<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, 2000
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
PNI TECHNOLOGIES, 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)
Preferred Networks, Inc.
(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: 16,523,417 shares of common
stock, no par value, as of November 14, 2000.
<PAGE> 2
PNI TECHNOLOGIES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
NUMBER
------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets for September 30, 2000
(Unaudited) and December 31, 1999......................................................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and 1999 (Unaudited)....................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (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
Item 3. Quantitative and Qualitative Disclosure of Market Risk.................................... 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures................................................................................. 12
</TABLE>
<PAGE> 3
PNI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents ...................................................... $ 2,918,729 $ 5,489,898
Accounts receivable, net ....................................................... 1,753,019 1,532,593
Inventory ...................................................................... 1,190,561 723,888
Prepaid expenses and other current assets ...................................... 107,291 1,287,408
------------- -------------
Total current assets ....................................................... 5,969,600 9,033,787
Property and equipment, net ......................................................... 12,382,903 14,926,475
Goodwill net ........................................................................ 6,437,898 6,855,669
FCC licenses, net ................................................................... 7,654,531 8,146,517
Other assets, net ................................................................... 179,360 180,306
------------- -------------
$ 32,624,292 $ 39,142,754
============= =============
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Accounts payable ............................................................... $ 1,977,271 $ 1,721,707
Accrued liabilities ............................................................ 972,093 1,050,355
Accrued compensation ........................................................... 86,109 270,585
State taxes payable ............................................................ -- 500,000
Current portion of notes payable and capital lease obligations ................. 4,258,307 1,126,374
------------- -------------
Total current liabilities .................................................. 7,293,780 4,669,021
Notes payable and capital lease obligations, less current portion ................... 1,398,849 4,942,213
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 $4,929,235 and
$3,808,333 of undeclared dividends in 2000 and 1999, respectively) ............ 19,240,787 17,802,495
Class B Senior Redeemable Preferred Stock, no par value, $1.50
per share redemption price; 5,500,000 shares authorized,
5,333,336 shares issued and outstanding (including $3,432,622 and
$2,285,180 of undeclared dividends in 2000 and 1999, respectively) ............ 10,925,069 9,628,081
------------- -------------
Total liabilities and Redeemable Preferred Stock ........................... 38,858,485 37,041,810
Stockholders' equity
Common Stock, no par value, 100,000,000 shares authorized
in 2000 and 1999; 16,544,417 and 16,369,302 issued and
outstanding in 2000 and 1999, respectively ................................. 56,715,834 58,643,698
Accretion of Redeemable Preferred Stock ....................................... (1,918,270) (1,451,345)
Accumulated deficit ............................................................ (61,031,757) (55,091,409)
------------- -------------
Total stockholders' equity ................................................. (6,234,193) 2,100,944
------------- -------------
$ 32,624,292 $ 39,142,754
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PNI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Network services ............................................... $ 2,565,700 $ 3,206,572 $ 8,214,372 $ 9,878,145
Pager sales .................................................... 826,422 752,575 2,436,447 3,195,216
Networking products ............................................ 18,756 -- 277,656 --
Other services ................................................. 43,264 56,040 147,929 158,759
------------ ------------ ------------ ------------
Total revenues ............................................ 3,454,142 4,015,187 11,076,404 13,232,120
Costs of revenues
Network services ............................................. 1,779,427 2,164,820 5,597,848 6,309,322
Pager sales .................................................. 743,906 745,515 2,127,878 3,073,318
Networking products .......................................... 110,599 -- 320,127 --
Other services ............................................... 441 6,430 1,693 10,193
------------ ------------ ------------ ------------
Total costs of revenues ................................... 2,634,373 2,916,765 8,047,546 9,392,833
------------ ------------ ------------ ------------
Gross margin ...................................................... 819,769 1,098,422 3,028,858 3,839,287
Selling, general and administrative expenses ...................... 1,612,408 1,372,304 4,830,513 6,418,920
Depreciation and amortization ..................................... 1,304,997 1,408,433 3,866,498 3,770,533
------------ ------------ ------------ ------------
Operating loss ............................................ (2,097,636) (1,682,315) (5,668,153) (6,350,166)
Interest expense .................................................. (164,525) (447,603) (490,031) (1,421,209)
Interest income ................................................... 25,165 21,045 126,293 77,372
Gain/(loss) on asset disposal ..................................... 91,543 12,314 91,543 (62,206)
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes
and cumulative effect of change in accounting principle .......... (2,145,453) (2,096,559) (5,940,348) (7,756,209)
Income tax benefit ................................................ -- 120,000 -- 400,000
------------ ------------ ------------ ------------
Net loss from continuing operations before cumulative
effect of change in accounting principle ......................... (2,145,453) (1,976,559) (5,940,348) (7,356,209)
Discontinued operations:
Net income from discontinued operations,
net of income tax ......................................... -- (71,748) -- (177,081)
Gain on sale of PTS, net of income tax ...................... -- 191,506 -- 836,428
------------ ------------ ------------ ------------
Net income from discontinued operations ..................... -- 119,758 -- 659,347
Cumulative effect of change in accounting principle ............... -- -- -- (1,832,398)
------------ ------------ ------------ ------------
Net loss ............................................... (2,145,453) (1,856,801) (5,940,348) (8,529,260)
Accretion of Redeemable Preferred Stock ........................... (155,641) (155,642) (466,925) (466,919)
Redeemable Preferred Stock dividend requirements .................. (823,627) (724,968) (2,268,344) (2,115,051)
------------ ------------ ------------ ------------
Net loss attributable to Common Stock .................. $ (3,124,721) $ (2,737,411) $ (8,675,617) $(11,111,230)
============ ============ ============ ============
Net income (loss) per share of Common Stock from:
Continuing operations before cumulative
effect of change in accounting principle ............ (0.19) (0.18) (0.53) (0.61)
Discontinued operations, net of income tax ............. -- 0.01 -- 0.04
Cumulative effect of change in accounting
principle ........................................... -- -- -- (0.11)
Net loss per share of Common Stock ................................ (0.19) (0.17) (0.53) (0.68)
Weighted average number of common shares used in
calculating net loss per share of Common Stock .............. 16,544,417 16,369,302 16,496,925 16,337,940
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PNI TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations ................................................. $(5,940,348) $(8,352,179)
Net loss from discontinued operations ............................................... -- (177,081)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting principle ............................ -- 1,832,398
Depreciation and amortization .................................................. 3,866,498 3,770,533
Maintenance services from sale of PTS .......................................... 416,665 333,332
Gain on sale of PTS, net of income taxes ........................................ -- (836,428)
Bad debt expense ............................................................... 331,193 301,150
Stock option and restricted stock grant compensation expense ................... 49,743 49,757
Gain on disposal of asset ....................................................... (91,543) 62,206
Changes in operating assets and liabilities:
Accounts receivable ....................................................... (551,619) (396,237)
Inventory ................................................................. (466,673) 758,692
Prepaid expenses and other assets ......................................... (13,031) (39,896)
Accounts payable .......................................................... 255,564 (632,891)
Accrued liabilities ....................................................... (158,262) (383,764)
Accrued compensation ...................................................... (34,476) (70,851)
----------- -----------
Net cash used in operating activities by continuing operations ................. (2,336,289) (3,781,242)
Net cash used in operating activities by discontinued operations ............... -- 116,747
----------- -----------
Net cash used in operating activities .......................................... (2,336,289) (3,664,512)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment .............................................................. (474,345) (151,939)
Proceeds from sale of equipment ..................................................... 180,150 --
Purchases of equipment for discontinued operations .................................. -- (151,752)
Purchases of other assets and FCC licenses .......................................... -- (155,682)
Payment of accrued expenses related to sale of subsidiary in 1999 ................... (570,000) --
Proceeds from holdback related to sale of subsidiary in 1999 ........................ 750,000 --
Proceeds from sale of PTS ........................................................... -- 3,088,625
----------- -----------
Net cash used by investing activities .......................................... (114,195) 2,629,252
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ............................................................ 799,703 1,167,136
Repayments of borrowings ............................................................ (1,211,134) (3,776,887)
Issuance of redeemable preferred stock .............................................. -- --
Issuance of Common Stock upon exercise of stock options ............................. 290,746 --
----------- -----------
Net cash provided by financing activities of continuing operations ............. (120,685) (2,609,751)
Net cash used in financing activities of discontinued operations ............... -- (226,813)
----------- -----------
Net cash provided (used) by financing activities ............................... (120,685) (2,836,564)
Net increase (decrease) in cash and cash equivalents ................................ (2,571,169) (3,871,824)
Cash and cash equivalents, beginning of period ...................................... 5,489,898 6,017,159
----------- -----------
Cash and cash equivalents, end of period ............................................ $ 2,918,729 $ 2,145,335
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PNI TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. THE COMPANY
PNI Technologies, Inc. ("PNI") is a developer and supplier of advanced
networking hardware and software products for companies that operate in
the wireless, fixed network and Internet marketplaces. These products
provide companies with greater processing efficiencies, cost savings,
and an open platform to bring them closer to their customers through
unified service offerings. PNI is at an early stage of development of
its networking products business. In early 2000, PNI began shipments to
customers of its first networking products and is making a series of
additional product introductions. PNI also owns and operates one-way
wireless messaging networks in the Eastern United States and provides
unbranded, wholesale network services. Substantially all of PNI's
revenues are currently derived from its network services business,
which it has operated since 1991.
2. BASIS FOR PRESENTATION
The interim condensed consolidated financial information contained
herein has been prepared by PNI, 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. PNI 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, 1999, included in PNI'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. In May 2000, PNI
paid $420,000 in state franchise tax related to the sale of its former
subsidiary, EPS Wireless, Inc. There were no other significant federal
or state income taxes paid or refunded for the nine months ended
September 30, 2000 and 1999.
4. DISCONTINUED OPERATIONS
On May 28, 1999, PNI sold substantially all of the assets of its
wholly-owned subsidiary, Preferred Technical Services ("PTS"), a
provider of wireless network equipment installation, maintenance and
engineering services. Under the terms of the purchase agreement, PNI
received $3,088,625 in net cash proceeds from the sale and a $1 million
credit for maintenance services to be provided by PTS to PNI on its
paging networks. At May 31, 2000, the credit was used in full. PNI
recognized a gain on the sale of PTS in the amount of $1,187,928.
Certain expenses and other items affecting the calculation of net cash
proceeds and gain from the sale of PTS were recognized over several
quarterly reporting periods during 1999, and accordingly, the above
figures represent items as of December 31, 1999. As the operations of
this subsidiary represented a separate segment, operating results for
this subsidiary for all periods presented have been reclassified and
reported as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
On December 10, 1999, PNI sold its wholly-owned subsidiary EPS
Wireless, Inc. ("EPS"), a provider of paging and cellular product
repair services, sales of new, used, and refurbished paging and
cellular products and inventory management services. PNI received $14.9
million in proceeds from this sale subject to a holdback of $750,000
that was subsequently paid on June 13, 2000. PNI recognized a gain on
the sale of EPS in the amount of $7,448,532 in December 1999. As the
operations of this subsidiary represented a separate segment, operating
results for this subsidiary for all periods presented have been
reclassified and reported as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30.
6
<PAGE> 7
PNI TECHNOLOGIES, INC.
5. ADOPTION OF NEW ACCOUNTING STANDARD In April 1998, the Accounting
Standards Executive Committee 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
organization costs, as incurred. In addition, SOP 98-5 requires a
write-off of any previously capitalized start-up or organizational
costs, to be reported as a cumulative effect of a change in accounting
principle. PNI adopted SOP 98-5 effective January 1, 1999, and wrote
off the unamortized amount of its market entry costs at January 1,
1999, in the amount of $1,832,398.
6. SEGMENT INFORMATION In its continuing operations, PNI operates its
business as one reportable segment.
7
<PAGE> 8
PNI TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
In this section, PNI 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 PNI's consolidated statements of operations and EBITDA for each of
the three and nine months ended September 30, 2000 and 1999, respectively, as a
percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues
Network services ............................................... 74.3 % 79.9 % 74.2% 74.7 %
Pager sales .................................................... 23.9 18.7 22.0 24.1
Networking products ............................................ 0.5. -- 2.5 --
Other services ................................................. 1.3. 1.4 1.3 1.2
----- ----- ----- -----
100.0 100.0 100.0 100.0
Total revenues
Cost of revenues
Network services ............................................... 51.5 53.9 50.5 47.7
Pager sales .................................................... 21.5 18.6 19.2 23.2
Networking products ............................................ 3.2 -- 2.9 --
Other services ................................................. -- 0.2 -- 0.1
----- ----- ----- -----
Total cost of revenues ..................................... 76.2 72.7 72.6 71.0
----- ----- ----- -----
Gross margin ......................................................... 23.8 27.3 27.4 29.0
Selling, general and administrative expenses ......................... 46.7 34.2 43.6 48.5
Depreciation and amortization ........................................ 37.8 35.1 34.9 28.5
----- ----- ----- -----
(60.7) (42.0) (51.1) (48.0)
----- ----- ----- -----
Operating loss
Interest expense ..................................................... (4.8) (11.1) (4.4) (10.7)
Interest income ...................................................... 0.7 0.5 1.1 0.6
Gain/(loss) on asset disposal ........................................ 2.7 0.3 0.8 (0.5)
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle ............ (62.1) (52.3) (53.6) (58.6)
Income tax benefit ................................................... -- 3.0 -- 3.0
----- ----- ----- -----
Net loss from continuing operations before cumulative effect
of change in accounting principle ............................. (62.1) (49.3) (53.6) (55.6)
Discontinued operations:
Income (loss) from operations, net of income tax ....... -- (1.8) -- (1.3)
Gain on sale of PTS .................................... -- 4.8 -- 6.3
----- ----- ----- -----
Net income from discontinued operations ................ -- (46.3) -- (50.6)
Cumulative effect of change in accounting principle .................. -- -- -- (13.8)
----- ----- ----- -----
Net loss ............................................................. (62.1) % (46.3)% (53.6) % (64.4) %
===== ===== ===== =====
EBITDA ............................................................... (22.9) % (6.8) % (16.3) % (19.5) %
===== ===== ===== =====
</TABLE>
8
<PAGE> 9
PNI TECHNOLOGIES, INC.
RESULTS OF OPERATIONS
Revenues
Total revenues were $3.5 million and $11.1 million for the three and nine months
ended September 30, 2000, respectively, compared to $4.0 million and $13.2
million for the three and nine months ended September 30, 1999, respectively.
The decrease in total revenues compared to the prior year periods was due to
lower network services revenues. This was partially offset by an increase in
revenues from networking products, which PNI began to sell in 2000.
Revenues from network services were $2.6 million and $8.2 million for the three
and nine months ended September 30, 2000, respectively, compared to $3.2 million
and $9.9 million for the three and nine months ended September 30, 1999,
respectively. PNI's airtime revenues were affected by decreased pager purchases,
particularly with respect to PNI's reseller customers, which typically rely on
PNI for pager supply in order to add service units to PNI's networks. PNI's
airtime revenues have also been affected by industry trends of increased
competition for reseller service units and declining average revenue per unit
("ARPU"). Due to these factors, PNI experienced a decline in total units in
service to 431,059 at September 30, 2000, compared to 536,942 at September 30,
1999. In addition, total ARPU declined to $1.92 for the nine months ended
September 30, 2000, compared to $2.06 in the prior year. PNI has undertaken
certain marketing initiatives to address these competitive pressures, including
increased supply of pager product to its customers to facilitate the addition of
more service units to its networks. However, no assurances can be given that
these marketing initiatives will lead to increased airtime revenues in the
future, and the trend toward decreasing network services revenues may continue.
Revenues from pager sales were $826,000 and $2.4 million for the three and nine
months ended September 30, 2000, respectively, compared to $753,000 and $3.2
million for the three and nine months ended September 30, 1999, respectively.
PNI began commercial shipments of its first networking product, the
iTerminal(TM) desktop messaging terminal, in early 2000, and has subsequently
introduced additional products, including its Platform1(R) intelligent,
high-speed, modular switch. For the first six months of 2000, PNI generated
revenues of $259,000 from sales of networking products. During the third quarter
of 2000, PNI's development team was primarily engaged in a Platform1(R) customer
product installation, which is expected to be concluded during the fourth
quarter. However, due to PNI's limited development personnel, dedication of
these personnel to that installation inhibited its ability to complete customer
orders. Accordingly, PNI generated only $19,000 of networking product revenues
in the three months ended September 30, 2000, and revenues of $278,000 for the
nine months ended September 30, 2000. The Company believes it will ship many of
its delayed orders during the fourth quarter, although due to the early stages
of commercial sales of PNI's networking products, there can be no assurance that
the Company will not experience further delays.
Cost of Revenues
Cost of network services were $1.8 million and $5.6 million for the three and
nine months ended September 30, 2000, respectively, compared to $2.2 million and
$6.3 million for the three and nine months ended September 30, 1999,
respectively. The decrease in cost of network services is due to continued
initiatives to reduce operating costs. In addition to these initiatives, PNI is
also currently deploying its networking products throughout its own network
markets, which should result in the elimination of leased line telephone
circuits and a further reduction of network operating costs. PNI expects to
substantially complete this internal deployment during the fourth quarter of
2000 and the first quarter of 2001.
Cost of pager sales were $744,000 and $2.1 million for the three and nine months
ended September 30, 2000, respectively, compared to $746,000 and $3.1 million
for the three and nine months ended September 30, 1999, respectively.
Cost of networking products were $111,000 and $320,000 for the three and nine
months ended September 30, 2000, respectively. The majority of the expense for
the three month period represents an allocation of existing S,G&A expenses that
had previously been included in research and development costs and are now
associated with the delivery of commercial products. Due to the early stages of
commercial sales of PNI's networking products and its attempts to build its
networking products business, this relatively fixed expense allocation exceeded
the networking product revenues for the three months ended September 30, 2000.
9
<PAGE> 10
PNI TECHNOLOGIES, INC.
Overhead
S,G&A expenses were $1.6 million and $4.8 million for the three and nine months
ended September 30, 2000, respectively, compared to $1.4 million and $6.4
million for the three and nine months ended September 30, 1999, respectively.
S,G&A for the three month period ended September 30, 1999, was lower due to an
adjustment in certain accruals related primarily to professional fees. The
decrease in S,G&A for the nine months ended September 30, 2000, was due to
certain cost reduction measures during the third quarter of 1999 through
employee terminations, which resulted in reduced expenses for the comparative
period in 2000.
Depreciation and amortization expenses were $1.3 million and $3.9 million for
the three and nine months ended September 30, 2000, respectively, compared to
$1.4 million and $3.8 million for the three and nine months ended September 30,
1999, respectively. Interest expense was $165,000 and $490,000 for the three and
nine months ended September 30, 2000, respectively, compared to $448,000 and
$1.4 million for the three and nine months ended September 30, 1999,
respectively. The decrease in interest expense is the result of reductions in
total debt outstanding during 1999.
Net loss from continuing operations before income tax benefit and cumulative
effect of change in accounting principle was $2.1 million and $5.9 for the three
and nine months ended September 30, 2000, respectively, compared to $2.1 million
and $7.8 million for the three and nine months ended September 30, 1999,
respectively. The cumulative effect of change in accounting principle for the
nine months ended September 30, 1999 resulted from the write-off of market
start-up costs as required by SOP 98-5 and was $1.8 million.
The net loss attributable to Common Stock was $3.1 million and $8.7 million for
the three and nine months ended September 30, 2000, respectively, compared to
$2.7 million and $11.1 million for the three and nine months ended September 30,
1999, respectively. The increase in net loss attributable to Common Stock for
the three month period was due primarily to the gain on sale of PTS and a
related tax benefit recognized in the 1999 three month period. The net loss
attributable to Common Stock for the nine month period decreased due to a
decrease in operating losses and the cumulative effect of adopting the new
accounting principle for market entry costs in January 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, PNI had $2.9 million in cash, $1.8 million in accounts
receivable and $2.0 million in accounts payable. An aggregate of $5.7 million in
principal plus accrued interest was outstanding under PNI's credit facilities
with its lenders as of September 30, 2000. At September 30, 2000, PNI was in
compliance with the financial covenants under its credit facilities and had no
additional borrowing availability. PNI's net cash used in operations for the
nine month period ended September 30, 2000 was $2.3 million, compared to $3.7
million in the prior year period. Total cash used for the nine month period
ended September 30, 2000 was $2.6 million, compared to $3.9 million in the prior
year period. The improvement in the nine month period was due primarily to
reduced net losses compared to the prior year period.
PNI is continuing in its efforts to develop its networking products business,
and to that end has incurred expenses in the development and promotion of this
business that it would not have incurred solely as a provider of network
services. PNI has not yet achieved significant sales of its networking products,
and its costs attributable to this business have exceeded its revenues. PNI's
principal revenue source remains its network services business, which continues
its trend toward lower per-user and aggregate revenues. PNI has undertaken
certain marketing initiatives to address competitive pressures in its network
services business, although no assurances can be given that this will lead to
increased airtime revenues in the future, and the trend toward decreasing
network services revenues may continue.
PNI is obligated to make aggregate principal payments of $2.9 million to two of
its three primary outside lenders in March 2001, and thereafter will be required
to make regular principal payments to two of these lenders in the aggregate
average monthly amount of $161,000 (in addition to monthly interest payments
presently made to these two lenders) for the remainder of 2001. If these lender
obligations are not successfully paid or restructured by the time they are due,
the lenders will be able to declare the principal and all accrued interest
currently due. These debts are secured by substantially all of PNI's assets. In
the absence of a substantial improvement in its networking products business or
its network services business (or both), PNI's cash and cash equivalents on
hand, together with cash from operations, may not be sufficient to meet these
debt service requirements. In such event,
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PNI would be required to raise funds in the form of equity, bank debt or other
debt financing to execute its business plan. PNI is exploring a variety of
financing and restructuring alternatives, including selling or licensing various
assets and restructuring or reorganizing its outstanding debt and/or its
business. There can be no assurance that if additional funds are required, such
funds will be available on terms acceptable to PNI, if at all, and the failure
to obtain such funds could have a material adverse effect on PNI.
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 PNI with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by PNI) contains
statements that are or will be forward-looking, such as statements relating to
future sales activity and financial performance, marketing efforts and their
possible results, financing and restructuring alternatives and their possible
results, 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 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 PNI. These risks and uncertainties include, but are not
limited to, uncertainties affecting the wireless industries generally; risks
relating to PNI's expansion and other business development activities; risks
relating to the deployment and feasibility of PNI's new networking technologies
and products; risks relating to technological change in the wireless industries;
risks associated with PNI's efforts to commercialize and market successfully its
networking products, such as the Platform1(R) and iTerminal(TM) products; the
relatively unproven nature of PNI's networking products, which represent a new
product line for PNI; possible challenges to PNI's technologies (such as
challenges to the validity of patents on PNI's switching technology); risks
relating to the ability of PNI to obtain additional funds in the form of debt or
equity (including availability of financing terms acceptable to PNI);
fluctuations in interest rates; and the existence of and changes to federal and
state laws and regulations. In particular, statements relating to the
competitive position and performance of PNI's current and future networking
products and their expected performance in the marketplace are forward-looking
statements that are subject to risks and uncertainties. PNI operates in a highly
competitive marketplace and new product developments by competitors can occur at
any time, thereby diminishing the attractiveness of PNI's products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
There have been no significant changes since June 30, 2000. See Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
<TABLE>
<S> <C>
3 Articles of Amendment to Articles of Incorporation filed August 14, 2000
10 Modification Agreement #4 by and between the Company and Associates Capital
Services Corporation dated September 29, 2000
27 Financial Data Schedule (For SEC use only)
</TABLE>
(b) Reports on Form 8-K:
There have been no reports on Form 8-K during the three months ended
September 30, 2000.
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PNI TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED NETWORKS, INC.
Date: November 14, 2000 By: /s/ Mark H. Dunaway
-------------------------------------------------
Mark H. Dunaway
Chief Executive Officer
Date: November 14, 2000 By: /s/ Kathryn Loev Putnam
-------------------------------------------------
Kathryn Loev Putnam
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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