) the date as of which
the Corporation is required to effect redemption of any Class A
Preferred Stock pursuant to notice given by any holder of Class A
Preferred Stock to the Corporation pursuant to Section 4.2 of the
Class A Terms (in any such case, the "Redemption Date") each holder of
Class B Preferred Stock shall be entitled to require the Corporation
to redeem all outstanding shares of Class B Preferred Stock held by
such holder, prior to the Corporation redeeming any shares of Class A
Preferred Stock or any other class or series of its outstanding
capital stock, making any other payment or distribution on account of
the Class A Preferred Stock (including, without limitation pursuant to
Section 4.5 of the Class A Terms) or any other class or series of its
outstanding capital stock, or setting aside any funds for such
purposes, at a price per share calculated as follows (in either case,
the "Redemption Price"):
(a) If the Redemption Date is on or prior to
March 17, 2001, the Redemption Price per share shall be equal to the
sum of (i) the Liquidation Preference Payments on the Class B
Preferred Stock as of the date such amount is paid in full in cash,
plus (ii) all additional Accruing Dividends that would have accrued on
the Class B
-4-
<PAGE> 51
Preferred Stock from the date of such redemption through March 17,
2001 had such redemption not occurred.
(b) If the Redemption Date is after March 17,
2001, the Redemption Price per share shall be equal to the Liquidation
Preference Payments on the Class B Preferred Stock as of the date such
amount is paid in full in cash.
4.3 Redemption Mechanics. At least 60 days prior to the
Redemption Date (in the case of Section 4.2(i) or (ii) above), or, in
the case of Section 4.2(iii) above, no more than three days following
the Corporation's receipt of notice of redemption from a holder of
Class A Preferred Stock, written notice of the Redemption Date,
including a copy of any notice of redemption delivered by a holder of
Class A Preferred Stock in the case of Section 4.2(iii) (in any such
case, the "Redemption Notice") shall be delivered by the Corporation
to each holder of Class B Preferred Stock by delivery in person of the
Redemption Date. At any time on or prior to five days before the
Redemption Date (and, in the case of Section 4.2(iii) above, not less
than 10 days after delivery of the Redemption Notice, even if such
date is after the Redemption Date), written notice shall be given to
the Corporation by each holder of Class B Preferred Stock who desires
to require the Corporation to redeem shares of Class B Preferred
Stock, notifying the Corporation of such redemption and specifying the
number of shares of Class B Preferred Stock to be redeemed from such
holder. From and after the close of business on a Redemption Date,
unless there shall have been a default in the payment of the
Redemption Price, all rights of holders of Class B Preferred Stock
electing to require the Corporation to redeem the Class B Preferred
Stock held by each of them (except the right to receive the Redemption
Price) shall cease with respect to the shares to be redeemed on such
Redemption Date, and such shares shall not thereafter be transferred
on the books of the Corporation or be deemed to be outstanding for any
purpose whatsoever. If the funds of the Corporation legally available
for redemption of the Class B Preferred Stock on the Redemption Date
are insufficient to redeem the total number of Class B Preferred Stock
electing to be redeemed on such Redemption Date, the holders of such
shares shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts that
would be payable to them if the full number of shares to be redeemed
on such Redemption Date were actually redeemed. The Class B Preferred
Stock required to be redeemed but not so redeemed shall remain
outstanding and entitled to all rights and preferences provided
herein. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of such Class B
Preferred Stock, such funds will be used, at the end of the next
succeeding fiscal quarter, to redeem the balance of such shares, or
such portion thereof for which funds are then legally available, on
the basis set forth above.
4.4 Redeemed or Otherwise Acquired Shares to be Retired.
Any shares of Class B Preferred Stock redeemed pursuant to this
Section 4 or otherwise acquired by the
-5-
<PAGE> 52
Corporation in any manner whatsoever shall be canceled and shall not
under any circumstances be reissued; and the Corporation may from time
to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of shares of authorized Class B
Preferred Stock.
4.5 Failure to Redeem. If the Corporation fails, for any
reason or for no reason, to redeem on the Redemption Date any of the
then outstanding Class B Preferred Stock elected by the holders
thereof to be redeemed in accordance with the terms and conditions of
this Section 4, eighty percent (80%) of the Accruing Dividends that
accrue from and after such Redemption Date (the "Cash Dividends")
shall be payable in cash and shall be due and payable on the first day
of each month after the Redemption Date. Cash Dividends paid by the
Corporation shall satisfy Accruing Dividends in an equal amount, and
such Accruing Dividends shall not be duplicated in determining the
Redemption Price or for any other purpose. If, as of each yearly
anniversary of the Redemption Date, the Corporation shall have failed
to pay in full the Cash Dividends for the immediately preceding
12-month period, the Redemption Price shall be recomputed on the basis
that Accruing Dividends for such 12-month period had accrued at an
annually compounding rate per annum of twenty percent (20%). If any
redemption elected by the holders of Class B Preferred Stock has not
been made in full on or before the first anniversary of the Redemption
Date, then, in addition to the rights of the holders of Class B
Preferred Stock set forth herein and arising at law or in equity, upon
the written request of the holders of two-thirds of the then
outstanding Class B Preferred Stock the Corporation shall take all
actions necessary to submit a proposal to sell capital stock or assets
of the Corporation sufficient to enable the Corporation to pay the
Redemption Price in full for stockholder approval including, without
limitation, the engagement of an investment banking firm reasonably
acceptable to the holders of two-thirds of the then outstanding Class
B Preferred Stock.
4.6 Failure to Surrender. Should any holder of Class B
Preferred Stock redeemed pursuant to this Section 4 fail to surrender
the certificate or certificates representing the shares to be
redeemed, the Corporation may transfer the money distributable upon
the redemption to a trustee for such holder in accordance with and
with the effect set forth in Section 14-2-641(b) of the Georgia
Business Corporation Code, or any successor provision.
4.7 Ranking. The Corporation shall not pay any dividend on,
redeem or make any other payment or distribution on account of (or set
aside any funds for such purpose) capital stock of any class or
series, including, without limitation, any shares of Class A Preferred
Stock (including, without limitation, making any payment pursuant to
Section 4.5 of the Class A Terms) while any shares of Class B
Preferred Stock shall remain outstanding.
-6-
<PAGE> 53
III.
The date of the adoption of the amendment was March 16, 1998.
IV.
The amendment was duly adopted by the Board of Directors of the
Corporation in accordance with the provisions of O.C.G.A. Section 14-2-602.
* * * * *
-7-
<PAGE> 54
DULY EXECUTED and delivered by the undersigned on March 17, 1998.
PREFERRED NETWORKS, INC.
By:
------------------------------
Michael J. Saner
President
* * * * *
-8-
<PAGE> 55
Exhibit D
SECOND AMENDMENT TO
REGISTRATION RIGHTS AGREEMENT
This Second Amendment to Registration Rights Agreement (this
"Amendment") is dated as of March 17, 1998 by and among Preferred Networks,
Inc., a Georgia corporation (the "Company") and each of the Persons listed as a
Stockholder on the signature pages to this Amendment (referred to herein
collectively as the "Stockholders").
The Company and the Stockholders have entered into a Registration
Rights Agreement dated as of June 21, 1995, as amended (the "Registration
Rights Agreement"). Subsequent to entering into the Registration Rights
Agreement, the Company and the Stockholders consented to certain actions by the
Company and waived compliance with certain provisions of the Registration
Rights Agreement pursuant to that certain Consent and Waiver Agreement dated as
of September 12, 1996 and that certain Second Waiver and Consent Agreement,
dated as of November 12, 1996, and amended the Registration Rights Agreement
pursuant to that certain Amendment to Registration Rights Agreement dated as of
June 16, 1997 (the "First Amendment").
The Company and certain investors, including certain of the persons
defined as Primary Holders in the Registration Rights Agreement, are parties to
a Class B Senior Redeemable Preferred Stock Purchase Agreement dated as of
March 17, 1998 (the "1998 Purchase Agreement").
It is a condition to closing under the 1998 Purchase Agreement that
the Registration Rights Agreement be amended as set forth herein.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
and agreements of the parties herein and in the Registration Rights Agreement,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows:
1. Defined Terms. Capitalized terms not defined in this
Amendment are used as defined in the Registration Rights Agreement, including
the First Amendment.
2. Definition of "Primary Holders". The definition of "Primary
Holders" set forth in the first paragraph of the preamble to the Registration
Rights Agreement is hereby expanded to include all persons purchasing stock and
warrants pursuant to the 1998 Purchase Agreement.
<PAGE> 56
3. Section 1(a)(i). Section 1(a)(i) of the Registration Rights
Agreement is hereby amended by adding the following at the end thereof:
Holders of at least 33.33% of the Class B Warrant Securities shall
also be entitled to request Primary Demand Registrations, provided the
estimated aggregate offering value for all securities included in such
a registration initiated by the Class B Holders is at least
$5,000,000.
4. Section 7(f). Section 7(f) of the Registration Rights
Agreement is hereby amended to read in full as follows:
"Warrants" means the contingent stock purchase warrants
issued to the Primary Holders pursuant to the Purchase Agreement, the stock
purchase warrants issued to the Primary Holders pursuant to Sections 1.3 and
1.4 of the 1997 Purchase Agreement, and the stock purchase warrants issued to
the Class B Holders pursuant to the 1998 Purchase Agreement.
5. Section 7. Section 7 is amended by adding the following new
defined terms:
"Class B Holder" means a holder of Class B Warrant Securities.
"Class B Warrant Securities" means the stock purchase
warrants issued pursuant to the 1998 Purchase Agreement and Common Stock issued
upon the exercise of such warrants.
6. No Other Effect. Except as specifically set forth in this
Amendment, the Registration Rights Agreement shall remain in full force and
effect.
7. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be an original and each of which shall
constitute one and the same amendment. Any party may deliver an executed copy
of this Amendment by facsimile transmission to the other parties and such
delivery shall have the same force and effect as delivery of a manually signed
copy of this Amendment.
[signatures on following pages]
2
<PAGE> 57
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
THE COMPANY: PREFERRED NETWORKS, INC.
March ____, 1998 By:
---------------------------------------
Its:
--------------------------------------
THE STOCKHOLDERS:
FLEET EQUITY PARTNERS VI, L.P.
By: Fleet Growth Resources II, Inc.
Its: General Partner
March ____, 1998 By:
-----------------------------
Its:
-----------------------------
Address: 50 Kennedy Plaza
Providence, RI 02903
FLEET VENTURE RESOURCES, INC.
March ____, 1998 By:
---------------------------------------
Its:
--------------------------------------
Address: 50 Kennedy Plaza
Providence, RI 02903
3
<PAGE> 58
CHISHOLM PARTNERS II, L.P.
By: Silverado II, L.P.
Its: General Partner
By: Silverado II Corp.
Its: General Partner
March ____, 1998 By:
----------------------
Its:
----------------------
Address: 50 Kennedy Plaza
Providence, RI 02903
ALTA COMMUNICATIONS, VI, L.P.
By: Alta Communications VI Management
Partners, L.P.
Its: General Partner
March ____, 1998 By:
--------------------------------
Its:
--------------------------------
Address: One Embarcadero Ctr.
Suite 4050
San Francisco, CA 94111
ALTA COMM S BY S, LLC
March ____, 1998 By:
-----------------------------------------
Its:
-----------------------------------------
Address: One Embarcadero Ctr.
Suite 4050
San Francisco, CA 94111
4
<PAGE> 59
CENTENNIAL FUND IV, L.P.
By: Centennial Holdings IV, L.P.
Its: General Partner
March ____, 1998 By:
----------------------------
Its:
----------------------------
Address: 1428 Fifteenth Street
Denver, CO 80202
SAUGATUCK CAPITAL COMPANY
LIMITED PARTNERSHIP III
By: Greyrock Partners
Its: General Partner
March ____, 1998 By:
----------------------------
Its:
----------------------------
Address: One Canterbury Green
Stamford, CT 06901
5
<PAGE> 60
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners III
Limited Partnership
Its: General Partner
By: Primus Venture Partners, Inc.
Its: General Partner
March ____, 1998 By:
------------------------
Its:
------------------------
Address: 5900 Landerbrook Drive
Suite 200
Cleveland, OH 44124
PNC CAPITAL CORP.
March ____, 1998 By:
----------------------------------------
Its:
----------------------------------------
Address: One PNC Plaza, 19th Floor
249 5th Ave & Wood Street
Pittsburgh, PA 15222
DAVID M. ELLIS
March ____, 1998 By:
----------------------------------------
Address: 22 Arden Place
Short Hills, NJ 07078
6
<PAGE> 61
PETER J. BICHE
March ____, 1998 By:
-------------------------------------
Address: 5 Deepwater Court
Edgewater, MD 21037
HOFFMAN INVESTMENT COMPANY
March ____, 1998 By:
-------------------------------------
Address: Attn: Bette Hoffman
1464 Hunter Road
Rydal, PA 19046
K. MITCHELL POSNER
March ____, 1998 By:
-------------------------------------
Address: 7 Druim Moir Ct.
Philadelphia, PA 19116
EDWARD BEALE PUTNAM
March ____, 1998 By:
-------------------------------------
Address: 8201 St. Martins Lane
Philadelphia, PA 15243
KATHRYN PUTNAM
March ____, 1998 By:
-------------------------------------
Address: 850 Center Way
Norcross, GA 30071
7
<PAGE> 62
MICHAEL J. DAVIES
March ____, 1998 By:
------------------------------------
Address: 15925 Old York Road
Monkton, MD 21111
SETH J. LEHR
March ____, 1998 By:
------------------------------------
Address: 1637 Paper Mill Road
Meadowbrook , PA 19046
ADVANCED TECHNOLOGY
DEVELOPMENT FUND II
March ____, 1998 By:
------------------------------------
Its:
------------------------------------
Address: 1000 Abernathy Road
Suite 1420
Atlanta, GA 30328
RICHARD H. STEWART
March ____, 1998 ----------------------------------------
Address: 77 E. Crossville Road
Suite 310
Roswell, GA 30075
8
<PAGE> 63
FISHER FINANCIAL CORP.
March ____, 1998 By:
------------------------------------
Its:
------------------------------------
Address: 1355 Peachtree Street
Suite 1700
Atlanta, GA 30309
DIGITAL COMMUNICATIONS
March ____, 1998 By:
------------------------------------
Its:
------------------------------------
Address: 319 Peachtree Parkway
Peachtree City, GA 30269
IDA AKERS MORRIS TRUST
March ____, 1998 By:
------------------------------------
Its:
------------------------------------
Address: 1000 Brickell Avenue
Suite 1200
Miami, FL 33131
TRUST B. UNDER AGREEMENT DATED
12/31/76 WITH I. WALTER FISHER
March ____, 1998 By:
------------------------------------
Its:
------------------------------------
Address: 1355 Peachtree Street
Suite 1725
Atlanta, GA 30309
9
<PAGE> 64
STEVEN E. FOX
March ____, 1998
-------------------------------------
Address: 2700 International Tower
Peachtree Center
229 Peachtree Street
Atlanta, GA 30303
STEPHEN R. LEEDS
March ____, 1998
-------------------------------------
Address: 2700 International Tower
Peachtree Center
229 Peachtree Street
Atlanta, GA 30303
HUNTER R. HUGHES
March ____, 1998
-------------------------------------
Address: 2700 International Tower
Peachtree Center
229 Peachtree Street
Atlanta, GA 30303
MICHAEL ROSENZWEIG
March ____, 1998
-------------------------------------
Address: 2700 International Tower
Peachtree Center
229 Peachtree Street
Atlanta, GA 30303
10
<PAGE> 65
DAN F. LANEY
March ____, 1998
-------------------------------------
Address: 2700 International Tower
Peachtree Center
229 Peachtree Street
Atlanta, GA 30303
RICHARD H. SINKFIELD
March ____, 1998
-------------------------------------
Address: 2700 International Tower
Peachtree Center
229 Peachtree Street
Atlanta, GA 30303
SAMUEL L. WORNOM, III
March ____, 1998
-------------------------------------
Address: 318 C Court Square
Sanford, NC 27330
SANDRA L. WORNOM
March ____, 1998
-------------------------------------
Address: 318 C Court Square
Sanford, NC 27330
FRANK E. PROCTOR
March ____, 1998
-------------------------------------
Address: 345 E. 57th Street
Apt. 15B
New York, NY 10022
11
<PAGE> 66
LLOYD M. SMITH
March ____, 1998
--------------------------------------
Address: 14270 Phillips Circle
Alpharetta, GA 30201
ELIZABETH G. SMITH
March ____, 1998
--------------------------------------
Address: 14270 Phillips Circle
Alpharetta, GA 30201
RTM, INC.
March ____, 1998 By:
----------------------------------
Its:
----------------------------------
Address: 5995 Barfield Road
Atlanta, GA 30328
DOUGLAS N. BENHAM
March ____, 1998
--------------------------------------
Address: 4 Lullwater Estates Road
Atlanta, GA 30307
BERTIL D. NORDIN
March ____, 1998
--------------------------------------
Address: 14 Ball Creek Way
Dunwoody, GA 30350
12
<PAGE> 67
MARK H. DUNAWAY
March ____, 1998
-------------------------------------
Address: 850 Center Way
Norcross, GA 30071
MARCIA M. DUNAWAY
March ____, 1998
-------------------------------------
Address: 850 Center Way
Norcross, GA 30071
MICHAEL J. SANER
March ____, 1998
-------------------------------------
Address: 850 Center Way
Norcross, GA 30071
SANER COMMUNICATIONS, INC.
March ____, 1998 By:
---------------------------------
Its:
---------------------------------
Address: 850 Center Way
Norcross, GA 30071
13
<PAGE> 68
EUGENE H. KREEFT
March ____, 1998
--------------------------------------
Address: 850 Center Way
Norcross, GA 30071
BILL G. HAMPTON
March ____, 1998
--------------------------------------
Address: 3100 Briarcliff Road, #470
Atlanta, GA 30329
JOHN P. BUTORAC
March ____, 1998
--------------------------------------
Address: 3306 Cove Circle
Stockton, CA 95204
AZURE LIMITED PARTNERSHIP I
March ____, 1998 By:
----------------------------------
Its:
----------------------------------
Address: 13 Eagles Nest Drive
Laconner, WA 98257
3-2-1 INVESTMENT COMPANY
March ____, 1998 By:
----------------------------------
Its:
----------------------------------
Address: 505 Madison Street, #220
Seattle, WA 98104
14
<PAGE> 69
THOMAS L. WINDLER
March ____, 1998
---------------------------------------
Address: 5 Concourse Parkway
Suite 3000
Atlanta, GA 30328
TRANSIT COMMUNICATIONS,
U.S.A., L.P.
March ____, 1998 By:
-----------------------------------
Its:
-----------------------------------
Address: 88 E. Crossville Road
Suite 310
Roswell, GA 30075
* * *
15
<PAGE> 1
EXHIBIT 10.36
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") dated as of
March 19, 1998, by and among PNI SYSTEMS, LLC, a Georgia limited liability
company (the "Company"), PREFERRED NETWORKS, INC., a Georgia corporation (the
"Parent", the Parent, together with the Company, the "Borrowers"), and
NATIONSBANK, N.A., successor to NationsBank, N.A. (South) (the "Lender").
WHEREAS, the Borrowers and the Lender have entered into that certain
Credit Agreement dated as of August 8, 1996, as amended as of December 20, 1996,
as of March 12, 1997 and as of April 11, 1997 (as so amended, the "Credit
Agreement"); and
WHEREAS, the Borrowers and the Lender desire to amend certain provisions
of the Credit Agreement on the terms and conditions contained herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
hereto hereby agree as follows:
Section 1. General Amendments to Credit Agreement. The parties hereto
agree that the Credit Agreement is amended as follows:
(a) The Credit Agreement is amended by deleting from Section 1.1 thereof
the definitions of the terms "Borrowing Base", "Net Proceeds", "Parent
Commitment" and "Termination Date" in their entirety and substituting in their
respective places the following:
"'Borrowing Base' shall mean at any time an amount equal to the
sum of:
(i) 75% of the face value of Eligible Receivables of the
Parent due and owing at such time, plus
(ii) 75% of the face value of Eligible Receivables of the
Company and the other Subsidiaries of the Parent due and owing at
such time, plus
(iii) the lesser of
(A) the sum of
(1) 40% of the lesser of cost (computed on a
first-in-first-out basis) and fair market value of Eligible
Inventory of the Parent at such time, plus
<PAGE> 2
(2) 40% of the lesser of cost (computed on a
first-in-first-out basis) and fair market value of Eligible
Inventory of the Company at such time, and
(B) $750,000."
"'Net Proceeds' shall mean, with respect to an Equity Issuance or
issuance of Subordinated Debt, the aggregate amount of all cash received
by the Parent in respect of such Equity Issuance or issuance of
Subordinated Debt net of investment banking fees, legal fees, accountants
fees, underwriting discounts and commissions and other customary fees and
expenses actually incurred by the Parent in connection with such Equity
Issuance or issuance of Subordinated Debt."
"'Parent Commitment' shall mean the obligation of the Lender to
make Parent Loans to the Parent in an aggregate principal amount at any
one time outstanding up to but not exceeding $3,750,000."
"'Termination Date' shall mean July 30, 2000."
(b) The Credit Agreement is amended by adding to the second line of the
definition of "Eligible Receivable" in Section 1.1 after the words "of the
Borrowers" the words "and their Subsidiaries".
(c) The Credit Agreement is amended by adding to Section 1.1 the
following new definitions in the appropriate alphabetical locations:
"Pro Forma Financial Statements" shall mean the pro forma
projected consolidated income statements, balance sheets and statements
of cash flows reflecting the forecasted financial condition and results
of operations of the Parent and its Subsidiaries on a quarterly basis for
the fiscal years ending December 31, 1998 and December 31, 1999, copies
of which are attached hereto as Exhibit A, as the same may be modified
from time to time with the written approval of the Lender (which may be
withheld in its sole and absolute discretion).
"Projected EBITDA" shall mean, for any fiscal period, the EBITDA
of the Parent and its Subsidiaries on a consolidated basis calculated
based upon the financial information contained in the Pro Forma Financial
Statements.
(d) The Credit Agreement is amended by deleting Section 2.4 thereof in
its entirety and substituting in its place the following:
"2.4 REPAYMENT OF LOANS
-2-
<PAGE> 3
(a) Company Loan. The principal balance of the Company Loan
shall be repaid in 18 consecutive monthly installments due and
payable on the last day of each calendar month, with the first
such installment being due on February 28, 1999. The first 17 such
installments shall each be in an amount equal to $120,833.33 and
the final installment shall be equal to the remaining principal
balance of the Company Loan. Notwithstanding the foregoing, on the
Termination Date, the aggregate principal amount of all Company
Loans then outstanding shall be due and payable in full.
(b) Parent Loans. On the Termination Date, the aggregate
principal amount of all Parent Loans then outstanding shall be due
and payable in full."
(e) The Credit Agreement is amended by deleting subsection (e) of Section
2.8 thereof in its entirety and substituting in its place the following:
"(e) During the period from the date of this Agreement to the
Termination Date, the Borrowers shall pay to the Lender any fees and
expenses incurred by the Lender and by NationsBank Business Credit
Services in connection with any monitoring and auditing relating to the
credit facilities and the Borrowers.
(f) All fees shall be fully earned and non-refundable upon
receipt."
(f) The Credit Agreement is amended by adding the following sentence to
the end of Section 2.10:
"Optional prepayments of Company Loans shall be applied to reduce
scheduled repayments of such Company Loans in inverse order of maturity."
(g) The Credit Agreement is amended by deleting clause (iv) of clause (d)
of the first sentence of Section 7.1 thereof in its entirety and substituting in
its place the following:
"(iv) if the amount of consideration (as determined as provided in the
definition of the term "Significant Acquisition") to be paid by the
Parent, the Company and their respective Subsidiaries in connection with
such Acquisition is greater than or equal to $250,000, the Lender shall
have given its prior written consent to such Acquisition."
(h) The Credit Agreement is amended by deleting Section 8.1 thereof in
its entirety and substituting in its place the following:
"8.1 CASH REQUIREMENT
-3-
<PAGE> 4
The Parent and its Subsidiaries must at all times hold on a
consolidated basis cash and Cash Equivalents in an aggregate amount
greater than or equal to $4,000,000."
(i) The Credit Agreement is amended by deleting Section 8.2 thereof in
its entirety and substituting in its place the following:
"8.2 TOTAL LIABILITIES TO NET WORTH
The Parent shall not permit the ratio of Total Liabilities to Net
Worth of the Parent and its Subsidiaries determined on a consolidated
basis to exceed 1.5 to 1.0 at any time."
(j) The Credit Agreement is amended by deleting Section 8.3 thereof in
its entirety and substituting in its place the following:
"8.3 MINIMUM NET WORTH
At all times following January 31, 1998, the Parent shall maintain
its Net Worth determined on a consolidated basis with its Subsidiaries
greater than or equal to (a) $28,000,000 plus (b) an amount equal to the
sum of 50% of net earnings of the Parent and its Subsidiaries determined
on a consolidated basis (without deduction for any losses) for each full
fiscal quarter ending after January 31, 1998 plus (c) 50% of the Net
Proceeds of any Equity Issuance or issuance by the Parent of any
Subordinated Debt after December 31, 1997."
(k) The Credit Agreement is amended by adding a new Section 8.5 as
follows:
"8.5 EBITDA TO PROJECTED EBITDA
The Parent shall not permit EBITDA of the Parent and its
Subsidiaries on a consolidated basis as of the end of each fiscal quarter
set forth below for the applicable period set forth below to be less than
75% of Projected EBITDA of the Parent and its Subsidiaries on a
consolidated basis as of the end of each such fiscal quarter for such
period:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
FISCAL QUARTER ENDING: PERIOD:
----------------------------------------------------------------------------------
<S> <C>
March 31, 1998 fiscal quarter most recently ended
----------------------------------------------------------------------------------
June 30, 1998 two consecutive fiscal quarters most
recently ended
----------------------------------------------------------------------------------
September 30, 1998 three consecutive fiscal quarters
most recently ended
----------------------------------------------------------------------------------
Each March 31, June 30, September 30 four consecutive fiscal quarters most
and December 31 thereafter recently ended
----------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE> 5
Section 2. Termination of Company Commitment; Company Loans. Immediately
prior to the effectiveness of this Amendment, the Lender had made available to
the Company $7,250,000 in aggregate principal amount of Company Loans. Upon the
effectiveness of this Amendment, the parties hereto agree as follows: (a) the
Company Commitment shall terminate and accordingly the Company may not borrow,
and the Lender shall be under no obligation whatsoever to make, any Company
Loans; (b) the outstanding Company Loans shall be repaid as provided in the
Credit Agreement, as amended hereby and (c) to the extent any of the principal
of any outstanding Company Loan is repaid, such principal may not be reborrowed
notwithstanding the last sentence of Section 2.1. of the Credit Agreement.
Section 3. Conditions Precedent to Effectiveness of this Amendment. The
effectiveness of this Amendment is subject to receipt by the Lender of each of
the following, each in form and substance satisfactory to the Lender:
(a) A counterpart of this Amendment duly executed by the Company, the
Parent and each Guarantor;
(b) Payment of a fee in the amount of $220,000, representing two percent
(2.0%) of the amount of the Commitment;
(c) A Parent Note executed by the Parent, payable to the order of the
Lender and in the original principal amount of $3,750,000.00 (the "New Note") in
replacement of the outstanding Parent Note in favor of the Lender in the
principal amount of $2,000,000.00;
(d) a copy of the Parent's Pro Forma Financial Statements for the fiscal
years ending December 31, 1998 and December 31, 1999;
(e) the results and auditor recommendations from the NationsBank Business
Credit Services' field audit of the Borrowers;
(f) A copy of the resolutions of the board of directors or members of
each Borrower, as applicable, authorizing the execution and delivery of this
Amendment and the New Note, certified by the Secretary or an Assistant Secretary
of each Borrower;
(g) an opinion of in-house counsel to the Borrowers, addressed to the
Lender, and regarding the authority of each Borrower to execute, deliver and
perform this Amendment, the Credit Agreement as amended hereby and the New Note;
(h) Payment of all costs and expenses incurred by the Lender, its counsel
and NationsBank Business Credit Services in connection with the preparation,
negotiation and
-5-
<PAGE> 6
execution of this Amendment and the other agreements and documents executed and
delivered in connection herewith; and
(i) Such other documents, instruments and agreements as the Lender may
reasonably request.
Section 4. Representations. Each of the Borrowers represents and warrants
to the Lender that:
(a) Authorization; No Conflict The execution and delivery by the
Borrowers of this Amendment and the New Note and the performance by the
Borrowers of this Amendment, the New Note and the Credit Agreement, as amended
by this Amendment, in accordance with their respective terms (a) have been duly
authorized by all requisite corporate and, to the extent required, stockholder
action (or membership action in the case of a limited liability company) on the
part of each Borrower and (b) will not (i) violate any provision of Applicable
Law, or any order of any Governmental Authority or any provision of the
certificate in incorporation, articles of organization or other comparable
organizational instrument or by-laws or operating agreement of either Borrower,
(ii) violate, conflict with, result in a breach of or constitute (alone or with
notice or lapse of time or both) a default or an event of default under any
Material Contract to which either Borrower is a party or by which each Borrower
or any of its property is or may be bound, or (iii) result in the creation or
imposition of any Lien upon any property or assets of the Borrowers.
(b) Enforceability. This Amendment and the New Note have been duly
executed and delivered by a duly authorized officer of each Borrower and each of
this Amendment, the New Note and the Credit Agreement, as amended by this
Amendment, is a legal, valid and binding obligation of the Borrowers enforceable
against the Borrowers in accordance with its respective terms except as the same
may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other laws affecting generally the enforcement of creditors'
rights and by general principles of equity (regardless of whether considered in
a proceeding in equity or at law).
(c) Financial Condition. Since September 30, 1997, there has been no
material adverse change in the business, property, assets, liabilities,
condition (financial or otherwise), operations or results of operations of the
Parent, the Company, any of their Subsidiaries or any other Loan Party. The Pro
Forma Financial Statements fairly present, in all material respects, the pro
forma financial condition of the Parent and its Subsidiaries on a consolidated
basis as of the date hereof.
Section 5. Reaffirmation by Borrowers. Each Borrower hereby repeats and
reaffirms all representations and warranties made by such Borrower to the Lender
in the Credit Agreement and the other Loan Documents to which it is a party on
and as of the date hereof with the same force and effect as if such
representations and warranties were set forth in this Amendment in full.
-6-
<PAGE> 7
Section 6. Reaffirmation by Guarantors. Each of the Guarantor reaffirms
its continuing obligations to the Lender under its Guaranty, and agrees that
this Amendment shall not in any way affect the validity and enforceability of
such Guaranty, or reduce, impair or discharge the obligations of such Guarantor
thereunder.
Section 7. Certain References. Each reference to the Credit Agreement in
any of the Loan Documents shall be deemed to be a reference to the Credit
Agreement as amended by this Amendment.
Section 8. Expenses. The Company shall reimburse the Lender upon demand
for all costs and expenses (including attorneys' fees) incurred by the Lender in
connection with the preparation, negotiation and execution of this Amendment and
the other agreements and documents executed and delivered in connection
herewith.
Section 9. Benefits. This Amendment shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns.
Section 10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Section 11. Effect. Except as expressly herein amended, the terms and
conditions of the Credit Agreement and the other Loan Documents remain in full
force and effect. The amendments contained herein shall be deemed to have
prospective application only, unless otherwise specifically stated herein.
Section 12. Counterparts. This Amendment may be executed in any number of
counterparts, each of which need not contain the signature of more than one
party and all of which taken together shall constitute one and the same original
instrument.
Section 13. Definitions. All capitalized terms not otherwise defined
herein are used herein with the respective definitions given them in the Credit
Agreement.
[Signatures on Next Page]
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment
to Credit Agreement to be executed as of the date first above written.
THE LENDER:
NATIONSBANK, N.A.
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
THE PARENT:
PREFERRED NETWORKS, INC.
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
THE COMPANY:
PNI SYSTEMS, LLC
By: Preferred Networks, Inc., its Manager
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
[Signatures Continued on Next Page]
-8-
<PAGE> 9
[SIGNATURE PAGE TO FOURTH AMENDMENT TO CREDIT AGREEMENT DATED
AS OF MARCH 19, 1998 FOR PREFERRED NETWORKS, INC.]
THE GUARANTORS:
PNI SPECTRUM, LLC PREFERRED TECHNICAL SERVICES, INC.
By: Preferred Networks, Inc., its Manager
By: By:
----------------------------------- --------------------------------
Name: Name:
------------------------------ ---------------------------
Title: Title:
----------------------------- --------------------------
PNI GEORGIA, INC. EPS WIRELESS, INC.
By: By:
----------------------------------- --------------------------------
Name: Name:
------------------------------ ---------------------------
Title: Title:
----------------------------- --------------------------
MERCURY PAGING & COMMUNICATIONS, INC. HTB COMMUNICATIONS, INC.
By: By:
----------------------------------- --------------------------------
Name: Name:
------------------------------ ---------------------------
Title: Title:
----------------------------- --------------------------
CUSTOM PAGE, INC. M.P.C. DISTRIBUTORS, INC.
By: By:
----------------------------------- --------------------------------
Name: Name:
------------------------------ ---------------------------
Title: Title:
----------------------------- --------------------------
-9-
<PAGE> 10
EXHIBIT A
PRO FORMA FINANCIAL STATEMENTS
ATTACHED.
- 10 -
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
PNI Systems, LLC
PNI Spectrum, LLC
EPS Wireless, Inc.
Preferred Technical Services, Inc.
PNI Georgia, Inc.
ECC Acquisition Corporation
Mercury Paging & Communications, Inc.
HTB Communications Inc.
M.P.C. Distributors Inc.
Custom Page, Inc.
57
<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, Form S-8 No. 333-3826 and Form
S-8 No. 333-33879) of Preferred Networks, Inc. and in the related Prospectuses
of our reports dated March 23, 1998 with respect to the consolidated financial
statements and schedule of Preferred Networks, Inc. in the Annual Report (Form
10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
March 23, 1998
58
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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>
<RESTATED>
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE
30, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 12,919,194
<SECURITIES> 0
<RECEIVABLES> 4,936,757
<ALLOWANCES> 296,275
<INVENTORY> 4,549,728
<CURRENT-ASSETS> 22,955,189
<PP&E> 32,190,840
<DEPRECIATION> 5,235,581
<TOTAL-ASSETS> 76,367,090
<CURRENT-LIABILITIES> 8,635,139
<BONDS> 16,667,167
12,977,666
0
<COMMON> 61,680,039
<OTHER-SE> (23,592,921)
<TOTAL-LIABILITY-AND-EQUITY> 76,367,090
<SALES> 6,406,433
<TOTAL-REVENUES> 17,705,189
<CGS> 6,638,724
<TOTAL-COSTS> 15,127,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 265,695
<INTEREST-EXPENSE> 606,383
<INCOME-PRETAX> (9,758,175)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,758,175)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,758,175)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF PREFERRED NETWORKS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 10,110,843
<SECURITIES> 0
<RECEIVABLES> 4,952,913
<ALLOWANCES> 303,147
<INVENTORY> 4,002,282
<CURRENT-ASSETS> 19,145,465
<PP&E> 32,877,275
<DEPRECIATION> 6,255,248
<TOTAL-ASSETS> 71,886,924
<CURRENT-LIABILITIES> 17,461,049
<BONDS> 8,352,647
13,458,462
0
<COMMON> 61,328,429
<OTHER-SE> (28,713,663)
<TOTAL-LIABILITY-AND-EQUITY> 71,886,924
<SALES> 9,523,439
<TOTAL-REVENUES> 26,328,696
<CGS> 9,839,888
<TOTAL-COSTS> 22,771,388
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 425,015
<INTEREST-EXPENSE> 929,435
<INCOME-PRETAX> (14,733,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,733,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,733,124)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF PREFERRED NETWORKS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,562,978
<SECURITIES> 0
<RECEIVABLES> 4,630,326
<ALLOWANCES> 661,300
<INVENTORY> 2,890,647
<CURRENT-ASSETS> 14,747,781
<PP&E> 32,745,990
<DEPRECIATION> 6,602,000
<TOTAL-ASSETS> 66,232,480
<CURRENT-LIABILITIES> 6,845,200
<BONDS> 17,658,608
13,956,123
0
<COMMON> 62,900,973
<OTHER-SE> (34,636,972)
<TOTAL-LIABILITY-AND-EQUITY> 66,232,480
<SALES> 13,603,312
<TOTAL-REVENUES> 35,981,556
<CGS> 13,552,874
<TOTAL-COSTS> 31,009,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 805,022
<INTEREST-EXPENSE> 1,277,478
<INCOME-PRETAX> (19,151,758)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,151,758)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,151,758)
<EPS-PRIMARY> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,883,718
<SECURITIES> 0
<RECEIVABLES> 1,928,313
<ALLOWANCES> 189,653
<INVENTORY> 2,033,544
<CURRENT-ASSETS> 25,474,034
<PP&E> 20,182,551
<DEPRECIATION> 2,715,432
<TOTAL-ASSETS> 51,006,768
<CURRENT-LIABILITIES> 4,829,306
<BONDS> 5,393,601
0
0
<COMMON> 1,461
<OTHER-SE> 40,782,400
<TOTAL-LIABILITY-AND-EQUITY> 51,006,768
<SALES> 1,239,083
<TOTAL-REVENUES> 3,135,949
<CGS> 1,651,410
<TOTAL-COSTS> 2,980,787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 63,200
<INTEREST-EXPENSE> 39,273
<INCOME-PRETAX> (2,507,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,507,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,507,798)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE
1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 28,941,156
<SECURITIES> 0
<RECEIVABLES> 1,006,283
<ALLOWANCES> 127,088
<INVENTORY> 1,419,911
<CURRENT-ASSETS> 31,585,865
<PP&E> 14,418,192
<DEPRECIATION> 2,213,003
<TOTAL-ASSETS> 46,664,774
<CURRENT-LIABILITIES> 2,224,678
<BONDS> 2,561,339
0
0
<COMMON> 1,443
<OTHER-SE> 41,877,314
<TOTAL-LIABILITY-AND-EQUITY> 46,664,774
<SALES> 1,049,797
<TOTAL-REVENUES> 2,494,647
<CGS> 1,307,720
<TOTAL-COSTS> 2,254,241
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 52,184
<INTEREST-EXPENSE> 13,237
<INCOME-PRETAX> (1,477,928)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,477,928)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,477,928)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 33,317,219
<SECURITIES> 0
<RECEIVABLES> 1,064,812
<ALLOWANCES> 104,654
<INVENTORY> 1,530,453
<CURRENT-ASSETS> 36,205,873
<PP&E> 10,849,132
<DEPRECIATION> 1,862,872
<TOTAL-ASSETS> 46,807,409
<CURRENT-LIABILITIES> 2,943,392
<BONDS> 520,291
0
0
<COMMON> 1,442
<OTHER-SE> 43,342,284
<TOTAL-LIABILITY-AND-EQUITY> 46,807,409
<SALES> 1,036,380
<TOTAL-REVENUES> 2,368,533
<CGS> 1,360,999
<TOTAL-COSTS> 2,102,558
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 48,903
<INTEREST-EXPENSE> 141,945
<INCOME-PRETAX> (1,500,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,500,760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,500,760)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM A
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1996.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 28,941,156
<SECURITIES> 0
<RECEIVABLES> 1,006,283
<ALLOWANCES> 127,088
<INVENTORY> 1,419,911
<CURRENT-ASSETS> 31,585,865
<PP&E> 14,418,192
<DEPRECIATION> 2,213,003
<TOTAL-ASSETS> 46,664,774
<CURRENT-LIABILITIES> 2,224,678
<BONDS> 2,561,339
0
0
<COMMON> 1,443
<OTHER-SE> 41,877,314
<TOTAL-LIABILITY-AND-EQUITY> 46,664,774
<SALES> 2,086,177
<TOTAL-REVENUES> 4,863,180
<CGS> 2,668,719
<TOTAL-COSTS> 4,356,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 101,087
<INTEREST-EXPENSE> 155,182
<INCOME-PRETAX> (2,978,688)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,978,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,978,688)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR QUARTERLY PERIOD ENDED SEPTEMBER 30,
1996.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 20,883,718
<SECURITIES> 0
<RECEIVABLES> 1,928,313
<ALLOWANCES> 189,653
<INVENTORY> 2,033,544
<CURRENT-ASSETS> 25,474,034
<PP&E> 20,182,551
<DEPRECIATION> 2,715,432
<TOTAL-ASSETS> 51,006,768
<CURRENT-LIABILITIES> 4,829,306
<BONDS> 5,393,601
0
0
<COMMON> 1,461
<OTHER-SE> 40,782,400
<TOTAL-LIABILITY-AND-EQUITY> 51,006,768
<SALES> 3,325,260
<TOTAL-REVENUES> 7,999,129
<CGS> 4,320,129
<TOTAL-COSTS> 7,337,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 164,287
<INTEREST-EXPENSE> 194,455
<INCOME-PRETAX> (5,486,486)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,486,486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,486,486)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> (.57)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR THE TWELVE MONTH PERIOD ENDED
DECEMBER 31, 1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,645,354
<SECURITIES> 0
<RECEIVABLES> 3,070,972
<ALLOWANCES> 254,990
<INVENTORY> 5,630,478
<CURRENT-ASSETS> 30,725,401
<PP&E> 24,933,750
<DEPRECIATION> 3,374,343
<TOTAL-ASSETS> 66,125,337
<CURRENT-LIABILITIES> 9,512,697
<BONDS> 16,029,652
0
0
<COMMON> 1,529
<OTHER-SE> 40,581,459
<TOTAL-LIABILITY-AND-EQUITY> 66,125,337
<SALES> 5,818,074
<TOTAL-REVENUES> 13,350,672
<CGS> 8,328,771
<TOTAL-COSTS> 13,612,207
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 248,362
<INTEREST-EXPENSE> 242,337
<INCOME-PRETAX> (10,199,330)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,199,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,199,330)
<EPS-PRIMARY> (.91)
<EPS-DILUTED> (.91)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 243,641
<SECURITIES> 0
<RECEIVABLES> 525,064
<ALLOWANCES> 24,501
<INVENTORY> 452,768
<CURRENT-ASSETS> 1,271,633
<PP&E> 4,303,858
<DEPRECIATION> 989,401
<TOTAL-ASSETS> 4,681,152
<CURRENT-LIABILITIES> 1,630,621
<BONDS> 2,469,392
1,753,147
0
<COMMON> 414
<OTHER-SE> (1,172,422)
<TOTAL-LIABILITY-AND-EQUITY> 4,681,152
<SALES> 661,246
<TOTAL-REVENUES> 1,331,995
<CGS> 832,366
<TOTAL-COSTS> 1,144,124
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,859
<INTEREST-EXPENSE> 77,708
<INCOME-PRETAX> (506,790)
<INCOME-TAX> 0
<INCOME-CONTINUING> (506,790)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (506,790)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 14,962,352
<SECURITIES> 0
<RECEIVABLES> 735,172
<ALLOWANCES> 40,464
<INVENTORY> 260,504
<CURRENT-ASSETS> 0
<PP&E> 4,586,932
<DEPRECIATION> 1,133,816
<TOTAL-ASSETS> 19,606,954
<CURRENT-LIABILITIES> 1,300,896
<BONDS> 2,488,905
17,563,051
0
<COMMON> 563
<OTHER-SE> (1,746,461)
<TOTAL-LIABILITY-AND-EQUITY> 19,606,954
<SALES> 861,189
<TOTAL-REVENUES> 1,651,568
<CGS> 1,052,000
<TOTAL-COSTS> 1,393,943
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 32,903
<INTEREST-EXPENSE> 77,346
<INCOME-PRETAX> (521,707)
<INCOME-TAX> 0
<INCOME-CONTINUING> (521,707)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (521,707)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM S-1 REGISTRATION STATEMENT FOR THE SALE OF
THE COMPANY'S COMMON STOCK.
</LEGEND>
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 9,311,379
<SECURITIES> 0
<RECEIVABLES> 1,010,316
<ALLOWANCES> 86,426
<INVENTORY> 1,068,970
<CURRENT-ASSETS> 11,757,312
<PP&E> 8,438,832
<DEPRECIATION> 1,553,810
<TOTAL-ASSETS> 20,045,719
<CURRENT-LIABILITIES> 3,385,728
<BONDS> 2,807,398
21,658,811
0
<COMMON> 414
<OTHER-SE> (7,806,632)
<TOTAL-LIABILITY-AND-EQUITY> 20,045,719
<SALES> 3,651,018
<TOTAL-REVENUES> 7,353,234
<CGS> 4,557,813
<TOTAL-COSTS> 6,325,984
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 120,042
<INTEREST-EXPENSE> 317,160
<INCOME-PRETAX> (2,869,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,869,760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,869,760)
<EPS-PRIMARY> (1.75)
<EPS-DILUTED> (1.75)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 1995.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 12,102,002
<SECURITIES> 0
<RECEIVABLES> 913,722
<ALLOWANCES> 51,205
<INVENTORY> 746,165
<CURRENT-ASSETS> 13,797,831
<PP&E> 6,753,734
<DEPRECIATION> 1,314,855
<TOTAL-ASSETS> 20,465,043
<CURRENT-LIABILITIES> 2,483,542
<BONDS> 2,933,234
18,087,836
0
<COMMON> 414
<OTHER-SE> (3,039,983)
<TOTAL-LIABILITY-AND-EQUITY> 20,465,043
<SALES> 2,527,896
<TOTAL-REVENUES> 4,996,964
<CGS> 3,194,607
<TOTAL-COSTS> 4,346,644
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 88,742
<INTEREST-EXPENSE> 231,718
<INCOME-PRETAX> (1,704,862)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,704,862)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,704,862)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> (.57)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1995.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 14,962,352
<SECURITIES> 0
<RECEIVABLES> 735,172
<ALLOWANCES> 40,464
<INVENTORY> 260,504
<CURRENT-ASSETS> 15,986,382
<PP&E> 4,586,932
<DEPRECIATION> 1,133,816
<TOTAL-ASSETS> 19,606,954
<CURRENT-LIABILITIES> 1,300,896
<BONDS> 2,488,905
17,563,051
0
<COMMON> 563
<OTHER-SE> (1,746,461)
<TOTAL-LIABILITY-AND-EQUITY> 19,606,954
<SALES> 1,522,435
<TOTAL-REVENUES> 2,983,563
<CGS> 1,884,366
<TOTAL-COSTS> 2,538,067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 46,762
<INTEREST-EXPENSE> 155,054
<INCOME-PRETAX> (1,028,497)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,028,497)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,028,497)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER
30, 1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 12,102,002
<SECURITIES> 0
<RECEIVABLES> 913,722
<ALLOWANCES> 51,205
<INVENTORY> 746,165
<CURRENT-ASSETS> 13,797,831
<PP&E> 6,753,734
<DEPRECIATION> 1,314,855
<TOTAL-ASSETS> 20,465,043
<CURRENT-LIABILITIES> 2,483,542
<BONDS> 2,933,234
18,087,836
0
<COMMON> 414
<OTHER-SE> (3,039,983)
<TOTAL-LIABILITY-AND-EQUITY> 20,465,043
<SALES> 1,005,461
<TOTAL-REVENUES> 2,013,401
<CGS> 1,310,241
<TOTAL-COSTS> 1,808,577
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 41,980
<INTEREST-EXPENSE> 76,664
<INCOME-PRETAX> (676,365)
<INCOME-TAX> 0
<INCOME-CONTINUING> (676,365)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (676,365)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
