<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE 0-16029
--------------------------
PRONET INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-1832168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6340 LBJ FREEWAY
DALLAS, TEXAS 75240
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code: 214-687-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 Par Value
(Title of Class)
--------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 26, 1996 was approximately $171,712,905. As of
February 26, 1996, there were 6,988,436 outstanding shares of the registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be furnished to stockholders
in connection with its 1996 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
Portions of the registrant's Registration Statement on Form S-1 (File No.
33-14956) filed with the Commission on July 10, 1987, July 15, 1987 and July 29,
1987 are incorporated by reference into Part IV of this Form 10-K.
Portions of the registrant's Current Reports on Form 8-K dated September 8,
1987, July 21, 1988, March 1, 1994, April 19, 1995, July 5, 1995, July 7, 1995
and January 16, 1996 are incorporated by reference into Part IV of this Form
10-K.
Portions of the registrant's Annual Report on Form 10-K for each of the
years ended December 31, 1991 and 1994 are incorporated by reference into Part
IV of this Form 10-K.
Portions of the registrant's Quarterly Report on Form 10-Q for the each of
the fiscal quarters ended June 30, 1994 and March 31, 1995 are incorporated by
reference into Part IV of this Form 10-K.
Portions of the registrant's Registration Statement on Form S-2 (File No.
33-85696) filed with the Commission on October 28, 1994 are incorporated by
reference into Part IV of this Form 10-K.
Portions of the registrant's Proxy Statement filed with the Commission on
April 26, 1994 and April 24, 1995 are incorporated by reference into Part IV of
this Form 10-K.
Portions of the registrant's Registration Statement on Form S-4 (File No.
33-60925) filed with the Commission on July 7, 1995 are incorporated herein by
reference into Part IV of this Form 10-K.
Portions of the registrant's Registration Statement on Form 8-A dated April
7, 1995 are incorporated by reference into Part IV of this Form 10-K.
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
ProNet Inc. ("ProNet" or the "Company") is one of the fastest growing
wireless messaging providers in the United States. The Company focuses its
activities in five geographic regions, or communication "SuperCenters" centered
around major metropolitan markets and population corridors, which generally have
the demographics, market size, travel patterns and types of businesses that
indicate significant potential demand for the Company's products and services.
The Company is a leading provider of paging services in 14 major metropolitan
markets in the United States, including New York, Chicago, Dallas/Fort Worth,
Houston, Charlotte and Los Angeles. As of December 31, 1995, the Company had
856,302 pagers in service, which was the sixth largest subscriber base of all
publicly traded paging companies in the United States. Upon the completion of
the acquisitions described in "Paging Operations -- Acquisitions," the Company
will have approximately 1,035,000 paging subscribers.
The Company is a Delaware corporation founded in 1982 with the purpose of
providing paging services to hospitals, doctors and other healthcare providers.
Prior to January 1994, the Company provided paging services solely to the
healthcare industry. The Company is a solutions-oriented organization dedicated
to individualized customer service which has concentrated on identifying market
opportunities in the wireless communications market where it can provide users
with enhanced wireless services. See "Strategy -- Enhanced Wireless Services and
Products." By utilizing proprietary technologies to manage the under-served
market of both the in-house and wide-area paging requirements of hospitals, the
Company quickly became the premier provider of customized, enhanced wireless
services to healthcare institutions in all of its major metropolitan markets. In
1988, the Company began to apply advanced wireless technology to the security
business by marketing radio-activated electronic tracking systems to financial
institutions. As of December 31, 1995, the Company's security systems consisted
of 27,548 miniature radio transmitters, or "TracPacs," in service. See "Security
Systems' Operations."
In 1993, ProNet management recognized that its operating expertise combined
with its presence in major metropolitan markets presented an opportunity to
capitalize on the growing demand for pagers among both business users and the
population at large. The Company believes that much of the future growth in
pagers in service will occur in large population centers where demand from both
business and individual subscribers will be primarily for metropolitan and/or
regional coverage. In 1994, the Company began to market to these constituents
through both direct and indirect distribution channels and began to pursue
acquisitions that complemented its existing market presence. As a result of the
Company's recent acquisition strategy, the Company primarily provides pagers in
the commercial marketplace.
In 1994, the Company completed the acquisitions of all of the outstanding
capital stock of Contact Communications, Inc. ("Contact") and substantially all
of the paging assets of Radio Call Company, Inc. ("Radio Call"), the RCC
division of Chicago Communication Service, Inc. ("ChiComm") and High Tech
Communications Corp. ("High Tech"). In 1995, the Company acquired the paging
assets of Signet Paging of Charlotte, Inc. ("Signet"), Carrier Paging Systems,
Inc. ("Carrier"), All City Communication Company, Inc. ("All City"), Americom
Paging Corporation ("Americom"), Lewis Paging, Inc. ("Lewis"), Gold Coast
Paging, Inc. ("Gold Coast") and Paging and Cellular of Texas, a Sole
Proprietorship, ("Paging & Cellular") and all of the outstanding capital stock
of Metropolitan Houston Paging Services, Inc. ("Metropolitan") and Apple
Communication, Inc. ("Apple" and, the acquisition of Apple together with the
acquisitions of Contact, Radio Call, ChiComm, High Tech, Signet, Carrier, All
City, Americom, Lewis, Gold Coast, Paging & Cellular and Metropolitan, the
"Completed Acquisitions"). Also in 1995, the Company signed definitive
agreements or letters of intent to acquire substantially all of the paging
assets of SigNet of Raleigh, Inc. ("Signet Raleigh"), RCS Paging, a
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Division of Reisenweaver Communications, Inc. ("RCS") and Sun Paging
Communications ("Sun") and all of the outstanding capital stock of Cobbwells,
Inc. dba Page One ("Page One"), A.G.R. Electronics, Inc. and affiliates ("AGR"),
Total Communications, Inc. ("Total"), Williams Metro Communications Corp. and
affiliates ("Williams") and Nationwide Paging, Inc. ("Nationwide" and, the
acquisition of Nationwide together with the acquisition of RCS, the "Pending
Acquisitions"). In 1996, the Company signed a definitive agreement to acquire
all of the outstanding capital stock of Nationwide. Effective January 1, 1996,
the Company completed the acquisitions of Sun and Signet Raleigh's assets and
Page One's capital stock. Effective February 1, 1996, the Company completed the
acquisitions of AGR, Total and William's stock. The Completed Acquisitions, the
Pending Acquisitions, and the acquisitions of Sun, Signet Raleigh, Page One,
AGR, Total and Williams are collectively referred to as the "Acquisitions".
Set forth below is a table showing the Company's SuperCenters and the number
of pagers in service in each market as of December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF PAGERS
IN SERVICE
SUPERCENTER ------------------------
- --------------------------------------- ACTUAL
REGION OPERATION CENTER (1) PRO FORMA (2)
- --------------------- ---------------- --------- -------------
<S> <C> <C> <C>
Midwest Chicago 152,356 152,356
Northeast New York 281,133 281,133
South Central Houston 304,707 304,707
Southeast Charlotte 79,952 214,000
West Los Angeles 38,154 83,000
--------- -------------
Total 856,302 1,035,196
--------- -------------
--------- -------------
</TABLE>
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(1) Includes pagers in service of the Completed Acquisitions.
(2) Adjusted to include pagers in service of Sun, Signet Raleigh, Page One, AGR,
Total, Williams and the Pending Acquisitions. See "Acquisitions."
STRATEGY
The Company's strategy is to achieve rapid growth of its subscriber base and
expand service offerings while maintaining its low cost operating structure. The
Company believes that by further developing its SuperCenters, it will continue
to realize the benefits of operational consolidation while maintaining the
flexibility to react to regional market developments. Key elements of the
Company's operating strategy include:
GEOGRAPHIC CONCENTRATION. ProNet management believes that focusing the
Company's planned growth strategy around its SuperCenters allows the Company to
receive the greatest benefit for each dollar invested and will most effectively
address anticipated demand by new paging subscribers for metropolitan and/or
regional coverage. ProNet ultimately intends to offer coverage to more than 60%
of the United States population through its SuperCenters encompassing the
Northeast (anchored by New York City), Midwest (anchored by Chicago), Southeast
(anchored by Charlotte), South Central (anchored by Houston) and the West
(anchored by Los Angeles).
SELECTIVE ACQUISITIONS. The Company attributes a substantial portion of its
growth to acquisitions of commercial paging companies in its SuperCenter
regions. ProNet carefully screens and evaluates acquisition candidates according
to their synergistic qualities such as technical and operational
characteristics, frequency compatabilities, geographic coverage and distribution
capabilities within the SuperCenter strategy. Through technical, operational and
financial field teams, each new acquisition is quickly and thoroughly integrated
into the existing SuperCenter operations to maximize cost savings and operating
efficiencies. Since January 1, 1994, the Company has completed 19 acquisitions
and signed definitive agreements with respect to two additional acquisitions
that are expected to close in 1996.
2
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INCREASE MARKET PENETRATION. ProNet intends to become a market leader in
both its current and future markets by utilizing a variety of existing
distribution channels and by continually exploring new channels. The Company
uses its highly trained direct sales force to target businesses, medical
institutions and individual customers. The Company also sells paging services
through non-exclusive agreements with resellers or agents and through local and
regional retailers. Emphasis on any one channel in a particular region is
dictated by market characteristics and business opportunities. Based upon
industry analyst estimates, the Company maintained a monthly disconnect
("churn") rate significantly below the industry average. Churn is the number of
customers discontinuing service each month as a percentage of the total
subscriber base. The Company's emphasis on customer service and system
reliability is intended to enable the Company to continue to maintain this below
average monthly churn rate and thereby further strengthen its market share
within its SuperCenters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
COST EFFICIENT PROVIDER. The Company operates efficiently through
consolidation of key operating functions in one location per SuperCenter and
through the elimination of redundant operations in acquired companies. The
Company believes that subscriber volume, automation and shared overhead will
allow each SuperCenter to be one of the most cost efficient providers in its
marketplace.
ENHANCED WIRELESS SERVICES AND PRODUCTS. ProNet currently offers a number
of enhanced wireless products and services. The Company's proprietary
Intelligent Processing Terminal ("IPT") system for large corporate accounts is a
multi-tasking wide-area communications system capable of managing a company's
in-house and wide-area paging requirements within a single system. The Company
also offers value-added paging services such as voice-mail, simultaneous group
paging, news and sports highlights, stock quotes, remote alpha entry and other
specialized marketing applications. ProNet's security systems, consisting of
TracPacs and tracking receivers, provide a wireless solution to the specialized
asset recovery needs of various governmental agencies and business customers.
The Company expects to offer additional enhanced services and technologies as
they become available.
PAGING INDUSTRY OVERVIEW
The paging industry has been in existence since 1949 when the Federal
Communications Commission ("FCC") allocated a group of radio frequencies for use
in providing one-way and two-way types of mobile communications services.
Throughout its history, the paging industry has been characterized by
substantial growth, technological change and consolidation. Historically, the
paging industry has been highly fragmented, with a large number of small, local
operators. During the 1980s and early 1990s, concentration in the paging
industry increased as certain paging companies grew rapidly either internally or
through acquisitions. As a result, based on industry sources, approximately 65%
of the estimated number of pagers in service in the United States are currently
provided by the 20 companies in the industry having the largest subscriber
bases, including ProNet. However, several thousand other small licensed paging
companies remain in existence in the United States, many of whom continue to
provide only local paging services. The Company believes that the paging
industry will be characterized by further consolidation, providing the Company
with potential acquisition and growth opportunities.
Industry sources indicate that the number of pagers in service in the United
States has been growing at a compound annual rate of 26-29% over the last 10
years and that there are currently approximately 34 million pagers in service in
the United States, which represents a penetration rate of approximately 14% of
the population. This growth rate is expected to continue; industry analysts
estimate there will be 60 million paging subscribers in the United States by the
year 2000. Factors that are expected to contribute to this growth include (i)
increasing mobility of the population, (ii) movement toward a service-based
economy, (iii) growing consumer awareness of the benefits of mobile
communications, (iv) technical advances in equipment and services offered, and
(v) continuing price efficiencies in equipment and services offered. Future
technological developments in the paging industry may include new paging
services such as "confirmation" or "response" paging, which will
3
<PAGE>
have the ability to send a message back to the paging system that confirms the
receipt of a paging message, digitized voice paging, two-way paging and notebook
and sub-notebook computer wireless data applications.
Paging provides a communications link to a paging service subscriber
throughout the coverage area. Each paging subscriber is assigned a distinct
paging number which the caller dials to activate the subscriber's pager. When a
telephone call for a subscriber is received at a computerized paging terminal, a
signal is sent to a primary or "link" transmitter, which in turn transmits the
signal to transmitting substations located on various broadcast towers
throughout the transmission area. The signal is then simultaneously broadcast
from each transmitter, blanketing the entire service area, causing the
subscriber's pager (a pocket-sized radio receiver carried by the subscriber) to
emit a beep or vibrate. In most cases, the subscriber is provided with
additional information from the caller such as a phone number or alpha message.
Depending on the type of pager in use, the subscriber may respond based on
information displayed by the pager or by calling his or her home or office to
receive the message. A pager has an advantage over a landline telephone in that
the pager's reception is not restricted to a single location. Compared to a
cellular telephone, a pager is smaller, has a longer battery life and, most
importantly, is substantially less expensive to use. In fact, some consumers use
a pager in conjunction with or in lieu of a cellular telephone to screen
incoming calls and to lower or eliminate the expense of cellular telephone
service.
PAGING OPERATIONS
PAGING SERVICES
BASIC SERVICES. The Company currently provides various types of paging
services utilizing two different types of pagers: (1) digital display pagers,
which permit a subscriber to receive a telephone number or other numeric coded
information and to store several such numeric messages that the customer can
recall when desired, and (2) alphanumeric display pagers, which allow the
subscriber to receive and store text messages of up to 6,000 characters. The
Company's paging systems are equipped to provide each type of paging service in
all of its markets. As of December 31, 1995, digital display pagers accounted
for more than 90% of the Company's pagers in service.
Subscribers may lease or purchase pagers and pay an access fee for the
Company's paging system. Each subscriber enters into a service contract which
provides for the purchase or lease of pagers and the payment of the access fee.
The Company's contracts with large unit volume subscribers are typically for
three- to five-year terms, while contracts for smaller subscribers are typically
for one-year terms with annual renewals. The combined lease and access fee of a
single leased pager currently ranges from approximately $3.00 to $25.00 per
month, depending upon the type of pager and the optional features selected. The
Company charges a monthly access fee for service to each customer owned and
maintained ("COAM") pager ranging from $2.00 to $15.00. Volume discounts on
lease costs and access fees are typically offered to large unit volume
subscribers. Prior to 1994, the Company delivered paging services solely to
members of the healthcare industry. However, most of the Company's growth since
January 1994 has resulted from, and much of the Company's future growth is
expected to result from, the addition of non-healthcare subscribers, such as
small businesses and
4
<PAGE>
individual consumers, many of whom will purchase and maintain their own pagers
rather than lease their pagers from the Company. This may tend to reduce the
Company's average revenue per unit ("ARPU") because such subscribers will not
generate leasing revenues.
<TABLE>
<CAPTION>
OWNERSHIP OF PAGERS IN SERVICE
------------------------------------------------------
DECEMBER 31,
------------------------------------------------------
1995 (1) 1994 (2) 1993
---------------- ---------------- ----------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Company owned and leased to
subscribers..................................................... 280,339 33% 165,359 47% 106,600 82%
Subscriber owned (COAM).......................................... 44,418 5% 20,163 6% 23,400 18%
Retail counters.................................................. 46,934 5% 1,675 0% -- --
Resellers........................................................ 484,611 57% 166,633 47% -- --
------- ------- ------- ------- ------- -------
Total........................................................ 856,302 100% 353,830 100% 130,000 100%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------
(1) Includes approximately 373,700 pagers in service acquired in the Signet,
Carrier, Metropolitan, All City, Americom, Lewis, Gold Coast and Apple
acquisitions in 1995.
(2) Includes approximately 180,000 pagers in service acquired in the Contact,
Radio Call, ChiComm and High Tech acquisitions in 1994.
ENHANCED SERVICES. The Company currently offers a number of enhanced
products and services. In 1988, recognizing the need for a comprehensive, fully
integrated facilities-based communication system, the Company introduced its
IPT, a multi-tasking communications system capable of managing, within a single
system, both the in-house and wide-area paging requirements of a business. The
IPT is a sophisticated paging terminal located at the business facility and is
designed to distribute pager traffic over multiple frequencies simultaneously.
With the IPT, the user controls the processing and distribution of paging
traffic and manages its pager database through statistical analysis of paging
traffic and pager inventory control tools. As a result of recent marketing
alliances with certain paging equipment manufacturers such as Glenayre
Technologies, Inc. ("Glenayre") and Motorola Inc. ("Motorola"), the Company is
providing enhancements to the IPT such as voice messaging, automated telephone
answering services and equipment monitoring capabilities. The Company had 114
IPTS installed and in operation as of December 31, 1995. The Company also offers
value-added paging services such as voice-mail, simultaneous group paging, news
and sports highlights, stock quotes, remote alpha entry and other specialized
marketing applications.
RESELLERS. In addition to providing paging services for pagers that either
are Company owned and leased to subscribers or are COAM, the Company sells
pagers to third parties who, in turn, lease or resell the pagers to their own
subscribers and resell the Company's paging services under marketing agreements.
See "Marketing."
MARKETING
The Company markets its paging services through four separate channels:
DIRECT SALES FORCE. The Company recruits, trains and manages its own sales
representatives, which it believes are distinguished by their extensive training
and low turnover. The Company's sales representatives are based in each of the
Company's 14 major metropolitan markets, which gives the representatives the
flexibility to react and adapt to changes within their specific region. The
direct sales force is supported through a variety of communications, advertising
and media resources which promote the Company's paging services through
telemarketing, direct mail, billboard, radio, print and Yellow Page advertising.
Referrals from existing subscriber accounts are also solicited as sources for
direct sales.
RESELLERS. In addition to offering paging services directly to end users,
the Company also provides commercial paging services indirectly through
marketing agreements with resellers. Typically,
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the Company offers these resellers paging services in bulk quantities at
wholesale monthly rates that are lower than the Company's regular rates through
its direct sales channel. The Company's costs of handling and billing such
reseller accounts are generally lower on a per pager basis than the costs of
handling and billing its other accounts. Management believes that this sales
channel generates attractive incremental cash flow and enables the Company to
increase operating efficiencies and lower per unit costs by further amortizing
its network infrastructure investment over a larger subscriber base. In
addition, because resellers bear the economic burden of pager capital
investment, direct selling expense and certain administrative costs, management
believes that the resulting cash flow stream from pagers serviced through
resellers represents an attractive return on the Company's total capital
investment.
COUNTER PROGRAM. In 1994, the Company initiated a pilot program to develop
a direct retail distribution channel through retail stores, or "counters". The
Company currently is operating five such stores in North Texas that sell pagers
under the trademark "AirWare-TM-". Through various acquisition in 1995 and the
first quarter of 1996, the Company has added over thirty other counters in the
Southeast and the Midwest which continue to operate under their existing names.
The Company believes that this distribution channel may offer an excellent
opportunity to expand awareness of pagers, access the general consumer
marketplace and increase the total number of pagers in service. The Company
believes that counter locations increase "walk-in" traffic, particularly from
non-business users. Furthermore, the Company believes that counters will
generally be less costly to establish than centralized office locations, which
may enable the Company to enter new markets or expand in existing markets with
lower initial capital expenditures and start-up costs, while retaining the
ability to expand by adding new locations in response to market demand.
LOCAL AND REGIONAL RETAILERS. The Company also markets its paging products
and services through local and regional retailers. Although the Company does not
presently intend to concentrate in this area, the emphasis of this channel of
distribution will be dictated by market characteristics and business
opportunities.
DIVERSIFICATION OF SUBSCRIBER BASE
The Company's recent utilization of additional channels of distribution has
resulted in a diversification of its subscriber base. Its historical focus on
direct sales to the healthcare customer created a customer base which primarily
leased its pagers, resulting in higher service revenues and fewer pager
equipment sales. The overall subscriber base has shifted from leased to COAM
pagers as the Company has emphasized marketing through its reseller and retail
distribution channels.
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ACQUISITIONS
In 1993, as part of its overall strategy to capitalize on the growing demand
for pagers among commercial users and consumers in general, the Company
announced its plan to commence acquiring paging businesses within its
SuperCenter regions. Since this announcement, the Company has purchased or
entered into definitive agreements to purchase the paging operations described
as follows:
<TABLE>
<CAPTION>
STATUS OF PAGERS IN
ACQUISITION LOCATION(S) ACQUISITION SERVICE (1) PURCHASE PRICE
- ------------------------- ---------------------- ------------------------- ------------- --------------------
<S> <C> <C> <C> <C>
CLOSED ACQUISITIONS
Contact New York City Closed 3-01-94 91,000 $ 19.0 million
Radio Call New York City Closed 8-01-94 57,000 7.8 million
ChiComm Chicago Closed 8-01-94 30,000 9.8 million
High Tech Chicago and Texas Closed 12-31-94 2,000 0.9 million
Signet Charlotte Closed 3-01-95 30,000 9.0 million
Carrier New York City Closed 4-01-95 31,200 6.5 million
Metropolitan Houston Closed 5-01-95 150,000 21.0 million
All City Milwaukee Closed 5-01-95 20,000 6.4 million
Americom Houston Closed 7-01-95 80,000 17.5 million
Lewis Georgia Closed 9-01-95 15,000 5.6 million
Gold Coast Florida Closed 9-01-95 6,000 2.3 million
Paging & Cellular Houston Closed 10-01-95 0(2) 9.5 million
Apple Chicago Closed 12-01-95 41,500 13.0 million
Sun Florida Closed 1-01-96 12,000 2.3 million
Signet Raleigh Raleigh Closed 1-01-96 13,000 8.7 million
Page One Georgia Closed 1-01-96 30,000 19.7 million
AGR Florida Closed 2-01-96 50,000 6.5 million
Total Florida Closed 2-01-96 13,000 2.2 million
Williams Florida Closed 2-01-96 6,500 2.7 million
------------- --------------------
Total Closed
Acquisitions 678,200 170.4 million
PENDING ACQUISITIONS
Definitive Agreement
RCS North Carolina signed on 11-16-95
Definitive Agreement
Nationwide Los Angeles signed on 1-09-96 54,000(3) 12.3 million(3)
Total Pending
Acquisitions 54,000 12.3 million
------------- --------------------
Total Acquisitions 732,200 $ 182.7 million
------------- --------------------
------------- --------------------
</TABLE>
- ------------------------
(1) As of the closing date or the date of execution of the definitive agreement,
as applicable.
(2) Paging & Cellular was the Company's largest reseller serving more than
40,000 subscribers in Texas.
(3) Represents aggregate amounts for RCS and Nationwide.
The Company employs a variety of criteria in evaluating acquisitions of
commercial paging businesses. An ideal acquisition candidate is located in one
or more of the Company's targeted regions, has good spectrum resources,
geographic service coverage, distribution characteristics and growth
opportunities, and demonstrates the potential for achieving operating and
financial efficiencies when integrated into the SuperCenters. Following
completion of an acquisition, the Company has achieved and will continue to seek
to achieve such efficiencies by consolidating staff, eliminating duplicative
overhead and integrating the acquired billing, collections and related
operations into the
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SuperCenters and common information system. The Company believes that many
excellent opportunities remain for it to acquire commercial paging companies and
to achieve economies of scale and greater penetration within selected regions in
the United States.
The Company believes that the revolving line of credit which was increased
to $125 million in February 1995, should position the Company to continue to
pursue its acquisition strategy in 1996, subject to certain debt covenants. See
"Management's Discussion of Financial Condition and Results of Operations."
Accordingly, the Company intends to continue to pursue its aggressive
acquisition strategy.
COMPETITION
The Company faces direct competition in all of its paging markets.
Competition for subscribers to the Company's paging services is based primarily
upon the quality and price of services offered and the geographic area covered.
The Company competes by emphasizing its commitment to customer service and the
reliability and performance of its paging systems.
Competitors in most markets include one or more radio common carriers,
private radio carriers, telephone company affiliates and equipment
manufacturers. Although competitors include small, privately-owned companies
serving only one market area, others are publicly-held corporations and other
large companies that have greater financial resources than the Company.
The Company's strategy is to target users of metropolitan and regional
paging services. The Company also resells nationwide paging services if required
by its customers. Many publicly-held corporations and other large companies in
the paging industry are increasingly focusing upon providing nationwide paging
services, while many smaller, privately-owned competitors lack the financial and
managerial resources and economies of scale to compete effectively with the
Company in providing metropolitan and regional paging services. As a result,
while competition in the market for metropolitan and/or regional paging services
remains intense, the Company believes that its regional strategy has positioned
the Company to compete most effectively with both large and small paging firms.
A variety of wireless two-way communication technologies, including cellular
telephones and personal communications services, are currently in use or under
development. Although these technologies currently are more highly priced than
paging services or are not commercially available, technological improvements
could result in increased capacity and efficiency for wireless two-way
communication and, accordingly, could result in increased competition for the
Company. In addition, future technological advances in the telecommunications
industry could create new services or products competitive with the paging
services currently provided by the Company. Recent and proposed regulatory
changes by the FCC are aimed at encouraging such technological advances and new
services, such as narrowband Personal Communication Services ("PCS") which will
increase the amount of spectrum available for paging or similar services.
Moreover, changes in technology could lower the cost of competitive services and
products to a level at which the Company's services and products would become
less competitive or the Company would be required to reduce the prices of its
services and products. There can be no assurance that the Company will be able
to develop or introduce new services and products to remain competitive or that
the Company would not be adversely affected in the event of such technological
developments.
NETWORK DESIGN AND SOURCES OF EQUIPMENT AND PAGERS
As part of its paging operations, the Company sells, leases and repairs
pagers. In developing its paging systems, the Company seeks to achieve optimal
building penetration and wide-area coverage. Paging services are initiated when
a telephone call is placed to a paging terminal. These state-of-the-art
terminals, which the Company maintains within its SuperCenters and service
centers, have a modular design that allows significant future expansion by
adding or replacing modules rather than replacing the entire terminal.
8
<PAGE>
The Company does not manufacture any of the transmitting and computer
equipment or pagers used in providing its paging services, but instead purchases
such equipment and pagers from multiple sources. The Company anticipates that
such equipment and pagers will continue to be available in the foreseeable
future, subject to normal manufacturing and delivery lead times. Because of the
high degree of compatibility among different models of transmitters, computers
and other paging equipment manufactured by multiple suppliers, the Company is
able to design its systems without depending upon any single source of
equipment. The Company continuously evaluates new developments in paging
technology in connection with the design and enhancement of its paging systems
and the selection of products and services to be offered to its subscribers.
In order to achieve significant cost savings from volume purchases, the
Company currently purchases substantially all its pagers from Motorola. The
Company purchases its transmitters from two competing sources and its paging
terminals from Glenayre, a manufacturer of mobile communications equipment. The
paging system equipment in existing markets has significant capacity for future
growth.
REGULATIONS AND LICENSES
The paging systems owned by the Company are subject to regulation by the FCC
pursuant to the Communications Act of 1934 (the "Act"). The Company, or its
wholly-owned subsidiaries, currently holds FCC licenses for radio common carrier
("RCC"), Special Emergency Radio Service ("SERS"), 929 MHz private carrier, and
Business Radio Service ("BRS") frequencies, which are used to provide one-way
paging service. In one market where the SERS license is held by a local hospital
association, the Company acts as operator and manager of the paging system,
subject to the licensee's ultimate control and authority.
SERS and BRS frequencies are licensed by the FCC on a shared basis. (RCC
frequencies are licensed on an exclusive basis.) When a frequency is shared by
more than one licensee in the same geographic area, technical measures must
frequently be implemented to prevent each licensee from interfering with
another's transmissions. Based on its experience to date, the Company believes
that the quality and reliability of its paging systems are not impaired by
sharing frequencies with other SERS and BRS licensees.
The FCC now issues licenses for thirty-five 929 MHz private carrier paging
channels on an exclusive basis to operators who construct systems with the
requisite number of transmitters in a specific geographic area. The Company
holds two exclusive licenses for a 929 MHz system in New York City and
surrounding areas, and one license each for systems in Chicago and Houston. The
Company is in the process of acquiring additional exclusive licensees for 929
MHz frequencies.
The Company's RCC licenses have ten year terms that expire in April 1999;
prior to the expiration date, renewal applications must be filed with the FCC.
The Company's 929 MHz and BRS licenses have five and ten year terms, depending
on the date of issuance; licenses issued since 1995 have ten year terms. The
Company's SERS licenses have five year terms.
Renewal applications for RCC, 929 MHz and BRS frequencies are routinely
granted where the licensee has provided "substantial" service and has complied
with FCC rules and regulations. SERS licenses are renewed where the licensee is
in compliance with FCC rules and regulations. Although the Company is unaware of
any circumstance that would prevent grant of any renewal application, no
assurance can be given that any of the Company's licenses will be renewed. If
licenses are not renewed by the FCC, then alternative spectrum will have to be
obtained and the underlying system reconfigured.
The FCC may temporarily or permanently restrict operation of any licensed
facility to eliminate or resolve signal interference caused by that operation.
The FCC may also revoke or condition licenses, or impose fines or forfeitures
for failure to comply with either the terms and conditions of the license or the
provisions of the Act or any FCC rule, regulation or order issued pursuant to
the Act.
9
<PAGE>
SECURITY SYSTEMS' OPERATIONS
GENERAL
As one of its enhanced wireless communications services, through its
wholly-owned subsidiary, Electronic Tracking Systems Inc. ("ETS"), which
operates under the name of ProNet Tracking Systems ("PTS"), the Company markets
radio-activated electronic tracking security systems primarily to financial
institutions throughout the United States. The systems consist of radio
transmitters, or "TracPacs," which are disguised in items of value. When such an
item is removed from a financial institution without authorization, the TracPac
signals the appropriate law enforcement authorities, who in turn follow the
signal generated by the TracPac to recover the item and apprehend the suspect.
The underlying technology of paging and security systems is essentially the
same; the security systems employ paging technology in reverse order. A tracking
network consists of a series of receivers within a geographic area that receive
signals from the TracPac, while a paging network consists of a system of
transmitters within a geographic area that sends signals to a receiver (the
pager). The Company owns the security systems' receiving equipment and TracPacs
and leases the TracPacs to its customers for a monthly fee.
The Company presently operates 29 security systems in 23 major metropolitan
markets within the United States. The Company had 27,548 TracPacs under lease to
its customers as of December 31, 1995. The Company expects to expand its
security systems' operations within the Company's current markets and to expand
into new geographic markets in the United States. The Company is also exploring
expansion opportunities in foreign markets.
MARKETING
When the Company expands into a new market, it typically enters into an
agreement and establishes a close working relationship with the local law
enforcement authorities to install receiving equipment, conduct officer training
and provide system maintenance at no cost to the authorities. In return, the
authorities monitor the systems 24 hours a day and provide all necessary
telephone lines and the facilities for the management of the receiving
equipment. The ability to enter a market depends upon the cooperation of the
local law enforcement authorities, the willingness of local financial
institutions to evaluate and test the security systems, and the size and
complexity of the security coverage area.
The Company markets its security systems directly to banks, savings
institutions, credit unions and other financial institutions and to retail
operations that maintain valuables that may present a security risk. A full or
part-time employee in each market is responsible for local service, customer and
police training and demonstrations. In its marketing, the Company emphasizes
improved recovery rates of stolen property, improved criminal apprehension
rates, related crime rate reduction through apprehension of repeat offenders,
and the direct alarm interface to the local law enforcement authorities.
COMPETITION
The Company is unaware of any product that is substantially similar to or
competes directly with the TracPac. The TracPac's primary indirect competition
consists of "gas and dye" packs that, upon being taken from a building, are
triggered and explode, emitting tear gas and dye. The Company also competes with
other forms of security such as video cameras, security guards, bandit barriers
and silent alarm systems. The Company believes that its TracPac product is
superior to other forms of security because of the direct interface with the
local law enforcement authorities and its proven record of asset recovery and
related crime rate reduction.
SOURCES OF EQUIPMENT
All equipment used in the security systems business is assembled by the
Company with some sub-assemblies manufactured to Company specifications by
outside vendors. The materials required for TracPacs and other tracking
equipment are readily available from several sources.
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<PAGE>
REGULATIONS, LICENSES AND PATENTS
The PTS systems operated and leased by the Company are subject to regulation
by the FCC pursuant to the Act. ETS operates under experimental licenses granted
by the FCC for the nonexclusive use of radio frequencies for the operation of
the PTS systems. The FCC issues experimental licenses for a two-year time frame,
and the Company's current licenses will expire on October 1, 1996. The licenses
may be withdrawn by the FCC at any time and are subject to renewal by the FCC
upon expiration. The licenses have been routinely renewed every two years since
initially granted to the previous owner in 1974. Accordingly, the Company
currently has no reason to believe that the FCC will withdraw the experimental
licenses or that such licenses will not be renewed by the FCC prior to
expiration upon the filing of a timely renewal application by the Company,
unless the FCC acts to modify its rules to adopt regulations that will permit
the operation of the PTS system on a regular (i.e., non-experimental) basis. In
this respect, the Company filed a petition with the FCC in November 1993 that
would provide permanent spectrum for operation of PTS systems. In response to
the Company's petition, on April 25, 1995, the FCC proposed to allocate
permanent spectrum for the operation of PTS systems. SEE USE OF THE 216-217 MHZ
BAND FOR LOW POWER RADIO AND AUTOMATED MARITIME COMMUNICATIONS SYSTEM
OPERATIONS, WT Docket No. 95-56. The Company anticipates the FCC will finalize
this action in 1996.
The Company has licenses from the seller of the PTS product line for the use
of technology and software related to the systems. The software license is
perpetual; and the technology license expires in 1996.
EMPLOYEES
The Company employed approximately 584 full- and part-time personnel as of
December 31, 1995, none of whom are subject to collective bargaining
arrangements. The Company believes that its relationship with its employees is
excellent.
RISKS ASSOCIATED WITH BUSINESS ACTIVITIES
The nature of the business activities conducted by the Company subjects the
Company, its stockholders and the holders of the Company's indebtedness to
certain risks. The following is a summary of some of the material risks relating
to the Company's business activities.
ACQUISITIONS AND GROWTH STRATEGY
The Company intends to continue to pursue an aggressive acquisition
strategy. Since January 1, 1994, the Company has purchased 19 paging operations.
The Company is currently a party to definitive agreements to purchase two
additional paging companies, representing approximately 54,000 pagers in service
in the aggregate. No assurances can be given that the Pending Acquisitions will
be consummated, that further suitable acquisition candidates can be found or
purchased on favorable terms, or that the Pending Acquisitions, if completed,
will be successful. Prior to 1994, the Company delivered paging services solely
to members of the healthcare industry. However, much of the Company's growth
since 1994 has resulted from, and much of the Company's future growth is
expected to result from, the addition of non-healthcare subscribers such as
small businesses and individual consumers. Many of these subscribers purchase
and maintain their own pagers rather than lease their pagers from the Company.
Future growth through the addition of such subscribers may tend to reduce the
Company's ARPU because such subscribers will not generate leasing revenues.
Marketing and providing paging services to such businesses and consumers can
vary significantly from marketing and providing such services to healthcare
subscribers. No assurances can be given that the Company will be successful in
the general marketplace. See "Business -- Strategy."
HIGH DEGREE OF LEVERAGE; RESTRICTIONS IMPOSED BY LENDERS
The Company is highly leveraged. At December 31, 1995, the Company had
approximately $99.3 million of debt outstanding and the Company's long-term debt
as a percentage of total capitalization was approximately 67%.
11
<PAGE>
The Company's high degree of leverage will have important consequences to
the Company, including the following: (i) the ability of the Company to obtain
additional financing in the future for acquisitions, working capital, capital
expenditures or other purposes, should it need to do so, may be impaired; (ii) a
substantial portion of the Company's cash flow from operations will be required
to be dedicated to the payment of the Company's interest expense, which will
reduce the funds available to the Company for its operations and future business
opportunities; (iii) the Company may be more highly leveraged than some of its
competitors, which may place it at a competitive disadvantage; and (iv) the
Company's high degree of leverage may make it more vulnerable to a downturn in
its business or the economy generally.
The Company's credit facility and the indenture governing the Company's
senior subordinated notes contain financial and operating covenants including,
among other things, requirements that the Company maintain certain financial
ratios and satisfy certain financial tests and limitations on the Company's
ability to incur other indebtedness, pay dividends, engage in transactions with
affiliates, sell assets and engage in mergers and consolidations and other
acquisitions. If the Company fails to comply with these covenants, the lenders
will be able to accelerate that maturity of the applicable indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Credit Facilities" and "--
Senior Subordinated Notes."
DEBT SERVICE; DEFICIT OF EARNINGS TO FIXED CHARGES
For the year ended December 31, 1995, the Company's earnings were
insufficient to cover fixed charges by $7.6 million. The ability of the Company
to continue making payments of principal and interest on its indebtedness will
be largely dependent upon its future performance. Many factors, some of which
will be beyond the Company's control (such as prevailing economic conditions),
will affect its performance. Because borrowings under the Company's credit
facility will bear interest at rates that will fluctuate with certain prevailing
interest rates, increases in such prevailing interest rates will increase the
Company's interest payment obligations and could have an adverse effect on the
Company. There can be no assurance that the Company will be able to generate
sufficient cash flow to cover required interest and principal payments. If the
Company is unable to meet interest and principal payments in the future, it may,
depending upon the circumstances which then exist, seek additional equity or
debt financing, attempt to refinance its existing indebtedness or sell all or
part of its business or assets to raise funds to repay its indebtedness. There
can be no assurance that sufficient equity or debt financing will be available,
or, if available, that it will be on terms acceptable to the Company, that the
Company will be able to refinance its existing indebtedness or that sufficient
funds could be raised through asset sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
HOLDING COMPANY STRUCTURE
Because the Company operates a significant portion of its business through
its subsidiaries, the Company's cash flow and its ability to service debt are
substantially dependent upon the cash flow of its subsidiaries and the payment
of funds by those subsidiaries to the Company through loans, dividends or
otherwise. The subsidiaries, however, are legally distinct from the Company and
have no obligation, contingent or otherwise, to make any funds available for
such payment. The ability of the Company's subsidiaries to make such payment
will be subject to applicable state laws. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets of such subsidiaries
over the claims of the Company and the holders of the Company's indebtedness.
Except as otherwise permitted in the indenture governing the Company's senior
subordinated notes, the Company's subsidiaries may not incur indebtedness.
However, all of the Company's subsidiaries are guarantors of the indebtedness
under the Company's credit facility and have granted security interests in
substantially all of their assets to secure such indebtedness. As a result of
these factors, the
12
<PAGE>
Company's senior subordinated notes are effectively subordinated to all
liabilities of the Company's subsidiaries. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
FUTURE PROFITABILITY
The Company was profitable in 1993 and 1994. However, due to the incurrence
of significantly greater general and administrative expenses and depreciation,
amortization and interest expenses in 1995 as a result of the Company's recent
acquisitions of commercial paging companies and the offering of the Company's
senior subordinated notes, the Company was not profitable in 1995. Such
increased expenses may continue, and, if continued, will reduce net income and
may contribute to the Company's incurrence of losses in future periods. In any
event, no assurances can be given that the Company will achieve profitability.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SUBSCRIBER TURNOVER
The results of operations of paging service providers such as the Company
may be significantly affected by subscriber cancellations. In order to realize
net growth in pagers in service, disconnected users must be replaced and
additional users must be added. However, the sales and marketing costs
associated with attracting new subscribers are substantially relative to the
costs of providing service to existing customers. Although the Company's current
churn rate is below the industry average, the Company anticipates that it may
experience a higher churn rate in the future among small businesses, individual
consumers and other non-healthcare subscribers than it has experienced
historically. A significant increase in the Company's subscriber cancellation
rate may adversely affect the Company's operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
COMPETITION AND TECHNOLOGICAL CHANGE
The Company faces direct competition in all of its paging markets. Some of
the Company's competitors, which include certain national and regional paging
companies and Regional Bell Operating Companies, possess greater financial and
other resources than the Company. There can be no assurance that additional
competitors will not enter markets served by the Company or that the Company
will be able to continue to compete successfully. In addition, the
telecommunications industry is characterized by rapid technological change.
Future technological advances in the industry may result in the availability of
new services or products that could compete directly with the services and
products being provided or developed by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such new services and
products. Moreover, changes in technology could lower the cost of competitive
services and products to a level at which the Company's services and products
would become less competitive or the Company would be required to reduce the
prices of its services and products. There can be no assurance that the Company
will be able to develop or introduce new services and products to remain
competitive or that the Company will not be adversely affected in the event of
such technological developments. See "Business -- Paging Operations --
Competition" and "-- Security Systems' Operations -- Competition."
GOVERNMENT REGULATION
The paging industry and the PTS systems operated and leased by the Company
are subject to regulation by the FCC and, depending on the jurisdiction, may be
regulated by state regulatory agencies. There can be no assurance that either
the FCC or those state agencies having jurisdiction over the Company's business
will not adopt regulations or take other actions that would adversely affect the
business of the Company. See "Business -- Paging Operations -- Regulations and
Licenses" and "-- Security Systems' Operations -- Regulations, Licenses and
Patents."
13
<PAGE>
RELIANCE ON SELECT GROUP OF EXECUTIVES
The Company believes that its success will depend to a significant extent on
the efforts and abilities of a relatively small group of executive personnel.
The loss of services of one or more of these key executives could adversely
affect the Company. The Company does not maintain "key man" life insurance
policies on its executives. However, the Company has entered into three-year
employment agreements with Jackie R. Kimzey, the Company's Chairman and Chief
Executive Officer, and David J. Vucina, the Company's President and Chief
Operating Officer. See "Directors and Executive Officers of the Registrant."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K are not
based on historical facts, but are forward-looking statements that are based
upon numerous assumptions about future conditions that could prove not to be
accurate. Actual events and results may materially differ from the anticipated
results described in such statements. The Company's ability to achieve such
results is subject to certain risks and uncertainties. Such risks and
uncertainties include, but are not limited to, the existence of demand for and
acceptance of the Company's products and services, the availability of
appropriate candidates for acquisition by the Company, economic conditions, the
impact of competition and pricing, results of financing efforts and other
factors affecting the Company's business that are beyond the Company's control,
including but not limited to the matters described in "Risks Associated with
Business Activities."
ITEM 2. PROPERTIES
The Company currently leases approximately 27,150 square feet of office
space in Dallas, Texas, which is also the location of its executive offices.
This lease provides for rental at an effective rate of approximately $24,000 per
month and expires in September 2000. The Company also leases office space for
its SuperCenters, paging terminals and marketing office locations in each of the
metropolitan areas where it has paging operations, as well as over 35 counter
locations. Such leases provide for effective monthly rental rates ranging from
$100 to $17,000 per month and expire on various dates through 2001.
The Company's transmitters for its paging systems are located on commercial
broadcast towers, buildings and other fixed structures. The Company has leases
and other agreements and arrangements relating to its transmitter sites. The
Company's receiving equipment for its PTS security product is located on fixed
structures and buildings, owned and managed primarily by the law enforcement
authorities participating in the PTS system. The Company has agreements relating
to its use of these sites.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") trades on the Nasdaq National
Market tier of the Nasdaq National Market-SM- under the symbol "PNET."
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<PAGE>
The following table sets forth the range of high and low last reported sales
prices for the Company's common stock as reported by the NASDAQ National Market
System for the periods indicated. At February 26, 1996, the number of record
holders of the Company's common stock was 180 and the approximate number of
beneficial shareholders was 2,000.
<TABLE>
<CAPTION>
1995 1994
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter..................................... $19 $13 7/8 $14 3/8 $11
2nd Quarter..................................... 22 1/8 17 3/4 13 10 3/4
3rd Quarter..................................... 32 1/8 20 1/4 16 5/8 11 1/8
4th Quarter..................................... 30 13/16 23 3/4 16 1/8 13 1/2
</TABLE>
The Company has not paid any dividends since its incorporation and does not
anticipate paying cash dividends in the foreseeable future. It is the present
policy of the Board of Directors to retain earnings to finance the expansion of
operations and to fund acquisitions. Moreover, the Company's credit facility and
the indenture governing the Company's senior subordinated notes prohibit the
payment of dividends or other distributions on the Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected financial data for the Company for each of the
last five years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGE, RATIO,
UNIT AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues (1).............................. $ 56,108 $ 33,079 $ 19,234 $ 16,845 $ 15,084
Product sales (2)................................. 10,036 6,639 2,040 1,855 1,466
----------- ----------- ----------- ----------- -----------
Total revenues.................................... 66,144 39,718 21,274 18,700 16,550
Depreciation and amortization expenses............ 18,662 8,574 4,656 4,077 3,748
Operating income (loss)........................... (270) 3,189 2,732 1,834 1,223
Interest expense.................................. 8,640 1,774 292 310 425
Income (loss) before extraordinary item........... (7,697) 693 1,574 1,754 794
Net income (loss)................................. (7,697) 693 1,574 1,754 1,312
Net income (loss) per share:
Before extraordinary item....................... (1.23) 0.16 0.40 0.43 0.20
Net income (loss)............................... (1.23) 0.16 0.40 0.43 0.33
BALANCE SHEET DATA:
Total assets...................................... 186,969 73,273 30,296 28,128 26,599
Long-term debt including current maturities....... 99,319 9,500 3,400 3,629 4,984
Total liabilities................................. 137,413 23,038 9,937 8,325 8,397
Total stockholders' equity........................ 49,556 50,235 20,359 19,803 18,202
OTHER DATA:
Pagers in service at end of period................ 856,302 353,830 130,000 114,356 103,157
TracPacs in service at end of period.............. 27,548 27,595 25,841 19,210 13,846
Pagers in service per employee (3)................ 1,619 1,325 1,000 880 570
ARPU -- Paging (4)................................ $ 6.57 $ 8.51 $ 10.23 $ 10.48 $ 10.64
ARPU -- TracPac (5)............................... 15.90 16.52 15.90 14.75 15.00
Operating, general and administrative costs per
paging subscriber (6)............................ 3.53 3.30 5.33 5.13 4.80
Cash flow from operating activities (7)........... 12,298 9,821 7,144 6,720 3,493
EBITDA (8)........................................ 18,392 11,763 7,388 5,911 4,971
EBITDA margin (9)................................. 32% 36% 36% 34% 32%
Capital expenditures (10)......................... $ 17,528 $ 5,777 $ 5,497 $ 5,523 $ 4,193
Ratio of total debt to EBITDA (11)................ 5.4x 0.8x -- -- --
Ratio of EBITDA to interest expense............... 2.1 6.6 25.3 19.1 11.7
</TABLE>
- ------------------------
(1) Service revenues consist of fixed monthly, quarterly, annual and bi-annual
service and leasing fees.
(2) Product sales include pager and paging equipment sales and other security
systems' income.
(3) Calculated by dividing pagers in service at the end of such month by the
number of employees at the end of the period presented. This calculation
excludes employees directly related to the security systems business.
(4) ARPU -- Paging (average revenue per paging unit) is calculated by dividing
paging systems' average monthly service revenues for the last quarter in the
period by the average number of pagers in service at the beginning of such
months.
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<PAGE>
(5) ARPU -- TracPac (average revenue per TracPac unit) is calculated by dividing
security systems' service revenues for the last month in the period by the
number of TracPacs in service at the beginning of such month.
(6) Calculated by dividing the sum of the cost of pager lease and access fees
and general and administrative expenses for the last month in the period by
the number of pagers in service at the beginning of such month.
(7) Cash flow from operating activities is derived from the statement of cash
flows and differs from EBITDA (as defined below) primarily due to interest
expense and changes in working capital.
(8) EBITDA is earnings before other income (expense), income taxes, depreciation
and amortization. Other income (expense) consists primarily of interest
expense. EBITDA does not represent operating cash flows as defined by
generally accepted accounting principles and does not necessarily indicate
that cash flows are sufficient to fund all of the Company's cash needs.
EBITDA should not be considered in isolation or as a substitute for net
income, cash from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles.
(9) Calculated by dividing EBITDA by the remainder of total revenues less cost
of products sold for the period presented.
(10)Excludes acquisition costs.
(11)Calculated by dividing total debt at the end of the period by EBITDA for the
12 months ended on the last day of the period. Total debt includes debt
associated with the paging systems' business. Prior to March 1994, no debt
was associated with the paging systems' business.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for discussion of factors that materially affect the
comparability of the information reflected in the "Selected Financial Data."
ITEM 7. 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 the completed acquisitions and
anticipated acquisitions, the Company's results of operations for prior periods
may not be indicative of future performance. See "Business -- Strategy" and "--
Paging Operations -- Acquisitions."
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, 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
monthly churn rates in the paging industry -- approximately 2.1%, compared to an
industry average of approximately 3.1% (source: Smith Barney's Wireless
Telecommunications report, Release Date January 9, 1996, paging industry average
for customer-owned pagers for 1994). Churn is the number of customers
discontinuing service each month as a
17
<PAGE>
percentage of the total subscriber base. 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 .8%.
Currently, service 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 their paging equipment rather than leasing it
from the Company is likely to increase. This, together with competitive factors,
may result in declining service 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 and cash flows from operating activities
have each grown at a compound annual rate of over 36% over the past four years.
EBITDA and cash flows from operating activities growth are expected to continue
although near term EBITDA 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 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 negatively impacted earnings in 1995 and have the
potential to continue the trend in the future.
The following discussion and analysis of financial condition and results of
operations includes the historical results of operations of the Company and the
results of operations of Contact, Radio Call, ChiComm, High Tech, Signet,
Carrier, Metropolitan, All City, Americom, Lewis, Gold Coast, Paging & Cellular
and Apple. The results of operations of Signet Raleigh, Sun, Page One, AGR,
Total, Williams and the Pending Acquisitions are not reflected in this
discussion.
18
<PAGE>
PAGING SYSTEMS' RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Service revenues.................................................. $ 50,805 $ 28,015 $ 14,853
Product sales..................................................... 9,899 6,506 1,554
---------- --------- ---------
Total revenues...................................................... 60,704 34,521 16,407
Cost of products sold............................................... (9,357) (6,605) (794)
---------- --------- ---------
Net revenues (1).................................................... 51,347 27,916 15,613
Cost of services.................................................... (13,218) (7,972) (4,119)
---------- --------- ---------
Gross margin........................................................ 38,129 19,944 11,494
Sales and marketing expenses........................................ 7,937 6,530 3,736
General and administrative expenses................................. 15,048 4,713 2,907
Depreciation and amortization expenses.............................. 17,122 7,017 3,333
---------- --------- ---------
Operating income.................................................... $ (1,978) $ 1,684 $ 1,518
---------- --------- ---------
---------- --------- ---------
EBITDA.............................................................. $ 15,144 $ 8,701 $ 4,851
---------- --------- ---------
---------- --------- ---------
</TABLE>
- ------------------------
(1) Net revenues represent revenues from services, rent and maintenance plus
product sales less cost of products sold.
PAGING SYSTEMS' NET REVENUES increased in each of the last three years
compared to prior years. These increases were attributable primarily to a
growing subscriber base achieved through greater market penetration in existing
markets and the additions of the Completed Acquisitions. Net revenues increased
to $51.3 million in 1995 from $27.9 million in 1994 and from $15.6 million in
1993. This increase was primarily due to a 142% increase in pagers to 856,302 at
December 31, 1995, from 353,830 at December 31, 1994 and a 172% increase at
December 31, 1994 from 130,000 at December 31, 1993. The increase in pagers in
service was primarily due to the Completed Acquisitions. In addition, internal
growth accounted for approximately 128,772 and 38,000 units during 1995 and
1994, respectively, which represents annualized internal growth rates of
approximately 36% and 16%. The Company believes that this internal growth rate
will continue due to ongoing commercial paging activity.
ARPU was $6.57, $8.51 and $10.23 for the quarters ended December 1995, 1994,
and 1993, respectively. This decrease was primarily due to the acquisition and
growth 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 rates 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 was $542,000 in 1995, ($99,000) in
1994 and $760,000 in 1993. The margin increased in 1995 primarily due to the
increase in product sales, partially offset by depreciation on pagers. Beginning
in the quarter ending December 31, 1995, the Company began recording all
purchases of pagers as a part of pager equipment and depreciating these pagers
accordingly. This change resulted in a decrease in cost of products sold in 1995
of approximately $156,000. The margin decreased in 1994 from 1993 due to the
addition of commercial operations, which tend to have lower margins than were
achieved prior to 1994 in the healthcare industry. Due to the change in the
method of recording pagers in the fourth quarter of 1995, management anticipates
that the
19
<PAGE>
margins on pager sales will increase in the short-term as a full year of the
pager purchases are depreciated. Management also anticipates that 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
previously classified as cost of services and sales and marketing expenses in
1994 were reclassified to general and administrative expenses in 1995. In the
aggregate, costs of services, sales and marketing expenses and general and
administrative expenses increased by 88% and 79% for the years ended December
31, 1995 and 1994, respectively, compared to the respective years ended December
31, 1994 and 1993 as a result of the Company's internal growth and acquisitions.
In total, these costs were $36.2 million (71% of paging systems' net revenues)
for the year December 31, 1995, compared to $19.2 million (69% of paging
systems' net revenues) and $10.8 million (69% of paging systems' net revenues)
for the years ended December 31, 1994 and 1993, respectively. The increase in
these costs as a percentage of net revenues for the year ended December 31, 1995
from the comparable periods in 1994 and 1993 was 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
redundant operations in acquired companies are eliminated and as cost savings of
recent acquisitions are integrated into the existing SuperCenters.
PAGING SYSTEMS' GROSS MARGIN (net revenues less cost of services) increased
to $38.1 million (74% of paging systems' net revenues) in 1995 from $19.9
million (71% of paging systems' net revenues) in 1994 and from $11.5 million
(74% of paging systems' net revenues) in 1993. The increase as a percentage of
net revenues in 1995 was due to the reclassification of cost of products sold
and certain other operating expenses previously discussed. The margin on net
revenue decreased in 1994 due to the transition into the commercial paging
marketplace which resulted in lower average revenue per unit as well as a slight
loss on product sales. However, management believes that these margins will
stabilize in the future as cost efficiencies and integration savings are
achieved through the acquisitions.
PAGING SYSTEMS' SALES AND MARKETING EXPENSES were $7.9 million (15% of
paging systems' net revenues) in 1995, $6.5 million (23% of paging systems' net
revenues) in 1994 and $3.7 million (24% of paging systems' net revenues) in
1993. The decrease as a percentage of paging systems' net revenues in 1995 was
due to the reclassification of certain operating expenses described above. These
expenses are not expected to change significantly as a percentage of paging
systems' net revenues.
PAGING SYSTEMS' GENERAL AND ADMINISTRATIVE EXPENSES were $15.0 million (29%
of paging systems' net revenues) in 1995, $4.7 million (17% of paging systems'
net revenues) in 1994 compared to $2.9 million (19% of paging systems' net
revenues) in 1993. The increase as a percentage of net revenues in 1995 was due
to the reclassification of certain operating expenses as previously discussed.
The decrease as a percentage of net revenues from 1993 to 1994 was due to
savings resulting from the consolidation of certain of the Completed
Acquisitions' paging operations into the SuperCenter structure. 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 service revenues since product sales do not require any
capital investment. Paging systems' depreciation and amortization expenses were
$17.1 million, $7.0 million and $3.3 million in 1995, 1994 and 1993,
respectively, which as a percentage of paging systems' service revenue is 34%
for 1995, 25% for 1994 and 22% in 1993. The increase was primarily due to the
amortization of intangibles arising from the Completed Acquisitions. The
increase in 1995 was also due to a change in the method of recording pager
purchases in 1995. Beginning in the fourth quarter of 1995, the Company began
recording all purchases of pagers as part of paging equipment and depreciating
these pagers accordingly. Pager
20
<PAGE>
amounts previously classified as inventories in the prior year financial
statements have been reclassified to conform to the current period's
presentation. This change resulted in an increase in depreciation expense in
1995 of approximately $536,000. The Company expects that this trend in
depreciation and amortization expenses as a percentage of paging systems'
service revenues will continue in the near term as a result of acquisitions and
continued capital investment in paging equipment to support the Company's
growth.
EBITDA for the paging systems' operations was approximately $15.1 million
(29% of paging systems' net revenues), $8.7 million (31% of paging systems' net
revenues) and $4.9 million (31% of paging systems' net revenues) for 1995, 1994
and 1993, respectively. The decrease in EBITDA as a percentage of net revenues
in 1995 from 1994 was the result of increased expenses related to the buildout
of the Company's regional SuperCenters. The Company believes that EBITDA margin
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
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Service revenues.................................................... $ 5,303 $ 5,064 $ 4,381
Product sales....................................................... 137 133 486
--------- --------- ---------
Total revenues........................................................ 5,440 5,197 4,867
Cost of products sold................................................. (64) (39) (162)
--------- --------- ---------
Net revenues (1)...................................................... 5,376 5,158 4,705
Cost of services...................................................... (1,178) (1,213) (983)
--------- --------- ---------
Gross margin.......................................................... 4,198 3,945 3,722
Sales and marketing expenses.......................................... 319 207 314
General and administrative expenses................................... 631 676 871
Depreciation and amortization expenses................................ 1,540 1,557 1,323
--------- --------- ---------
Operating income...................................................... $ 1,708 $ 1,505 $ 1,214
--------- --------- ---------
--------- --------- ---------
EBITDA................................................................ $ 3,248 $ 3,062 $ 2,537
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Net revenues represent revenues from services, rent and maintenance plus
product sales less cost of products sold.
SECURITY SYSTEMS' NET REVENUES increased in each of the last three years.
These increases were attributable primarily to the installation of new systems
in each year, as well as further market penetration in existing markets. The
Company installed three systems in 1995, two in 1994 and four in 1993. The
number of TracPacs in service at the end of 1995 was 27,548, a minimal decrease
compared to the end of 1994. The number of TracPacs in service at the end of
1994 was 27,595, an increase of 7% over the end of 1993.
PRODUCT SALES LESS COST OF PRODUCTS SOLD was $73,000 for the year ended
December 31, 1995 compared to $94,000 and $324,000 for the comparable periods in
1994 and 1993, respectively. Net product sales fluctuate depending on the type
and volume of equipment sold. The Company does not anticipate significantly
increasing this area of security systems operations.
21
<PAGE>
SECURITY SYSTEMS' GROSS MARGIN was $4.2 million (78% of security systems net
revenues) in 1995, $3.9 million (76% of security systems' net revenues) in 1994
and $3.7 million (79% of security systems' net revenues) in 1993. The increase
as a percentage of net revenues in 1995 was due to additional product sales in
the first quarter. The decrease as a percentage of net revenues in 1994 from
1993 was due to profitable production work on earlier research and development
contracts that were completed in 1993. The Company anticipates that these
margins will decrease slightly in the near future as more systems are installed
in new or existing markets, but will increase over time as more subscribers are
added to new or existing systems.
SECURITY SYSTEMS' SALES AND MARKETING EXPENSES were $319,000 (6% of security
systems' net revenues) in 1995, $207,000 (4% of security systems' net revenues)
in 1994 compared to $314,000 (7% of security systems' net revenues) in 1993. The
increase in 1995 was the result of hiring additional personnel to accelerate the
growth of security systems' net revenues. The decrease in 1994 was due to the
movement of certain personnel to paging systems. The Company anticipates hiring
additional management in the near future which should increase sales and
marketing expenses at or slightly above the rate of growth in security systems'
net revenues, therefore increasing slightly as a percentage of these revenues.
SECURITY SYSTEMS' GENERAL AND ADMINISTRATIVE EXPENSES were $631,000 (12% of
security systems' net revenues) in 1995, $676,000 (13% of security systems' net
revenues) in 1994 and $871,000 (19% of security systems' net revenues) in 1993.
The decrease in 1995 and 1994 as a percentage of net revenues was a result of
decreased burden of corporate overhead due to the Company's expanded paging
operations. The Company 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 service revenues since product sales do not require
any capital investment. Security systems' depreciation and amortization expenses
were $1.5 million (29% of security systems' service revenues), $1.6 million (31%
of security systems' service revenues) and $1.3 million (30% of security
systems' service revenues) in 1995, 1994 and 1993, respectively. The decrease in
depreciation and amortization expenses as a percentage of service revenues in
1995 from 1994 primarily resulted from increasing revenues in 1995. The Company
believes that depreciation and amortization expenses will increase in the near
future due to planned increases in capital expenditures, primarily the
installation of several new systems.
EBITDA for security systems' operations were $3.2 million (60% of security
systems' net revenues) in 1995, $3.1 million (59% of security systems' net
revenues) and $2.5 million (54% of security systems' net revenues) in 1993. This
increase was primarily due to increases in net revenues and 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. The period-to-period fluctuations in
interest expense have resulted primarily from changes in the outstanding amounts
under the Company's revolving loan agreement and the senior subordinated notes.
Interest expense increased in 1995 as a result of interest due on the senior
subordinated notes which were issued in June 1995. Interest expense increased in
1994 as a result of the increased borrowings to fund acquisitions made during
the year. Interest expense is expected to increase in the future as a result of
interest due on the senior subordinated notes and borrowings under the revolving
loan agreement to fund further acquisitions. Investment of proceeds from the
sale of the senior subordinated notes caused interest income to increase in
1995. The Company anticipates this income will decline in future periods as the
proceeds are used to fund future acquisitions.
22
<PAGE>
FEDERAL INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards of
$11.0 million for income tax purposes that expire in years 2005 through 2011.
For the year ended December 31, 1995, 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, net operating losses with no
benefit 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 1995, 1994 and 1993, the Company financed the majority of its growth,
other than acquisitions, through internally generated funds. Net cash provided
by operating activities was $12.3 million in 1995, $9.8 million in 1994 and $7.1
million in 1993. The net increase in cash provided by operating activities was
primarily due to increases in depreciation and amortization, the provision for
losses on accounts receivable, and trade payables and other accrued expenses and
liabilities, offset by increases in accounts receivable and inventories and a
decrease in net income. The acquisitions of Contact, Radio Call, ChiComm and
High Tech in 1994 and Signet, Carrier, Metropolitan and All City in 1995 were
financed with borrowings under the Company's revolving loan agreement. Proceeds
from the sale of the senior subordinated notes were used to repay all
indebtedness outstanding under the revolving loan agreement and to fund the
acquisitions of Americom, Lewis, Gold Coast, Paging & Cellular and Apple in
1995. The Company funded $7.3 million of the cash for the acquisitions of Sun,
Signet Raleigh, Page One, AGR, Total and Williams in 1996 with proceeds from the
sale of the senior subordinated notes, with the remaining amounts financed with
borrowings under the Company's revolving loan agreement. The Company anticipates
that its ongoing capital needs, including the Pending Acquisitions, will be
funded with borrowings under its revolving loan agreement and net cash generated
by operations.
CAPITAL EXPENDITURES
As of December 31, 1995, the Company had invested $62.8 million in system
equipment and pagers for its 14 major metropolitan markets and $11.9 million in
system equipment and TracPacs for its twenty-nine security systems.
Capital expenditures for paging systems' equipment and pagers were $16.2
million in 1995, $5.0 million in 1994, and $4.0 million in 1993 (excluding
assets acquired pursuant to the Completed Acquisitions), and $1.4 million for
security systems' equipment and TracPacs in 1995, $763,300 in 1994 and $1.5
million for 1993.
At December 31, 1995, the Company had invested $1.6 million in inventories,
compared to $1.2 million at December 31, 1994. The increase was a result of
higher security systems inventory in 1995 for planned installations of new
security systems in 1996. Inventory balances are expected to decline slightly as
the new systems are installed.
Except for those assets acquired through acquisitions, the Company expects
to meet its capital requirements in 1996 with cash generated from operations.
Although the Company had no material binding commitments to acquire capital
equipment at December 31, 1995, the Company anticipates capital expenditures for
1996 to be $21.9 million for the purchase of pagers and system equipment for its
current paging systems operations and $2.1 million for the manufacture of
TracPacs and the purchase of system equipment for its security systems'
operations.
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
23
<PAGE>
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 a
Federal Funds Rate, plus a margin 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 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 further amended and restated in February 1995
and June 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 and permitting the issuance of senior subordinated
notes. 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 a 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 Company or an equity issuance (other than the common stock
offering which occurred in December 1994), the Lender can request that a
percentage of the proceeds be used to pay down outstanding borrowings under the
New Credit Facility.
At December 31, 1995 the Company had approximately $47.2 million of
available funds under the New Credit Facility, based on financial and operating
covenants.
Effective June 12, 1995, the Lender began requiring 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 December 31, 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 (the "Notes") due
2005. 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 has used 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
24
<PAGE>
affiliates, sell assets and engage in certain other transactions. Interest on
the Notes is payable in cash semi-annually on each June 15 and December 15,
commencing December 15, 1995. The Notes will not be redeemable at the Company's
option prior to June 15, 2000.
The Company filed a Form S-4 Registration Statement (the "1995 S-4") on July
7, 1995 to register the Notes with the SEC under the Securities Act. On October
6, 1995, the SEC declared the 1995 S-4 effective.
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. In 1995, the
Company acquired the paging assets of Signet for $9.0 million, Carrier for $6.5
million, All City for $6.4 million, Americom for $17.5 million, Lewis for $5.6
million, Gold Coast for $2.3 million and Paging & Cellular for $9.5 million and
all the outstanding capital stock of Metropolitan for $21.0 million and Apple
for $13.0 million. Also in 1995, the Company signed definitive agreements or
letters of intent to acquire substantially all of the paging assets of Signet
Raleigh, RCS and Sun and all of the outstanding capital stock of Page One, AGR,
Total, Williams and Nationwide. In 1996, the Company signed a definitive
agreement to acquire substantially all of the outstanding capital stock of
Nationwide. Effective January 1, 1996, the Company acquired substantially all of
the paging assets of Sun and Signet Raleigh and all of the outstanding capital
stock of Page One. Effective February 1, 1996, the Company completed the
acquisition of all of the outstanding capital stock of AGR, Total and Williams.
The two Pending Acquisitions are expected to close in the second quarter of 1996
and will be funded with proceeds from borrowings under the New Credit Facility.
The Pending Acquisitions are subject to various conditions, including FCC,
regulatory and other third-party approvals.
At December 31, 1995, the Company had deferred payments outstanding related
to the High Tech, Signet, Carrier, All City, Americom and Lewis acquisitions of
$200,000, $4.2 million, $3.0 million, $245,000, $8.7 million and $2.1 million,
respectively, which are due and payable one year from the closing of the
respective transactions. In addition, the Company incurred deferred payments in
1996 of $800,000 and $4.9 million, related to the Signet Raleigh and Page One
acquisitions, respectively. The 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,
Metropolitan, Gold Coast, Paging & Cellular, Apple, Sun, AGR, Total and
Williams, the purchase price was paid in full at closing.
On August 1, 1995, the Company issued 44,166 shares of its Common Stock to
ChiComm in payment of the $950,000 deferred portion of the purchase price of
ChiComm. In January 1996, the Company paid in cash the $200,000 deferred portion
of the purchase price of High Tech.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1996, the Company will adopt the Financial
Accounting Standards Board ("FASB") Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Adoption of this statement will not have a material effect on the Company's
financial statements.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
ProNet Inc.
We have audited the accompanying consolidated balance sheets of ProNet Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. Our audits also included the
financial statement schedule listed in the Index to Financial Statements and
Financial Statement Schedule at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ProNet Inc. and subsidiaries at December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Dallas, Texas
February 5, 1996
26
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................................................. $ 10,154 $ 666
Trade accounts receivable, less allowance for doubtful accounts of $1,018 and $532 as
of December 31, 1995 and 1994, respectively........................................... 7,498 5,055
Federal income tax receivable -- Note E................................................ 990 --
Inventories -- Note A.................................................................. 1,574 1,220
Other current assets -- Note B......................................................... 1,937 2,528
----------- ----------
22,153 9,469
EQUIPMENT
Pagers................................................................................. 36,789 27,063
Communications equipment............................................................... 26,051 14,561
Security systems' equipment............................................................ 11,866 10,517
Office and other equipment............................................................. 7,179 3,210
----------- ----------
81,885 55,351
Less allowance for depreciation........................................................ (34,203) (25,441)
----------- ----------
47,682 29,910
GOODWILL AND OTHER ASSETS, net of accumulated amortization of $9,266 and $3,828 as of
December 31, 1995 and 1994, respectively -- Note B...................................... 117,134 33,894
----------- ----------
$ 186,969 $ 73,273
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables......................................................................... $ 8,387 $ 4,759
Other accrued expenses and liabilities -- Note B....................................... 10,524 7,829
----------- ----------
18,911 12,588
LONG-TERM DEBT, LESS CURRENT MATURITIES -- Note C........................................ 99,319 9,500
DEFERRED CREDITS -- Note D............................................................... 19,183 950
STOCKHOLDERS' EQUITY -- Notes F and G
Common stock........................................................................... 70 65
Additional capital..................................................................... 56,617 49,574
Retained earnings (deficit)............................................................ (5,671) 2,026
Less treasury stock at cost............................................................ (1,460) (1,430)
----------- ----------
49,556 50,235
----------- ----------
$ 186,969 $ 73,273
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Service revenues............................................................. $ 56,108 $ 33,079 $ 19,234
Product sales................................................................ 10,036 6,639 2,040
--------- --------- ---------
Total revenues............................................................... 66,144 39,718 21,274
Cost of products sold........................................................ (9,421) (6,644) (956)
--------- --------- ---------
56,723 33,074 20,318
COST OF SERVICES
Pager lease and access services.............................................. 13,218 7,972 4,119
Security systems' equipment services......................................... 1,178 1,213 983
--------- --------- ---------
14,396 9,185 5,102
--------- --------- ---------
GROSS MARGIN................................................................. 42,327 23,889 15,216
EXPENSES
Sales and marketing.......................................................... 8,256 6,737 4,050
General and administrative................................................... 15,679 5,389 3,778
Depreciation and amortization................................................ 18,662 8,574 4,656
--------- --------- ---------
42,597 20,700 12,484
--------- --------- ---------
OPERATING INCOME (LOSS)...................................................... (270) 3,189 2,732
OTHER INCOME (EXPENSE)
Interest and other income.................................................... 1,291 173 43
Interest expense............................................................. (8,640) (1,774) (292)
--------- --------- ---------
(7,349) (1,601) (249)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.......................................... (7,619) 1,588 2,483
Income tax expense -- Note E................................................. 78 895 909
--------- --------- ---------
NET INCOME (LOSS).......................................................... $ (7,697) $ 693 $ 1,574
--------- --------- ---------
--------- --------- ---------
NET INCOME (LOSS) PER SHARE.................................................... $ (1.23) $ .16 $ 0.40
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES........................................................ 6,267 4,393 3,982
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (7,697) $ 693 $ 1,574
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization............................................. 18,662 8,574 4,656
Amortization of discount.................................................. 36 -- --
Deferred tax provision.................................................... -- 293 373
Provision for losses on accounts receivable............................... 1,034 570 189
Changes in operating assets and liabilities:
Increase in trade accounts receivable................................... (1,788) (585) (387)
Increase in inventories................................................. (714) (2,413) (17)
Increase in other current assets........................................ (190) (342) (295)
Increase in trade payables and other accrued expenses and liabilities... 2,955 3,031 1,051
---------- ---------- ---------
Net cash provided by operating activities................................. 12,298 9,821 7,144
INVESTING ACTIVITIES:
Purchase of equipment....................................................... (17,528) (5,777) (5,497)
Acquisitions, net of cash acquired.......................................... (70,189) (36,828) (656)
Reduction in equipment...................................................... 929 196 246
Computer system software, product enhancements and other intangible
assets..................................................................... (1,591) (812) (174)
Other....................................................................... (455) (21) 10
---------- ---------- ---------
Net cash used in investing activities..................................... (88,834) (43,242) (6,071)
FINANCING ACTIVITIES:
Net proceeds from senior subordinated debt offering......................... 95,583 -- --
Proceeds from sale of common stock.......................................... -- 28,916 --
Proceeds from bank debt..................................................... 39,900 35,100 700
Payments on bank debt....................................................... (49,400) (29,000) --
Exercise of incentive stock options for common stock........................ 1,494 267 138
Debt financing costs........................................................ (1,469) (1,449) (16)
Other....................................................................... (84) (277) (1,496)
---------- ---------- ---------
Net cash provided by (used in) financing activities....................... 86,024 33,557 (674)
---------- ---------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS......................................... 9,488 136 399
CASH AND CASH EQUIVALENTS:
Beginning of year........................................................... 666 530 131
---------- ---------- ---------
End of year................................................................. $ 10,154 $ 666 $ 530
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
PAR VALUE $0.01
-------------------- RETAINED- TREASURY STOCK
SHARES ADDITIONAL EARNINGS ----------------------
ISSUED PAR VALUE CAPITAL (DEFICIT) SHARES COST
--------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992......................... 4,089 $ 41 $ 20,276 $ (241) 219 $ (273)
Net income......................................... 1,574
Exercise of incentive stock options................ 67 1 138
Repurchase of common stock......................... 178 (1,157)
--------- --------- ----------- --------- --- ---------
BALANCE AT DECEMBER 31, 1993......................... 4,156 42 20,414 1,333 397 (1,430)
Net income......................................... 693
Exercise of incentive stock options................ 47 267
Sale of common stock............................... 2,300 23 28,893
--------- --------- ----------- --------- --- ---------
BALANCE AT DECEMBER 31, 1994......................... 6,503 65 49,574 2,026 397 (1,430)
Net loss........................................... (7,697)
Exercise of incentive stock options................ 258 3 1,491 1 (30)
Common stock issued for acquisitions............... 216 2 5,443
Common stock issued for Employee Stock Purchase
Plan.............................................. 10 109
--------- --------- ----------- --------- --- ---------
BALANCE AT DECEMBER 31, 1995......................... 6,987 $ 70 $ 56,617 $ (5,671) 398 $ (1,460)
--------- --------- ----------- --------- --- ---------
--------- --------- ----------- --------- --- ---------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
NOTE A -- ACCOUNTING POLICIES
PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONSOLIDATION: The consolidated financial statements include the accounts
of ProNet Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
CASH EQUIVALENTS: Cash equivalents are recorded at cost, which approximates
market, and include investments in financial instruments having maturities of
three months or less at the time of purchase.
INVENTORIES: Inventories are valued at the lower of first-in, first-out
(FIFO) cost or market and consist primarily of finished goods.
EQUIPMENT: Equipment is recorded at cost. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets.
Communication equipment and security systems' equipment are depreciated over a
ten-year period. Pagers and office equipment are depreciated over a three- to
five-year in-service period.
Beginning in October 1995, the Company began recording and depreciating all
pagers as a part of pager equipment. Depreciation expense recorded on pagers in
the fourth quarter of 1995 was approximately $536,000. Pager amounts classified
as inventories in prior year financial statements have been reclassified to
conform to the current period's presentation.
OTHER ASSETS: Other assets include goodwill, noncompetition agreements,
debt financing costs, customer lists, patents, software purchased for internal
use and other intangible assets, all of which are amortized using the
straight-line method over five- to fifteen-year periods. Goodwill, currently
being amortized on a straight-line basis over a fifteen-year period, is net of
accumulated amortization of $5.7 million and $1.2 million at December 31, 1995
and 1994, respectively. The noncompetition agreements are amortized using the
straight-line method over the terms of the agreements, generally five-years.
Debt financing costs consist of costs incurred in connection with the Company's
senior subordinated notes and revolving line of credit and are being amortized
over periods not to exceed the terms of the related agreements. Management
regularly reviews remaining goodwill and other assets with consideration toward
recovery through future operating results (undiscounted) at the current rate of
amortization.
REVENUE RECOGNITION: Revenue is recognized as earned over the contract
terms.
FEDERAL INCOME TAXES: Taxes are reported under the liability method;
accordingly, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET INCOME (LOSS) PER SHARE: Net income (loss) 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.
31
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK: The Company provides paging services to
businesses, individual consumers, medical institutions and health care
professionals and specialized security devices to financial institutions, most
of which are in major metropolitan areas. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
significant collateral. Receivables generally are due within 30 days. Credit
losses relating to its customers consistently have been within management's
expectations.
SOURCES OF SUPPLY OF MATERIAL: The Company does not manufacture any of the
transmitting and computer equipment or pagers used in providing its paging
services, but instead purchases such equipment and pagers from multiple sources.
The Company anticipates that such equipment and pagers will continue to be
available in the foreseeable future, subject to normal manufacturing and
delivery lead times. Because of the high degree of compatibility among different
models of transmitters, computers and other paging equipment manufactured by
multiple suppliers, the Company is able to design its systems without depending
upon any single source of equipment. The Company continuously evaluates new
developments in paging technology in connection with the design and enhancement
of its paging systems and the selection of products and services to be offered
to its subscribers.
In order to achieve significant cost savings from volume purchases, the
Company currently purchases substantially all its pagers from Motorola. The
Company purchases its transmitters from two competing sources and its paging
terminals from Glenayre, a manufacturer of mobile communications equipment. The
paging system equipment in existing markets has significant capacity for future
growth.
All equipment used in the security systems business is assembled by the
Company with some sub-assemblies manufactured to Company specifications by
outside vendors. The materials required for TracPacs and other tracking
equipment are readily available from several sources.
RECLASSIFICATION OF FINANCIAL STATEMENTS: The 1994 and 1993 financial
statements have been reclassified to conform to the 1995 financial statement
presentation.
NEW ACCOUNTING PRONOUNCEMENTS: In the first quarter of 1996, the Company
will adopt the FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." Adoption of this
statement will not have a material effect on the Company's financial statements.
In October 1995, the FASB issued its Statement No. 123, "Accounting for
Stock Based Compensation" ("FAS 123") which establishes an alternative method of
accounting for stock based compensation to the method set forth in Accounting
Principles Board Opinion No. 25 ("APB 25"). FAS 123 encourages, but does not
require, adoption of a fair valued based method of accounting for stock options
and similar equity instruments granted to employees. The Company will continue
to account for such grants under the provision of APB No. 25 and will adopt the
disclosure provisions of FAS 123 in 1996. Accordingly, adoption of FAS 123 will
not effect the Company's financial statements.
NOTE B -- BALANCE SHEET DETAIL
Other current assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Security transmitter TracPacs............................................ $ 1,217 $ 1,428
Other current assets..................................................... 720 1,100
--------- ---------
$ 1,937 $ 2,528
--------- ---------
--------- ---------
</TABLE>
32
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- BALANCE SHEET DETAIL (CONTINUED)
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
----------- ---------
<S> <C> <C>
Goodwill............................................................. $ 108,153 $ 27,946
Noncompetition agreements............................................ 4,750 3,050
Debt financing costs................................................. 6,980 1,445
Other................................................................ 6,517 5,281
----------- ---------
126,400 37,722
Less accumulated amortization........................................ 9,266 3,828
----------- ---------
$ 117,134 $ 33,894
----------- ---------
----------- ---------
</TABLE>
Other accrued expenses and liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Accrued revenue......................................................... $ 4,891 $ 3,530
Customer deposits....................................................... 2,604 2,247
Accrued interest........................................................ 1,002 161
Other accrued liabilities............................................... 2,027 1,891
--------- ---------
$ 10,524 $ 7,829
--------- ---------
--------- ---------
</TABLE>
NOTE C -- LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Senior subordinated notes............................................... $ 99,319 $ --
Revolving line of credit................................................ -- 9,500
--------- ---------
99,319 9,500
Less current maturities................................................. -- --
--------- ---------
$ 99,319 $ 9,500
--------- ---------
--------- ---------
</TABLE>
In June 1995, the Company completed a Rule 144A Offering of $100 million
principal amount of its 11 7/8% senior subordinated notes (the "Notes") due
2005. 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 has used 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 fair value of the Notes at December 31, 1995 was
$110 million based on quoted market price.
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
33
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LONG-TERM DEBT (CONTINUED)
affiliates, sell assets and engage in certain other transactions. Interest on
the Notes is payable in cash semi-annually on each June 15 and December 15,
commencing December 15, 1995. The Notes will not be redeemable at the Company's
option prior to June 15, 2000.
The Company filed the 1995 S-4 on July 7, 1995 to register the Notes with
the SEC under the Securities Act. On October 6, 1995, the SEC declared the 1995
S-4 effective.
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 a Federal Funds Rate,
plus a margin 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 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 further amended and restated in February 1995
and June 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 and permitting the issuance of senior subordinated
notes. 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 a 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 Company or an equity issuance (other than the common stock
offering which occurred in December 1994), the Lender can request that a
percentage of the proceeds be used to repay outstanding borrowings under the New
Credit Facility.
At December 31, 1995 the Company had approximately $47.2 million of
available funds under the New Credit Facility, based on financial and operating
covenants.
Effective June 12, 1995, the Lender began requiring 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 December 31, 1995, none of the outstanding long-term
debt was subject to hedging agreements.
The weighted average interest rate on the outstanding Notes and line of
credit during 1995 and 1994 was 12.9% and 6.5%, respectively. Total interest
paid was $7.8 million, $1.7 million and $177,000 for 1995, 1994 and 1993,
respectively.
34
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- DEFERRED CREDITS
Deferred credits consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred payments......................................................... $ 18,495 $ 950
Deferred tax liability.................................................... 688 --
--------- ---------
$ 19,183 $ 950
--------- ---------
--------- ---------
</TABLE>
The Company has deferred payments outstanding related to the High Tech,
Signet, Carrier, All City, Americom and Lewis acquisitions of $200,000, $4.2
million, $3.0 million, $245,000, $8.7 million and $2.1 million, respectively,
which are due and payable one year from the closing of the respective
transactions. The 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. On August 1, 1995, the Company issued 44,166 shares of its
Common Stock to ChiComm in payment of the $950,000 deferred portion of the
purchase price of ChiComm. The purchase prices for the Contact, Radio Call,
Metropolitan, Gold Coast, Paging & Cellular and Apple acquisitions were paid in
full at closing.
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
purchase prices or deferred payments related to the purchase prices for the
Company's acquisitions.
NOTE E -- INCOME TAXES
At December 31, 1995, net operating loss carryforwards of $11.0 million were
available to reduce income taxes and expire in years 2005 through 2011.
The valuation allowance increased during 1995 in recognition of the
Company's 1995 operating losses and management's belief that the realization of
the deferred tax asset in the near term is remote.
In 1995 and 1994, the Company was subject to an alternative minimum tax of
$0 and $453,407, respectively, which will be allowed as a credit against regular
tax in the future in the event regular tax expense exceeds AMT. At December 31,
1995, the Company had unused investment tax credit carryforwards of $147,000
which expire beginning in 1999.
35
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- INCOME TAXES (CONTINUED)
Significant components of deferred tax liabilities and assets are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................................ $ (2,343) $ (2,817)
Other -- net.............................................................. (575) (319)
--------- ---------
Total deferred tax liabilities.......................................... (2,918) (3,136)
Deferred tax assets:
Net operating loss carryforwards.......................................... 3,727 1,135
Alternative minimum tax credit............................................ 225 1,127
Investment tax credit..................................................... 147 147
Other -- net.............................................................. 2,236 917
--------- ---------
Total deferred tax assets............................................... 6,335 3,326
Valuation allowance for deferred tax assets............................... (4,105) (190)
--------- ---------
Net of valuation allowance.............................................. 2,230 3,136
--------- ---------
Net deferred tax liabilities................................................ $ (688) $ 0
--------- ---------
--------- ---------
</TABLE>
Significant components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal current tax expense.............................................. $ -- $ 506 $ 515
Current benefits from investment tax credits............................. -- -- (128)
Federal deferred tax expense............................................. -- 293 373
State income taxes....................................................... 78 96 149
--------- --------- ---------
$ 78 $ 895 $ 909
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of income tax computed at the U. S. federal statutory tax
rates to income tax expense is (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Tax expense (benefit) at U. S. statutory rates........................ $ (2,590) $ 540 $ 844
Non-deductible goodwill amortization.................................. 633 298 --
Net operating losses with no benefit (1).............................. 1,138 -- --
Change in valuation allowance......................................... 1,323 (19) (88)
State income taxes, net of Federal benefit............................ 51 63 98
Other................................................................. (477) 13 55
--------- --------- ---------
$ 78 $ 895 $ 909
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Excludes benefit from stock options exercised.
Federal income tax paid amounted to $132,000, $755,000 and $266,000 in 1995,
1994 and 1993, respectively. Payments made in 1995 were refunded to the Company
in the first quarter of 1996. Current year tax losses will be available to carry
back to prior years to recover taxes paid in 1992, 1993 and 1994 upon filing the
1995 tax return. In 1995, 1994 and 1993, $156,000, $112,000 and $106,000 in
state income taxes were paid, respectively.
36
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- STOCKHOLDERS' EQUITY
Twenty million shares of common stock, $.01 par value, and five million
shares of preferred stock, $1.00 par value, were authorized to be issued at
December 31, 1995. Ten million shares of common stock, $.01 par value, and one
million shares of preferred stock, $1.00 par value, were authorized at December
31, 1994. As of December 31, 1995, no shares of preferred stock had been issued.
In December 1994, 2.3 million shares of common stock were issued through a
common stock offering at a price of $13.625 per share. If this offering had
occurred as of the beginning of 1994, earnings per share would have been $0.11
for the year ended December 31, 1994.
On July 25, 1995, the Company filed the 1995 S-3 to register 2,000,000
shares of the Common Stock to fund various purchase prices and deferred payments
related to acquisitions. In August 1995, the Company issued 44,166 shares of
Common Stock in payment of the $950,000 deferred payment to ChiComm. In December
1995, the Company issued 172,282 shares of Common Stock in payment for
$4,500,000 of the purchase price of Apple.
Total shares of common stock reserved for future issuance under stock option
plans and the 1995 S-3 were 3,722,615 and 1,206,842 at December 31, 1995 and
1994, respectively.
NOTE G -- STOCK OPTION PLANS
THE 1987 PLAN
Under the 1987 Stock Option Plan as amended ("1987 Plan"), the Board of
Directors may grant incentive and non-incentive stock options to key employees
for the purchase of up to 1.2 million shares of common stock at the fair market
value of a share of common stock on the date the option is granted, and the term
of each option will not exceed ten years.
At December 31, 1995, incentive stock options for 573,245 shares were
outstanding which vest over a three-year period and 204,600 shares which vest
over a five-year period. There were 818,777 and 1,076,842 shares of common stock
reserved for future issuance and exercise of outstanding options under the 1987
Plan at December 31, 1995 and 1994, respectively. Of the outstanding options,
334,045 and 470,900 shares were exercisable at December 31, 1995 and 1994,
respectively.
Stock option activity was as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
----------- --------------------
<S> <C> <C>
Options outstanding at December 31, 1992....................... 598,966 $ .01 -- $ 7.63
Options granted.............................................. 168,500 5.75 -- 7.00
Options exercised............................................ (66,636) .01 -- 7.63
Options cancelled............................................ (4,700) 5.38 -- 7.63
-----------
Options outstanding at December 31, 1993....................... 696,130 2.75 -- 7.63
Options granted.............................................. 395,000 11.00 -- 14.75
Options exercised............................................ (39,570) 2.75 -- 7.63
Options cancelled............................................ (37,250) 5.38 -- 7.63
-----------
Options outstanding at December 31, 1994....................... 1,014,310 2.75 -- 14.75
Options granted.............................................. 39,500 7.63 -- 20.25
Options exercised............................................ (258,065) 2.75 -- 11.13
Options cancelled............................................ (17,900) 5.38 -- 11.00
-----------
Options outstanding at December 31, 1995....................... 777,845 2.75 -- 20.25
-----------
-----------
</TABLE>
37
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- STOCK OPTION PLANS (CONTINUED)
THE NON-EMPLOYEE DIRECTOR OPTION PLAN
The Non-Employee Director Stock Option Plan ("Non-Employee Director Option
Plan"), approved in July 1991, authorized 37,500 shares of common stock for
issuance under the Plan and provides for a one-time grant of options for the
purchase of 7,500 shares of common stock to non-employee directors of the
Company.
The per share exercise price for shares subject to each option is the fair
market value of the common stock at the date of grant. The option shall be
exercisable in full after the completion of six months of continuous service on
the Board of Directors after the date of grant, and the term of each option is
ten years. At December 31, 1995 and 1994, there were options outstanding and
exercisable for 15,000 shares at an option price per share of $7.63 and 7,500
shares at an option price per share of $6.88.
In May 1991, under a separate agreement, a one-time grant of options for the
purchase of 7,500 shares of common stock was made to a non-employee director.
The option, with a per share price of $7.63, became fully exercisable at the
date of grant and was outstanding at December 31, 1995 and 1994.
1994 EMPLOYEE STOCK PURCHASE PLAN
In May 1994, the Company's Board of Directors and Stockholders approved an
Employee Stock Purchase Plan ("Stock Purchase Plan") that became effective July
1, 1994. A total of 100,000 shares of common stock are reserved for issuance
under the Stock Purchase Plan. Employees who work at least 20 hours per week and
more than five months in a calendar year are eligible to participate in the
Stock Purchase Plan and may contribute up to 15% of their base pay. At the end
of each six-month offering period, participants may purchase the Company's
common stock at a 15% discount of the fair market value of the stock on the
first or last day of the offering period, whichever is lower.
In 1995, 4,244 and 5,470 shares were purchased with payroll deductions
withheld during the six month offering periods ending December 31, 1994 and June
30, 1995, respectively. On January 11, 1996, 6,571 shares were purchased with
payroll deductions withheld during the six month offering period ending December
31, 1995.
1995 LONG-TERM INCENTIVE PLAN
In May 1995, the Company's Board of Directors and Stockholders approved the
1995 Long-Term Incentive Plan (the "1995 Plan") under which the Board of
Directors may grant incentive and non-incentive stock options, restricted stock
awards and stock appreciation rights to key employees and non-incentive stock
options to non-employee directors of the Company totaling 1,000,000 shares of
Common Stock to be issued. Grants to key employees will expire ten years after
the date of grant. Incentive stock options will have an exercise price of the
fair value of a share of common stock at the date the option is granted.
Non-incentive stock options, restrictive stock awards and stock appreciation
rights will have an exercise price as specified in their award agreement.
Under the 1995 Plan, on an annual basis each non-employee director of the
Company will be automatically granted non-incentive stock options to purchase
2,500 shares of Common Stock, beginning in 1995. The per share exercise price
for shares subject to each option is the fair market value of the common stock
at the date of grant. The option shall become vested and exercisable over a
three year period, and the term of each option is ten years. In May 1995, there
were 10,000 options granted to non-employee directors of the Company.
38
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- STOCK OPTION PLANS (CONTINUED)
At December 31, 1995, there were options outstanding and exercisable for
10,000 shares at an option price per share of $18.25 relating to the
non-incentive stock options granted to non-employee directors of the Company.
There were no grants under the 1995 Plan to key employees of the Company.
NOTE H -- EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan that covers all employees who
have worked for the Company for more than one year. Employee contributions range
from 2% to 10%, up to the limits defined by Section 401(k) of the Internal
Revenue Code. In 1995, 1994 and 1993, the Company contributed $71,000, $43,000
and $20,000, respectively, to the plan which represents 20%, 15% and 10% of all
employee contributions.
NOTE I -- SEGMENT INFORMATION
The Company provides communication products and enhanced services to
organizations and individuals requiring wireless communication applications. The
Company provides these specialized products through two distinct operating
segments: the paging systems' operations and the security systems' operations.
The paging systems' operations provide paging services to businesses, medical
institutions and individual consumers in major metropolitan areas of the United
States. The security systems' operations provide specialized security services
to financial institutions and retail operations throughout the United States.
TOTAL REVENUES: Total revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Service revenues:
Pager lease and access fees........................................ $ 50,805 $ 28,015 $ 14,853
Security systems equipment fees.................................... 5,303 5,064 4,381
--------- --------- ---------
56,108 33,079 19,234
Product sales:
Pager and paging equipment......................................... 9,899 6,506 1,554
Other security systems income...................................... 137 133 486
--------- --------- ---------
10,036 6,639 2,040
--------- --------- ---------
Total revenues....................................................... $ 66,144 $ 39,718 $ 21,274
--------- --------- ---------
--------- --------- ---------
</TABLE>
Operating income is revenue less expenses exclusive of general corporate
expenses, corporate related depreciation and amortization and other income
(expense). Identifiable assets are those assets used in the operations of each
business segment. Corporate assets consist primarily of short-term cash
investments, software, debt financing costs and corporate office equipment.
During 1994, the Company restructured its technical, sales and operational
functions into its decentralized SuperCenter strategy. Certain costs that were
previously classified as general corporate expenses in 1994 and 1993 were
classified as paging systems' or security systems' expenses in 1995. Thus,
operating income before general corporate expenses for paging systems' and
security systems' operations decreased in 1995 from 1994 as costs were allocated
from general corporate expenses. Segment data as of and for the years ended
December 31, 1995, 1994 and 1993 follows (in thousands).
39
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE I -- SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
PAGING SECURITY ADJUSTMENTS
SYSTEMS' SYSTEMS' AND
OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
1995
Total revenues............................................. $ 60,704 $ 5,440 $ -- $ 66,144
Cost of products sold...................................... (9,357) (64) -- (9,421)
---------- ----------- ------------ ------------
$ 51,347 $ 5,376 $ -- $ 56,723
Operating income before general corporate expenses......... $ 4,384 $ 2,295 $ -- $ 6,679
General corporate expenses................................. (6,949)
Interest and other income.................................. 1,291
Interest expense........................................... (8,640)
------------
Loss before income taxes................................... $ (7,619)
------------
------------
Identifiable assets at December 31, 1995................... $ 153,825 $ 10,678 $ -- $ 164,503
Corporate assets........................................... 22,466
------------
Total assets at December 31, 1995.......................... $ 186,969
------------
------------
Capital expenditures....................................... $ 16,171 $ 1,357 $ -- $ 17,528
Depreciation and amortization.............................. 16,159 1,454 1,049 18,662
1994
Total revenues............................................. $ 34,521 $ 5,197 $ -- $ 39,718
Cost of products sold...................................... (6,605) (39) -- (6,644)
---------- ----------- ------------ ------------
$ 27,916 $ 5,158 $ -- $ 33,074
Operating income before general corporate expenses......... $ 7,021 $ 2,512 $ -- $ 9,533
General corporate expenses................................. (6,344)
Interest and other income.................................. 173
Interest expense........................................... (1,774)
------------
Income before income taxes................................. $ 1,588
------------
------------
Identifiable assets at December 31, 1994................... $ 59,878 $ 9,721 $ -- $ 69,599
Corporate assets........................................... 3,674
------------
Total assets at December 31, 1994.......................... $ 73,273
------------
------------
Capital expenditures....................................... $ 5,014 $ 763 $ -- $ 5,777
Depreciation and amortization.............................. 6,393 1,226 955 8,574
1993
Total revenues............................................. $ 16,407 $ 4,867 $ -- $ 21,274
Cost of products sold...................................... (794) (162) (956)
---------- ----------- ------------ ------------
$ 15,613 $ 4,705 $ -- $ 20,318
Operating income before general corporate expenses......... $ 4,753 $ 2,395 $ -- $ 7,148
General corporate expenses................................. (4,416)
Interest and other income.................................. 43
Interest expense........................................... (292)
------------
Income before income taxes................................. $ 2,483
------------
------------
Identifiable assets at December 31, 1993................... $ 17,680 $ 10,359 $ -- $ 28,039
Corporate assets........................................... 2,257
------------
Total assets at December 31, 1993.......................... $ 30,296
------------
------------
Capital expenditures....................................... $ 4,045 $ 1,452 $ -- $ 5,497
Depreciation and amortization.............................. 3,004 1,014 638 4,656
</TABLE>
40
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- COMMITMENTS
The Company leases office space and transmitter sites under operating leases
expiring through 2002. Rent expense was $4,514,000, $2,422,000 and $1,076,000
for the years ended December 31, 1995, 1994 and 1993, respectively. Future
minimum payments under noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1996.................................................. $ 4,176,526
1997.................................................. 2,578,289
1998.................................................. 1,989,851
1999.................................................. 1,555,582
2000.................................................. 1,002,228
-----------
$11,302,476
-----------
-----------
</TABLE>
NOTE K -- QUARTERLY DATA (UNAUDITED)
The following summarizes the quarterly operating results of the Company for
the years ended December 31, 1995 and 1994 (in thousands except per share
amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
1995
Total revenues.............................................. $ 12,684 $ 15,877 $ 17,759 $ 19,824
Operating income (loss)..................................... 769 630 573 (2,242)
Income (loss) before income taxes........................... 424 (796) (1,914) (5,333)
Net income (loss)........................................... 66 (400) (2,030) (5,333)
Net income (loss) per share................................. .01 (.06) (.32) (.86)
1994
Total revenues.............................................. $ 6,563 $ 8,829 $ 11,358 $ 12,968
Operating income............................................ 598 827 835 929
Income before income taxes.................................. 432 501 278 377
Net income.................................................. 197 258 71 167
Net income per share........................................ .05 .06 .02 .03
</TABLE>
41
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- ACQUISITIONS
The Completed Acquisitions, which were all accounted for as purchases,
consisted of the following:
<TABLE>
<CAPTION>
PAGERS IN
ACQUISITION LOCATION(S) CLOSING DATE SERVICE (1) PURCHASE PRICE
- --------------------- ----------------- ----------------------- ------------- -----------------
<S> <C> <C> <C> <C>
Contact New York City March 1, 1994 91,000 $ 19.0 million
Radio Call New York City August 1, 1994 57,000 7.8 million
ChiComm Chicago August 1, 1994 30,000 9.8 million
High Tech Chicago and Texas December 31, 1994 2,000 0.9 million
Signet Charlotte March 1, 1995 30,000 9.0 million
Carrier New York City April 1, 1995 31,200 6.5 million
Metropolitan Houston May 1, 1995 150,000 21.0 million
All City Milwaukee May 1, 1995 20,000 6.4 million
Americom Houston July 1, 1995 80,000 17.5 million
Lewis Georgia September 1, 1995 15,000 5.6 million
Gold Coast Florida September 1, 1995 6,000 2.3 million
Paging & Cellular Houston October 1, 1995 0(2) 9.5 million
Apple Chicago December 1, 1995 41,500 13.0 million
------------- -----------------
553,700 $ 128.3 million
------------- -----------------
------------- -----------------
</TABLE>
- ------------------------
(1) As of the closing date.
(2) Paging & Cellular was the Company's largest reseller serving more than
40,000 subscribers in Texas.
The Completed Acquisition's results of operations have been included in the
consolidated results of operations since the date of acquisition. The following
table presents the unaudited pro forma results of operations as if the
acquisitions had occurred at the beginning of each respective period presented.
The pro forma adjustments to sales and marketing and general and administrative
expenses represent expenses that either would or would not have been incurred
had the acquisitions occurred at the beginning of the periods presented. Pro
forma adjustments reflect additional depreciation and amortization expense based
on the fair value of the assets acquired as if the acquisitions had occurred at
the beginning of the periods presented. Pro forma adjustments also reflect
additional interest expense due to additional borrowings required to fund the
cash portion of the purchase price of each acquisition. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made as of
those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Total revenues......................................................... $ 84,528 $ 83,913
Net loss............................................................... (9,752) (7,615)
Net loss per share..................................................... (1.56) (1.73)
</TABLE>
42
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- ACQUISITIONS (CONTINUED)
Other acquisition activity consisted of the following:
<TABLE>
<CAPTION>
PAGERS IN
ACQUISITION LOCATION(S) STATUS OF ACQUISITION SERVICE (1) PURCHASE PRICE
- ----------------- ------------------ -------------------------------------- ------------- -------------------
<S> <C> <C> <C> <C>
Sun Florida Closed January 1, 1996 12,000 $ 2.3 million
Signet Raleigh Raleigh Closed January 1, 1996 13,000 $ 8.7 million
Page One Georgia Closed January 1, 1996 30,000 $ 19.7 million
AGR Florida Closed February 1, 1996 50,000 $ 6.5 million
Total Florida Closed February 1, 1996 13,000 $ 2.2 million
Williams Florida Closed February 1, 1996 6,500 $ 2.7 million
Definitive Agreement signed
RCS North Carolina on November 16, 1995 54,000(2) $ 12.3 million(2)
Definitive Agreement signed
Nationwide Los Angeles on January 9, 1996
------------- -------------------
178,500 $ 54.4 million
------------- -------------------
------------- -------------------
</TABLE>
- ------------------------
(1) As of the closing date or the date of execution of the definitive agreement,
as applicable.
(2) Represents aggregate amounts for RCS and Nationwide.
RCS and Nationwide are expected to close in 1996 and will be funded by
borrowings under the New Credit Facility. These transactions are subject to
various conditions, including FCC, regulatory or other third party approvals.
NOTE M -- SUBSEQUENT EVENTS
Effective January 1, 1996, the Company completed three acquisitions. The
first acquisition involved the purchase of substantially all of the paging
assets of Sun for approximately $2.3 million paid in cash at closing. The second
acquisition involved the purchase of substantially all of the paging assets of
Signet Raleigh for approximately $8.7 million, comprised of approximately $4.7
million paid in cash and $3.2 million in Common Stock at closing and an $800,000
deferred payment. The third acquisition involved the purchase of all of the
outstanding capital stock of Page One for approximately $14.8 million paid in
cash at closing and a $4.9 million deferred payment. The deferred payments are
due and payable one year from the closing of the respective transactions and are
payable, at the Company's discretion, either in cash or shares of Common Stock
based upon market value at the date of payment. These acquisitions were all
accounted for as purchases. The Company funded $7.3 million of cash for the
acquisitions of Sun, Signet Raleigh and Page One with proceeds from the Notes.
The remaining $14.5 million was funded from borrowings under the New Credit
Facility. These acquisitions will be accounted for as purchases.
Effective February 1, 1996, the Company completed the purchase of all of the
outstanding common stock of AGR, Total and Williams. AGR was purchased for
approximately $6.5 million paid in cash at closing. Total was purchased for
approximately $2.2 million, consisting of $400,000 paid in cash and $1.8 million
in Common Stock at closing. Williams was purchased for approximately $2.7
million paid in cash at closing. The Company funded these acquisitions with
borrowings under the New Credit Facility. These acquisitions will be accounted
for as purchases.
The following table presents the unaudited pro forma results of operations
as if the acquisitions of Sun, Signet Raleigh, Page One, AGR, Total, Williams
and the Completed Acquisitions had occurred at the beginning of each respective
period presented. The pro forma adjustments to sales and marketing and general
and administrative expenses represent expenses that either would or would not
have been
43
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- SUBSEQUENT EVENTS (CONTINUED)
incurred had the acquisitions occurred at the beginning of the periods
presented. Pro forma adjustments reflect additional depreciation and
amortization expense based on the fair value of the assets acquired as if the
acquisitions had occurred at the beginning of the periods presented. Pro forma
adjustments also reflect additional interest expense due to additional
borrowings required to fund the cash portion of the purchase price of each
acquisition. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had the
acquisitions been made as of those dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Total revenues............................................. $ 99,898 $ 97,010
Net loss................................................... (14,864) (12,635)
Net loss per share......................................... (2.37) (2.88)
</TABLE>
In January 1996, the Company signed a definitive agreement to purchase the
outstanding capital stock of Nationwide for approximately $6.75 million.
Nationwide serves more than 45,000 subscribers in Los Angeles. For the latest
fiscal year ended December 31, 1995, Nationwide had revenues and operating
income of approximately $5.5 million and $158,000, respectively, and total
assets of approximately $1.4 million. This transaction is subject to various
conditions including due diligence, approval by the Board of Directors of the
Company and FCC, regulatory and other third-party approvals. This acquisition
will be accounted for as a purchase.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held in 1996.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held in 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held in 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's Proxy Statement for its
Annual Meeting of Stockholders to be held in 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a)(1) -- The financial statements filed as part of this Report are listed in the Index to
Financial Statements and Financial Statement Schedules following Part IV of this
Report.
(a)(2) -- The financial statement schedules filed as a part of this Report are listed in the
Index to Financial Statements and Financial Statement Schedules following Part IV
of this Report.
(a)(3) -- The following documents are filed or incorporated by reference as exhibits to this
Report:
3.1 -- Restated Certificate of Incorporation dated July 31, 1987 (filed as an exhibit to
the Company's Registration Statement on Form S-4 (File No. 33-60925) filed July 7,
1995, and incorporated herein by reference).
3.2 -- Certificate of Designation of Series A Junior Participating Preferred Stock dated
April 11, 1995 (filed as part of the Company's Registration Statement on Form 8-A
dated April 7, 1995, and incorporated herein by reference).
3.3 -- Certificate of Amendment to Restated Certificate of Incorporation dated June 12,
1995 (filed as an exhibit to the Company's Current Report on Form 8-K, dated July
5, 1995, and incorporated herein by reference).
3.4 -- Restated Bylaws of the Company, as amended (filed as an exhibit to the Company's
Current Report on Form 8-K filed April 19, 1995, and incorporated herein by
reference).
4.1 -- Indenture, dated as of June 15, 1995, between the Company and First Interstate
Bank of Texas, N.A., as Trustee (filed as an exhibit to the Company'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 Company,
Lehman Brothers, Inc., Alex. Brown & Sons Incorporated and PaineWebber
Incorporated (filed as an exhibit to the Company's Registration Statement on Form
S-4 (File No. 33-60925) filed July 7, 1995, and incorporated herein by reference).
</TABLE>
45
<PAGE>
<TABLE>
<S> <C> <C>
4.3 -- Rights Agreement, dated as of April 5, 1995, between the Company and Chemical
Shareholder Services Group, Inc., as Rights Agent, specifying the terms of the
rights to purchase the Company's Series A Junior Participating Preferred Stock,
and the exhibits thereto (filed as an exhibit to the Company's Registration
Statement on Form 8-A dated April 7, 1995, and incorporated herein by reference).
10.1 -- Form of Indemnification Agreement between the Company and certain of the Company's
Directors (filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (File No. 33-14956) filed July 10, 1987, and incorporated
herein by reference).
10.2 -- Deferred Compensation Plan of the Company (filed as an exhibit to Amendment No. 2
to the Company's Registration Statement on Form S-1 (File No. 33-14956) filed July
15, 1987, and incorporated herein by reference).
10.3 -- 1987 Stock Option Plan of the Company (filed as an exhibit to Amendment No. 4 to
the Company's Registration Statement on Form S-1 (File No. 33-14956) filed July
29, 1987, and incorporated herein by reference).
10.4 -- Agreement dated June 15, 1988, between the Company and Texas Instruments
Incorporated for the acquisition of assets including the use of patents,
technology and software related to ProNet Tracking Systems (filed as an exhibit to
the Company's Current Report on Form 8-K, dated July 21, 1988, and incorporated
herein by reference).
10.5 -- Nonqualified Stock Option Agreement of the Company dated May 22, 1991 (filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended December
31, 1991, and incorporated herein by reference).
10.6 -- Non-Employee Director Stock Option Plan of the Company (filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1991, and
incorporated herein by reference).
10.7 -- Stock Purchase Agreement dated September 24, 1993, by and between the Company and
Contact Communications, Inc. (filed as an exhibit to the Company's Current Report
on Form 8-K, dated March 1, 1994, and incorporated herein by reference).
10.8 -- Amendment Letter No. One to Stock Purchase Agreement dated October 20, 1993, by
and between the Company and Contact Communications, Inc. (filed as an exhibit to
the Company's Current Report on Form 8-K, dated March 1, 1994, and incorporated
herein by reference).
10.9 -- Amendment Letter No. Two to Stock Purchase Agreement dated January 4, 1994, by and
between the Company and Contact Communications, Inc. (filed as an exhibit to the
Company's Current Report on Form 8-K, dated March 1, 1994, and incorporated herein
by reference).
10.10 -- Amendment Letter No. Three to Stock Purchase Agreement dated March 1, 1994, by and
between the Company and Contact Communications, Inc. (filed as an exhibit to the
Company's Current Report on Form 8-K, dated March 1, 1994, and incorporated herein
by reference).
10.11 -- 1994 Employee Stock Purchase Plan of the Company (filed as an exhibit to the
Company's Proxy Statement filed April 26, 1994, and incorporated herein by
reference).
10.12 -- Stock Purchase Agreement dated April 20, 1994, regarding the acquisition of the
outstanding capital stock of Metropolitan Houston Paging Services, Inc.,
("Metropolitan") by and among Contact Communications Inc., Metropolitan and the
shareholders of Metropolitan (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1995, and incorporated
herein by reference).
</TABLE>
46
<PAGE>
<TABLE>
<S> <C> <C>
10.13 -- Form PS-58 Split Dollar Agreement between the Company and each of its executive
officers (filed as an exhibit to the Company's Registration Statement on Form S-2
(File No. 33-85696) filed October 28, 1994, and incorporated herein by reference).
10.14 -- Employment Agreement dated May 18, 1994, by and between the Company and Jackie R.
Kimzey (filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1994, and incorporated herein by reference).
10.15 -- Employment Agreement dated May 18, 1994, by and between the Company and David J.
Vucina (filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1994, and incorporated herein by reference).
10.16 -- Change in Control Agreement dated May 18, 1994, by and between the Company and Bo
Bernard (filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1994, and incorporated herein by reference).
10.17 -- Change in Control Agreement dated May 18, 1994, by and between the Company and Jan
E. Gaulding (filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994, and incorporated herein by reference).
10.18 -- Change in Control Agreement dated May 18, 1994, by and between the Company and
Jeffery Owens (filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994, and incorporated herein by reference).
10.19 -- Change in Control Agreement dated January 17, 1995, by and between the Company and
Mark A. Solls (filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, and incorporated herein by reference).
10.20 -- Asset Purchase Agreement dated May 24, 1995, regarding the acquisition of
substantially all of the paging assets of Americom Paging Corporation, by and
among the Company, Gregory W. Hadley, Mo Shebaclo and American 900 Paging, Inc.
dba Americom Paging Corporation (filed as an exhibit to the Company's Current
Report on Form 8-K, dated July 7, 1995, and incorporated herein by reference).
10.21 -- Amended and Restated Credit Agreement dated February 9, 1995, by and among the
Company, The First National Bank of Chicago, as Agent, and the Lenders party
thereto (filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated herein by reference).
10.22 -- Waiver, Consent and Amendment No. 1 dated as of June 12, 1995 by and among the
Company, The First National Bank of Chicago, as Agent, and the Lenders party
thereto (filed as an exhibit to the Company's Registration Statement on Form S-4
(File No. 33-60925) filed July 7, 1995, and incorporated herein by reference).
10.23 -- Office Lease Agreement by and between the Company and Carter-Crowley Properties,
Inc., as Landlord (filed as an exhibit to the Company's Current Report on Form
8-K, dated July 5, 1995, and incorporated herein by reference).
10.24 -- Stock Purchase Agreement dated October 6, 1995, regarding the acquisition of all
of the outstanding capital stock of Apple Communication, Inc., by and among CCI,
Apple Communication, Inc., and Salvatore Zarcone and Jill DiFoggio (filed as an
exhibit to the Company's Current Report on 8-K, dated January 16, 1996, and
incorporated herein by reference).
10.25 -- Stock Purchase Agreement dated November 22, 1995, regarding the acquisition of all
of the outstanding capital stock of Cobbwells, Inc. d/b/a Page One, by and among
the Company, CCI, Cobbwells, Inc. d/b/a Page One, James H. Cobb, III and Warren K.
Wells (filed as an exhibit to the Company's Current Report on 8-K, dated January
16, 1996, and incorporated herein by reference).
</TABLE>
47
<PAGE>
<TABLE>
<S> <C> <C>
10.26 -- 1995 Long-Term Incentive Plan of the Company (filed as an exhibit to the Company's
Proxy Statement filed April 24, 1995, and incorporated herein by reference).
21 -- Subsidiaries of the Company.*
23 -- Consent of Ernst & Young LLP, Independent Auditors.*
27 -- Financial Data Schedule*
(b) -- Reports on Form 8-K: On October 3, 1995 and October 5, 1995, the Company filed
Amendment No. 1 and Amendment No. 2, respectively, to its Current Report on Form
8-K filed on September 15, 1995, relating to the acquisitions of Lewis and Gold
Coast. No other Current Report on Form 8-K was filed by the Company during the
last quarter of 1995.
</TABLE>
- ------------------------
* Filed herewith.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 1, 1996 By: /s/ JAN E. GAULDING
-----------------------------------
Jan E. Gaulding
SENIOR VICE PRESIDENT, TREASURER,
AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<C> <S> <C>
/s/ JACKIE R. KIMZEY Chairman, Chief Executive Officer and
------------------------------------------- Director (principal executive March 1, 1996
Jackie R. Kimzey officer)
/s/ DAVID J. VUCINA
------------------------------------------- President, Chief Operating Officer and March 1, 1996
David J. Vucina Director
/s/ JAN E. GAULDING Senior Vice President, Treasurer and
------------------------------------------- Chief Financial Officer (principal March 1, 1996
Jan E. Gaulding financial and accounting officer)
/s/ THOMAS V. BRUNS
------------------------------------------- Director March 1, 1996
Thomas V. Bruns
/s/ HARVEY B. CASH
------------------------------------------- Director March 1, 1996
Harvey B. Cash
/s/ EDWARD E. JUNGERMAN
------------------------------------------- Director March 1, 1996
Edward E. Jungerman
/s/ MARK C. MASUR
------------------------------------------- Director March 1, 1996
Mark C. Masur
</TABLE>
49
<PAGE>
PRONET INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------
ADDITIONS
CHARGED TO
BALANCE OTHER
AT CHARGED TO ACCOUNTS- DEDUCTIONS- BALANCE AT
BEGINNING COSTS AND DESCRIBE DESCRIBE END OF
DESCRIPTION OF PERIOD EXPENSES (2) (1) PERIOD
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Deducted from asset accounts:
Allowance for doubtful
accounts........................ $ 110,800 $ 189,276 $ -- $ 164,776 $ 135,300
--------- ---------- ----------- ----------- ----------
--------- ---------- ----------- ----------- ----------
YEAR ENDED DECEMBER 31, 1994
Deducted from asset accounts:
Allowance for doubtful
accounts........................ $ 135,300 $ 570,076 $ 122,495 $ 295,671 $ 532,200
--------- ---------- ----------- ----------- ----------
--------- ---------- ----------- ----------- ----------
YEAR ENDED DECEMBER 31, 1995
Deducted from asset accounts:
Allowance for doubtful
accounts........................ $ 532,200 $1,033,961 $ 388,615 $ 936,376 $1,018,400
--------- ---------- ----------- ----------- ----------
--------- ---------- ----------- ----------- ----------
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Amounts represent beginning balances related to acquired companies as of the
acquisition dates.
S-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of the Company and its
subsidiaries are included in this Report pursuant to Item 8 of this Report:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................................ 26
Consolidated Balance Sheets -- December 31, 1995 and 1994........................................ 27
Consolidated Statements of Operations For the Years Ended December 31, 1995, 1994 and 1993....... 28
Consolidated Statements of Cash Flows For the Years Ended December 31, 1995, 1994 and 1993....... 29
Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1995, 1994 and
1993............................................................................................ 30
Notes to Consolidated Financial Statements For the Years Ended December 31, 1995, 1994 and
1993............................................................................................ 31
</TABLE>
The following financial statement schedule of the Company and its
subsidiaries is included in this Report pursuant to Item 14 of this Report:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts................................................. S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation dated July 31, 1987 (filed as an exhibit to the Company's
Registration Statement on Form S-4 (File No. 33-60925) filed July 7, 1995, and incorporated herein by
reference).
3.2 -- Certificate of Designation of Series A Junior Participating Preferred Stock dated April 11, 1995
(filed as part of the Company's Registration Statement on Form 8-A dated April 7, 1995, and
incorporated herein by reference).
3.3 -- Certificate of Amendment to Restated Certificate of Incorporation dated June 12, 1995 (filed as an
exhibit to the Company's Current Report on Form 8-K, dated July 5, 1995, and incorporated herein by
reference).
3.4 -- Restated Bylaws of the Company, as amended (filed as an exhibit to the Company's Current Report on
Form 8-K filed April 19, 1995, and incorporated herein by reference).
4.1 -- Indenture, dated as of June 15, 1995, between the Company and First Interstate Bank of Texas, N.A., as
Trustee (filed as an exhibit to the Company'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 Company, Lehman Brothers, Inc.,
Alex. Brown & Sons Incorporated and Paine Webber Incorporated (filed as an exhibit to the Company's
Registration Statement on Form S-4 (File No. 33-60925) filed July 7, 1995, and incorporated herein by
reference).
4.3 -- Rights Agreement, dated as of April 5, 1995, between the Company and Chemical Shareholder Services
Group, Inc., as Rights Agent, specifying the terms of the rights to purchase the Company's Series A
Junior Participating Preferred Stock, and the exhibits thereto (filed as an exhibit to the Company's
Registration Statement on Form 8-A dated April 7, 1995, and incorporated herein by reference).
10.1 -- Form of Indemnification Agreement between the Company and certain of the Company's Directors (filed as
an exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 33-14956)
filed July 10, 1987, and incorporated herein by reference).
10.2 -- Deferred Compensation Plan of the Company (filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (File No. 33-14956) filed July 15, 1987, and incorporated herein by
reference).
10.3 -- 1987 Stock Option Plan of the Company (filed as an exhibit to Amendment No. 4 to the Company's
Registration Statement on Form S-1 (File No. 33-14956) filed July 29, 1987, and incorporated herein by
reference).
10.4 -- Agreement dated June 15, 1988, between the Company and Texas Instruments Incorporated for the
acquisition of assets including the use of patents, technology and software related to ProNet Tracking
Systems (filed as an exhibit to the Company's Current Report on Form 8-K, dated July 21, 1988, and
incorporated herein by reference).
10.5 -- Nonqualified Stock Option Agreement of the Company dated May 22, 1991 (filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by
reference).
10.6 -- Non-Employee Director Stock Option Plan of the Company (filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference).
10.7 -- Stock Purchase Agreement dated September 24, 1993, by and between the Company and Contact
Communications, Inc. (filed as an exhibit to the Company's Current Report on Form 8-K, dated March 1,
1994, and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
10.8 -- Amendment Letter No. One to Stock Purchase Agreement dated October 20, 1993, by and between the
Company and Contact Communications, Inc. (filed as an exhibit to the Company's Current Report on Form
8-K, dated March 1, 1994, and incorporated herein by reference).
<S> <C> <C>
10.9 -- Amendment Letter No. Two to Stock Purchase Agreement dated January 4, 1994, by and between the Company
and Contact Communications, Inc. (filed as an exhibit to the Company's Current Report on Form 8-K,
dated March 1, 1994, and incorporated herein by reference).
10.10 -- Amendment Letter No. Three to Stock Purchase Agreement dated March 1, 1994, by and between the Company
and Contact Communications, Inc. (filed as an exhibit to the Company's Current Report on Form 8-K,
dated March 1, 1994, and incorporated herein by reference).
10.11 -- 1994 Employee Stock Purchase Plan of the Company (filed as an exhibit to the Company's Proxy Statement
filed April 26, 1994, and incorporated herein by reference).
10.12 -- Stock Purchase Agreement dated April 20, 1994, regarding the acquisition of the outstanding capital
stock of Metropolitan Houston Paging Services, Inc., ("Metropolitan") by and among Contact
Communications Inc., Metropolitan and the shareholders of Metropolitan (filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1995, and incorporated
herein by reference).
10.13 -- Form PS-58 Split Dollar Agreement between the Company and each of its executive officers (filed as an
exhibit to the Company's Registration Statement on Form S-2 (File No. 33-85696) filed October 28,
1994, and incorporated herein by reference).
10.14 -- Employment Agreement dated May 18, 1994, by and between the Company and Jackie R. Kimzey (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and
incorporated herein by reference).
10.15 -- Employment Agreement dated May 18, 1994, by and between the Company and David J. Vucina (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and
incorporated herein by reference).
10.16 -- Change in Control Agreement dated May 18, 1994, by and between the Company and Bo Bernard (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and
incorporated herein by reference).
10.17 -- Change in Control Agreement dated May 18, 1994, by and between the Company and Jan E. Gaulding (filed
as an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1994, and incorporated herein by reference).
10.18 -- Change in Control Agreement dated May 18, 1994, by and between the Company and Jeffery Owens (filed as
an exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994,
and incorporated herein by reference).
10.19 -- Change in Control Agreement dated January 17, 1995, by and between the Company and Mark A. Solls
(filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1994,
and incorporated herein by reference).
10.20 -- Asset Purchase Agreement dated May 24, 1995, regarding the acquisition of substantially all of the
paging assets of Americom Paging Corporation, by and among the Company, Gregory W. Hadley, Mo Shebaclo
and American 900 Paging, Inc. dba Americom Paging Corporation (filed as an exhibit to the Company's
Current Report on Form 8-K, dated July 7, 1995, and incorporated herein by reference).
10.21 -- Amended and Restated Credit Agreement dated February 9, 1995, by and among the Company, The First
National Bank of Chicago, as Agent, and the Lenders party thereto (filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by
reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
10.22 -- Waiver, Consent and Amendment No. 1 dated as of June 12, 1995 by and among the Company, The First
National Bank of Chicago, as Agent, and the Lenders party thereto (filed as an exhibit to the
Company's Registration Statement on Form S-4 (File No. 33-60925) filed July 7, 1995, and incorporated
herein by reference).
<S> <C> <C>
10.23 -- Office Lease Agreement by and between the Company and Carter-Crowley Properties, Inc., as Landlord
(filed as an exhibit to the Company's Current Report on Form 8-K, dated July 5, 1995, and incorporated
herein by reference).
10.24 -- Stock Purchase Agreement dated October 6, 1995, regarding the acquisition of all of the outstanding
capital stock of Apple Communication, Inc., by and among CCI, Apple Communication, Inc., and Salvatore
Zarcone and Jill DiFoggio (filed as an exhibit to the Company's Current Report on 8-K, dated January
16, 1996, and incorporated herein by reference).
10.25 -- Stock Purchase Agreement dated November 22, 1995, regarding the acquisition of all of the outstanding
capital stock of Cobbwells, Inc. d/b/a Page One, by and among the Company, CCI, Cobbwells, Inc. d/b/a
Page One, James H. Cobb, III and Warren K. Wells (filed as an exhibit to the Company's Current Report
on 8-K, dated January 16, 1996, and incorporated herein by reference).
10.26 -- 1995 Long-Term Incentive Plan of the Company (filed as an exhibit to the Company's Proxy Statement
filed April 24, 1995, and incorporated herein by reference).
21 -- Subsidiaries of the Company.*
23 -- Consent of Ernst & Young LLP, Independent Auditors.*
27 -- Financial Data Schedule*
</TABLE>
- ------------------------
* Filed herewith.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Professional Communications Systems, Inc........................................................... Texas
Electronic Tracking Systems Inc.................................................................... Delaware
Contact Communications Inc......................................................................... Delaware
The Message Express, Inc........................................................................... New York
Beepers to Go, Inc................................................................................. Delaware
Metropolitan Houston Paging Services, Inc.......................................................... Texas
A.G.R. Electronics, Inc............................................................................ Florida
Total Communication Services, Inc.................................................................. Florida
Williams Metro Communications Corporation.......................................................... Florida
Metro Mobile Corporation........................................................................... Florida
Metro Paging of Georgia, Inc....................................................................... Georgia
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements:
Form S-8 No. 33-18977 pertaining to the 1987 Incentive Stock Option Plan of
ProNet Inc.; Form S-8 No. 33-52606 pertaining to the 1987 Incentive Stock Option
Plan of ProNet Inc.; Form S-8 No. 33-80382 pertaining to the 1994 Employee Stock
Purchase Plan of ProNet Inc.; Form S-8 No. 33-81220 pertaining to the
Non-Employee Director Stock Option Plan of ProNet Inc.; Form S-8 No. 33-66193
pertaining to the 1995 Long-Term Incentive Plan of ProNet Inc.; and Form S-3 No.
33-61279 pertaining to the registration of 2,000,000 shares of ProNet Inc.'s
common stock of our report dated February 5, 1996, with respect to the
consolidated financial statements and schedule of ProNet Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1995.
ERNST & YOUNG LLP
March 1, 1996
Dallas, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR PRONET INC. FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 10,154
<SECURITIES> 0
<RECEIVABLES> 8,516
<ALLOWANCES> 1,018
<INVENTORY> 1,574
<CURRENT-ASSETS> 22,153
<PP&E> 81,885
<DEPRECIATION> 34,203
<TOTAL-ASSETS> 186,969
<CURRENT-LIABILITIES> 18,911
<BONDS> 99,319
0
0
<COMMON> 70
<OTHER-SE> 49,486
<TOTAL-LIABILITY-AND-EQUITY> 186,969
<SALES> 56,723
<TOTAL-REVENUES> 66,144
<CGS> 9,421
<TOTAL-COSTS> 23,817
<OTHER-EXPENSES> 42,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,640
<INCOME-PRETAX> (7,619)
<INCOME-TAX> (78)
<INCOME-CONTINUING> (7,697)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,697)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
