<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: June 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
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: 16,544,417 shares of common
stock, no par value, as of July 24, 2000.
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PREFERRED NETWORKS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
NUMBER
------
<S> <C> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets for June 30, 2000
(Unaudited) and December 31, 1999...................................... 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999 (Unaudited).......... 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 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 4. Submission of Matters to a Vote of Security Holders.................... 12
Item 6. Exhibits and Reports on Form 8-K....................................... 12
Signatures............................................................. 12
</TABLE>
<PAGE> 3
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ................................................ $ 3,802,999 $ 5,489,898
Accounts receivable, net ................................................. 1,795,643 1,532,593
Inventory ................................................................ 945,890 723,888
Prepaid expenses and other current assets ................................ 96,837 1,287,408
------------ ------------
Total current assets ................................................... 6,641,369 9,033,787
Property and equipment, net ................................................. 13,083,785 14,926,475
Goodwill net ................................................................ 6,577,155 6,855,669
FCC licenses, net ........................................................... 7,815,659 8,146,517
Other assets, net ........................................................... 176,409 180,306
============ ============
$ 34,294,377 $ 39,142,754
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ......................................................... $ 1,299,857 $ 1,721,707
Accrued liabilities ...................................................... 1,211,963 1,050,355
Accrued compensation ..................................................... 113,227 270,585
State taxes payable ...................................................... -- 500,000
Current portion of notes payable and capital lease obligations ........... 3,713,737 1,126,374
------------ ------------
Total current liabilities .............................................. 6,338,784 4,669,021
Notes payable and capital lease obligations, less current portion ........... 1,894,367 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 $4,556,284 and
$3,808,333 of undeclared dividends in 2000 and 1999, respectively) ....... 18,762,040 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 $2,981,946 and
$2,285,180 of undeclared dividends in 2000 and 1999, respectively) ....... 10,424,548 9,628,081
------------ ------------
Total liabilities and Redeemable Preferred Stock ....................... 37,419,739 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 ............................. 57,522,879 58,643,698
Accretion of Redeemable Preferred Stock ................................. (1,762,629) (1,451,345)
Accumulated deficit ...................................................... (58,885,612) (55,091,409)
------------ ------------
Total stockholders' equity ............................................. (3,125,362) 2,100,944
------------ ------------
$ 34,294,377 $ 39,142,754
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTH ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Network services ........................................................ $ 2,712,071 $ 3,365,419 $ 5,648,672 $ 6,671,573
Pager sales ............................................................. 791,190 852,806 1,610,025 2,442,641
Networking products ..................................................... 189,409 -- 258,900 --
Other services .......................................................... 66,907 48,871 104,665 102,719
------------ ------------ ------------ ------------
Total revenues ................................................. 3,759,577 4,267,096 7,622,262 9,216,933
Costs of revenues
Network services ........................................................ 1,839,401 2,019,139 3,818,421 4,144,502
Pager sales ............................................................. 664,350 819,965 1,383,972 2,327,803
Networking products ..................................................... 112,070 -- 209,528 --
Other services .......................................................... 133 1,196 1,252 3,763
------------ ------------ ------------ ------------
Total costs of revenues ........................................ 2,615,954 2,840,300 5,413,173 6,476,068
------------ ------------ ------------ ------------
Gross margin .............................................................. 1,143,623 1,426,796 2,209,089 2,740,865
Selling, general and administrative expenses .............................. 1,616,159 2,424,849 3,218,105 5,046,616
Depreciation and amortization ............................................. 1,261,599 1,135,816 2,561,501 2,362,100
------------ ------------ ------------ ------------
Operating loss ................................................. (1,734,135) (2,133,869) (3,570,517) (4,667,851)
Interest expense .......................................................... (162,333) (489,856) (325,506) (973,606)
Interest income ........................................................... 75,111 19,166 101,128 56,327
Gain/(loss) on asset disposal ............................................. -- (74,520) -- (74,520)
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes
and cumulative effect of change in accounting principle .................. (1,821,357) (2,679,079) (3,794,895) (5,659,650)
Income tax benefit ........................................................ -- 280,000 -- 280,000
------------ ------------ ------------ ------------
Net loss from continuing operations before cumulative
effect of change in accounting principle ................................. (1,821,357) (2,399,079) (3,794,895) (5,379,650)
Discontinued operations:
Net income from discontinued operations,
net of income tax ............................................... -- (45,491) -- (105,333)
Gain on sale of PTS, net of income tax ............................ -- 644,922 -- 644,922
------------ ------------ ------------ ------------
Net income from discontinued operations ........................... -- 599,431 -- 539,589
Cumulative effect of change in accounting principle ....................... -- -- -- (1,832,398)
------------ ------------ ------------ ------------
Net loss ....................................................... (1,821,357) (1,799,648) (3,794,895) (6,672,459)
Accretion of Redeemable Preferred Stock ................................... (155,653) (155,632) (311,284) (311,283)
Redeemable Preferred Stock dividend requirements .......................... (719,989) (715,083) (1,444,717) (1,390,083)
------------ ------------ ------------ ------------
Net loss attributable to Common Stock .......................... $ (2,696,999) $ (2,670,363) $ (5,550,896) $ (8,373,825)
============ ============ ============ ============
Net income (loss) per share of Common Stock from:
Continuing operations before cumulative
effect of change in accounting principle .................... (.16) (.20) (.34) (.43)
Discontinued operations, net of income tax ..................... -- .04 -- .03
Cumulative effect of change in accounting principle ............ -- -- -- (.11)
Net loss per share of Common Stock ........................................ (.16) (.16) (.34) (.51)
Weighted average number of common shares used in
calculating net loss in calculating net loss per share of Common Stock ... 16,544,417 16,304,639 16,472,917 16,287,665
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
PREFERRED NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations ..................................... $ (3,794,895) $ (6,567,124)
Net loss from discontinued operations ................................... -- (105,333)
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 ........................................ 2,561,501 2,362,100
Maintenance services from sale of PTS ................................ 416,665 83,333
Gain on sale of PTS, net of income taxes ............................. -- (644,922)
Bad debt expense ..................................................... 214,556 207,430
Stock option and restricted stock grant compensation expense ......... 23,254 33,180
Loss on disposal of asset ............................................ -- 74,520
Changes in operating assets and liabilities:
Accounts receivable ............................................. (477,606) (96,256)
Inventory ....................................................... (222,002) 660,655
Prepaid expenses and other assets ............................... 8,628 (65,338)
Accounts payable ................................................ (421,158) 220,767
Accrued liabilities ............................................. 81,608 (23,900)
Accrued compensation ............................................ (7,358) 17,922
------------ ------------
Net cash used in operating activities by continuing operations ....... (1,616,807) (2,010,568)
Net cash used in operating activities by discontinued operations ..... -- 173,619
------------ ------------
Net cash used in operating activities ................................ (1,616,807) (1,836,949)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment .................................................. (91,356) (266,104)
Purchases of equipment for discontinued operations ...................... -- (262,460)
Purchases of other assets and FCC licenses .............................. -- 152
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 --
Payment for acquisitions, net of cash acquired .......................... -- 3,079,583
------------ ------------
Net cash used by investing activities ................................ 88,644 2,551,171
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings ................................................ 550,000 492,136
Repayments of borrowings ................................................ (999,482) (3,320,940)
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 ... (158,736) (2,828,804)
Net cash used in financing activities of discontinued operations ..... -- (226,813)
------------ ------------
Net cash provided (used) by financing activities ..................... (158,736) (3,055,617)
Net increase (decrease) in cash and cash equivalents .................... (1,686,899) (2,341,395)
Cash and cash equivalents, beginning of period .......................... 5,489,898 6,017,159
------------ ------------
Cash and cash equivalents, end of period ................................ $ 3,802,999 $ 3,675,764
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
PREFERRED NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. THE COMPANY
Preferred Networks, 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 EPS. There
were no other significant federal or state income taxes paid or
refunded for the six months ended June 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
PREFERRED NETWORKS, 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
PREFERRED NETWORKS, 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 six months ended June 30, 2000 and 1999, respectively, as a
percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Network services ......................................... 72.1% 78.9% 74.1% 72.4%
Pager sales .............................................. 21.0 20.0 21.1 26.5
Networking products ...................................... 5.0 0.0 3.4 0.0
Other services ........................................... 1.9 1.1 1.4 1.1
------ ------ ------ ------
100.0 100.0 100.0 100.0
Total revenues
Cost of revenues
Network services ......................................... 48.9 47.3 50.1 45.0
Pager sales .............................................. 17.7 19.2 18.2 25.3
Networking products ...................................... 3.0 0.0 2.7 0.0
Other services ........................................... 0.0 0.0 0.0 0.0
------ ------ ------ ------
Total cost of revenues ............................... 69.6 66.5 71.0 70.3
------ ------ ------ ------
Gross margin ................................................. 30.4 33.5 29.0 29.7
Selling, general and administrative expenses ................. 43.0 56.8 42.2 54.8
Depreciation and amortization ................................ 33.6 26.6 33.6 25.6
------ ------ ------ ------
Operating loss ....................................... (46.2) (49.9) (46.8) (50.7)
------ ------ ------ ------
Interest expense ............................................. (4.3) (11.5) (4.3) (10.6)
Interest income .............................................. 2.0 0.4 1.3 0.6
Gain/(loss) on asset disposal ................................ -- (1.8) -- (0.8)
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle ...... (48.5) (62.8) (49.8) (61.5)
Income tax benefit ........................................... -- 6.6 -- 3.0
------ ------ ------ ------
Net loss from continuing operations before cumulative effect
of change in accounting principle ........................ (48.5) (56.2) (49.8) (58.5)
Discontinued operations:
Income (loss) from operations, net of income tax -- (1.1) -- (1.1)
Gain on sale of PTS ............................ -- 15.1 -- 7.0
------ ------ ------ ------
Net income from discontinued operations ........ -- 14.0 -- 5.9
Cumulative effect of change in accounting principle .......... -- -- -- (19.9)
------ ------ ------
Net loss ..................................................... (48.5)% (42.2)% (49.8)% (72.5)%
====== ====== ====== ======
EBITDA ....................................................... (12.6)% (23.3)% (13.2)% (25.1)%
====== ====== ====== ======
</TABLE>
8
<PAGE> 9
PREFERRED NETWORKS, INC.
RESULTS OF OPERATIONS
Revenues
Total revenues were $3.8 million and $7.6 million for the three and six months
ended June 30, 2000, respectively, compared to $4.3 million and $9.2 million for
the three and six months ended June 30, 1999, respectively. The decrease in
total revenues compared to the prior year periods was primarily due to decreased
pager sales, which also resulted in lower network service revenue. This was
partially offset by an increase in revenues from networking products, which PNI
began to sell in 2000.
Revenues from network services were $2.7 million and $5.6 million for the three
and six months ended June 30, 2000, respectively, compared to $3.4 million and
$6.7 million for the three and six months ended June 30, 1999, respectively.
PNI's airtime revenues were affected by reduced 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. Accordingly, lower pager
sales resulted in a decline in total units in service to 468,314 at June 30,
2000, compared to 538,470 at June 30, 1999. In addition, because PNI's Direct
Access customers, which supply their own switching, typically have their own
sources of pagers, this customer base was less affected by the decline in pager
sales, and accordingly, Direct Access units in service increased as a percentage
of revenues to 46.0% of total units in service, compared to 43.0% at June 30,
1999. Because PNI incurs less marginal cost in supplying only airtime to Direct
Access customers, it therefore charges these customers less per unit in service
per month than it charges its reseller customers. Accordingly, total average
revenue per unit ("ARPU") declined to $1.92 for the six months ended June 30,
2000, compared to $2.06 in the prior year. PNI's airtime revenues have also been
affected by industry trends of increased competition for reseller service units
and declining ARPU. 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.
Revenues from pager sales were $791,000 and $1.6 million for the three and six
months ended June 30, 2000, respectively, compared to $853,000 and $2.4 million
for the three and six months ended June 30, 1999, respectively. The decrease in
revenues from pager sales compared to the prior year periods resulted from a
limited amount of working capital available to PNI to purchase pagers in the
second half of 1999 as further discussed in "Liquidity and Capital Resources."
Following completion of the sales of PTS and EPS, management believes PNI
currently has sufficient working capital to increase its purchases of pagers,
which management further believes will have a positive effect on re-establishing
total net unit growth and associated revenues. However, management also believes
that it may take several quarters to increase its pagers sales to the higher
levels achieved prior to the working capital shortage that occurred during 1999.
Since January 2000, PNI has introduced a number of its new networking products.
In March 2000, PNI began shipments of the first such product, its iTerminal(TM)
desktop messaging terminal. In May 2000, PNI introduced its iLink TNPP Internet
router, and in June 2000, it began shipments of its Platform1(TM) modular
switch. Total networking product revenues for the three and six months ended
June 30, 2000, were $189,000 and $259,000, respectively. PNI expects to generate
increased revenues from such sales in the remainder of 2000 and expects to
introduce additional products and feature sets.
Cost of Revenues
Cost of network services were $1.8 million and $3.8 million for the three and
six months ended June 30, 2000, respectively, compared to $2.0 million and $4.1
million for the three and six months ended June 30, 1999, respectively. The
decrease in cost of network services is due to continued initiatives to reduce
operating costs. 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.
Cost of pager sales were $664,000 and $1.4 million for the three and six months
ended June 30, 2000, respectively, compared to $820,000 and $2.3 million for the
three and six months ended June 30, 1999, respectively. The decrease in cost of
pager sales is due primarily to the decrease in pager sales.
9
<PAGE> 10
PREFERRED NETWORKS, INC.
Cost of networking products were $112,000 and $210,000 for the three and six
months ended June 30, 2000, respectively. The majority of this expense
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, this relatively fixed expense allocation exceeded the
networking product revenues for the three months ended March 31, 2000. However,
PNI's revenue from sales of networking products exceeded these expenses for the
three months ended June 30, 2000, resulting in gross profits from such product
sales. PNI expects that its future increases in networking product shipments and
associated revenue will result in increased positive gross profit after these
allocated expenses.
Overhead
S,G&A expenses were $1.6 million and $3.2 million for the three and six months
ended June 30, 2000, respectively, compared to $2.4 million and $5.0 million for
the three and six months ended June 30, 1999, respectively. S,G&A expenses
decreased as a percentage of total revenues to 43.0% and 42.2% for the three and
six months ended June 30, 2000, respectively, compared to 56.8% and 54.8% for
the three and six months ended June 30, 1999, respectively. The decreases in
S,G&A were due to certain cost reduction measures during the third quarter of
1999 through employee terminations, which resulted in reduced expenses for the
comparative first six months of 2000. PNI also has experienced increased
efficiencies in supporting a greater service unit mix among Direct Access
customers, which tend to have a greater number of service units per customer on
PNI's networks compared to reseller customers, and accordingly, require less
customer support.
Depreciation and amortization expenses were $1.3 million and $2.6 million for
the three and six months ended June 30, 2000, respectively, compared to $1.1
million and $2.4 million for the three and six months ended June 30, 1999,
respectively. Interest expense was $162,000 and $326,000 for the three and six
months ended June 30, 2000, respectively, compared to $490,000 and $974,000 for
the three and six months ended June 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 improved by
$858,000 or 32.0% for the three months ended June 30, 2000 to $1.8 million
compared to $2.7 million for the three months ended June 30, 1999. Net loss from
continuing operations before cumulative effect of change in accounting principle
and before income tax benefit improved by $1.9 million or 33.0% for the six
months ended June 30, 2000 to $3.8 million compared to $5.7 million for the six
months ended June 30, 1999. The cumulative effect of change in accounting
principle for the six months ended June 30, 1999 resulted from the write-off
of market start-up costs as required by SOP 98-5 was $1.8 million.
The net loss attributable to Common Stock was $ 2.7 million and $ 5.6 million
for the three and six months ended June 30, 2000, respectively, compared to $
2.7 million and $ 8.4 million for the three and six months ended June 30, 1999,
respectively. The net loss attributable to Common Stock for 2000 decreased due
to decreased operating losses and the cumulative effect of adopting the new
accounting principle for market entry costs in January 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, PNI had $3.8 million in cash, of which $3.3 million was
invested in short-term, investment grade securities at various interest rates.
At June 30, 2000, PNI was in compliance with the financial covenants under its
credit facilities and had $160,000 of additional unused borrowing capacity under
its senior revolving credit facility.
PNI's net cash used in operations improved for both the six months ended June
30, 2000 compared to the prior year period and for the three months ended June
30, 2000 compared to the three months ended March 31, 2000. Net cash used in
operations improved by $220,000 to $1.6 million for the six months ended June
30, 2000, compared to $1.8 million for the six months ended June 30, 1999. The
improvement was due to reduced net losses, which was partially offset by an
increase in accounts receivable and a decrease in accounts payable that was
expected following the completion of PNI's restructuring events in December 1999
(as further discussed in the "Liquidity and Capital Resources" section of PNI's
1999 Annual Report on Form 10-K.) The three months ended June 30, 2000
represented a quarterly improvement of $258,000 of net cash used in operations
compared to the three months ended March 31, 2000. The improvement in the most
recent three-month period was due to
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reduced net loss and more efficient management of accounts receivable and
accounts payable compared to the first three months of 2000.
PNI is experiencing growth in the sales of its new networking products and
continued reductions in operating costs, which it expects will lead to continued
improvements in cash from operations. PNI believes these improvements, together
with its cash and cash equivalents at June 30, 2000, will provide sufficient
cash resources to fund its working capital requirements for the foreseeable
future. However, PNI's networking products represent a new business for PNI and
there can be no assurance that the marketplace will find the price and
functionality of PNI's products attractive, which could adversely affect
networking product sales. In addition, no assurances can be given that PNI's
marketing initiatives with respect to its network service business will be
successful, which could adversely affect airtime revenues.
PNI intends to pursue additional capitalization strategies, including but not
limited to refinancing its senior revolving credit facility that matures on
March 31, 2001 and retiring its preferred stock that becomes redeemable in 2002
and 2003. PNI has historically accessed capital through equity issuances and
debt financings; however, no assurances can be given 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
expansion and other business development activities, future capital
expenditures, financing sources and availability and the effects of laws and
regulations (including FCC regulations) and competition. Such forward-looking
information involves important risks and uncertainties that could significantly
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 related 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(TM) and iTerminal(TM) products; the
relatively unproven nature of PNI's networking products, which represent a new
product line for PNI; 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 March 31, 2000. See Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 8, 2000, the Company held its Annual Meeting of Shareholders. The
following were the results of the meeting:
The shareholders elected William H. Bang and John J. Hurley as Class I directors
until the annual meeting of shareholders in 2003 or until their successors are
elected and shall have been qualified.
<TABLE>
<CAPTION>
Bang Hurley
---------- ----------
<S> <C> <C>
Votes Cast For.......................... 28,727,898 28,727,898
Abstentions/Broker
Non-Votes............................ 63,012 63,012
</TABLE>
In addition to Messrs. Bang and Hurley, the terms of Mark H. Dunaway, Robert Van
Degna and Richard P. Campbell, Jr. (who are Class II and III directors)
continued after the Company's 2000 annual meeting of the shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit:
27 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K:
There have been no reports on Form 8-K during the three months ended
June 30, 2000.
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: August 4, 2000 By: /s/ Mark H. Dunaway
-------------------------------------------------
Mark H. Dunaway
Chief Executive Officer
Date: August 4, 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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