<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1995
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 0-16029
PRONET INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1832168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
600 Data Drive, Suite 100
Plano, Texas 75075
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214-964-9500)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of June 30, 1995; 6,198,881.
===============================================================================
<PAGE>
PRONET INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1995 and
December 31, 1994 .................................... 1
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1995 and 1994 .............. 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1995 and 1994 ......................... 3
Notes to Consolidated Financial Statements ............ 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ..... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ... 16
Item 6. Exhibits and Reports on Form 8-K ...................... 17
SIGNATURES ..................................................... 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................................. $ 48,725 $ 666
Trade accounts receivable, net of allowance for
doubtful accounts........................................ 4,813 5,055
Inventories - Note A....................................... 4,148 4,614
Other current assets - Note A.............................. 2,562 2,528
-------- --------
60,248 12,863
EQUIPMENT
Pagers..................................................... 26,926 23,669
Communications equipment................................... 19,877 14,561
Security systems equipment................................. 11,186 10,517
Office and other equipment................................. 5,388 3,210
-------- --------
63,377 51,957
Less allowance for depreciation............................ (28,762) (25,441)
-------- --------
34,615 26,516
GOODWILL AND OTHER ASSETS, net of amortization - Note A...... 73,646 33,894
-------- --------
$168,509 $ 73,273
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables............................................. $ 3,213 $ 4,759
Other accrued expenses and liabilities - Note A............ 7,238 7,829
-------- -------
10,451 12,588
LONG-TERM DEBT, less current maturities - Note B............. 108,002 10,450
STOCKHOLDERS' EQUITY - Note A
Common stock............................................... 66 65
Additional capital......................................... 49,729 49,574
Retained earnings.......................................... 1,691 2,026
Less treasury stock at cost................................ (1,430) (1,430)
-------- -------
50,056 50,235
-------- -------
$168,509 $73,273
======== =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES - Note A
Recurring revenues.......... $13,404 $ 7,499 $23,892 $13,461
Product sales............... 2,473 1,330 4,669 1,931
------- ------- ------- -------
Total revenues.............. 15,877 8,829 28,561 15,392
Cost of products sold....... (2,529) (1,385) (4,595) (1,855)
------- ------- ------- -------
Net revenues................ 13,348 7,444 23,966 13,537
COST OF SERVICES
Pager lease and access
services................... 3,134 1,710 5,355 2,960
Security systems equipment
services................... 294 284 539 617
------- ------- ------- -------
3,428 1,994 5,894 3,577
------- ------- ------- -------
GROSS MARGIN.................. 9,920 5,450 18,072 9,960
EXPENSES
Sales and marketing......... 1,771 1,532 3,412 2,802
General and administrative.. 3,803 1,149 6,800 2,294
Depreciation and
amortization............... 3,716 1,942 6,461 3,438
------- ------- ------- -------
9,290 4,623 16,673 8,534
------- ------- ------- -------
OPERATING INCOME............ 630 827 1,399 1,426
OTHER INCOME (EXPENSE)
Interest and other income... 82 19 123 24
Interest expense............ (1,508) (345) (1,894) (517)
------- ------- ------- -------
(1,426) (326) (1,771) (493)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES...................... (796) 501 (372) 933
Income tax expense
(benefit) - Note D........... (396) 243 (37) 478
------- ------- ------- -------
NET INCOME (LOSS)........... $ (400) $ 258 $ (335) $ 455
------- ------- ------- -------
------- ------- ------- -------
NET INCOME (LOSS) PER SHARE... $ (0.06) $ 0.06 $ (0.05) $ 0.11
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE SHARES....... 6,159 4,130 6,137 4,151
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (335) $ 455
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization........................... 6,461 3,438
Deferred tax provision (benefit)........................ (53) 157
Provision for losses on accounts receivable............. 440 192
Changes in operating assets and liabilities:
Decrease in trade accounts receivable................. 673 706
(Increase) decrease in inventories.................... 1,227 (478)
(Increase) decrease in other current assets........... (39) 45
Decrease in trade payables and other accrued
expenses and liabilities............................. (3,384) (819)
-------- --------
Net cash provided by operating activities............... 4,990 3,696
INVESTING ACTIVITIES:
Purchase of equipment................................... (5,200) (1,861)
Acquisitions, net of cash acquired...................... (35,858) (19,111)
Reduction in equipment.................................. 328 218
Computer system software, product enhancements
and other intangible assets........................... (647) (214)
Payments for acquisition costs and debt financing....... (1,768) (1,534)
Other................................................... 39 5
-------- --------
Net cash used in investing activities................... (43,106) (22,497)
FINANCING ACTIVITIES:
Proceeds from bank debt................................. 39,900 18,500
Proceeds from senior subordinated debt offering......... 95,583 --
Increase (decrease) in other long-term obligations...... 92 (46)
Payment on bank debt.................................... (49,400) --
-------- --------
Net cash provided by financing activities............... 86,175 18,454
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 48,059 (347)
CASH AND CASH EQUIVALENTS:
Beginning of period..................................... 666 530
-------- --------
End of period........................................... $ 48,725 $ 183
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995
NOTE A - ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1995 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1995. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Form 10-K for
ProNet Inc. (the "Company") filed with the Securities and Exchange Commission
on March 13, 1995.
INVENTORIES: The Company values inventory at the lower of first-in,
first-out (FIFO) cost or market. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
Raw materials............... $ 188 $ 263
Work in process............. 224 89
Finished goods.............. 3,736 4,262
------ ------
$4,148 $4,614
------ ------
------ ------
</TABLE>
OTHER CURRENT ASSETS: Other current assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
Security transmitter
TracPacs................... $1,289 $1,428
Other current assets........ 1,273 1,100
------ ------
$2,562 $2,528
------ ------
------ ------
</TABLE>
GOODWILL AND OTHER ASSETS: Goodwill and other assets consist of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
Goodwill................... $64,359 $27,946
Noncompetition agreements.. 3,250 3,050
Senior subordinated debt
offering costs............ 3,700 --
Other...................... 8,425 6,726
------- -------
79,734 37,722
Less accumulated
amortization.............. 6,088 3,828
------- -------
$73,646 $33,894
------- -------
------- -------
</TABLE>
OTHER ACCRUED EXPENSES AND LIABILITIES: Other accrued expenses and
liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
Accrued revenue............ $3,174 $3,530
Customer deposits.......... 2,065 2,247
Other accrued liabilities.. 1,999 2,052
------ ------
$7,238 $7,829
------ ------
------ ------
</TABLE>
<PAGE>
Goodwill is amortized on the straight-line method over a fifteen year term.
Noncompetition agreements are amortized on the straight-line method over a
five year term. Senior subordinated debt offering costs are amortized on the
straight-line method over a ten year term.
NET REVENUES: Net revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Recurring revenues:
Pager lease and access fees....... $12,092 $ 6,258 $21,278 $10,984
Security systems equipment fees... 1,312 1,241 2,614 2,477
------- ------- ------- -------
13,404 7,499 23,892 13,461
Product sales:
Pager and paging equipment........ 2,447 1,302 4,532 1,850
Other security systems income..... 26 28 137 81
------- ------- ------- -------
2,473 1,330 4,669 1,931
------- ------- ------- -------
Cost of products sold:
Cost of pager and paging equipment
sales............................. (2,525) (1,366) (4,532) (1,825)
Cost of other security systems
income............................ (4) (19) (63) (30)
------- ------- ------- -------
(2,529) (1,385) (4,595) (1,855)
------- ------- ------- -------
Net revenues........................ $13,348 $ 7,444 $23,966 $13,537
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
NET INCOME PER SHARE: Net income per share is based on the weighted
average number of common and common equivalent shares outstanding during each
period. Stock options are considered common stock equivalents for purposes of
computing weighted average shares outstanding in periods with net income.
RECLASSIFICATION OF FINANCIAL STATEMENTS: The 1994 financial statements
have been reclassified to conform to the 1995 financial statement
presentation.
NOTE B - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
Senior subordinated notes........... $ 99,283 $ --
Revolving line of credit............ -- 9,500
Deferred payments................... 8,719 950
-------- -------
108,002 10,450
-------- -------
Less current maturities............. -- --
-------- -------
$108,002 $10,450
-------- -------
-------- -------
</TABLE>
During the six months ended June 30, 1995, the Company paid $1,482,328 in
interest compared to $301,600 for the comparable period in 1994.
CREDIT FACILITIES
In June 1994, the Company entered into an agreement with The First National
Bank of Chicago, as Agent (the "Lender") making available a $52 million
revolving line of credit (the "Former Credit Facility") for working capital
purposes and for acquisitions approved by the Lender. Borrowings were secured
by all assets of the Company and its subsidiaries. Under terms of the Former
Credit Facility, the borrowings bore interest, at the Company's designation,
at either (i) the greater of the Lender's corporate base rate or the Federal
Funds Rate, plus
<PAGE>
a margin of up to one percent, or (ii) the London Interbank Offer Rate
("LIBOR"), plus a margin of up to 2.25%. In addition, the Former Credit
Facility required maintenance of certain specified financial and operating
covenants, prohibited the payment of dividends or other distributions on the
Company's common stock, par value $.01 ("Common Stock") and required the
proceeds from the December 1994 common stock offering to repay indebtedness
under the Former Credit Facility if such proceeds were not used to make
approved acquisitions.
The Former Credit Facility was amended and restated in February 1995 (the
"New Credit Facility") increasing the amount of available credit from $52
million under the Former Credit Facility to $125 million under the New Credit
Facility. This agreement was subsequently amended in June 1995. In February
1997, the revolving line of credit under the New Credit Facility will convert
to a five and one-half year term loan maturing in July 2002. The term loan
may be repaid at any time and will be payable in quarterly installments,
based on the principal amount outstanding on the conversion date, in amounts
ranging from 3.25% initially to 5.75%. The borrowings bear interest, at the
Company's designation, at either (i) the greater of the Lender's corporate
base rate or the Federal Funds Rate, plus a margin of up to 1.25%, or
(ii) LIBOR, plus a margin of up to 2.50%. In addition, an arrangement fee of
1.125% of the aggregate commitment was paid in February 1995 and a commitment
fee is required on the revolving line of credit at .5% per annum computed on
the daily unused portion of the available loan commitment. Borrowings are
secured by all assets of the Company and its subsidiaries. The New Credit
Facility requires maintenance of certain specified financial and operating
covenants and prohibits the payment of dividends or other distributions on
the Common Stock. The New Credit Facility also states that in the event of an
issuance of subordinated indebtedness of the Borrower or an equity issuance
(other than the common stock offering which occurred in December 1994), the
Lender can request that some portion of the proceeds be used to pay down
outstanding borrowings under the New Credit Facility.
Effective June 12, 1995, the Lender requires that the interest expense on
50% of the aggregate principal amount of all outstanding indebtedness be
fixed at a prevailing market rate through either or both of (a) loans or
other financial accommodations bearing interest at a fixed rate or (b) an
interest rate exchange or insurance agreement or agreements with one or more
financial institutions. At June 30, 1995, none of the outstanding long-term
debt was subject to hedging agreements.
SENIOR SUBORDINATED NOTES
In June 1995, the Company completed a Rule 144A Offering of $100 million
principal amount of its 11 7/8% Senior Subordinated Notes due 2005 (the
"Notes"). Proceeds to the Company from the sale of the Notes, after
deducting discounts, commissions and offering expenses, were approximately
$95.6 million. The Company used approximately $49.4 million of the net
proceeds to repay all indebtedness outstanding under the New Credit Facility.
The Company expects to use the remaining proceeds to pursue the Company's
acquisition strategy, to purchase frequency rights, to make capital
expenditures for buildout of the Company's regional paging systems and for
enhanced services, and for working capital and general corporate purposes.
The Notes are general unsecured obligations of the Company and are
subordinated to all existing and future Senior Debt of the Company. The
indenture provides that the Company may not incur any debt that is
subordinate in right of payment to the Senior Debt and senior in right of
payment to the Notes. The indenture also contains certain covenants that,
among other things, limit the ability of the Company and its subsidiaries to
incur indebtedness, pay dividends, engage in transactions with affiliates,
sell assets and engage in certain other transactions.
DEFERRED PAYMENTS
The Company has deferred payments outstanding related to the RCC Division
of Chicago Communication Service, Inc. ("ChiComm"), High Tech Communications
Corp. ("High Tech"), Signet Paging of Charlotte, Inc. ("Signet"), Carrier
Paging Systems, Inc. ("Carrier") and All City Communications Company, Inc.
("All City") acquisitions of $950,000, $200,000, $4.2 million, $3.0 million
and $350,000, respectively, which are due and payable one year from the
closing of the respective transactions. These balances are payable, at the
Company's discretion, either in cash or shares of the Company's Common Stock
based on market value at the date of payment.
<PAGE>
With regard to the Company's remaining completed acquisitions, including
Contact Communications, Inc. ("Contact"), Radio Call Company, Inc. ("Radio
Call"), and Metropolitan Houston Paging Services, Inc. ("Metropolitan"), the
purchase price was paid in full at closing.
NOTE C - ACQUISITIONS
In early 1993, the Company announced its plans to commence a program of
acquiring businesses that serve the commercial paging market and offer
operational synergies when integrated within the Company's SuperCenters.
During 1994, the Company acquired all of the outstanding capital stock of
Contact, substantially all of the paging assets of Radio Call and High Tech
and substantially all of the Chicago-area paging assets of ChiComm for $19.0
million, $7.8 million, $900,000 and $9.8 million, respectively. To date in
1995, the Company has acquired the paging assets of Signet for $9.0 million,
Carrier for $6.5 million and All City for $6.4 million and all the
outstanding capital stock of Metropolitan for $21.0 million. The eight
completed acquisitions were all accounted for as purchases and were funded
primarily by borrowings under the New Credit Facility. Prior to the end of
the second quarter of 1995, the Company signed letters of intent or
definitive agreements to purchase the paging assets of Lewis Paging, Inc.
("Lewis"), Gold Coast Paging, Inc. ("Gold Coast"), Denton Enterprises, Inc.
("Denton") and MetroTones, Inc. ("MetroTones") for approximately $9.5
million, collectively. The pending acquisitions are expected to close in late
1995 or early 1996 and will be funded either by proceeds from the sale of the
Notes or borrowings under the New Credit Facility. The pending acquisitions
are subject to various conditions, including FCC, regulatory and other
third-party approvals and the execution of definitive agreements.
The pro forma unaudited results of operations for the six months ended
June 30, 1995 and 1994, (which include acquisitions closed as of June 30, 1995),
assuming consummation of the purchases at the beginning of the periods
indicated, are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1994
---- ----
<S> <C> <C>
Net revenues............................ $28,247 $28,549
Net income (loss)....................... (818) (1,230)
Net income (loss) per common share...... (.13) (.30)
</TABLE>
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions been made as of those dates
or of results which may occur in the future.
NOTE D - INCOME TAXES
For the three and six months ended June 30, 1995, the primary differences
between the U.S. Federal statutory tax rate and the effective rate are state
income taxes and the amortization of goodwill related to stock acquisitions,
which is not deductible for tax purposes. The difference in the effective
tax rate for the six months ended June 30, 1995 and the three months ended
March 31, 1995 is due to additional interest expense related to the senior
subordinated notes, which were issued in June 1995.
During the three and six months ended June 30, 1995, the Company paid
approximately $149,344 and $280,315 in Federal and state income taxes,
respectively, compared to $257,500 and $534,700 for the comparable periods
ended June 30, 1994.
NOTE E - SUBSEQUENT EVENTS
Effective July 1, 1995, the Company completed the acquisition of
substantially all of the paging assets of Americom Paging Corporation
("Americom") for approximately $17.5 million. The transaction includes a
deferred payment of $8.7 million which is due and payable one year from the
closing of the transaction. The
<PAGE>
deferred payment is payable at the Company's discretion, either in cash or in
shares of the Company's Common Stock based on market value at the date of
payment. This acquisition was accounted for as a purchase and was funded
primarily by a portion of the proceeds from the sale of the Notes.
The Company filed a Form S-4 Registration Statement (the "1995 S-4") on
July 7, 1995, to register the Notes with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1993, as amended (the
"Securities Act").
On July 11, 1995, the Company announced the signing of letters of intent to
acquire all of the outstanding capital stock of Apple Communications, Inc.
("Apple"), a Chicago-based paging operation with approximately 41,500
subscribers, and the paging assets of Signet Paging of Raleigh, Inc. ("Signet
Raleigh"), a Raleigh, North Carolina-based paging operation with
approximately 13,000 subscribers. On July 27, 1995, the Company announced
the signing of a letter of intent to acquire the paging assets of Sun Paging
Communications ("Sun"), a Fort Myers, Florida based paging operation with
approximately 12,000 subscribers. On August 4, 1995, the Company announced
the signing of a letter of intent to acquire the paging assets of Paging and
Cellular of Texas ("Paging and Cellular"), a Houston-based reseller of paging
services. Paging and Cellular is currently the Company's largest reseller
serving more than 40,000 subscribers in Texas. On August 8, 1995, the
Company announced the signing of a letter of intent to acquire the paging
assets of Page One/Airtel ("Page One"), a Georgia-based paging operator with
approximately 30,000 subscribers. On August 11, 1995, the Company announced
the signing of a letter of intent to acquire the paging assets of Nationwide
Paging, Inc. ("Nationwide"), a California-based paging operator with
approximately 45,000 subscribers. These transactions are subject to the
execution of definitive agreements, as well as various conditions and
approvals, and are expected to close in late 1995 or 1996.
On July 25, 1995, the Company filed a Form S-3 Registration Statement (the
"1995 S-3") to register 2,000,000 shares of the Common Stock to fund the
deferred payments related to the purchase prices for the Company's
acquisitions. The Company is currently working with the SEC, and the 1995
S-3 has not yet been declared effective.
On August 1, 1995, the Company issued 44,166 shares of its common stock to
ChiComm for full payment of the $950,000 deferred portion of the purchase
price of ChiComm.
On August 2, 1995, the Company and its wholly-owned subsidiary, Contact
Communications Inc. ("CCI") filed a lawsuit against Page East, Inc. ("Page
East"), C.T. Spruill ("Spruill"), Network USA Paging Corp. ("Network USA")
and A+ Communications ("A+") in the 296th Judicial District Court, Collin
County, Texas. See Part II, Item 1, Legal Proceedings.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides wireless messaging services through its paging and
security systems operations. Until 1994, paging services were provided solely
to members of the healthcare industry. Beginning in 1994, the Company
broadened its paging focus through the acquisition of paging businesses
serving the general commercial marketplace. As a result of completed and
anticipated acquisitions, the Company's results of operations for prior
periods may not be indicative of future performance.
In both its paging and security systems operations, the Company builds and
operates communications systems and generates revenues from the sale and
lease of pagers, Intelligent Processing Terminal ("IPT") systems and security
devices and related access fees. The Company's revenues are derived primarily
from fixed monthly, quarterly, annual and bi-annual fees charged to customers
for paging and security tracking services. While a subscriber remains in
service, operating results benefit from this recurring monthly revenue stream
with minimal requirements for additional selling expenses or other fixed
costs. However, certain variable costs such as telephone and equipment
charges are directly related to the number of pagers in service.
Each month a percentage of the customer base disconnects service for a
variety of reasons. ProNet does, however, place substantial emphasis on
customer care and quality of service and as a result currently has one of the
lowest average monthly disconnect ("churn") rates in the paging industry -
approximately 2%, compared to an industry average of approximately 2.9%. In
the future, the Company expects that it will experience a higher churn rate
among small businesses, individual consumers and other subscribers than it
has experienced historically with its healthcare subscribers. The Company's
monthly churn rate in the security tracking business is lower than in its
paging business - currently approximately 0.7%.
Currently, recurring revenues consist of two components - service fees and
unit leasing fees. As the Company pursues its strategy of expanding into new
markets, increasing its coverage within its existing service areas and
broadening its customer base and distribution channels, the percentage of
customers who own and maintain ("COAM") their paging equipment rather than
leasing it from the Company is likely to increase. This, together with
competitive factors, may result in declining recurring revenues per
subscriber since these customers will not pay a leasing fee as part of their
monthly charge. However, the Company will not incur the capital costs related
to these COAM pagers. Additionally, average revenue per unit ("ARPU") for
pagers served through resellers is lower than for direct sales due to the
wholesale rates charged to this distribution channel. Such resellers do,
however, assume all selling, marketing, subscriber management and related
costs that would otherwise be incurred by the Company.
Product sales and costs are also likely to increase as the business mix
shifts in favor of COAM units. The Company's objective is to break even on
product sales, but it may selectively offer discounts due to promotional
offers or competitive pressures.
The Company currently enjoys low operating costs per unit due to the
efficiency of its operations. It expects that the development of its business
around its SuperCenters will result in substantial economies of scale and
consolidation of operating and selling expenses that will help it retain this
competitive advantage.
Earnings before other income (expense), income taxes, depreciation and
amortization ("EBITDA") is a standard measure of operating performance in the
paging industry. The Company's EBITDA has grown at a compound annual rate of
over 30% over the past four years. EBITDA growth is expected to continue
although near term margins may be slightly impacted by start-up costs
associated with certain SuperCenters and the buildout of existing and
acquired frequencies in its marketplaces. The Company, unlike a number of its
competitors, has
<PAGE>
generated net income in recent years. It should be noted, however, that
non-cash and financing-related charges for the Company's acquisition program
have the potential to negatively impact earnings in the future.
PAGING SYSTEMS' RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Net revenues and gross margin for paging systems consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues
Pager lease and access fees................. $ 12,092 $ 6,258 $ 21,278 $ 10,984
Product sales............................... 2,447 1,302 4,532 1,850
-------- ------- -------- --------
Total revenues................................ 14,539 7,560 25,810 12,834
Cost of products sold......................... (2,525) (1,366) (4,532) (1,825)
-------- ------- -------- --------
Net revenues.................................. 12,014 6,194 21,278 11,009
Cost of pager lease and access fees........... (3,134) (1,710) (5,355) (2,960)
-------- ------- -------- --------
Gross margin.................................. 8,880 4,484 15,923 8,049
Sales and marketing expenses.................. 1,701 1,472 3,271 2,675
General and administrative expenses........... 3,628 988 6,434 1,912
Depreciation and amortization expense......... 3,303 1,551 5,632 2,680
------- ------- -------- --------
Operating income.............................. $ 248 $ 473 $ 586 $ 782
-------- ------- -------- --------
-------- ------- -------- --------
EBITDA........................................ $ 3,551 $ 2,024 $ 6,218 $ 3,462
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
PAGING SYSTEMS' NET REVENUES for the three and six months ended June 30,
1995 increased to $12.0 million and $21.3 million, respectively, compared to
$6.2 million and $11.0 million for the comparable periods in 1994. Recurring
pager lease and access fees increased approximately 93% and 94%,
respectively, to $12.1 million and $21.3 million for the three and six months
ended June 30, 1995, compared to $6.3 million and $11.0 million for the
comparable periods in 1994. This increase in recurring revenue was primarily
the result of a 170% increase in pagers in service to 636,701 at June 30,
1995 from 235,903 at June 30, 1994. The increase in pagers in service was
primarily the result of the acquisitions of Radio Call, ChiComm, and High
Tech in 1994 and the acquisition of Signet, Carrier, All City and
Metropolitan during the first two quarters of 1995. In 1994 and 1995, most of
the Company's growth in pagers in service has been from acquisitions. In
addition, internal growth accounted for approximately 27,000 pagers in
service during the quarter ended June 30, 1995, representing an annual growth
rate of approximately 30%. The Company believes that this internal growth
rate will increase due to continued commercial paging activity.
ARPU was $6.79 for the month of June 1995 compared to $9.31 for the month
of June 1994. This decrease was due to the Company's continued acquisition of
commercial paging businesses, which traditionally have lower ARPU than
healthcare operations since most commercial pagers are COAM and do not
generate leasing fees. The Company believes that ARPU will continue to
decrease, although at a slower rate upon completion of the Pending
Acquisitions, as the Company continues to become more involved in the
commercial paging business and expands its reseller operations, which tend to
generate lower revenues per subscriber.
PRODUCT SALES LESS COST OF PRODUCTS SOLD were a loss of ($78,000) and at
breakeven for the three and six months ended June 30, 1995, compared to a
loss of ($64,000) and a gain of $25,000 for the comparable periods ended June
30, 1994. In certain of the Company's markets, pagers are being sold at a
slight loss in order to gain market share. As the Company's commercial
operations continue to grow, management anticipates that product sales will
increase but that margins on these sales will be lower than have been
achieved prior to 1994 in the
<PAGE>
healthcare industry. Management also anticipates that the Company's margins
may vary from market to market due to competition and other factors.
RECLASSIFICATION OF COSTS. During 1994, the Company restructured its
technical, sales and operational functions into its decentralized SuperCenter
strategy. To reflect this restructuring financially, certain costs that were
classified as cost of pager lease and access fees and sales and marketing
expenses in 1994 were reclassified to be general and administrative expenses
in 1995. In the aggregate, costs of pager lease and access fees, sales and
marketing expenses and general and administrative expenses increased by 103%
and 100% for the three and six months ended June 30, 1995, compared to the
same periods last year as a result of the Company's internal growth and
acquisitions. In total, these costs were $8.5 million (70% of paging
systems' net revenues) and $15.1 million (71% of paging systems' net
revenues) for the three and six months ended June 30, 1995, compared to $4.2
million (67% of paging systems' net revenues) and $7.5 million (69% of paging
systems' net revenues) for the comparable periods ended June 30, 1994. The
increase in these costs as a percentage of net revenues is the result of
increased expenses related to the buildout of the Company's regional
SuperCenters. These expenses as a percentage of net revenues should decline
in the future as new acquisition companies are integrated into the existing
SuperCenters.
PAGING SYSTEMS' GROSS MARGIN (net revenues less cost of pager lease and
access fees) was $8.9 million (74% of paging systems' net revenues) and $15.9
million (75% of paging systems' net revenues) for the three and six months
ended June 30, 1995, compared to $4.5 million (72% of paging systems' net
revenues) and $8.0 million (73% of paging systems' net revenues) for the
comparable periods ended June 30, 1994. The increase in gross margin was due
to the reclassification of certain operating expenses described above. The
Company believes that the margin on net revenues will decrease in the near
future as an increasing number of the Company's customers elect to purchase
their paging equipment resulting in a corresponding decrease in ARPU as
discussed above. In addition, service operating expenses increased to $3.1
million and $5.4 million for the three and six months ended June 30, 1995,
compared to $1.7 million and $3.0 million for the comparable periods ended
June 30, 1994, as a result of the increased costs of servicing new customers
added through both internal growth and acquisitions.
PAGING SYSTEMS' SALES AND MARKETING EXPENSES were $1.7 million (14% of
paging systems' net revenues) and $3.3 million (15% of paging systems' net
revenues) for the three and six months ended June 30, 1995, compared to $1.5
million (24% of paging systems' net revenues) and $2.7 million (24% of paging
systems' net revenues) for the comparable periods of the prior year. The
decrease as a percentage of paging systems' net revenues was due to the
reclassification of certain operating expenses described above. These
expenses are not expected to change significantly in the future as a
percentage of paging systems' net revenues.
PAGING SYSTEMS' GENERAL AND ADMINISTRATIVE EXPENSES were $3.6 million (30%
of paging systems' net revenues) and $6.4 million (30% of paging systems' net
revenues) for the three and six months ended June 30, 1995, compared to
$988,000 (16% of paging systems' net revenues) and $1.9 million (17% of
paging systems' net revenues) for the comparable periods ended June 30, 1994.
The increase as a percentage of paging systems' net revenues was due to the
reclassification of certain operating expenses described above, plus the cost
of additional management hired in the fourth quarter of 1994 and the first
quarter of 1995, offset by savings resulting from consolidating the paging
operations into the Company's SuperCenters. The Company anticipates that
paging systems' general and administrative expenses will continue to grow but
at a lesser rate than increases in paging systems' net revenues, as a result
of general and administrative expenses being amortized across a larger
subscriber base as well as savings resulting from the consolidation of
acquisitions.
PAGING SYSTEMS' DEPRECIATION AND AMORTIZATION EXPENSES are better expressed
as a percentage of paging systems' recurring revenues since product sales do
not require any capital investment. Paging systems' depreciation and
amortization expenses as a percentage of recurring paging revenues for the
three and six months ended June 30, 1995, were 27% and 26%, respectively,
compared to 25% and 24%, respectively, for the comparable periods in 1994.
The increase is due to the amortization of intangibles arising from
acquisitions. The Company believes that this trend in depreciation and
amortization expenses as a percentage of paging systems' recurring revenues
will continue in the short term as a result of acquisitions and continued
capital investment in paging equipment to support the Company's growth.
<PAGE>
EBITDA for the paging systems' operations was $3.6 million (30% of paging
systems' net revenues) and $6.2 million (29% of paging systems' net revenues)
for the three and six months ended June 30, 1995, compared to $2.0 million
(33% of paging systems' net revenues) and $3.5 million (31% of paging
system's net revenues) for the comparable periods in 1994. Consolidation
savings in general and administrative expenses were offset by lower margins
on product sales by the closed acquisitions which sell pagers at a lower
margin or at a slight loss compared to the Company's healthcare
communications operations. The Company believes EBITDA may decrease in the
short term due to increased commercial paging activity as a result of
internal growth and future acquisitions of commercial paging operations, but
will thereafter increase over time as the Company integrates the acquired
operations and achieves resulting economies of scale and operating
efficiencies.
SECURITY SYSTEMS' RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
Security systems' net revenues and gross margin consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues
Security systems' equipment fees........... $1,312 $1,241 $2,614 $2,477
Other security systems' income............. 26 28 137 81
------ ------ ------ ------
Total revenues............................... 1,338 1,269 2,751 2,558
Cost of other security systems............... (4) (19) (63) (30)
------ ------ ------ ------
Net revenues................................. 1,334 1,250 2,688 2,528
Cost of security systems' equipment services. (293) (284) (539) (617)
------ ------ ------ ------
Gross margin................................. 1,041 966 2,149 1,911
Sales and marketing expenses................. 70 60 141 127
General and administrative expenses.......... 176 161 365 382
Depreciation and amortization expense........ 413 391 830 758
------ ------ ------ ------
Operating income............................. $ 382 $ 354 $ 813 $ 644
------ ------ ------ ------
------ ------ ------ ------
EBITDA....................................... $ 795 $ 745 $1,643 $1,402
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
SECURITY SYSTEMS' EQUIPMENT FEES increased to $1.3 million and $2.6 million
for the three and six months ended June 30, 1995, from $1.2 million and $2.5
million for the comparable periods in 1994. The increase was due to the
installation of two new systems since June 30, 1994, as well as expansion and
additional penetration in existing markets. The number of TracPacs in service
increased from 26,767 at June 30, 1994 to 27,015 at June 30, 1995.
OTHER SECURITY SYSTEMS' INCOME LESS COST OF OTHER SECURITY SYSTEMS was
$22,000 and $74,000 for the three and six months ended June 30, 1995 compared
to $9,000 and $51,000 for the comparable periods in 1994. Net revenues
fluctuate depending on the type and volume of equipment sold. The Company
does not anticipate significantly increasing this area of security systems
operations.
SECURITY SYSTEMS' GROSS MARGIN was $1.0 million (78% of security systems'
net revenues) and $2.1 million (80% of security systems' net revenues) for
the three and six months ended June 30, 1995, compared to $966,000 (77% of
security systems' net revenues) and $1.9 million (76% of security systems'
net revenues) for the comparable periods ended June 30, 1994. The increase as
a percentage of net revenues is due to additional product sales in the first
quarter of 1995. The Company anticipates that these margins will increase
slightly above the margin for the six months ended June 30, 1994 in the near
future as more subscribers are added to existing systems and as systems are
installed in new or existing markets.
<PAGE>
SECURITY SYSTEMS' SALES AND MARKETING EXPENSES were $70,000 and $141,000
for the three and six months ended June 30, 1995 (5% of security systems' net
revenues for each period), compared to $60,000 and $127,000 for the
comparable periods in 1994 (5% of security systems' net revenues for each
period). The Company currently anticipates hiring additional management in
the near future to accelerate the growth of security systems' net revenues.
Therefore, these expenses should grow at or slightly above the rate of growth
in the related security systems' net revenues and therefore should increase
slightly as a percentage of these revenues.
SECURITY SYSTEMS' GENERAL AND ADMINISTRATIVE EXPENSES were $176,000 (13% of
security systems' net revenues) and $365,000 (14% of security systems' net
revenues) for the three and six months ended June 30, 1995, compared to
$161,000 (13% of security systems' net revenues) and $382,000 (15% of
security systems' net revenues) for the comparable periods ended June 30,
1994. This decrease in general and administrative expenses was the result of
the decreased burden of corporate overhead as a result of the Company's
expanded paging operations. The Company currently believes that general and
administrative expenses will grow at a slower rate than security systems' net
revenues and therefore should represent a decreasing percent of such revenues.
SECURITY SYSTEMS' DEPRECIATION AND AMORTIZATION EXPENSES are better
expressed as a percentage of recurring revenues since product sales do not
require any capital investment. Security systems' depreciation and
amortization expenses as a percentage of recurring revenues for the three and
six months ended June 30, 1995, were 31% and 32%, respectively, compared to
32% and 31%, respectively, for the comparable periods in 1994. These
increases were a result of the capital investment necessary to support the
expansion into new markets as well as growth within existing markets. The
Company believes that this trend in depreciation and amortization should
continue due to the relationship of capital investment to recurring revenue.
EBITDA for the security systems' operations was $795,000 (60% of security
systems' net revenues) and $1.6 million (61% of security systems' net
revenues) for the three and six months ended June 30, 1995, compared to
$745,000 (60% of security systems' net revenues) and $1.4 million (55% of
security systems' net revenues) for the same periods in 1994. This increase
was primarily due to decreases in general and administrative expenses as
described above.
OTHER INCOME (EXPENSE)
Other income (expense) includes interest income generated from short-term
investments and interest expense incurred on the Company's revolving loan
agreement. The period-to-period fluctuation in interest expense has resulted
primarily from changes in the outstanding amounts under the Company's
revolving loan agreement and its Senior Subordinated Notes. Interest expense
increased in 1994 as a result of the increased borrowings to fund
acquisitions made during the year. Interest expense will increase in the
future as a result of interest due on the Company's Senior Subordinated Notes
which were issued in June 1995.
FEDERAL INCOME TAXES
At December 31, 1994, the Company had net operating loss carryforwards of
$3.3 million for income tax purposes that expire in years 2004 through 2007.
For the year ended December 31, 1994, the primary differences between the
U.S. Federal statutory tax rate and the effective rate in the Company's
historical financial statements are state income taxes and the amortization
of goodwill related to stock acquisitions, which is not deductible for tax
purposes. The Company anticipates that in the future the primary differences
between the U.S. Federal statutory tax rate and the effective rate in the
Company's financial statements will continue to be state income taxes and the
amortization of goodwill related to stock acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
During 1992, 1993 and 1994, the Company financed the majority of its
growth, other than acquisitions, through internally generated funds. Net cash
provided by operating activities was $6.7 million in 1992, $7.1 million in
1993 and $9.8 million in 1994. The acquisitions of Contact, Radio Call,
ChiComm and High Tech
<PAGE>
in 1994 and Signet Carrier, Metropolitan and All City in 1995 were financed
under the New Credit Facility. The Company anticipates that its ongoing
capital needs, including the Pending Acquisitions, will be funded with the
proceeds of its December 1994 common stock offering, borrowings under the New
Credit Facility, proceeds from the sale of its Senior Subordinated Notes and
net cash generated by operations.
CAPITAL EXPENDITURES
As of June 30, 1995, the Company had invested $46.8 million in system
equipment and pagers for its 12 major metropolitan markets and $11.2 million
in system equipment and TracPacs for its twenty-six security systems.
Capital expenditures for paging systems' equipment and pagers (excluding
assets acquired pursuant to the completed acquisitions) were $4.0 million in
each of 1992 and 1993, $5.0 million in 1994 and $4.5 million for the six
months ended June 30, 1995. Capital expenditures for security systems'
equipment and TracPacs were $1.5 million in each of 1992 and 1993, $763,000
in 1994 and $672,000 for the six months ended June 30, 1995.
At June 30, 1995, the Company had invested $4.1 million in inventories, the
majority of which were pagers, compared to $4.6 million at December 31, 1994.
The decrease was due to better inventory management as the SuperCenters
generated operating efficiencies. Inventory balances are expected to remain
at higher levels than in prior years as a result of acquisitions and
increased subscriber growth.
Except for those assets acquired through acquisitions, the Company expects
to meet its capital requirements in 1995 with cash generated from operations.
Although the Company had no material binding commitments to acquire capital
equipment at June 30, 1995, the Company anticipates capital expenditures for
the remainder of 1995 to be approximately $9.9 million for the purchase of
pagers and system equipment for its current paging systems' operations and
$1.5 million for the manufacture of TracPacs and the purchase of system
equipment for its security systems' operations.
RULE 144A OFFERING OF $100 MILLION OF SENIOR SUBORDINATED NOTES
In June 1995, the Company completed a Rule 144A Offering of $100
million principal amount of its 11 7/8% Senior Subordinated Notes due 2005
(the "Notes"). Proceeds to the Company from the sale of the Notes, after
deducting discounts, commissions and offering expenses, were approximately
$95.6 million. The Company used approximately $49.4 million of the net
proceeds to repay all indebtedness outstanding under the New Credit Facility.
The Company expects to use the remaining proceeds to pursue the Company's
acquisition strategy, to purchase frequency rights, to make capital
expenditures for buildout of the Company's regional paging systems and for
enhanced services, and for working capital and general corporate purposes.
The Notes are general unsecured obligations of the Company and are
subordinated to all existing and future Senior Debt of the Company. The
indenture provides that the Company may not incur any debt that is
subordinate in right of payment to the Senior Debt and senior in right of
payment to the Notes. The indenture also contains certain covenants that,
among other things, limit the ability of the Company and its subsidiaries to
incur indebtedness, pay dividends, engage in transactions with affiliates,
sell assets and engage in certain other transactions.
The Company filed the 1995 S-4 on July 7, 1995, to register the Notes with
the SEC under the Securities Act.
FORMER AND NEW CREDIT FACILITIES
The Former Credit Facility was amended and restated in February 1995 to
increase the amount of available credit from $52 million to $125 million (the
"New Credit Facility"). The New Credit Facility was subsequently amended in
June 1995. The New Credit Facility is a revolving line of credit which, in
February 1997, will convert to a five and one-half year term loan maturing in
July 2002. The term loan may be repaid at any time and will be payable in
quarterly installments, based on the
<PAGE>
principal amount outstanding on the conversion date, in amounts ranging from
3.25% initially to 5.75% over five and one-half years.
Concurrent with the Company's Rule 144A Offering, the New Credit Facility
was amended by and among the Company and its Lenders to permit issuance of
the Senior Subordinated Notes. The approximate $49.9 million outstanding
under the New Credit Facility was repaid with the proceeds of the Rule 144A
offering.
ACQUISITIONS
In early 1993, the Company announced its plans to commence a program of
acquiring businesses that serve the commercial paging market and offer
operational synergies when integrated within the Company's SuperCenters.
During 1994, the Company acquired all of the outstanding capital stock of
Contact, substantially all of the paging assets of Radio Call and High Tech
and substantially all of the Chicago-area paging assets of ChiComm for $19.0
million, $7.8 million, $900,000 and $9.8 million, respectively. To date in
1995, the Company has acquired the paging assets of All City for $6.4
million, Signet for $9.0 million and Carrier for $6.5 million and all the
outstanding capital stock of Metropolitan for $21.0 million. In July 1995,
the Company acquired the paging assets of Americom for $17.5 million. The
nine completed acquisitions were all accounted for as purchases and were
funded either by borrowings under the New Credit Facility or proceeds from
the sale of the Notes. Also in 1995, the Company signed letters of intent or
definitive agreements to purchase the paging assets of Lewis, Gold Coast,
Denton and MetroTones for approximately $9.5 million, collectively. The
Company has also signed letters of intent to acquire the paging assets of
Signet Raleigh, Sun, Paging and Cellular, Page One and Nationwide and all of
the outstanding capital stock of Apple. The pending acquisitions are expected
to close in late 1995 or early 1996 and will be funded either by proceeds from
the sale of the Notes or borrowings under the New Credit Facility. The
pending acquisitions are subject to various conditions, including FCC,
regulatory and other third-party approvals and the execution of definitive
agreements.
The Company has deferred payments outstanding related to the ChiComm, High
Tech, Signet, Carrier and All City acquisitions of $950,000, $200,000, $4.2
million, $3.0 million and $350,000, respectively, which are due and payable
one year from the closing of the respective transactions. These balances are
payable, at the Company's discretion, either in cash or shares of the
Company's Common Stock based on current market value at the date of payment.
With regard to Contact, Radio Call and Metropolitan, the purchase price was
paid in full at closing. In addition, the Company has an $8.7 million
deferred payment related to the Americom acquisition which closed subsequent
to the end of the second quarter.
On August 1, 1995, the Company issued 44,166 shares of its common stock to
ChiComm for full payment of the $950,000 deferred portion of the purchase
price of ChiComm.
REGISTRATION STATEMENTS
The Company filed a Form S-4 Registration Statement (the "1995 S-4") on
July 7, 1995, to register the Notes with the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1993, as amended (the
"Securities Act").
On July 25, 1995, the Company filed a Form S-3 Registration Statement (the
"1995 S-3") to register 2,000,000 shares of the Common Stock to fund the
deferred payments related to the purchase prices for the Company's
acquisitions. The Company is currently working with the SEC, and the 1995
S-3 has not yet been declared effective.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 2, 1995, the Company and its wholly-owned subsidiary, Contact
Communications Inc. ("CCI") filed a lawsuit against Page East, Inc. ("Page
East"), C.T. Spruill ("Spruill"), Network USA Paging Corp. ("Network USA"),
and A+ Communications, Inc. ("A+") in the 296th Judicial District Court,
Collin County, Texas, Cause No. 296-850-95. The lawsuit alleges that Network
USA and A+, with full knowledge of the terms and conditions of the letter of
intent between ProNet and CCI, as buyers, and Page East and Spruill, as
sellers, maliciously interfered with existing contracts and with prospective
business relationships with Page East, Spruill, and the customers of Page
East. The lawsuit also alleges that Page East and Spruill breached their
contractual obligations and made actionable misrepresentations and material
omissions to ProNet and CCI, which constituted fraud. The lawsuit seeks
damages in an unspecified amount, exemplary damages, and attorney's fees.
The Company cannot predict the outcome of the litigation. However, based
upon the information available to the Company at this time, the Company
believes that this matter should not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 25, 1995, the Company held its Annual Meeting of Stockholders. The
following items were voted on and approved at the meeting.
(a) ELECTION OF DIRECTORS. The following individuals were nominated and
elected as directors of the Company:
Votes For Votes Withheld
--------- --------------
Mr. Thomas V. Bruns 5,107,208 159,208
Mr. Harvey B. Cash 5,107,308 159,108
Mr. Edward E. Jungerman 5,107,308 159,108
Mr. Jackie R. Kimzey 5,107,233 159,183
Mr. Mark C. Masur 5,107,208 159,208
Mr. David J. Vucina 5,107,233 159,183
(b) AMENDMENT OF CERTIFICATE OF INCORPORATION. The Company's Certificate of
Incorporation was amended by the stockholders to increase the number of
authorized shares of Common Stock from 10,000,000 shares to 20,000,000
shares and to increase the number of authorized shares of Preferred Stock
from 1,000,000 to 5,000,000 shares. The voting results are as follows:
For Against Abstain
--- ------- -------
3,634,304 826,929 6,683
(c) 1995 LONG-TERM INCENTIVE PLAN. The Company's 1995 Long-Term Incentive
Plan was adopted and approved by the stockholders. The Plan reserves an
aggregate of 1,000,000 shares of Common Stock for issuance thereunder.
The voting results are as follows:
For Against Abstain
--- ------- -------
3,110,060 1,303,942 10,504
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
4.1 - Indenture, dated as of June 15, 1995, between the Registrant
and First Interstate Bank of Texas, N.A., as Trustee (filed
as an Exhibit to the Registrant's Current Report on Form 8-K,
dated July 5, 1995, and incorporated herein by reference).
4.2 - Registration Rights Agreement, dated as of June 15, 1995,
between the Registrant, Lehman Brothers, Inc., Alex. Brown &
Sons Incorporated and PaineWebber Incorporated (filed as an
Exhibit to the Registrant's Registration Statement on
Form S-4 (file no. 33-60925) filed with the Commission
July 7, 1995, and incorporated herein by reference).
4.3 - Rights Agreement, dated as of April 5, 1995, between the
Registrant and Chemical Shareholder Services Group, Inc.,
as Rights Agent, specifying the terms of the rights to
purchase the Registrant's Series A Junior Participating
Preferred Stock, and the exhibits thereto (filed as an
Exhibit to the Registrant's Registration Statement on
Form 8-A dated April 7, 1995, and incorporated herein by
reference).
10.1 - Asset Purchase Agreement dated May 24, 1995, regarding the
acquisition of substantially all of the paging assets of
Americom Paging Corporation, by and among CCI, Gregory W.
Hadley, Mo Shebaclo and American 900 Paging, Inc. dba
Americom Paging Corporation (filed as an Exhibit to the
Registrant's Current Report on Form 8-K, dated July 7, 1995,
and incorporated herein by reference).
10.2 - Waiver, Consent and Amendment No. 1 dated as of June 12, 1995
by and among the Registrant, The First National Bank of Chicago,
as Agent, and the Lenders party thereto (filed as an Exhibit
to the Registrant's Registration Statement on Form S-4 (file
no. 33-60925) filed with the Commission July 7, 1995, and
incorporated herein by reference).
10.3 - Office Lease Agreement by and between the Registrant and
Carter-Crowley Properties, Inc., as Landlord (filed as an
Exhibit to the Registrant's Current Report on Form 8-K, dated
July 5, 1995, and incorporated herein by reference).
10.4 - Letter of Agreement dated July 10, 1995, regarding the
acquisition of substantially all of the paging assets of Signet
Paging of Raleigh, Inc., by and among CCI, Signet Paging of
Raleigh, Inc., and W. David Sweatt (filed as an Exhibit to
the Registrant's Registration Statement on Form S-3 (file
no. 33-61279) filed with the Commission July 25, 1995,
and incorporated herein by reference).
10.5 - Letter of Agreement dated July 10, 1995, regarding the
acquisition of the common stock of Apple Communications, Inc.
and certain assets of Best Page, Inc., by and among Apple
Communications, Inc., Best Page, Inc., CCI, Sam Zarcone and
Jill DiFoggio (filed as an Exhibit to the Registrant's
Registration Statement on Form S-3 (file no. 33-61279)
filed with the Commission July 25, 1995, and incorporated
herein by reference).
10.6 - Letter of Agreement dated August 2, 1995, regarding the
acquisition of substantially all of the paging assets of
Paging and Cellular of Texas, by and among CCI, Paging and
Cellular of Texas and Daniel L. Sheppard.
10.7 - Letter of Agreement dated August 7, 1995, regarding the
acquisition of substantially all of the paging assets of
Cobbwells, Inc. dba Page One/Airtel, by and among CCI,
Cobbwells, Inc. dba Page One/Airtel, James H. Cobb, III
and Warren K. Wells.
(b) REPORTS ON FORM 8-K. On April 17, 1995, the Company filed a Current
Report on Form 8-K relating to the acquisition of Carrier. On this
same day, April 19, 1995, the Company filed a Current Report Form 8-K
relating to its Shareholder Rights Agreement. On May 12, 1995, the
Company filed a Current Report on Form 8-K which included the
historical and proforma financial information concerning the acquisition
of Signet. On May 18, 1995, the Company filed a Current Report on
Form 8-K relating to the acquisition of Metropolitan. On May 19, 1995,
the Company filed a Current Report on Form 8-K relating to the proposed
Rule 144A offering of $100 million of Senior Subordinated Notes. On
June 2, 1995, the Company filed a Current Report on Form 8-K/A relating
<PAGE>
to the acquisition of Carrier. On this same day, June 2, 1995, the
Company filed a Current Report on Form 8-K relating to the acquisition
of All City.
<PAGE>
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.
PRONET INC.
(Registrant)
DATE: August 14, 1995 By: /s/ Jan E. Gaulding
--------------------------------
Jan E. Gaulding
SENIOR VICE PRESIDENT,
TREASURER AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION NUMBER
------ ----------- ------
4.1 - Indenture, dated as of June 15, 1995, between the Registrant
and First Interstate Bank of Texas, N.A., as Trustee (filed
as an Exhibit to the Registrant's Current Report on Form 8-K,
dated July 5, 1995, and incorporated herein by reference).
4.2 - Registration Rights Agreement, dated as of June 15, 1995,
between the Registrant, Lehman Brothers, Inc., Alex. Brown &
Sons Incorporated and PaineWebber Incorporated (filed as an
Exhibit to the Registrant's Registration Statement on
Form S-4 (file no. 33-60925) filed with the Commission
July 7, 1995, and incorporated herein by reference).
4.3 - Rights Agreement, dated as of April 5, 1995, between the
Registrant and Chemical Shareholder Services Group, Inc.,
as Rights Agent, specifying the terms of the rights to
purchase the Registrant's Series A Junior Participating
Preferred Stock, and the exhibits thereto (filed as an
Exhibit to the Registrant's Registration Statement on
Form 8-A dated April 7, 1995, and incorporated herein by
reference).
10.1 - Asset Purchase Agreement dated May 24, 1995, regarding the
acquisition of substantially all of the paging assets of
Americom Paging Corporation, by and among CCI, Gregory W.
Hadley, Mo Shebaclo and American 900 Paging, Inc. dba
Americom Paging Corporation (filed as an Exhibit to the
Registrant's Current Report on Form 8-K, dated July 7, 1995,
and incorporated herein by reference).
10.2 - Waiver, Consent and Amendment No. 1 dated as of June 12, 1995
by and among the Registrant, The First National Bank of Chicago,
as Agent, and the Lenders party thereto (filed as an Exhibit
to the Registrant's Registration Statement on Form S-4 (file
no. 33-60925) filed with the Commission July 7, 1995, and
incorporated herein by reference).
10.3 - Office Lease Agreement by and between the Registrant and
Carter-Crowley Properties, Inc., as Landlord (filed as an
Exhibit to the Registrant's Current Report on Form 8-K, dated
July 5, 1995, and incorporated herein by reference).
10.4 - Letter of Agreement dated July 10, 1995, regarding the
acquisition of substantially all of the paging assets of Signet
Paging of Raleigh, Inc., by and among CCI, Signet Paging of
Raleigh, Inc., and W. David Sweatt (filed as an Exhibit to
the Registrant's Registration Statement on Form S-3 (file
no. 33-61279) filed with the Commission July 25, 1995,
and incorporated herein by reference).
10.5 - Letter of Agreement dated July 10, 1995, regarding the
acquisition of the common stock of Apple Communications, Inc.
and certain assets of Best Page, Inc., by and among Apple
Communications, Inc., Best Page, Inc., CCI, Sam Zarcone and
Jill DiFoggio (filed as an Exhibit to the Registrant's
Registration Statement on Form S-3 (file no. 33-61279)
filed with the Commission July 25, 1995, and incorporated
herein by reference).
10.6 - Letter of Agreement dated August 2, 1995, regarding the
acquisition of substantially all of the paging assets of
Paging and Cellular of Texas, by and among CCI, Paging and
Cellular of Texas and Daniel L. Sheppard.
10.7 - Letter of Agreement dated August 7, 1995, regarding the
acquisition of substantially all of the paging assets of
Cobbwells, Inc. dba Page One/Airtel, by and among CCI,
Cobbwells, Inc. dba Page One/Airtel, James H. Cobb, III
and Warren K. Wells.
<PAGE>
CONTACT COMMUNICATIONS INC.
600 Data Drive, Suite 100
Plano, Texas 75075
August 2, 1995
Mr. Daniel L. Sheppard
Paging and Cellular Of Texas
701 North Post Oak Road
Suite #100
Houston, Texas 77024
Dear Mr. Sheppard:
This letter will confirm the understanding that Daniel L. Sheppard
("Sheppard") as the owner of Paging and Cellular of Texas, a sole
proprietorship ("Company"), has reached with Contact Communications Inc., a
Delaware corporation ("Buyer"), and wholly owned subsidiary of ProNet Inc., a
Delaware corporation ("ProNet"), with respect to the acquisition
("Acquisition") by Buyer from Sheppard of those assets relating to the
Company business described in EXHIBIT A attached hereto as "Acquired Assets"
("Acquired Assets").
1. The parties hereto shall immediately proceed with the further
negotiation, preparation and execution of a Definitive Agreement (herein so
called) containing, among other things, the terms and conditions set forth in
EXHIBIT A attached hereto. The parties intend that the Definitive Agreement
be executed no later that 5:00 p.m., Dallas time, October 15, 1995, unless
they shall otherwise agree in writing.
2. Following the date of execution hereof, the Sheppard shall afford to
Buyer through its officers, attorneys, accountants, lenders and authorized
representatives and affiliates free and full reasonable access to the
properties, books and records of the Company on reasonable notice during
normal business hours in order to permit Buyer to make such investigation of
the business, properties and operations of the Company involving the Acquired
Assets as Buyer may deem necessary. Until the acquisition is completed, any
information furnished to, or obtained by, any party hereto, its officers,
attorneys, accountants, lenders or authorized representatives, as a result of
its investigations or otherwise in connection with the Acquisition, shall be
treated as confidential information by the party receiving such information
except (a) to the extent such information is otherwise public or generally
available to the public or (b) as required by applicable law. In the event
the Acquisition does not occur, each party shall return to the other parties
all confidential information, written or otherwise, furnished by the other
parties to it or him and will not thereafter use, for any purposes
whatsoever, such confidential information, or permit any such confidential
information to be made publicly available.
<PAGE>
Mr. Dan Sheppard
August 2, 1995
Page -2-
3. Sheppard represents and warrants to Buyer that, to the best of his
knowledge and belief, (a) he has not entered into any agreement pursuant to
which any person or entity has obtained the right to acquire any material
portion of the Acquired Assets other than leases of pagers and the rights of
Metropolitan Houston Paging Services, Inc., and (b) the execution, delivery
and performance of this letter of intent by Sheppard does not and will not
breach, violate or conflict with, or permit the cancellation of, any material
agreement involving the Acquired Assets to which Sheppard or the Company is
a party or by which the Acquired Assets are bound. In order to induce Buyer
to undertake the considerable effort and to incur the major expenses
associated with the Acquisition, Sheppard shall not, and he shall use
reasonable best efforts to cause the employees and agents of the Company not
to, (a) solicit, initiate or encourage the submission of proposals or offers
from any person or entity for, or enter into any agreement or arrangement
relating to, any acquisition or purchase of all or any material Acquired
Assets except in the ordinary course of business or (b) participate in any
negotiations, or, except as required by applicable law, furnish to any other
person or entity any information, or otherwise cooperate in any way with, or
assist or participate in, facilitate, or encourage, any effort or attempt by
any other person or entity to do or seek any of the foregoing, with respect
to acquisition or purchase of all or any material Acquired Assets except in
the ordinary course of business. The above covenant is effective until 5:00
p.m., Dallas, Texas time, on October 15, 1995; provided, the covenant shall
terminate earlier if Buyer expresses a desire to not proceed with the
Acquisition. In addition, until 5:00 p.m., Dallas, Texas time, on October 15,
1995 (unless Buyer expresses a desire to not proceed with the Acquisition),
Sheppard agrees that he will not enter into any agreement or consummate any
transaction that would materially interfere with the consummation of the
Acquisition. Sheppard shall promptly notify Buyer if any such proposal or
offer described in this paragraph, or any inquiry or contact with any person
or entity with respect thereto, is made. The notification under this
paragraph shall include the identity of the person or entity making such
acquisition, offer or other proposal, the terms thereof, and any other
non-confidential information with respect thereto as Buyer may reasonably
request.
4. No public announcement shall be made by Buyer, ProNet, Sheppard with
respect to the transactions contemplated hereby without the approval of the
respective parties, unless otherwise required by applicable law; provided,
however, it is specifically understood that ProNet may issue reasonable press
releases regarding the execution of this letter of intent, the execution of
the Definitive Agreement and the Closing of the Aquisition.
5. This letter is intended merely to be guide in the preparation of a
Definitive Agreement satisfactory to the parties hereto and nothing contained
herein shall be construed to preclude other provisions that are inconsistent
with the terms of the Acquisition outlined herein from being included in the
Definitive Agreement, provided such other provisions are satisfactory to all
parties to the Definitive Agreement. While the parties presently intend to
proceed promptly to complete the Definitive Agreement, it is expressly
understood that this is a letter of intent and that no liability or
obligation of any nature whatsoever is intended to be created between or
among any of the parties hereto except as set forth in paragraph 2, 3, and 4
hereof.
<PAGE>
Mr. Dan Sheppard
August 2, 1995
Page -3-
If the foregoing sets forth your understanding with respect to this
matter, please execute the enclosed copies of this letter in the space
provided below for your signatures and return one fully executed copy to the
undersigned, whereupon this letter shall become a binding agreement among the
parties hereto and our respective heir, successors and assigns as of the date
hereof.
CONTACT COMMUNICATIONS INC.
By: /s/ MARK A. SOLLS
----------------------------------------
Name & Title: Mark A. Solls, Vice President
-------------------------------
PRONET INC.
By: /s/ MARK A. SOLLS
----------------------------------------
Name & Title: Mark A. Solls, Vice President
-------------------------------
Accepted and agreed to in all respects
as of 3 day of August, 1995
PAGING & CELLULAR OF TEXAS
By: /s/ DANIEL L. SHEPPARD
------------------------------
Daniel L. Sheppard
Sole Proprietor
/s/ DANIEL L. SHEPPARD
------------------------------
Daniel L. Sheppard
<PAGE>
EXHIBIT A
PAGING AND CELLULAR OF TEXAS
TERM SHEET
Nature of Transaction Sale Of Assets
Purchase Price The Purchase Price shall be $10,000,000,
payable in cash at the Closing.
The Purchase Price shall be $10,000,000,
payable in cash at the Closing.
Purchase Price The Purchase Price shall be allocated
between the Acquired Assets and the
Shareholder's and the Company's Non-
Competition Agreements in amounts to be
agreed to by the parties hereto.
Acquired Assets (a) All of the Company's pagers in the
field (provided the number of pagers in
service shall not be less than 40,000 at
the date of Closing at an average revenue per
unit of approximately $9.00).
(b) All of the tangible assets of the
Company including but not limited to
customer lists, all agreements, furniture,
fixtures and computer equipment to
support operations.
(c) Accounts receivable (according to a
formula to be agreed to by the parties in
accordance with the Company's aging of
accounts receivable). The parties agree that,
subject to review and approval of the
Company's accounts receivable aging by the
Buyer, the formula shall be: 100% of the
accounts receivable aging which is less than
30 days; 80% of the accounts receivable
aging which is between 30 and 60 days; 50%
of the accounts receivable aging which is
between 60 and 90 days; and 10% of the
accounts receivable aging which is over 90
days.
<PAGE>
Paging And Cellular Of Texas
Terms -2-
(d) The Company's useable, current
model pagers in inventory (provided the
number of such pagers in inventory shall not
be less than 3,000 at the date of Closing
provided that the Closing occurs no later
than November 1, 1995).
Excluded Assets (a) The Company's cash: the cash and
cash equivalents of the Company shall meet
or exceed the amount of Accounts Payable
existing on the date of the Closing. On or
prior to Closing, the Shareholder may retain
or dividend cash and cash equivalents in
excess of such Accounts Payable.
(b) The Company's office lease;
provided that Buyer shall remain in the
Company's premises through the end of
1995 at a monthly rental of $5,000 (including
local telephone service and utilities) to be
paid in full at the Closing (with an option to
renew for an interim term thereafter). The
Purchase Price will be increased by $25,000
to support the cost of reconfiguration of
such offices.
(c) The Company's Glenayre paging
terminal.
(d) Furniture, computers and equipment
which do not support operations (as agreed
to by the parties).
Noncompetition Agreements/ The Company and the Shareholder will agree
Reseller Agreement not to compete with Buyer in the area in
which the Company serves its customers for
a period of five years from the closing of the
Acquisition; provided that the Shareholder
shall be entitled to be a Reseller on Buyer's
paging system (exclusively). Such reselling
activities shall be limited to sales/leases to
other resellers (Shareholder shall be
<PAGE>
Paging And Cellular Of Texas
Terms -3-
prohibited from reselling to "direct"
customers). The parties shall enter into a
new Reseller Agreement which shall include
the following:
Buyer shall sell such numbers to
Shareholder as follows: (1) $1.00
per number for all numbers to be
provided through Shareholder's
paging terminal, (2) $1.25 per
number for all numbers provided
through Shareholder's paging
terminal.
Representations and Warranties The Shareholder shall represent and warrant
that (a) neither they nor the Company has
entered into any agreement pursuant to
which any person or entity has obtained the
right to acquire any portion of the securities
or all or substantially all of the assets of
the Company (whether by purchase of assets or
stock, by merger or otherwise), and (b)
except as otherwise disclosed on the
appropriate disclosure schedule, the
execution, delivery and performance of the
Definitive Agreement by such Shareholders
and the Company do not and will not breach,
violate or conflict with, or permit the
cancellation of, any agreement to which the
Shareholders or the Company is a party or
by which any of them or their properties is
bound.
Deferred Revenue/Deposits The Purchase Price shall be reduced by (a)
the amount of any revenues collected by the
Company prior to the Closing in respect of
services or merchandise to be provided after
the Closing and (b) the amount of customer
pager rental deposits collected by the
Company prior to the Closing.
<PAGE>
Paging And Cellular Of Texas
Terms -4-
Liabilities The Company will pay or provide for
payment at closing for all of its liabilities
so that Buyer will be receiving the Acquired
Assets free and clear of all liabilities, liens
and encumbrances.
Indemnification/Offset Buyer shall have a right to offset and
indemnification for any damages resulting
from breaches of the Definitive Agreement
by the Company or the Shareholder.
ProNet Guarantee ProNet shall guarantee the obligations of
Buyer contained in the Definitive Agreement.
Indemnification Escrow The parties shall establish an Indemnification
Escrow at Closing in the amount of
$200,000. The escrowed funds will be paid
to the Shareholder at the rate of $50,000
after each quarter following the Closing
(subject to applicable offsets during the
quarter).
<PAGE>
EXHIBIT 10.7
CONTACT COMMUNICATIONS INC.
600 Data Drive, Suite 100
Plano, Texas 75075
August 7, 1995
SENT VIA FACSIMILE
C/O Jake Cogburn, Esquire
(404) 228-5018
-------------------------
Mr. James H. Cobb, III
President
Cobbwells, Inc.
245 Meriwether Street
Griffin, GA 30223-3010
Dear Mr. Cobb:
This letter will confirm the understanding that James H. Cobb, III and
Warren K. Wells (the "Shareholders"), and Cobbwells, Inc., d/b/a Page
One/Airtel, a Georgia corporation, all of the capital stock of which is owned
by the Shareholders (the "Company"), have reached with Contact
Communications Inc., a Delaware corporation ("Buyer"), and wholly owned
subsidiary of ProNet Inc. ("ProNet"), with respect to the acquisition
("Acquisition") by Buyer from the Company of those assets described in
EXHIBIT A attached hereto as "Acquired Assets" (the "Acquired Assets").
1. The parties hereto shall immediately proceed with the further
negotiation, preparation and execution of a Definitive Agreement (herein so
called) containing, among other things, the terms and conditions set forth in
EXHIBIT A attached hereto. The parties intend that the Definitive Agreement
be executed no later than 5:00 p.m., Dallas time, October 31, 1995, unless
they shall otherwise agree in writing.
2. Following the date of execution hereof, the Shareholders and the
Company shall afford to Buyer through its officers, attorneys, accountants,
lenders and authorized representatives and affiliates free and full access to
the properties, books and records of the Company on reasonable notice during
normal business hours in order to permit Buyer to make such investigation of
the business, properties and operations of the Company as Buyer may deem
necessary. In the event Buyer determines not to proceed with the Acquisition,
any information furnished to, or obtained by, any party hereto, its officers,
attorneys, accountants, lenders or authorized representatives, as a result of
its investigations or otherwise in connection with the Acquisition, shall be
treated as confidential information except (a) to the extent such information
is otherwise public or generally available to the public or (b) as required
by law. In the event the Acquisition does not occur, each party shall return
to the other parties all written confidential information furnished by the
other parties to it or him and will not thereafter use, for any purposes
whatsoever, such confidential information, or permit any such confidential
information to be made publicly available.
<PAGE>
Mr. James Cobb
August 7, 1995
Page -2-
3. The Shareholders and the Company represent and warrant to Buyer that
neither Shareholders nor the Company has entered into any agreement pursuant
to which any person or entity has obtained the right to acquire any portion
of the securities or assets of the Company (whether by purchase of assets or
stock, by merger, or otherwise) and (b) the execution, delivery and
performance of this letter of intent by the Shareholders and the Company
do not and will not breach, violate or conflict with, or permit the
cancellation of, any agreement to which the Company is a party or by which it
or its properties is bound. In order to induce Buyer to undertake the
considerable effort and to incur the major expenses associated with the
Acquisition, the Shareholders and the Company shall not, and shall use their
best efforts to cause the officers, directors, employees, and agents of the
Company not to, (a) solicit, initiate or encourage the submission of
proposals or offers from any person or entity for, or enter into any
agreement or arrangement relating to, any acquisition or purchase of any or
all of the assets of, or securities of, or any merger, consolidation, or
business combination with, the Company or any subsidiary thereof or (b)
participate in any negotiations regarding, or, except as required by legal
process, furnish to any other person or entity any information with respect
to, or otherwise cooperate in any way with, or assist or participate in,
facilitate, or encourage, any effort or attempt by any other person or entity
to do or seek any of the foregoing until 5:00 p.m., Dallas, Texas time, on
October 31, 1995. In addition, until 5:00 p.m., Dallas, Texas time, on
October 31, 1995, the Shareholders and the Company agree that neither the
Shareholders nor the Company will enter into any agreement or consummate any
transaction that would interfere with the consummation of the Acquisition.
The Shareholders and the Company shall promptly notify Buyer if any such
proposal or offer described in this paragraph, or any inquiry or contact
with any person or entity with respect thereto, is made. The notification
under this paragraph shall include the identity of the person or entity
making such acquisition, offer or other proposal, the terms thereof, and any
other information with respect thereto as Buyer may reasonably request and
which may be legally provided to Buyer by the Company and the Shareholders.
4. No public announcement shall be made by Buyer, ProNet, the Company or
either Shareholders with respect to the transactions contemplated hereby
without the approval of the respective parties, unless otherwise required by
law; provided, however, it is specifically understood that ProNet may issue
press releases regarding the execution of this letter of intent, the
execution of the Definitive Agreement and the Closing of the Acquisition.
<PAGE>
Mr. James Cobb
August 7, 1995
Page -3-
5. This letter is intended merely to be a guide in the preparation of a
Definitive Agreement satisfactory to the parties hereto and nothing contained
herein shall be construed to preclude other provisions that are inconsistent
with the terms of the Acquisition outlined herein from being included in the
Definitive Agreement, provided such other provisions are satisfactory to all
parties to the Definitive Agreement. While the parties presently intend to
proceed promptly to complete the Definitive Agreement, it is expressly
understood that this is a letter of intent and that no liability or
obligation of any nature whatsoever is intended to be created between or
among any of the parties hereto except as set forth in paragraphs 2, 3 and 4
hereof.
If the foregoing sets forth your understanding with respect to this
matter, please execute the enclosed copies of this letter in the space
provided below for your signatures and return one fully executed copy to the
undersigned, whereupon this letter shall become a binding agreement among the
parties hereto and our respective heirs, successors and assigns as of the
date hereof.
CONTACT COMMUNICATIONS INC.
/s/ MARK A. SOLLS
By: __________________________
VICE PRESIDENT
Title: _______________________
Accepted and agreed to in all respects
as of 7 day of August, 1995.
COBBWELLS, INC.
/s/ JAMES H. COBB, III
By: _____________________________
PRESIDENT
Title: __________________________
/s/ JAMES H. COBB, III
_________________________________
James H. Cobb, III
/s/ WARREN K. WELLS
_________________________________
Warren K. Wells
<PAGE>
EXHIBIT A
COBBWELLS, INC.
TERM SHEET
Nature of Transaction Sale Of Assets
Purchase Price The Purchase Price shall be $16,200,000.
The Purchase Price shall be paid as
follows: (a) 70% in cash at closing, and (b)
30% payable in shares of common stock
("Common Stock") of ProNet Inc. (valued at
the then current trading price) or cash (the
"Deferred Amount"), in Buyer's sole
discretion, within 12 months after the closing
of the Acquisition. The Purchase Price shall
be allocated between the Acquired Assets
and the Shareholders and the Company's
Noncompetition Agreements (in an amount
to be agreed to by the parties hereto). On
the date of execution of the definitive
agreement, Buyer shall deposit with an
escrow agent, a $500,000 earnest money
deposit ("Earnest Money"). Such Earnest
Money would be credited toward the
Purchase Price at Closing. In the event the
transaction does not close due solely to
Buyer's breach of its obligations under the
definitive agreement, then the Earnest
Money shall be payable to Company;
otherwise, the Earnest Money shall be
payable to Buyer. Buyer shall pay the
Company interest at the rate of 6 1/2% per
annum on any portion of the Deferred
Amount outstanding (calculated from the
date of Closing until paid).
The shares of common stock to be delivered
in payment of the Deferred Amount, if any,
shall be the subject of a Registration Rights
Agreement between the Shareholder and
ProNet pursuant to which ProNet shall agree
that such shares shall be registered with the
Securities and Exchange Commission (the
"SEC") within 14 days after the delivery of
such shares to the Shareholder.
<PAGE>
Cobbwells, Inc.
Terms -2-
Recurring Revenue The Company shall have at least $328,000 in
recurring monthly revenue (as defined from
the summary billing by price code generated
by the Company in its ordinary course) for
the last complete month prior to the date of
Closing ("Recurring Monthly Revenue"). In
the event Recurring Monthly Revenue is less
than $328,000, the Buyer shall have the
option to terminate the transaction with the
Earnest Money payable to the Buyer. In the
event Recurring Monthly Revenue exceeds
$328,000, the purchase price shall be
increased by $25,000 for each $1,000 over
$328,000.
Acquired Assets (a) All of the Company's radio paging
systems, including all affiliated networks for
continuity of such system and including all
pending applications, as well as any
proposed/pending transactions to acquire
paging systems or frequencies (collectively,
the "System"), and any frequencies licensed
for radio paging in such metropolitan areas
held by the Company but not currently used
in the operation of the System.
(b) All of the System's pagers in the field
(provided the number of pagers in service
shall not be less than 27,328 at the date of
Closing).
(c) All of the tangible assets of the
System including receivers, transmitters,
base station equipment, inventory (of an
appropriate working level to supply the
System; provided however, that the value of
the inventory shall not be less than
$200,000), furniture, fixtures and computer
equipment.
<PAGE>
Cobbwells, Inc.
Terms -3-
(d) Accounts receivable (subject to a
formula reflecting the Company's aging to be
mutually agreed to by the parties).
(e) To the extent assignable, all
outstanding licenses, authorizations, permits
and certificates issued to the Company by the
Federal Communications Commission and
other governmental authorities and all
pending applications with respect to the
same used by the Company in connection
with or necessary for the operation of the
System.
Excluded Assets (a) The Company's cash: the cash and
cash equivalents (excluding accounts
receivable).
(b) Two (2) leased automobiles.
(c) Spectrum Mail Machine.
(d) Postage Machine.
(e) The Company's telephone answering
service equipment.
Noncompetition Agreement The Company and the Shareholders will
agree not to compete with Buyer in the area
in which the Company serves its customers
(Georgia and South Carolina) for a period of
five years from the closing of the
Acquisition; provided however, the
Shareholders may operate as Resellers on
Buyer's system under terms to be mutually
agreed upon by the parties.
Representation and Warranties The Shareholders shall represent and warrant
that (a) neither they nor the Company has
entered into any agreement pursuant to
which any person or entity has obtained the
right to acquire any portion of the securities
or all or substantially all of the assets of
the Company (whether by purchase of assets or
stock, by merger or otherwise), and (b)
except as otherwise disclosed on the
appropriate disclosure schedule, the
execution, delivery and performance of the
<PAGE>
Cobbwells
Terms -4-
Definitive Agreement by such Shareholders
and the Company do not and will not breach,
violate or conflict with, or permit the
cancellation of, any agreement to which the
Shareholders or the Company is a party or
by which any of them or their properties is
bound.
License Transfers Within 30 days after the parties have signed
this letter of intent, Buyer (with the
Company's/Shareholders' assistance) shall
apply with the Federal Communications
Commission for the transfer of all licenses
currently issued to the Company (including
any pending applications with respect to the
Company). The parties will each pay one-
half of the cost of such applications.
Deferred Revenue/Deposits The Purchase Price shall be reduced by (a)
the amount of any revenues collected by the
Company prior to the Closing in respect of
services or merchandise to be provided after
the Closing and (b) the amount of customer
pager rental deposits collected by the
Company prior to the Closing.
Liabilities The Company will pay or provide for
payment at closing for all of its liabilities
so that Buyer will be receiving the Acquired
Assets free and clear of all liabilities, liens
and encumbrances.
Indemnification/Offset Buyer shall have a right to offset and
indemnification for any damages resulting
from breaches of the Definitive Agreement
by the Company or the Shareholders.
ProNet Guarantee ProNet shall guarantee the obligations of
Buyer contained in the Definitive Agreement.
Closing The Closing shall take place on or after
January 1, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR PRONET INC. FOR THE SIX MONTHS ENDED JUNE 30,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 48,725
<SECURITIES> 0
<RECEIVABLES> 5,427
<ALLOWANCES> 614
<INVENTORY> 4,148
<CURRENT-ASSETS> 60,248
<PP&E> 63,377
<DEPRECIATION> 28,762
<TOTAL-ASSETS> 168,509
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0
0
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</TABLE>