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PREFERRED NETWORKS ATTRIBUTES LOSS TO EXPANSION

NEW YORK-Preferred Networks Inc., a paging wholesaler that went public in March, experienced net losses of $1.5 million during the first quarter of 1996, the price for investment in rapid expansion, company officials said.

At the same time, revenues increased by $1 million to $2.4 million for the quarter ending March 31, compared with the same period in 1995. Total paging units in service increased by 105,526 to 178,061 when the two first quarters are compared.

“We expect to incur losses in start-up areas, and that consolidated losses will continue for the next three years,” said Kim Smith Hughes, chief financial officer.

Preferred Networks, based in Norcross, Ga., owns or has pending licenses to use high-power 157.740 MHz paging frequencies in the 50 largest U.S. metropolitan markets and their surrounding areas. The company built and operates technical control centers in Atlanta and Washington, D.C., to support its paging networks in the Southeast and Mid-Atlantic regions.

Technical control centers in Chicago and Poughkeepsie, N.Y., will be in operation by the end of the second quarter, and the next center to be built will be in Detroit, according to Mark H. Dunaway, company president.

A key cause of the reported first-quarter loss was the company’s below-cost sale of pagers. Consequently, an important component of the company’s expansion strategy is to grow to a “critical mass” in which it is large enough to negotiate better deals on paging units with manufacturers.

“We provide paging units to some of our resellers, mostly the smaller ones. We believe we will continue to lose money selling pagers for the foreseeable future, but that the gap will decrease as our size increases,” Dunaway said. “Also, because there is no leased product, we can’t depreciate them in a bundled pool.”

Preferred Networks used the $32 million net proceeds of its March initial public offering to repay its outstanding debt and to terminate all outstanding vendor financing, Hughes said. It then entered into a $12 million equipment vendor line of credit, as well as a $5 million finance company line of credit, the latter for purchase of Motorola Inc. paging system equipment.

A growing trend in Preferred Networks sales is the acquisition of “interconnection, collocation customers, more sophisticated than traditional resellers because they own their own paging terminals,” Dunaway said. “Large companies with an embedded customer base are selling paging, and in fact entering wireless.”

An ample supply of paging network capacity also is causing stiff price competition in the reseller marketplace, particularly in large metropolitan areas. “But as prices decline, more and more companies like MCI and Sprint will bundle in paging,” Dunaway said. “In New York, we are in discussions with very large resellers that may want to buy paging for the first time in their history.”

Although Preferred Networks has acquired 14 other companies so far, some on other bands, the company completed no acquisitions in the first quarter of 1996. However, Dunaway announced it has hired Kathryn Loev Putnam, formerly vice president of corporate finance for Legg Mason Wood Walker Inc., Philadelphia, as its new vice president of mergers and acquisitions. “Legg Mason has been our investment bank for the past 18 months,” Dunaway said.

An April 22 order by the Federal Communications Commission easing the freeze on license applications for shared paging channels, including 157.740 MHz, will allow Preferred Networks to apply as an incumbent for sites within 40 miles of its existing operating transmission sites.

“Our primary concern was about expansion, but this interim relief lets us expand based on customer needs. It may require us to add transmitter sites ahead of schedule, but that’s OK.” Dunaway said. “Because it is granted only to incumbents on this frequency, it eliminated the licensing mills that have occurred in this industry.”

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