<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________________to_____________________
Commission File Number: 0-27658
PREFERRED NETWORKS, INC.
(Exact name of Registrant as Specified in its Charter)
GEORGIA 58-1954892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
850 Center Way, Norcross, GA 30071
(Address of principal executive offices)
(Zip Code)
(770) 582-3500
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 16,334,377 shares of common
stock, no par value, as of November 16, 1998.
<PAGE> 2
PREFERRED NETWORKS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, September 30, 1998
(Unaudited) and December 31, 1997......................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997 (Unaudited)....... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (Unaudited)...................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited).......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 8
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.......................................... 14
Item 6. Exhibits and Reports on Form 8-K.......................................... 14
Signatures................................................................ 15
</TABLE>
2
<PAGE> 3
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents...................................... $ 7,254,046 $ 7,562,978
Accounts receivable, net....................................... 4,592,681 3,969,026
Inventory...................................................... 2,800,707 2,890,647
Prepaid expenses and other current assets...................... 601,605 325,130
------------- --------------
Total current assets......................................... 15,249,039 14,747,781
Property and equipment, net....................................... 23,054,403 25,569,209
Goodwill, net..................................................... 12,664,085 13,396,459
FCC licenses, net................................................. 9,037,205 9,544,622
Other assets, net................................................. 2,672,533 2,974,409
------------- --------------
$ 62,677,265 $ 66,232,480
============= ==============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............................................... $ 2,428,964 $ 3,091,994
Accrued liabilities............................................ 854,551 832,656
Accrued compensation........................................... 1,157,369 797,302
Current portion of notes payable and capital lease obligations. 3,367,166 2,123,248
-------------- --------------
Total current liabilities.................................... 7,808,050 6,845,200
Notes payable and capital lease obligations, less current portion. 15,756,696 17,658,608
Class A Redeemable Preferred Stock, no par value, $1.50 per share
redemption price; 13,500,000 shares authorized, 10,000,000
shares issued and outstanding (including $1,125,000
and $808,333 of undeclared dividends in 1998 and 1997,
respectively).................................................. 15,398,512 13,956,123
Class B Senior Redeemable Preferred Stock, no par value, $1.50
per share redemption price; 5,500,000 shares authorized in
1998, 5,333,336 shares issued and outstanding in 1998 (including
$645,161 of undeclared dividends in 1998)...................... 7,738,848 -
-------------- ---------------
Total liabilities and Redeemable Preferred Stock............. 46,702,106 38,459,931
Stockholders' equity
Preferred stock, no par value, 11,000,000 and 16,500,000 shares
authorized in 1998 and 1997, respectively; no shares issued
and outstanding.............................................. - -
Common Stock, no par value, 100,000,000 shares authorized
in 1998 and 1997; 16,334,377 and 16,200,552 issued and
outstanding in 1998 and 1997, respectively................... 62,111,712 62,900,973
Accretion of Redeemable Preferred Stock ....................... (673,136) (245,726)
Accumulated deficit............................................ (45,463,417) (34,882,698)
-------------- --------------
15,975,159 27,772,549
-------------- --------------
$ 62,677,265 $ 66,232,480
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Network services.................................... $ 3,327,732 $ 3,268,100 $ 9,886,147 $ 9,084,609
Product sales....................................... 3,691,127 3,117,006 11,206,610 9,523,439
Other services...................................... 2,138,275 2,238,402 7,591,740 7,720,649
------------- -------------- ------------- -------------
Total revenues............................. 9,157,134 8,623,508 28,684,497 26,328,697
Costs of revenues
Network services ................................... 2,160,812 2,030,025 6,501,601 6,133,675
Product sales....................................... 3,627,789 3,201,164 9,964,860 9,839,889
Other services...................................... 1,880,945 2,413,007 6,099,704 6,797,824
------------- -------------- ------------- -------------
Total costs of revenues.................... 7,669,546 7,644,196 22,566,165 22,771,388
------------- -------------- ------------- -------------
Gross margin............................................. 1,487,588 979,312 6,118,332 3,557,309
Selling, general and administrative expenses............. 3,758,628 3,961,669 10,875,292 12,181,624
Depreciation and amortization............................ 1,582,525 1,845,949 4,973,780 5,295,665
Other expenses........................................... 169,637 - 169,637 277,707
------------- -------------- ------------- -------------
Operating loss............................. (4,023,202) (4,828,306) (9,900,377) (14,197,687)
Interest expense......................................... (349,346) (323,050) (970,381) (929,432)
Interest income.......................................... 89,776 136,411 290,039 353,999
------------- -------------- ------------- -------------
Net loss................................... (4,282,772) (5,014,945) (10,580,719) (14,773,120)
Accretion of Redeemable Preferred Stock.................. (155,642) (105,797) (426,776) (140,566)
Redeemable Preferred Stock dividend requirements......... (675,000) (375,000) (1,770,161) (433,333)
------------- -------------- ------------- -------------
Net loss attributable to Common Stock...... $ (5,113,414) $ (5,495,742) $ (12,777,656) $ (15,347,019)
============= ============== ============= =============
Net loss per share of Common Stock....................... $ (.32) $ (.34) $ (.79) $ (.96)
============= ============== ============= =============
Weighted average number of common shares
used in calculating net loss per share of
Common Stock.......................................... 16,265,377 16,194,512 16,228,877 16,067,527
============= ============== ============= =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................ $ (10,580,719) $ (14,773,120)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 4,973,780 5,291,601
Bad debt expense.................................................. 319,829 425,015
Stock option and restricted stock grant compensation expense...... 49,744 261,036
Changes in operating assets and liabilities:
Accounts receivable............................................. (792,819) (1,520,073)
Inventory....................................................... 67,840 1,992,427
Prepaid expenses and other assets............................... 215,427 (15,663)
Accounts payable................................................ (663,027) (562,360)
Accrued liabilities............................................. 158,899 (596,204)
Accrued compensation............................................ 360,067 188,486
--------------- ---------------
Net cash used in operating activities......................... (5,890,979) (9,308,855)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment............................................... (1,298,607) (3,556,756)
Purchases of other assets and FCC licenses........................... (440,413) (1,224,584)
Payment for acquisitions, net of cash acquired....................... - (10,629,768)
--------------- ---------------
Net cash used in investing activities......................... (1,739,020) (15,431,108)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings............................................. 1,000,000 10,000,000
Repayments of borrowings............................................. (1,373,754) (1,616,872)
Payment of deferred loan costs ...................................... (220,000) -
Net proceeds from issuance of Redeemable Preferred Stock ............ 6,983,666 2,884,553
Net proceeds from issuance of Common Stock purchase warrants......... 810,000 1,930,963
Issuance of Common Stock upon exercise of stock options.............. 121,155 6,808
--------------- ---------------
Net cash provided by financing activities..................... 7,321,067 13,205,452
Net decrease in cash and cash equivalents............................ (308,932) (11,534,511)
Cash and cash equivalents, beginning of period....................... 7,562,978 21,645,354
--------------- ---------------
Cash and cash equivalents, end of period............................. $ 7,254,046 $ 10,110,843
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. THE COMPANY
Preferred Networks, Inc. ("PNI" or "the Company"), headquartered in
metropolitan Atlanta, provides outsourcing solutions to the wireless
industry which allow companies to offer branded wireless services directly
to subscribers, while relying on PNI to provide high-quality network,
technical, and product services. PNI offers its services through its
Network Services Division, PNI Access Services ("Access"), a provider of
wholesale paging network service as one of the largest carrier's carriers
in the U.S., and through its wholly-owned subsidiaries: Preferred
Technical Services, Inc. ("PTS"), a provider of paging network equipment
installation, maintenance and engineering services; and EPS Wireless, Inc.
("EPS"), a national provider of paging and cellular product repair
services, sales of new, used and refurbished paging and cellular products
and inventory management services.
The Company has formed wholly-owned subsidiaries and limited liability
companies to execute certain business transactions. All significant
intercompany activity has been eliminated.
2. BASIS FOR PRESENTATION
The interim condensed consolidated financial information contained herein
has been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and includes
in the opinion of management, all adjustments, which are of a normal
recurring nature necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been condensed or omitted pursuant to
such rules and regulations. The Company believes, however, that its
disclosures are adequate to make the information presented not misleading.
These financial statements and related notes should be read in conjunction
with the financial statements and notes as of December 31, 1997, included
in the Company's Annual Report on Form 10-K (File No. 0-27658). Results of
operations for the periods presented herein are not necessarily indicative
of results to be expected for the full year or any other interim period.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash and cash equivalents include investments in money market instruments,
which are carried at fair market value. Cash payments made for interest,
net of capitalized interest, during the nine months ended September 30,
1998 and 1997 were approximately $969,000 and $856,000, respectively.
There were no significant federal or state income taxes paid or refunded
for the nine months ended September 30, 1998 and 1997.
4. 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 net loss
per share because they would have been antidilutive for the periods
presented:
<TABLE>
<CAPTION>
Nine Months ended
September 30,
---------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Common Stock Options 2,534,064 2,142,047
Common Stock Warrants 17,322,353 11,922,353
Unvested Restricted Stock 69,000 60,000
-------------- -------------
Total Securities 19,925,417 14,070,400
============== =============
</TABLE>
6
<PAGE> 7
5. ACQUISITIONS
In January 1997, the Company acquired the stock of Mercury Paging &
Communications, Inc. ("Mercury") and its affiliated companies for
approximately $14.2 million of which approximately $10.0 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.
6. ISSUANCE OF CLASS B SENIOR REDEEMABLE PREFERRED STOCK AND COMMON STOCK
PURCHASE WARRANTS
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. In addition, if the holders so demand, 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 Company's Class A Redeemable Preferred Stock
(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. The Class B Preferred is
recorded at cost, net of expenses, plus accretion and undeclared
dividends.
7. 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 their
financial statements. FAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. FAS 131 is effective for annual 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.
In April 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 requires entities to charge to expense
start-up costs, including organizational costs, as incurred. In addition,
SOP 98-5 requires a write-off of any previously capitalized start-up or
organization costs, and must be reported as the cumulative effect of a
change in accounting principle. SOP 98-5 is effective January 1, 1999. The
Company will adopt SOP 98-5 effective January 1, 1999 and will write off
the unamortized balance of its market entry costs and cease to capitalize
such costs at that time. Market entry costs, net of accumulated
amortization, at September 30, 1998 were approximately $1.9 million.
Additional amounts capitalized during the three and nine months ended
September 30, 1998 were $89,000 and $427,000, respectively. Amortization
expense equaled the amounts capitalized during the three months ended
September 30, 1998. Amortization expense was in excess of additional
amounts capitalized during the nine months ended September 30, 1998 by
$117,000. Additional amounts capitalized, net of amortization expense,
during the three and nine months ended September 30, 1997 were $76,000 and
$527,000, respectively.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
In this section, the Company makes reference to "EBITDA" which represents
earnings before interest expense, interest income, taxes, depreciation and
amortization. EBITDA is a financial measure commonly used in the
telecommunications industry and should not be construed as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles ("GAAP")), as an alternative to cash flows from operating
activities (as determined in accordance with GAAP), or as a measure of
liquidity.
The table below provides the components of the Company's consolidated
statements of operations and EBITDA for each of the three and the nine months
ended September 30, 1998 and 1997, respectively, as a percentage of total
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
1998 1997 1998 1997
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Network services ........................... 36.3 % 37.9 % 34.5 % 34.5 %
Product sales............................... 40.3 36.1 39.1 36.2
Other services.............................. 23.4 26.0 26.4 29.3
---------- ---------- ----------- -----------
Total revenues............................ 100.0 100.0 100.0 100.0
Cost of revenues
Network services ........................... 23.6 23.5 22.7 23.3
Products sales.............................. 39.7 37.1 34.7 37.4
Other services ............................. 20.5 28.0 21.3 25.8
---------- ---------- ----------- -----------
Total cost of revenues.................... 83.8 88.6 78.7 86.5
Gross margin 16.2 11.4 21.3 13.5
Selling, general and administrative expenses... 41.0 46.0 37.9 46.2
Depreciation and amortization.................. 17.2 21.4 17.3 20.1
Other expenses................................. 1.9 - 0.6 1.1
---------- ---------- ----------- -----------
Operating loss............................ (43.9) (56.0) (34.5) (53.9)
Interest expense............................... (3.8) (3.7) (3.4) (3.5)
Interest income................................ 1.0 1.6 1.0 1.3
---------- ---------- ----------- -----------
Net loss ................................. (46.7) % (58.1) % (36.9) % (56.1) %
========== ========== =========== ===========
EBITDA......................................... (26.7) % (34.6) % (17.2) % (33.8) %
========== ========== =========== ===========
</TABLE>
The table below provides information about the Company's units in service
on the Company's networks by customer type.
<TABLE>
<CAPTION>
SEPTEMBER 30, PERCENTAGE INCREASE IN
------------------------------- ------------------------------
1998 1997 1998 1997
-------------- --------------- -------------- --------------
Units in service
<S> <C> <C> <C> <C>
Reseller units.............................. 314,799 335,988 3.5% 72.8%
Colocation/interconnection units............ 189,042 121,639 25.5% 121.5%
------------ ------------
Total units in service...................... 503,841 457,627 10.8% 46.1%
============ ============
</TABLE>
8
<PAGE> 9
RESULTS OF OPERATIONS
Total revenues increased by $534,000, or 6.2%, to $9.2 million for the three
months ended September 30, 1998 from $8.6 million for the three months ended
September 30, 1997. Total revenues increased by $2.4 million, or 8.9%, to $28.7
million for the nine months ended September 30, 1998 from $26.3 million for the
nine months ended September 30, 1997.
Revenues from network services increased by $60,000, or 1.8%, to $3.3 million
for the three months September 30, 1998 from $3.3 million for the three months
ended September 30, 1997. Revenues from network services increased by $802,000,
or 8.8%, to $9.9 million for the nine months ended September 30, 1998 from $9.1
million for the nine months ended September 30, 1997. The Company has
experienced an increase in network services revenue as unit growth and the
associated recurring revenue streams have continued, as well as from the
acquisition of Mercury Paging & Communications, Inc., ("Mercury"), a
reseller-based paging carrier acquired in January 1997. The Company had 27
markets in service at September 30, 1998. Units in service increased by 46,214,
or 10.1%, to 503,841 at September 30, 1998 from 457,627 at September 30, 1997.
Airtime revenue per unit decreased by $0.21 and $0.22 to $2.22 and $2.27 for the
three and nine months ended September 30, 1998 from $2.43 and $2.49 for the
three and nine months ended September 30, 1997. This decrease is primarily due
to an increase in units in service from colocation/interconnection customers as
a percentage of total units in service. Units from colocation/interconnection
customers increased to 37.5% of total units at September 30, 1998 from 26.6% at
September 30, 1997. 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 $574,000, or 18.4%, to $3.7 million for
the three months September 30, 1998 from $3.1 million for the three months ended
September 30, 1997. Revenues from product sales increased by $1.7 million, or
17.7%, to $11.2 million for the nine months ended September 30, 1998 from $9.5
million for the nine months ended September 30, 1997. The increase in product
sales revenue is due to increased sales at EPS of new, used and refurbished
pager and cellular products partially offset by decreased sales of new pagers to
network customers.
Other services revenues decreased by $100,000, or 4.5%, to $2.1 million for the
three months ended September 30, 1998 from $2.2 million for the three months
ended September 30, 1997. Other services revenues decreased by $129,000 or 1.7%,
to $7.6 million for the nine months ended September 30, 1998 from $7.7 million
for the nine months ended September 30, 1997. The decrease for the three and
nine months ended September 30, 1998 is due to decreased revenue charged per
unit and decreased volume for pager repair and refurbishment services at EPS.
The decrease in volume that EPS experienced in the third quarter was primarily
market driven as several of EPS' large customers are presently transitioning to
centralized pager inventory management which the Company believes has negatively
affected the volume of pagers sent out for repair and refurbishment. The Company
believes the effect of this transition is temporary. This revenue decrease was
partially offset in the third quarter of 1998 by increases in cellular repair
and refurbishment revenue at EPS and by increases in technical services revenue
at PTS.
Total costs of revenues increased by $25,000, or 0.3% to $7.7 million for the
three months ended September 30, 1998 from $7.6 million for the three months
ended September 30, 1997. Total costs of revenues decreased by $205,000, or
0.9% to $22.6 million for the nine months ended September 30, 1998 from $22.8
for the nine months ended September 30, 1997.
Cost of network services increased by $131,000, or 6.4%, to $2.2 million for the
three months ended September 30, 1998 from $2.0 million for the three months
ended September 30, 1997. Cost of network services increased by $368,000, or
6.0%, to $6.5 million for the nine months ended September 30, 1998 from $6.1
million for the nine months ended September 30, 1997. However, cost of network
services decreased as a percentage of network services revenue to 65.8% for the
nine months ended September 30, 1998 from 67.5% for the nine months ended
September 30, 1997. 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 $427,000, or 13.3%, to $3.6 million for the
three months ended September 30,
9
<PAGE> 10
1998 from $3.2 million for the three months ended September 30, 1997. Cost of
product sales increased by $125,000, or 1.3%, to $10.0 million for the nine
months ended September 30, 1998 from $9.8 million for the nine months ended
September 30, 1997. Cost of product sales as a percentage of product sales
revenue decreased to 98.2% and 88.9% for the three and nine months ended
September 30, 1998, respectively, from 102.7% and 103.3% for the three and nine
months ended September 30, 1997, respectively. The decrease in cost of product
sales in both periods is due primarily to Access' decreasing losses on new
pagers sold to its network customers.
Cost of other services decreased by $532,000, or 22.0% to $1.9 million for the
three months ended September 30, 1998 from $2.4 million for the three months
ended September 30, 1997. Cost of other services decreased by $698,000, or
10.3%, to $6.1 million for the nine months ended September 30, 1998 from $6.8
million for the nine months ended September 30, 1997. Cost of other services as
a percentage of other services revenue decreased to 88.0% and 80.3% for the
three and nine months ended September 30, 1998, respectively, from 107.8% and
88.0% for the three and nine months ended September 30, 1997, respectively. The
decrease in cost of other services for the three and nine month periods is due
to the decrease in pager repair revenue, offset partially by the increase in
cellular repair revenue and engineering and technical services. The decrease in
cost of other services as a percentage of other services revenue for the three
month period ended September 30, 1998 is primarily due to increased revenue from
engineering and technical services and efficiencies gained by less increase in
associated variable expense, offset partially by an increase in costs as a
percentage of revenues for pager repair caused by the inefficiencies associated
with the decrease in volume. The decrease in cost of other services as a
percentage of other services revenue for the nine month period is due to the
increased efficiencies associated with the revenue increases in engineering and
technical services and the higher pager repair revenue during the six months
ended June 30, 1998, offset partially by the inefficiencies associated with the
pager repair volume decrease for the three months ended September 30, 1998.
Selling, general and administrative (SG&A) expenses decreased by $203,000, or
5.1%, to $3.8 million for the three months ended September 30, 1998 from $4.0
million for the three months ended September 30, 1997. SG&A expenses decreased
as a percentage of total revenues to 41.0% for the three months ended September
30, 1998 from 45.9% for the three months ended September 30 1997. SG&A
decreased by $1.3 million, or 10.7%, to $10.9 million for the nine months ended
September 30, 1998 from $12.2 million for the nine months ended September 30,
1997. SG&A expenses decreased as a percentage of total revenues to 37.9% for
the nine months ended September 30, 1998, from 46.3% for the nine months ended
September 30, 1997. The decrease in SG&A expenses for the three and nine months
ended September 30, 1998 is primarily due to the benefits experienced beginning
in the three months ended September 30, 1997 due to the personnel cost
reduction measures taken in the second quarter of 1997. Additionally, because
the Company does not market directly to end-users, it does not incur
subscriber-related acquisition and customer support costs and, accordingly, its
SG&A expenses do not increase in direct proportion to its revenue growth.
Depreciation and amortization decreased by $263,000, or 14.3%, to $1.6 million
for the three months ended September 30, 1998 from $1.8 million for the three
months ended September 30, 1997. Depreciation and amortization decreased as a
percentage of total revenues to 17.3% for the three months ended September 30,
1998 from 21.4% for the three months ended September 30, 1997. Depreciation and
amortization decreased by $322,000 or 6.1%, to $5.0 million for the nine months
ended September 30, 1998 from $5.3 million for the nine months ended September
30, 1997. Depreciation and amortization decreased as a percentage of total
revenues to 17.3% for the nine months ended September 30, 1998 from 20.1% for
the nine months ended September 30, 1997. Depreciation and amortization
decreased primarily due to less amortization expense incurred in the current
year as certain market start-up costs became fully amortized offset partially
by increased depreciation expense on additional assets placed in service in
1998.
Other expenses increased by $170,000, or 100% to $170,000 for the three months
ended September 30, 1998. Other expenses decreased by $108,000, or 38.9%, to
$170,000 for the nine months ended September 30, 1998 from $278,000 for the nine
months ended September 30, 1997. Other expenses represent severance expenses
incurred in the second quarter of 1997 related to personnel cost reduction
measures and severance expenses incurred in the third quarter of 1998 related to
executive management personnel changes at EPS.
Interest expense, net of capitalized amounts, increased by $26,000, or 8.1%,
to $349,000 for the three months ended September 30, 1998 from $323,000 for the
three months ended September 30, 1997. Interest expense
10
<PAGE> 11
increased $41,000, or 4.4%, to $970,000 for the nine months ended September 30,
1998, from $929,000 for the nine months ended September 30, 1997. The increase
in interest expense is primarily due to less interest being capitalized due to
decreased construction activities during the nine months ended September 30,
1998 as compared to the nine months ended September 30, 1997.
Interest income decreased by $47,000 or 34.2% to $90,000 for the three months
ended September 30, 1998 from $136,000 for the three months ended September 30,
1997. Interest income decreased $64,000, or 18.1%, to $290,000 for the nine
months ended September, 30, 1998 from $354,000 for the nine months ended
September 30, 1997. The decrease in interest income is due to a corresponding
decrease in cash and cash equivalents.
Net loss for the three months ended September 30, 1998 as compared to the
three months ended September 30, 1997 decreased to $4.3 million from $5.0
million. Net loss for the nine months ended September 30, 1998, as compared
with the nine months ended September 30, 1997 decreased to $10.6 million from
$14.8 million. The decreased losses for both periods are due to substantial
increases in gross margin combined with decreases in SG&A, as described above.
The net loss attributable to Common Stock decreased due to the lower net loss,
offset in part by higher accretion and dividends related to the Class A
Preferred and the Class B Preferred, issued in June 1997 and March 1998,
respectively.
The net loss per share of Common Stock for the three months ended September 30,
1998 decreased to $0.32 from $0.34 for the three months ended September 30,
1997. The net loss per share of Common Stock for the nine months ended
September 30, 1998 decreased to $0.79 from $0.96 for the same nine months ended
in 1997 due to the Company's decreased net loss, which was offset in part by
higher accretion and dividends on the Company's outstanding preferred stock.
All prior year net loss per share amounts have been restated to conform to
Statement of Financial Accounting Standards No. 128 and Staff Accounting
Bulletin No. 98.
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 has experienced a reduction in capital expenditures in 1998
compared to 1997. The timing and construction of additional markets will
depend, among other things, on customer requirements and the timing and
availability of capital.
The Company's net cash used in operations was $5.9 million and $9.3 million
for the nine months ended September 30, 1998 and 1997, respectively. The
primary reasons for the reduction in net cash used in operations were the
decrease in the net loss from operations and a decrease in accounts receivable
compared to the prior year period.
Capital expenditures were $1.3 million and $3.6 million for the nine months
ended September 30, 1998 and 1997, respectively, reflecting the later stages of
the Company's network expansion. 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.
In 1997 and prior years, the Company 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.
In June 1997, the Company sold $15 million of Class A Preferred with warrants
to certain existing stockholders. 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. No dividends on
the Class A Preferred have been paid as of September 30, 1998.
In March 1998, the Company sold $8.0 million of 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. No dividends on the Class B Preferred
have been paid as of September 30, 1998.
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.
11
<PAGE> 12
This credit facility contains various conditions, financial covenants and
restrictions and is secured by paging equipment. As of September 30, 1998,
there was $5.2 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 September 30, 1998,
there was $3.2 million outstanding under this facility with no additional
availability.
The Company has an $11.0 million credit facility with a financial institution,
which is to be used to finance paging network acquisitions and for general
working capital purposes. The outstanding balance under this facility bears
interest at 1% plus the higher of the Federal Funds Rate for each day plus 1/2%
or prime. Borrowings under this facility are secured by substantially all the
assets of the Company. This credit facility contains various conditions and
financial covenants, including but not limited to a requirement to maintain a
minimum cash balance of $4 million. Monthly installments of principal are due
beginning in February 1999, with the remaining principal balance due in July
2000. The amount outstanding under this facility as of September 30, 1998 was
$10.1 million, with $355,000 in additional availability. In November 1998, the
Company requested and received a waiver of a debt covenant from the financial
institution as of September 30, 1998 and also received certain modifications for
the December 31, 1998 measurement date.
At September 30, 1998, the Company had $7.3 million invested in short-term
investment grade securities at various interest rates.
The Company believes its quarterly debt covenant requirements in respect to the
$11.0 million credit facility may require additional modifications as early as
March 31, 1999. The denial of such a request for modifications of the covenants
could have a material adverse affect on the Company, including the possible
demand by the financial institution of acceleration of the amounts outstanding.
Excluding the effects of a possible demand by the financial institution of
acceleration of the amounts outstanding, 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 and capital
expenditure requirements through at least June 30, 1999 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 $10.0 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.
YEAR 2000 COMPLIANCE
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 that
have time sensitive software or embedded technology may recognize a date of
"00" as the year 1900 rather than the year 2000. This may cause many computer
systems to fail completely or to create erroneous results unless corrective
measures are taken.
In the current year, the Company has designated members of its Information
Technology, Engineering and Finance departments to evaluate the impact of the
Year 2000 problem. The Company utilizes software and related computer
technologies essential to its operations that may be affected by the Year 2000
issue. The Company's evaluation of the Year 2000 issue includes assessment of
the impact on the mission critical systems of the Company, its customers,
vendors and other parties that service the Company, as well as a plan to survey
third parties and test the effectiveness of the upgraded systems. This plan
includes specific goals with timeframes and milestones. According to the
established plan, the Company's mission critical systems will be Year 2000
compliant by June 1999. Assessment of all mission critical systems and
applications has been substantially completed and most third party vendors who
supply these mission critical systems have been contacted. The Company intends
to bring its mission critical systems into Year 2000 compliance through
hardware and software upgrades, software replacement and internally developed
enhanced software. The Company believes that the cost of modifying its software
and related computer technologies will not exceed $250,000 and will be incurred
during
12
<PAGE> 13
the fourth quarter of 1998 and the first and second quarters of 1999. Costs of
the Year 2000 project are based on current estimates and actual results may
vary from such estimates once plans are fully implemented.
NASDAQ REQUIREMENT
The NASDAQ Stock Market has requirements for continued listing, including a
requirement that the minimum bid price per share of the stock of each listed
company not fall below $1.00 for any 30-consecutive business day period. The
Company was notified on October 5, 1998 by NASDAQ that it was not in compliance
with the listing rules because the closing minimum bid price per share of the
Company's common stock has remained below $1.00 for 30 consecutive business
days. If the closing minimum bid price is not at least $1.00 for a minimum of
ten consecutive business days during the 90-day correction period ending
January 4, 1999, the Company's common stock may be delisted from the NASDAQ
Stock Market.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Quarterly
Report on Form 10-Q and other materials filed or to be filed by the Company
with the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by the Company)
contains statements that are or will be forward-looking, such as statements
relating to acquisitions, construction and other business development
activities, future capital expenditures, timing of the Company's need for
additional capital, 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 affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, uncertainties affecting the paging and wireless industries
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, risks relating to the availability of transmitters,
terminals, network project management services and network engineering support,
fluctuations in interest rates, and the existence of and changes to federal and
state laws and regulations.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At the September 30, 1998 measurement date, the Company was in breach of a
quarterly debt covenant requirement in respect to the $11.0 million credit
facility with a financial institution. In November 1998, the Company requested
and received a waiver of a debt covenant from the financial institution as of
September 30, 1998 and also received a quarter debt covenant amendment for the
December 31, 1998 measurement date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
10.4 Fifth Amendment to Credit Agreement and Waiver dated as of
November 12, 1998, by and among the Company, PNI Systems, LLC,
and NATIONSBANK, N.A., successor to NationsBank, N.A. (South)
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
The registrant did not file any reports on Form 8-K during the three
months ended September 30, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED NETWORKS, INC.
Date: November 16, 1998 By: /s/ Mark H. Dunaway
---------------------------------------
Mark H. Dunaway
Chief Executive Officer
Date: November 16, 1998 By: /s/ Kathryn Loev Putnam
----------------------------------------
Kathryn Loev Putnam
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15
<PAGE> 1
Execution Copy
FIFTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this "Amendment
and Waiver") dated as of November 12, 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, as of April 11, 1997 and as of March 19, 1998 (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. Amendment to Credit Agreement. The parties hereto agree that
the Credit Agreement is amended by deleting Section 8.5 thereof in its entirety
and substituting in its place the following:
"8.5 EBITDA TO PROJECTED EBITDA
The Parent shall not permit the EBITDA of the Parent and its
Subsidiaries determined on a consolidated basis for the period of four
consecutive fiscal quarters ending on the dates set forth below to be
less than the corresponding percentage set forth below of Projected
EBITDA of the Parent and its Subsidiaries determined on a consolidated
basis for such four quarter period:
<TABLE>
<CAPTION>
FOUR QUARTER PERIOD ENDING: PERCENTAGE OF PROJECTED EBITDA:
<S> <C>
December 31, 1998 25%
Each March 31, June 30, September 30 and December 75%
31 thereafter
</TABLE>
Section 2. Interest Rate Restriction. Notwithstanding anything set
forth in the Credit Agreement to the contrary, all Loans made to the Borrowers
after the date hereof shall be Base Rate Loans. Any LIBOR Loan outstanding on
the date hereof shall automatically convert to a Base Rate Loan on the last day
of such LIBOR Loan's current Interest Period and may not be continued by either
Borrower as a LIBOR Loan.
<PAGE> 2
Section 3. Waiver. The Lender hereby waives the Event of Default that
has occurred pursuant to Section 9.4(i) of the Credit Agreement arising by
reason of the failure of the Parent to perform its obligations under Section 8.5
of the Credit Agreement during the fiscal quarter of the Parent ending September
30, 1998.
Section 4. Conditions Precedent to Effectiveness of this Amendment and
Waiver. The effectiveness of this Amendment and Waiver 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 and Waiver duly executed by
the Company, the Parent and each Guarantor;
(b) Payment of a fee to the Lender in the amount of $13,750; and
(c) Such other documents, instruments and agreements as the Lender
may reasonably request.
Section 5. 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 Waiver and the performance by the Borrowers of
this Amendment and Waiver and the Credit Agreement, as amended by this Amendment
and Waiver, 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 Waiver has been duly executed
and delivered by a duly authorized officer of each Borrower and each of this
Amendment and Waiver and the Credit Agreement, as amended by this Amendment and
Waiver, 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).
Section 6. 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
-2-
<PAGE> 3
and effect as if such representations and warranties were set forth in this
Amendment and Waiver in full.
Section 7. Reaffirmation by Guarantors. Each of the Guarantor reaffirms
its continuing obligations to the Lender under its Guaranty, and agrees that
this Amendment and Waiver 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 8. 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 and Waiver.
Section 9. 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
Waiver and the other agreements and documents executed and delivered in
connection herewith.
Section 10. Benefits. This Amendment and Waiver shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
Section 11. GOVERNING LAW. THIS AMENDMENT AND WAIVER SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
Section 12. 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 amendment contained in Section 1 herein shall be deemed to
have prospective application only. The waiver contained in Section 2 herein
shall not be construed to be a waiver of any other Event of Default that may be
in existence as of the date hereof. Further, this Amendment and Waiver shall not
be construed as a waiver of any future violation of Section 8.5 or any of the
other terms and conditions of the Credit Agreement nor shall the Borrowers, by
receipt of this waiver, expect that such a waiver will be given in the future.
Section 13. Counterparts. This Amendment and Waiver 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 14. 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]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment
to Credit Agreement and Waiver to be executed as of the date first above
written.
THE LENDER:
NATIONSBANK, N.A.
By: /s/ Anne P. Appleby
-------------------
Name: Anne P. Appleby
Title: Senior Vice President
THE PARENT:
PREFERRED NETWORKS, INC.
By: /s/ Mark H. Dunaway
-------------------
Name: Mark H. Dunaway
Title: Chief Executive Officer
THE COMPANY:
PNI SYSTEMS, LLC
By: Preferred Networks, Inc., its Manager
By: /s/ Mark H. Dunaway
-------------------
Name: Mark H. Dunaway
Title: Chief Executive Officer
[Signatures Continued on Next Page]
-4-
<PAGE> 5
[SIGNATURE PAGE TO FIFTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER DATED
AS OF NOVEMBER 12, 1998 FOR PREFERRED NETWORKS, INC.]
THE GUARANTORS:
<TABLE>
<S> <C>
PNI SPECTRUM, LLC PREFERRED TECHNICAL
SERVICES, INC.
By: Preferred Networks, Inc., its Manager
By: /s/ Mark H. Dunaway
---------------------------------
Name: Mark H. Dunaway
By:/s/ Mark B. Jones Title: Chief Executive Officer
---------------------------------
Name: Mark B. Jones
Title: Secretary
PNI GEORGIA, INC. EPS WIRELESS, INC.
By: /s/ Mark H. Dunaway By: /s/ Mark B. Jones
----------------------------------- ---------------------------------
Name: Mark H. Dunaway Name: Mark B. Jones
Title: Chief Executive Officer Title: Vice President & Secretary
MERCURY PAGING & HTB COMMUNICATIONS, INC.
COMMUNICATIONS, INC.
By: /s/ Mark H. Dunaway By: /s/ Mark H. Dunaway
----------------------------------- ---------------------------------
Name: Mark H. Dunaway Name: Mark H. Dunaway
Title: Chief Executive Officer Title: Chief Executive Officer
CUSTOM PAGE, INC. M.P.C. DISTRIBUTORS, INC.
By: /s/ Mark H. Dunaway By: /s/ Mark H. Dunaway
----------------------------------- ---------------------------------
Name: Mark H. Dunaway Name: Mark H. Dunaway
Title: Chief Executive Officer Title: Chief Executive Officer
</TABLE>
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PREFERRED NETWORKS, INC. RESTATED 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, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,254,046
<SECURITIES> 0
<RECEIVABLES> 4,938,342
<ALLOWANCES> 345,661
<INVENTORY> 2,800,707
<CURRENT-ASSETS> 15,249,039
<PP&E> 32,646,163
<DEPRECIATION> 9,591,760
<TOTAL-ASSETS> 62,677,265
<CURRENT-LIABILITIES> 7,808,050
<BONDS> 15,756,696
23,137,360
0
<COMMON> 62,111,712
<OTHER-SE> (46,136,553)
<TOTAL-LIABILITY-AND-EQUITY> 62,677,265
<SALES> 11,206,610
<TOTAL-REVENUES> 28,684,497
<CGS> 9,964,860
<TOTAL-COSTS> 22,566,165
<OTHER-EXPENSES> 169,637
<LOSS-PROVISION> 319,829
<INTEREST-EXPENSE> 970,381
<INCOME-PRETAX> (10,580,719)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,580,719)
<EPS-PRIMARY> (.79)
<EPS-DILUTED> (.79)
</TABLE>
