<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-03279
Registration No. 333-04843
PROSPECTUS
$120,000,000
[LOGO]
10 7/8% Senior Subordinated Notes due 2006
----------------
Interest Payable March 15 and September 15
-------------------
ProNet Inc. ("ProNet" or the "Company") is offering (the "Offering")
$120,000,000 aggregate principal amount of its 10 7/8% Senior Subordinated Notes
due 2006 (the "Notes"). Interest on the Notes will be payable semiannually on
March 15 and September 15 of each year, commencing September 15, 1996. The Notes
will be redeemable at the option of the Company, in whole or in part, at any
time on or after September 15, 2001, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the date of redemption. The Notes
will not be subject to any mandatory sinking fund. In the event of a Change of
Control (as defined), each holder of the Notes will have the right, at such
holder's option, to require the Company to purchase such holder's Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of such purchase.
The Notes also may be redeemed at the option of the Company, in whole but
not in part, at any time prior to December 16, 1996 at 101% of the principal
amount of Notes at maturity, plus accrued interest to the date of redemption
(the "Special Redemption Price"), if, in the sole judgment of the Company, the
Teletouch Acquisition (as defined) will not be consummated by December 6, 1996
(a "Special Redemption"). In addition, a Special Redemption shall mandatorily
occur on December 16, 1996 if the Teletouch Acquisition has not been consummated
by December 6, 1996. During the period when a Special Redemption may occur, the
net proceeds of the Offering will be held in an escrow account, together with
additional amounts deposited, and to be deposited, in the escrow account by the
Company such that the total amount in the escrow account (the "Escrowed
Amounts") will be sufficient to pay the Special Redemption Price in the event of
a Special Redemption. Until the release of the funds to the Company at the time
of the Teletouch Acquisition, the holders of the Notes will look to the escrow
account for payment in the event of a Special Redemption. See "Description of
Notes -- Escrow of Proceeds; Special Redemption."
The Notes will be general unsecured obligations of the Company subordinated
in right of payment to all existing and future Senior Debt (as defined) of the
Company. As of March 31, 1996, after giving pro forma effect to certain
acquisitions and the Concurrent Offering (as defined), the Company would have
had approximately $241 million of outstanding indebtedness, including the Notes,
$22 million of Senior Debt and $100 million aggregate principal amount of PARI
PASSU debt. See "Use of Proceeds" and "Capitalization."
Concurrently with the Offering, ProNet is publicly offering (the "Concurrent
Offering" and, together with the Offering, the "Offerings") in the U.S. and
internationally 4,000,000 shares (excluding underwriters' over-allotment options
to purchase up to 600,000 shares) of ProNet's Common Stock, par value $.01 per
share (the "Common Stock"). The closings of the Offering and the Concurrent
Offering are not conditioned upon each other.
Settlement for the Notes will be made in immediately available funds. The
Notes will trade in The Depository Trust Company's Same-Day Funds Settlement
System, and secondary market trading activity in the Notes will therefore settle
in immediately available funds. All payments of principal of and premium, if
any, and interest on the Notes will be made by the Company in immediately
available funds or the equivalent. See "Description of Notes -- Same-Day
Settlement and Payment."
---------------------------
FOR A DISCUSSION OF CERTAIN RISKS TO BE CONSIDERED BY PROSPECTIVE INVESTORS
IN CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public(1) Discount(2) Company(1)(3)
<S> <C> <C> <C>
Per Note............................... 100.00% 3.00% 97.00%
Total.................................. $120,000,000 $3,600,000 $116,400,000
</TABLE>
(1) Plus accrued interest, if any, from June 5, 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $400,000.
---------------------------
The Notes offered by this Prospectus are offered by the Underwriters subject
to prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by the Underwriters and to certain further
conditions. It is expected that delivery of the Notes will be made in book-entry
form through The Depository Trust Company on or about June 5, 1996.
---------------------------
LEHMAN BROTHERS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
FIRST CHICAGO CAPITAL MARKETS, INC.
May 31, 1996
<PAGE>
Inside the front cover of the document is a map of the United States with
certain states highlighted as ProNet Pro Forma Territory (Arizona, California,
Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Nevada, New
Hampshire, New Jersey, New York, North Carolina, Pennsylvania, South Carolina,
Texas, Virginia, Washington, D.C. and Wisconsin) and Teletouch Pro Forma
Territory (Alabama, Arkansas, Louisiana, Mississippi, Missouri, Oklahoma and
Tennessee). The map also shows pro forma subscribers by region as of March 31,
1996:
<TABLE>
<S> <C> <C>
West Region Los Angeles 89,711
Midwest Region Chicago 157,796
Northeast Region New York 291,724
Southeast Region Charlotte 308,681
South Central Region Houston 612,030
</TABLE>
Below the map are two photographs. On the left is a photograph of a computer
room in one of the Company's SuperCenter locations that includes an employee
working on the computer. The photo has the following caption under it: "To bring
reliable, cost-effective paging services to an expanding subscriber base and to
integrate our acquired paging companies, ProNet has established five regional
SuperCenters and invested in a world-class infrastructure." Below the map on the
right is a photo of two boys, ages 9-10, carrying a baseball bat, mitt and ball.
One of the boys is wearing a pager. The caption under this picture reads as
follows: "A growing number of consumers are being attracted to paging by its
practicality, low cost and reliability. For keeping track of family members and
staying in touch any place at any time, nothing beats paging."
On the page opposite the map, there is text with a picture in the top left
corner. The picture depicts a woman and a young girl shopping. The young girl is
holding a bag from AirWare Pagers and Cellular (one of ProNet's retail names).
The caption under the picture reads: "In 1996, ProNet plans to explore what we
believe to be unrealized retail sales opportunities in smaller urban markets
largely ignored by both major paging service providers and large
telecommunications product retailers."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE. UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "PRONET" AND THE "COMPANY"
REFER TO PRONET INC. AND ITS CONSOLIDATED SUBSIDIARIES. CAPITALIZED NAMES OF
PAGING COMPANIES AND GROUPS OF PAGING COMPANIES ACQUIRED AND TO BE ACQUIRED BY
THE COMPANY AND TELETOUCH COMMUNICATIONS, INC. ARE DEFINED IN "SUMMARY PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS."
THE COMPANY
ProNet is one of the fastest growing providers of wireless messaging
services in the United States. The Company's subscriber base has grown through
both acquisitions and internal growth at annual rates of 14%, 172% and 142% in
1993, 1994 and 1995, respectively. Over this time period, the Company has
migrated its business focus from serving primarily the healthcare industry to
broader commercial and retail markets. Since March 1, 1994, the Company has
completed 19 acquisitions, adding 678,200 subscribers. Additionally, the Company
has focused on and generated internal growth in its paging subscriber base of
36% and 41% for the 12 months ended December 31, 1995 and March 31, 1996,
respectively. Upon completion by the Company of the acquisitions of Teletouch
Communications, Inc. ("Teletouch"), the nationwide, one-way paging license on
the 931.9125 MHz frequency covering the United States (the "Nationwide License")
from Motorola, Inc. ("Motorola"), and the other Pending Acquisitions, the
Company will be the fifth largest publicly traded paging company in the United
States, with approximately 1.5 million subscribers at March 31, 1996.
Upon completion of the Pending Acquisitions and the acquisition of the
Nationwide License, the Company will offer local, regional and nationwide paging
services in 25 states covering 72% of the population of the United States. The
Company has focused its business development around five geographic regions
serviced by communication "SuperCenters" which are located in Charlotte,
Chicago, Houston, Los Angeles and New York. This geographically concentrated
operating and expansion strategy allows the Company to develop regional critical
mass, undertake cost-effective incremental expansion and selectively access
markets which feature the size, growth rates, demographic groups, types of
businesses and competitive dynamics that indicate significant potential demand
for the Company's current and future products and services. In addition, by
developing a heavy concentration of subscribers in each geographic region, the
Company is able to maintain one of the lowest cost operating structures in the
paging industry.
The Company believes that it has solidified its position as one of the
leading wireless messaging providers in the United States with the execution in
April 1996 of definitive agreements to purchase the Nationwide License and to
acquire Teletouch, both of which will enhance and augment the Company's
SuperCenter expansion strategy. The acquisition of the Nationwide License will
provide the Company with the ability to use an exclusive nationwide frequency as
a platform to expand on a cost-effective basis into attractive markets within
and contiguous to the Company's SuperCenters. The Nationwide License will also
position the Company to develop regional and national distribution alliances
with a variety of other communications service providers. In addition, the
Nationwide License will allow the Company the flexibility to focus on
acquisition candidates that offer distribution enhancements, economies of scale
and market expansion opportunities rather than acquisitions that would
supplement the Company's spectrum resources.
With 310,720 subscribers (pro forma for the Teletouch Pending Acquisitions),
Teletouch is a geographically concentrated provider of paging services in
medium-sized markets in the southern United States (Alabama, Arkansas,
Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas). Teletouch
enjoys a leading position in its markets, which generally are subject to less
competition than major metropolitan centers. Teletouch subscribers generate
higher average revenue per unit ("ARPU") than is considered typical for larger,
more competitive metropolitan markets. The Company believes that the acquisition
of Teletouch (the "Teletouch Acquisition") will strengthen the Company's
competitive position in the southern United States as a result of increased
scale, expanded contiguous signal and sales coverage and increased retail
distribution. Management also believes that
3
<PAGE>
the Teletouch Acquisition will strengthen ProNet's position as a low cost
provider because (i) the resulting increase in the subscriber base of the
Company's Houston and Charlotte SuperCenters will allow the Company to benefit
from significant operating leverage and (ii) the integration of Teletouch's
operating and administrative functions will allow for the removal of redundant
overhead costs.
The Company's strategy seeks to capitalize on the critical mass of
subscribers, broad spectrum resources, distribution capabilities and marketing
expertise that the Company has built since the initiation of its three-phase
growth plan in 1993. The objective of the Company's strategy is to enhance the
Company's position as a leading provider of wireless messaging services and to
accelerate the Company's growth in subscribers and cash flow. Key elements of
the Company's strategy include (i) focusing the Company's operations on, and
expanding the business around, specific geographic regions anchored by the
Company's five operational SuperCenters, (ii) selectively acquiring additional
companies in SuperCenter regions that have complementary operations to those
already existing in the market, (iii) selectively acquiring companies in areas
contiguous to SuperCenter regions that provide a more cost-effective method of
market entry than launching a start-up operation, (iv) increasing penetration of
selected distribution channels, primarily reseller and retail, through the
development of innovative marketing programs, (v) offering a variety of enhanced
wireless products and services, including new products and services, such as
narrowband PCS, as they become available and (vi) selectively expanding the
Company's senior management team and focusing on the ongoing training and career
development of its managers and employees. See "Business -- Strategy."
The Company was incorporated under Delaware law in 1982. The Company's
principal executive office is located at 6340 LBJ Freeway, Dallas, Texas 75240
and its telephone number is (214) 687-2000.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.............. $120,000,000 principal amount of 10 7/8% Senior
Subordinated Notes due 2006.
Maturity Date................... September 15, 2006.
Interest Payment Dates.......... March 15 and September 15, commencing September 15, 1996.
Sinking Fund Provision.......... None.
Optional Redemption............. The Notes will be redeemable, in whole or in part, at the
option of the Company at any time on or after September
15, 2001 at the redemption prices set forth herein plus
accrued interest to the redemption date. See "Description
of Notes -- Optional Redemption."
Ranking......................... The Notes will be general unsecured senior subordinated
obligations of the Company, will be subordinated to all
existing and future Senior Debt of the Company, and will
rank PARI PASSU with the Company's 11 7/8% Senior
Subordinated Notes due 2005 (the "Existing Notes"). The
indenture pursuant to which the Notes will be issued (the
"Indenture") will provide that the Company will not incur
any debt that is subordinate in right of payment to any
Senior Debt of the Company and senior in right of payment
to the Notes. See "Description of Notes -- Subordination."
As of March 31, 1996, after giving pro forma effect to the
Offerings, the Pending Acquisitions and the acquisition of
the Nationwide License, the Company would have had
approximately $22 million of Senior Debt and $100 million
aggregate principal amount of PARI PASSU debt outstanding.
Change of Control............... The Company will be required to offer to repurchase all
outstanding Notes at 101% of the principal amount thereof
plus accrued interest promptly after the occurrence of a
Change of Control. See "Description of Notes -- Certain
Covenants."
Escrow of Proceeds.............. During the period when a Special Redemption may occur, the
proceeds of the Offering will be held in an escrow
account, together with additional amounts deposited, and
to be deposited, in the escrow account by the Company such
that the total amount in the escrow account will be
sufficient to pay the Special Redemption Price in the
event of a Special Redemption. Until the release of the
funds to the Company at the time of the Teletouch
Acquisition, the holders of the Notes will look to the
escrow account for payment in the event of a Special
Redemption. The full amount of the indebtedness
represented by the Notes may only be incurred by, and the
Escrowed Amounts may only be released to, the Company
under the conditions described in "Description of Notes --
Escrow of Proceeds; Special Redemption."
Special Redemption.............. The Notes may be redeemed at the option of the Company, in
whole but not in part, at any time on or prior to December
16, 1996, at 101% of the principal amount at maturity,
plus accrued interest to the date of redemption, if, in
the sole judgment of the Company, the Teletouch
Acquisition will not be consummated by December 6, 1996.
In addition, the Special Redemption shall mandatorily
occur (i) on December 16, 1996 if the Teletouch
Acquisition has not been consummated by December 6, 1996;
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
(ii) upon the occurrence of certain events of default
relating to bankruptcy of the Company and its
subsidiaries; or (iii) on September 15, 1996, if the
Company has failed, on or prior to September 10, 1996, to
deposit with the escrow agent an amount equal to the
interest calculated on $120,000,000 principal amount of
the Notes from September 15, 1996 through December 16,
1996. See "Description of Notes -- Escrow of Proceeds;
Special Redemption."
Certain Covenants............... The Indenture will contain certain covenants that, among
other things, limit the ability of the Company and its
subsidiaries to incur other indebtedness, pay dividends,
engage in transactions with affiliates, sell assets and
engage in mergers and consolidations. See "Description of
Notes -- Certain Covenants."
Concurrent Offering............. The Company is concurrently offering to the public
4,000,000 shares of Common Stock (4,600,000 shares if the
Underwriters' over-allotment options are exercised in
full). The closings of the Offering and the Concurrent
Offering are not conditioned upon each other.
Use of proceeds of the
Offerings...................... The Company intends to use approximately $115 million of
the net proceeds of the Offerings to refinance Teletouch
debt and senior subordinated notes and to redeem Teletouch
Series A Preferred Stock. The balance of the net proceeds
will be used to fund the cash consideration to be paid for
the Company's acquisition of the Nationwide License ($43
million), PacWest ($9 million), Georgialina ($12 million),
and VIP ($6 million), and to repay a portion of the
outstanding indebtedness under the Company's revolving
credit facility (the "Credit Facility"). If the Concurrent
Offering is not completed, the Company anticipates that it
will seek to obtain additional debt or equity financing.
No assurance can be given that the Company will obtain
such financing. See "Use of Proceeds."
</TABLE>
RISK FACTORS
See "Risk Factors" beginning on page 9 for a discussion of certain
information that should be considered by prospective investors.
Certain statements contained herein 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,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability to
consummate such transactions and achieve such events or 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, regulatory approvals, 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 "Risk Factors." See "Risk
Factors."
6
<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table presents summary financial data for the Company as of
the dates and for the periods indicated. The financial data for the five years
ended December 31, 1995 were derived from the audited consolidated financial
statements of the Company. The financial data for the three months ended March
31, 1996 and 1995 have been derived from the Company's unaudited financial
statements. The following information should be read in conjunction with the
Company's pro forma condensed consolidated financial statements and the
consolidated financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------ (UNAUDITED)
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
------- ------- ------- ------- ------- --------- ------- --------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE, RATIO, UNIT AND PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues (2).................. $15,084 $16,845 $19,234 $33,079 $56,108 $ 133,474 $10,488 $21,016 $34,536
Product sales (3)..................... 1,466 1,855 2,040 6,639 10,036 24,478 2,196 3,146 5,377
------- ------- ------- ------- ------- --------- ------- --------- ----------
Total revenues...................... 16,550 18,700 21,274 39,718 66,144 157,952 12,684 24,162 39,913
Depreciation and amortization
expense.............................. 3,748 4,077 4,656 8,574 18,662 50,473 2,745 8,707 14,668
Operating income (loss)............... 1,223 1,834 2,732 3,189 (270) (5,278) 769 (2,492) (3,468)
Interest expense...................... 425 310 292 1,774 8,640 21,760 386 3,659 6,824
Income (loss) before extraordinary
item................................. 794 1,754 1,574 693 (7,697) (25,409) 66 (6,124) (10,255)
Net income (loss)..................... 1,312 1,754 1,574 693 (7,697) (25,409) 66 (6,124) (10,255)
OTHER DATA:
Pagers in service at end of period.... 103,157 114,356 130,000 353,830 856,302 1,401,522 404,713 1,039,222 1,459,942
TracPacs in service at end of
period............................... 13,846 19,210 25,841 27,595 27,548 27,548 27,106 28,409 28,409
Pagers in service per employee (4).... 570 880 1,000 1,325 1,619 1,222 1,289 1,531 1,249
ARPU-Paging (5)....................... $ 10.64 $ 10.48 $ 10.23 $ 8.51 $ 6.57 $ 6.97 $ 8.26 $ 6.69 $ 7.59
ARPU-TracPac (6)...................... 15.00 14.75 15.90 16.52 15.90 15.90 15.86 17.41 17.41
Operating, selling, general and
administrative costs per paging
subscriber (7)....................... 6.82 7.80 7.91 5.08 4.78 5.06 5.94 5.02 5.25
Cash flow from operating activities
(8).................................. 3,493 6,720 7,144 9,821 12,298 26,397 (344) 7,651 9,481
EBITDA (9)............................ 4,971 5,911 7,388 11,763 18,392 45,195 3,514 6,215 11,200
EBITDA margin (10).................... 32% 34% 36% 36% 32% 34% 33% 29% 32%
Capital expenditures (11)............. $ 4,193 $ 5,523 $ 5,497 $ 5,777 $17,528 $ 32,500 $ 926 $ 5,811 $ 13,385
Ratio of earnings to fixed charges
(12)................................. 4.1x 6.1x 8.7x 1.8x -- -- 1.9x -- --
Ratio of EBITDA to interest expense... 11.7 19.1 25.3 6.6 2.1x 2.1x 9.1 1.7x 1.6x
Ratio of total debt to EBITDA (13).... 1.0 0.6 0.5 0.9 6.4 5.3 2.1 7.0 5.4
</TABLE>
7
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<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------
(UNAUDITED)
PRO FORMA
AS ADJUSTED
ACTUAL (14)
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 2,089 $ 1,000
Working capital (deficit).......................................... (9,784) (10,202)
Total assets....................................................... 230,830 511,915
Total debt......................................................... 148,031 241,431
Total liabilities.................................................. 175,136 274,167
Total stockholders' equity......................................... 55,694 237,748
</TABLE>
- ------------------------
(1) Assumes consummation of the Offerings and the application of the net
proceeds therefrom as if each had occurred at the beginning of the
respective periods. Also gives effect to the Acquisitions. In the event that
the Company does not complete the Concurrent Offering, the Company
anticipates that it will seek additional debt or equity financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(2) Service revenues consist of fixed monthly, quarterly, annual and bi-annual
service and leasing fees.
(3) Product sales include pager and paging equipment sales and other security
systems' income.
(4) Calculated by dividing pagers in service at the end of each period by the
number of employees at the end of such period presented. This calculation
excludes employees directly related to the security systems' business.
(5) ARPU-Paging (average revenue per paging unit) is calculated by dividing
paging systems' average monthly service revenues for the last quarter of the
period by the average of the number of pagers in service at the beginning of
such months.
(6) 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 miniature radio transmitters ("TracPacs") in service at the
beginning of such month.
(7) Calculated by dividing the sum of the cost of pager lease and access fees
and selling, general and administrative expenses for the last month in the
period by the number of pagers in service at the beginning of such month.
(8) 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.
(9) EBITDA is earnings before other income (expense), income taxes, depreciation
and amortization. Other income (expense) consists primarily of interest
expense. EBITDA does not represent 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 (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles.
(10) Calculated by dividing EBITDA by the remainder of total revenues less cost
of products sold for the period presented.
(11) Includes communications equipment valued at $6 million associated with the
acquisition of the Nationwide License for the year ended December 31, 1995
and for the three months ended March 31, 1996, in each case on a pro forma
basis, and excludes the cost of the Acquisitions.
(12) The ratio of earnings to fixed charges is calculated as the sum of income
before taxes plus fixed charges, divided by fixed charges. Fixed charges
consist of interest expense including amortization of deferred financing
costs. For the year ended December 31, 1995, for the three months ended
March 31, 1996 and on a pro forma basis for the year ended December 31, 1995
and the three months ended March 31, 1996, earnings were insufficient to
cover fixed charges by $7.6 million, $6.1 million, $25.3 million and $10.3
million, respectively.
(13) 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, excepting the pro forma
ratio for the three months ended March 31, 1996, which is based on
annualized EBITDA.
(14) Gives effect to the Pending Acquisitions and the acquisition of the
Nationwide License as if they had occurred on March 31, 1996 and assumes
consummation of the Offerings and the application of the net proceeds
therefrom as if each had occurred on March 31, 1996. In the event that the
Company does not complete the Concurrent Offering, the Company anticipates
that it will seek additional debt or equity financing. If the Balance Sheet
Data were adjusted only for the consummation of the Offering, the
application of the net proceeds therefrom, the Pending Acquisitions, the
acquisition of the Nationwide License, and the incurrence of such additional
debt financing as may be necessary to complete such transactions, the
Company's Pro Forma As Adjusted Cash and cash equivalents, Working capital,
Total assets, Total debt, Total liabilities and Total stockholders equity on
March 31, 1996 would have been $1.0 million, $(10.2) million, $511.9
million, $336.3 million, $369.0 million, and $142.9 million, respectively.
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY EACH PROSPECTIVE PURCHASER OF THE
NOTES.
ACQUISITION STRATEGY
Since March 1, 1994, the Company has purchased 19 paging operations and has
five acquisitions pending, including the Teletouch Acquisition and the
acquisition of the Nationwide License. The Pending Acquisitions (which include
the Teletouch Pending Acquisitions) represent an aggregate of 420,720 pagers in
service. 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. Moreover, there can be no assurance that the Company will be
able to integrate the paging operations of each of the acquired companies
successfully. In particular, the Company's ability to integrate Teletouch may be
adversely affected by: (i) Teletouch's large size (310,720 pagers in service on
a pro forma basis) relative to the Company; (ii) Teletouch's involvement in
markets not currently served by the Company; and (iii) Teletouch's efforts to
integrate its own completed and pending acquisitions. If the Company is not
successful in integrating such paging operations, the business of the Company
may be adversely affected. In addition, integration of new acquisitions may, at
least in the short term, have an adverse impact upon the Company's operations.
The closings of the Teletouch Acquisition and the acquisition of the
Nationwide License are each subject to receipt of customary regulatory approvals
and other conditions (including, in the case of the Teletouch Acquisition, the
approval of both the Company's and Teletouch's stockholders). Pending the
completion of the Teletouch Acquisition, the net proceeds of the Offering will
be deposited into an escrow account. If (i) the Company, in its sole judgment,
determines that the Teletouch Acquisition will not be consummated prior to
December 16, 1996, (ii) the Teletouch Acquisition has not been consummated by
December 6, 1996 or (iii) certain other events described in "Description of
Notes -- Escrow of Proceeds; Special Redemption" occur, a Special Redemption
will occur. In the event that the Company does not complete the Concurrent
Offering, the Company anticipates that it will seek additional debt or equity
financing. The Company has received a commitment letter from The First National
Bank of Chicago ("First Chicago") to amend the Credit Facility to permit the
borrowing thereunder of up to $300 million, but there can be no assurance that
the Credit Facility will be amended or that, even if the Credit Facility is so
amended, sufficient financing will be available to the Company to complete the
Teletouch Acquisition and the acquisition of the Nationwide License. Although
the Company expects that the Teletouch Acquisition and the acquisition of the
Nationwide License will be completed in the third quarter of 1996, no assurance
can be given that either such acquisition will be completed. The Company's
failure to obtain the necessary financing to complete the Teletouch Acquisition
or the acquisition of the Nationwide License could subject the Company to claims
for substantial damages and would have a material adverse effect on the Company.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business."
HIGH DEGREE OF LEVERAGE; RESTRICTIONS IMPOSED BY LENDERS
The Company is highly leveraged. At March 31, 1996, the Company had
approximately $148 million of debt outstanding and the Company's long-term debt
as a percentage of total capitalization was 73%. Upon completion of the
Offerings, the Teletouch Acquisition and the acquisition of the Nationwide
License, the Company would have had outstanding at March 31, 1996 (i)
approximately $5 million in variable rate debt under the Credit Facility, (ii)
approximately $17 million of Deferred Payments (as defined), (iii) $100 million
in principal amount of the Existing Notes and (iv) $120 million in principal
amount of the Notes. On a pro forma basis for the year ended December 31, 1995
and the three months ended March 31, 1996, the Company's earnings were
insufficient to cover fixed charges by $25.3 million and $10.3 million,
respectively.
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
9
<PAGE>
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 ability of the Company to continue making payments of principal and
interest will be largely dependent upon its future performance. Because
borrowings under the Credit Facility bear interest at rates that 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. Other factors, some of which will be beyond the
Company's control, such as prevailing economic conditions, will affect its
performance. 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.
The Credit Facility and the indenture governing the Existing Notes (the
"Existing Notes Indenture" and, together with the Indenture, the "Indentures")
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, among other things, 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 the maturity of the applicable indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Description of Other
Indebtedness" and "Description of Notes."
SUBORDINATION
The Notes will be unsecured and subordinated in right of payment to all
existing and future Senior Debt of the Company, including all indebtedness under
the Credit Facility. By reason of such subordination, in the event of the
insolvency, liquidation or other reorganization of the Company, the Senior Debt
must be paid in full before the principal of, premium, if any, and interest on
the Notes may be paid. As of March 31, 1996, after giving pro forma effect to
the Pending Acquisitions, the acquisition of the Nationwide License and the
Offerings, the Notes would have been subordinated to approximately $22 million
of Senior Debt. The Indenture will not limit the amount of Senior Debt that may
be incurred by the Company if certain tests are met. See "Description of Notes
- -- Certain Covenants."
The Company may not pay the principal of, premium, if any, or interest on
the Notes, or repurchase, redeem or otherwise retire the Notes, if any Senior
Debt is not paid when due or any default on Senior Debt occurs and the maturity
of such Senior Debt is accelerated in accordance with its terms unless, in
either case, the default has been cured or waived, any such acceleration has
been rescinded or such Senior Debt has been paid in full, except that the
Company may make payments with respect to the Notes with the approval of certain
holders of Senior Debt. In addition, if any default exists with respect to
certain Senior Debt and certain other conditions are satisfied, the Company may
not make any payments on the Notes for a designated period of time. The right of
each holder of the Notes to require the Company to repurchase the Notes at a
premium upon the occurrence of a Change of Control would be blocked by the
foregoing subordination provisions to the extent that the event constituting a
Change of Control also causes a default (or if a default otherwise exists) under
the Credit Facility or other Senior Debt. Upon any payment or distribution of
assets of the Company upon a total or partial liquidation, dissolution,
reorganization or similar proceeding, the holders of Senior Debt will be
entitled to receive payment in full before the holders of the Notes are entitled
to receive any payment. See "Description of Notes -- Subordination."
10
<PAGE>
FUTURE PROFITABILITY
The Company was profitable in 1991, 1992, 1993 and 1994. However, due to the
incurrence of significantly greater depreciation, amortization and interest
expenses in 1995 as a result of the Company's recent acquisitions of commercial
paging companies and the issuance of the Existing Notes, the Company was not
profitable in 1995 or the first quarter of 1996. 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. No assurances can be given
that the Company will achieve profitability in the future. See "Selected
Financial and Operating Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CAPITAL REQUIREMENTS
The Company may be required from time to time to incur additional
indebtedness or issue additional equity securities to finance its growth
strategy, including acquisitions and the buildout of the infrastructure
supporting the Nationwide License. There can be no assurance, however, that
funds will be available on terms favorable to the Company, or that such funds
will be available when needed. The terms of the Credit Facility and the
Indentures limit, and will limit, the amount of indebtedness that the Company
may incur. The limited availability of capital may affect the Company's ability
to acquire additional assets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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 substantial relative to the costs
of providing service to existing customers. Although the Company's current
disconnect rate is below the industry average, there can be no assurance that
the Company will not experience an increase in its subscriber cancellation rate
which may adversely affect the Company's results of operations.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company faces direct competition in all of its paging markets.
Competition for subscribers to the Company's paging services in most geographic
markets is based primarily on the price and quality of services offered and the
geographic area covered. 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 Federal Communications
Commission (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."
DEPENDENCE ON SUPPLIERS
The Company does not manufacture any of the pagers used in its paging
operations. The Company buys pagers primarily from Motorola and therefore is
dependent on Motorola to obtain sufficient pager inventory for new subscriber
and replacement needs. In addition, the Company purchases terminals and
transmitters primarily from Glenayre Technologies, Inc. ("Glenayre") and thus is
dependent on Glenayre for sufficient terminals and transmitters to meet its
expansion and replacement requirements. To date, the Company has not experienced
significant delays in obtaining pagers, terminals or transmitters, but there can
be no assurance that the Company will not experience such
11
<PAGE>
delays in the future. Although the Company believes that sufficient alternative
sources of pagers, terminals and transmitters exist, there can be no assurance
that the Company would not be adversely affected if it were unable to obtain
these items from current supply sources or on terms comparable to existing
terms. See "Business -- Paging Operations."
GOVERNMENT REGULATION
The paging industry is 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.
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, both of which expire on May 31, 1997, with Jackie R.
Kimzey, the Company's Chairman and Chief Executive Officer, and David J. Vucina,
the Company's President and Chief Operating Officer.
ABSENCE OF PUBLIC MARKET
There is no existing trading market for the Notes. The Company does not
intend to apply for listing of the Notes on any securities exchange. The
Underwriters have advised the Company that they currently intend to make a
market in the Notes. However, they are not obligated to do so and any such
market making may be discontinued at any time without notice. Accordingly, there
can be no assurance as to the prices or liquidity of, or trading markets for,
the Notes. The liquidity of any market for the Notes will depend upon the number
of holders of Notes, the interest of securities dealers in making a market in
the Notes, and other factors. The absence of an active market for the Notes
could adversely affect the liquidity of the Notes. Even if such a market were to
develop, the Notes could trade at prices that may be lower than their initial
offering price as a result of many factors, including prevailing interest rates
and the Company's operating results and financial condition at the time. The
liquidity of, and trading markets for, the Notes may also be adversely affected
by general declines in the market for non-investment grade debt.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting
underwriting discounts and commissions and offering expenses) will be
approximately $116 million. The proceeds to the Company from the Concurrent
Offering (after deducting underwriting discounts and commissions and offering
expenses) will be approximately $95 million (approximately $110 million if the
Underwriters' over-allotment options are exercised in full). The Company intends
to apply the net proceeds of the Offerings as follows: (i) to refinance $88
million of outstanding Teletouch bank debt and accrued interest anticipated to
be outstanding at the time of the closing of the Teletouch Acquisition; (ii) to
repay $10 million in aggregate principal amount of Teletouch's 14% senior
subordinated notes due 2003; (iii) to redeem approximately $17 million in
liquidation preference of, and accrued and unpaid dividends on, Teletouch
preferred stock; (iv) to fund the $43 million cash acquisition of the Nationwide
License; (v) to pay approximately $9 million to fund the cash portion of the
purchase price of PacWest; (vi) to pay approximately $12 million to fund the
purchase price of Georgialina; (vii) to pay approximately $6 million to fund the
purchase price of VIP; and (viii) to repay approximately $27 million of
borrowings outstanding under the Credit Facility. Pending the completion of the
Teletouch Acquisition, the proceeds of the Offering will be deposited with the
Escrow Agent (as defined). If the Concurrent Offering is not completed, the
Company anticipates that it will seek additional debt or equity financing. No
assurance can be given that the Company will obtain such financing. See "Risk
Factors," "Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Notes."
The Credit Facility provides for borrowings of up to $125 million which bear
interest, at the Company's designation, at either (i) the greater of the
corporate base rate charged by First Chicago or the Federal Funds Rate, plus a
margin of up to 1.25%, or (ii) the London Interbank Offer Rate ("LIBOR"), plus a
margin of up to 2.5%. In addition, a commitment fee is required on the revolving
line of credit of .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. As of March 31, 1996, $32 million of indebtedness was
outstanding under the Credit Facility. Immediately following the completion of
the Offerings and the application of the proceeds thereof, the Company will have
approximately $5 million in borrowings outstanding under the Credit Facility.
The Company anticipates that Teletouch will refinance its current $50
million credit facility with a new extended line of credit prior to the closing
of the Teletouch Acquisition. Borrowings under such new line of credit,
anticipated to be $88 million at the time of closing of the Teletouch
Acquisition, will be repaid with the net proceeds of the Offerings.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 on an historical basis and a pro forma basis as adjusted to reflect the
issuance of the Notes offered hereby, the sale by the Company of 4,000,000
shares of Common Stock in the Concurrent Offering (after deducting estimated
offering expenses and underwriting discounts and commissions), the application
of the net proceeds therefrom, the completion of the Pending Acquisitions and
the acquisition of the Nationwide License. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of the Company and the
notes thereto included elsewhere in this Prospectus. See "Risk Factors," "Use of
Proceeds" and "Summary Pro Forma Condensed Consolidated Financial Statements."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
(UNAUDITED)
PRO FORMA
AS ADJUSTED
ACTUAL (1)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................. $ 2,089 $ 1,000
---------- --------------
---------- --------------
Credit Facility....................................................................... $ 32,000 $ 5,400
11 7/8% Senior Subordinated Notes due 2005............................................ 99,337 99,337
10 7/8% Senior Subordinated Notes due 2006............................................ -- 120,000
Deferred Payments (2)................................................................. 16,694 16,694
---------- --------------
Total debt........................................................................ 148,031 241,431
---------- --------------
Stockholders' equity:
Preferred Stock, par value $1.00 per share; 5,000,000 shares authorized; no shares
issued or outstanding.............................................................. -- --
Common Stock, par value $.01 per share; 20,000,000 shares authorized; 7,069,000
shares issued and outstanding; 14,130,000 shares issued and outstanding pro forma
as adjusted (3).................................................................... 75 146
Less treasury stock at cost......................................................... (1,460) (1,460)
Additional capital.................................................................. 68,874 253,139
Retained deficit.................................................................... (11,795) (14,077)
---------- --------------
Total stockholders' equity........................................................ 55,694 237,748
---------- --------------
Total capitalization.............................................................. $ 203,725 $ 479,179
---------- --------------
---------- --------------
</TABLE>
- --------------------------
(1) Assumes (i) consummation of the Offerings and the application of the net
proceeds therefrom as if each had occurred on March 31, 1996, and (ii) the
Underwriters' over-allotment options for 600,000 shares of Common Stock in
connection with the Concurrent Offering are not exercised. In the event that
the Company does not complete the Concurrent Offering, the Company
anticipates that it will seek additional debt or equity financing. If the
Company's actual capitalization were adjusted only for the consummation of
the Offering, the application of the net proceeds therefrom, the Pending
Acquisitions, the acquisition of the Nationwide License, and the incurrence
of such additional debt financing as may be necessary to complete such
transactions, the Company's Pro Forma As Adjusted Cash and cash equivalents,
Total debt, Total stockholders' equity and Total capitalization on March 31,
1996 would have been $1.0 million, $336.3 million, $142.9 million and $479.2
million, respectively.
(2) The Company has deferred payment obligations (the "Deferred Payments")
aggregating $16.7 million in respect of certain of the ProNet Completed
Acquisitions. The Deferred Payments generally are due one year from the
closing of the respective acquisitions. The Company either is required to or
has the option to issue Common Stock in lieu of cash for each Deferred
Payment.
(3) Pro Forma As Adjusted includes (i) the shares of Common Stock outstanding as
of March 31, 1996, and the 4,000,000 shares of Common Stock which will be
issued and outstanding upon the completion of the Concurrent Offering, (ii)
approximately 342,000 shares of Common Stock that may be issued in the
PacWest acquisition and (iii) approximately 2.7 million shares of Common
Stock that may be issued to Teletouch stockholders upon the completion of
the Teletouch Acquisition. See "The Teletouch Agreement." Pro Forma As
Adjusted excludes (i) options outstanding on March 31, 1996 to purchase up
to 979,395 shares of Common Stock at a weighted average exercise price of
$10.54 per share, (ii) 83,715 shares of Common Stock that have been reserved
for issuance at a purchase price equal to 85% of their fair market value
pursuant to the Company's 1994 Employee Stock Purchase Plan and (iii) up to
$16.7 million in aggregate value of shares of Common Stock that the Company
either is required to or has the option to issue in satisfaction of the
Deferred Payments.
14
<PAGE>
SUMMARY PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The Pro Forma Condensed Consolidated Financial Statements of Operations
assume the acquisition of (a) Metropolitan Houston Paging Services, Inc.
("Metropolitan"), Apple Communication, Inc. ("Apple"), Cobbwells, Inc. dba Page
One ("Page One"), Total Communication Services, Inc. ("Total"), A.G.R.
Electronics, Inc. and affiliates ("AGR"), and Williams Metro Communications
Corp. and affiliates ("Williams"), and the acquisitions of the paging assets of
Carrier Paging Systems, Inc. ("Carrier"), Signet Paging of Charlotte, Inc.
("Signet Charlotte"), All City Communication Company, Inc. ("All City"),
Americom Paging Corporation ("Americom"), Gold Coast Paging, Inc. ("Gold
Coast"), Lewis Paging, Inc. ("Lewis"), Paging & Cellular of Texas ("Paging &
Cellular"), Sun Paging Communications ("Sun"), SigNet Paging of Raleigh, Inc.
("SigNet Raleigh" and, together with Metropolitan, Apple, Page One, Total, AGR,
Williams, Carrier, Signet Charlotte, All City, Americom, Gold Coast, Lewis,
Paging & Cellular and Sun, the "ProNet Completed Acquisitions"), (b) the pending
acquisitions by the Company of Georgialina Communication Company and affiliates
("Georgialina"), the Paging Divisions of Pac-West Telecomm, Inc. and Subsidiary
("PacWest") and the paging assets of
Ventures In Paging L.C. ("VIP" and, together with Georgialina and PacWest, the
"ProNet Pending Acquisitions"), (c) the acquisition of Teletouch, (d) the
acquisition by Teletouch of Beepers Plus of Memphis, Inc. and Beepers Plus of
Nashville, Inc., and the acquisition of the paging assets of Beepers Plus of
Jackson Partnership (collectively, "Beepers Plus"), and the acquisition of the
paging assets of Waco Communications, Inc. ("Waco"), and Dial-A-Page, Inc.
("Dial-A-Page" and, together with Beepers Plus and Waco, the "Teletouch
Completed Acquisitions"), and (e) Teletouch's pending acquisitions of AACS
Communications, Inc. ("AACS"), Premier Paging, Inc. ("Premier") and Russell's
Communications, Inc., dba LaPageCo ("LaPageCo"), and the acquisitions of the
paging assets of Warren Communications, Inc. ("Warren"), Hyde's Stay In Touch,
Inc. ("Stay In Touch"), Dave Fant Company dba Oklahoma Radio Systems
("Oklahoma"), Cimarron Paging, Inc. ("Cimarron" and, together with AACS,
Premier, LaPageCo, Warren, Stay in Touch and Oklahoma, the "Teletouch Pending
Acquisitions") as if they had occurred at the beginning of the period presented.
The ProNet Completed Acquisitions and the ProNet Pending Acquisitions are
collectively referred to as the "ProNet Acquisitions." The acquisition of
Teletouch, the Teletouch Completed Acquisitions and the Teletouch Pending
Acquisitions are collectively referred to as the "Teletouch Acquisition." The
ProNet Pending Acquisitions, the acquisition of Teletouch and the Teletouch
Pending Acquisitions are collectively referred to as the "Pending Acquisitions."
The ProNet Acquisitions and the Teletouch Acquisition are collectively referred
to as the "Acquisitions." The Acqusitions do not include the acquisition of the
Nationwide License. The foregoing defined terms are explained in graphic form
below:
<TABLE>
<CAPTION>
"ACQUISITIONS"
- -----------------------------------------------------------------------------------------------------------
"PRONET ACQUISITIONS" "TELETOUCH ACQUISITION"
- ----------------------------------------- ----------------------------------------------------------------
"PENDING ACQUISITIONS"
----------------------------------------------------------------
"PRONET COMPLETED "PRONET PENDING "TELETOUCH PENDING "TELETOUCH COMPLETED
ACQUISITIONS" ACQUISITIONS" "TELETOUCH" ACQUISITIONS" ACQUISITIONS"
- ------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Signet Charlotte Georgialina Teletouch Premier Beepers Plus
Carrier PacWest LaPageCo Waco
Metropolitan VIP Oklahoma Dial-A-Page
All City Cimarron
Americom Stay in Touch
Gold Coast AACS
Lewis Warren
Paging & Cellular
Apple
Sun
SigNet Raleigh
Page One
AGR
Total
Williams
</TABLE>
15
<PAGE>
The accompanying unaudited pro forma condensed consolidated balance sheet of
the Company at March 31, 1996, combines the historical consolidated balance
sheet of the Company, the ProNet Pending Acquisitions, Teletouch and the
Teletouch Pending Acquisitions as if the Acquisitions and the acquisition of the
Nationwide License had occurred on March 31, 1996 and assumes that the
Acquisitions were funded with the proceeds of the Existing Notes and the
Offerings.
The accompanying unaudited pro forma condensed consolidated statement of
operations of the Company for the year ended December 31, 1995, combines the pro
forma consolidated statements of operations of the Company and Teletouch as if
the Teletouch Acquisition had occurred on January 1, 1995, and assumes that the
Acquisitions were funded with the proceeds of the Existing Notes and the
Offerings.
The accompanying unaudited pro forma condensed consolidated statement of
operations of the Company for the three months ended March 31, 1996, combines
the pro forma consolidated statement of operations of the Company and the
Teletouch Acquisition as if these acquisitions had occurred on January 1, 1996,
and assumes that the acquisitions were funded with the proceeds of the Offerings
and the Existing Notes.
The pro forma condensed consolidated financial statements do not purport to
represent what the Company's results of operations would have been had the
Acquisitions occurred on the dates indicated or for any future period or date.
The pro forma adjustments give effect to available information and assumptions
that management believes are reasonable. The pro forma condensed consolidated
financial statements should be read in conjunction with the Company's historical
consolidated financial statements and the financial statements of certain
Acquisitions and the notes thereto included or incorporated elsewhere herein.
16
<PAGE>
PRONET INC. AND SUBSIDIARIES
SUMMARY PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED(1)
------------------------- PRO FORMA PRO FORMA
PRONET TELETOUCH ADJUSTMENTS FOOTNOTE CONSOLIDATED
----------- ------------ ------------ ------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets.............................. $ 19,040 $ 9,313 $ (6,507) (A),(B),(C),(D) $ 21,846
Equipment
Pagers.................................... 50,334 6,977 1,462 (D),(F) 58,773
Communications equipment.................. 41,516 16,409 (2,774) (D) 55,151
Security systems' equipment............... 12,304 -- -- 12,304
Office and other.......................... 9,451 4,177 (731) (D) 12,897
----------- ------------ ------------ ------------
113,605 27,563 (2,043) 139,125
Less allowance for depreciation........... 38,614 4,514 (4,514) (D) 38,614
----------- ------------ ------------ ------------
74,991 23,049 2,471 100,511
Goodwill and other assets, net.............. 217,284 88,011 84,263 (A),(D),(E),(F) 389,558
----------- ------------ ------------ ------------
TOTAL ASSETS................................ $ 311,315 $ 120,373 $ 80,227 $ 511,915
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................... $ 28,242 $ 5,466 $ (1,660) (B),(C) $ 32,048
Deferred payments........................... 16,694 -- -- 16,694
Long-term debt, less current maturities..... 199,997 93,148 (68,408) (A),(B),(C) 224,737
Deferred tax liabilities.................... 688 1,507 (1,507) (D) 688
Shareholders' equity........................ 65,694 20,252 151,802 (A),(C),(D) 237,748
----------- ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY..................................... $ 311,315 $ 120,373 $ 80,227 $ 511,915
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
- ------------------------
(1) See Pro Forma Financial Statements beginning on page F-3 for additional
information.
See accompanying notes to unaudited summary pro forma
condensed consolidated financial statements.
17
<PAGE>
PRONET INC. AND SUBSIDIARIES
SUMMARY PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED (1)
---------------------- PRO FORMA PRO FORMA
PRONET TELETOUCH ADJUSTMENTS FOOTNOTE CONSOLIDATED
----------- --------- ----------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Service revenues................................. $ 95,588 $ 37,886 $ -- $ 133,474
Product sales.................................... 18,003 6,475 -- 24,478
----------- --------- ----------- ------------
Total revenues................................. 113,591 44,361 -- 157,952
Cost of products sold............................ (18,417) (7,083) -- (25,500)
----------- --------- ----------- ------------
95,174 37,278 -- 132,452
COST OF SERVICES................................... 22,761 6,188 (98) (G) 28,851
----------- --------- ----------- ------------
GROSS MARGIN..................................... 72,413 31,090 98 103,601
EXPENSES
Sales, general and administrative................ 43,463 16,575 (1,632) (G) 58,406
Depreciation and amortization.................... 33,106 11,886 5,481 (H) 50,473
----------- --------- ----------- ------------
76,569 28,461 3,849 108,879
----------- --------- ----------- ------------
OPERATING INCOME (LOSS)........................ (4,156) 2,629 (3,751) (5,278)
OTHER INCOME (EXPENSE)
Interest expense................................. (10,514) (5,653) (5,593) (I) (21,760)
Interest and other income........................ 1,630 61 -- 1,691
----------- --------- ----------- ------------
(8,884) (5,592) (5,593) (20,069)
LOSS BEFORE INCOME TAXES....................... (13,040) (2,963) (9,344) (25,347)
Provision (benefit) for income taxes............... 62 (1,370) 1,370 (J) 62
----------- --------- ----------- ------------
NET LOSS....................................... $ (13,102) $ (1,593) $ (10,714) $ (25,409)
----------- --------- ----------- ------------
----------- --------- ----------- ------------
</TABLE>
- ------------------------
(1) See Pro Forma Financial Statements beginning on page F-3 for additional
information.
See accompanying notes to unaudited summary pro forma
condensed consolidated financial statements.
18
<PAGE>
PRONET INC. AND SUBSIDIARIES
SUMMARY PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED (1)
------------------------- PRO FORMA PRO FORMA
PRONET TELETOUCH ADJUSTMENTS FOOTNOTE CONSOLIDATED
----------- ------------ ----------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Service revenues............................... $ 24,461 $ 10,075 $ -- $ 34,536
Product sales.................................. 3,857 1,520 -- 5,377
----------- ------------ ----------- ------------
Total revenues............................... 28,318 11,595 -- 39,913
Cost of products sold.......................... (3,555) (1,793) 179 (H) (5,169)
----------- ------------ ----------- ------------
24,763 9,802 179 34,744
COST OF SERVICES................................. 6,509 2,002 (25) (G) 8,486
----------- ------------ ----------- ------------
GROSS MARGIN................................. 18,254 7,800 204 26,258
EXPENSES
Sales, general and administrative.............. 11,233 4,233 (408) (G) 15,058
Depreciation and amortization.................. 10,384 2,998 1,286 (H) 14,668
----------- ------------ ----------- ------------
21,617 7,231 878 29,726
----------- ------------ ----------- ------------
OPERATING INCOME (LOSS)...................... (3,363) 569 (674) (3,468)
OTHER INCOME (EXPENSES)
Interest expense............................... (3,830) (1,927) (1,067) (I) (6,824)
Interest and other income...................... 47 (10) -- 37
----------- ------------ ----------- ------------
(3,783) (1,937) (1,067) (6,787)
LOSS BEFORE INCOME TAXES..................... (7,146) (1,368) (1,741) (10,255)
Provision (benefit) for income taxes........... -- (601) 601 (J) --
----------- ------------ ----------- ------------
NET LOSS..................................... $ (7,146) $ (767) $ (2,342) $ (10,255)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
- ------------------------
(1) See Pro Forma Financial Statements beginning on page F-3 for additional
information.
See accompanying notes to unaudited summary pro forma
condensed consolidated financial statements.
19
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The accompanying ProNet summary pro forma condensed consolidated balance
sheet as of March 31, 1996, has been prepared as if the Teletouch Acquisition
had occurred on that date and reflects the following adjustments:
(A) Pro forma adjustments are made to record the (i) proceeds from the
Offerings and associated expenses and (ii) write-off of the previous bank
debt financing costs. The following is a detail of these adjustments (in
thousands):
<TABLE>
<CAPTION>
DEBIT CREDIT
----------- -----------
<S> <C> <C>
Current assets............................................ $ 207,700
Goodwill and other assets................................. 7,100
Shareholders' equity...................................... 2,282
Goodwill and other assets............................... $ 2,282
Long-term debt, less current maturities................. 120,000
Shareholders' equity.................................... 94,800
</TABLE>
To record the proceeds from the Offerings and associated issuance expenses.
(B) Pro forma adjustments are made to record payments on the Credit
Facility. The following is a detail of these adjustments (in thousands):
<TABLE>
<S> <C> <C>
Current liabilities............................ $ 1,040
Long-term debt, less current maturities........ 95,260
Current assets............................... $ 96,300
</TABLE>
To record the payments on the Credit Facility.
(C) Pro forma adjustments are made to (i) record the use of cash, (ii)
record the repayment of Teletouch's debt and redemption of Teletouch's
preferred stock and (iii) the issuance of stock in connection with the
Teletouch Acquisition. The following is a detail of these adjustments (in
thousands):
<TABLE>
<S> <C> <C>
Shareholders' equity........................... $ 17,447
Investment in the Teletouch Acquisition........ 83,422
Current liabilities............................ 620
Long-term debt, less current maturities........ 93,148
Current assets............................... $ 115,101
Shareholders' equity......................... 79,536
</TABLE>
To record the Teletouch Acquisition.
(D) Pro forma adjustments are made to reflect the fair value of those
assets to be acquired and liabilities to be assumed in the Teletouch
Acquisition. The following is a detail of these adjustments (in thousands):
<TABLE>
<S> <C> <C>
Investment in the Teletouch Acquisition........ $ 83,774
Allowance for depreciation..................... 4,514
Deferred tax liabilities....................... 1,507
Shareholders' equity........................... 2,805
Current assets............................... $ 2,806
Equipment.................................... 1,864
Goodwill and other assets.................... 87,930
</TABLE>
To reflect the allocation of the purchase price of the Teletouch
Acquisition.
20
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(E) Pro forma adjustments are made to goodwill equal to the excess of
the applicable purchase price over the fair values assigned to assets to be
acquired and liabilities to be assumed. The following is a detail of these
adjustments (in thousands):
<TABLE>
<CAPTION>
DEBIT CREDIT
----------- -----------
<S> <C> <C>
Goodwill and other assets................................. $ 167,196
Investments in the Teletouch Acquisition................ $ 167,196
</TABLE>
To record goodwill related to the Teletouch Acquisition.
(F) Pro forma adjustments are made to depreciate pagers according to
the method used by the Company. The following is a detail of these
adjustments (in thousands):
<TABLE>
<S> <C> <C>
Goodwill and other assets...................... $179
Pagers....................................... $179
</TABLE>
To depreciate pagers related to the Teletouch Acquisition.
The following is a summary of the fair value assigned to the assets to be
acquired and liabilities to be assumed in the Teletouch Acquisition (in
thousands):
<TABLE>
<CAPTION>
TELETOUCH ADJUSTMENTS FAIR VALUE
-------------- ----------- -----------
<S> <C> <C> <C>
Current assets........................... $ 9,313 $ (2,806) $ 6,507
Equipment
Pagers................................. 6,977 1,462 8,439
Communications equipment............... 16,409 (2,774) 13,635
Office and other....................... 4,177 (731) 3,446
-------------- ----------- -----------
27,563 (2,043) 25,520
Less allowance for depreciation.......... 4,514 (4,514) --
-------------- ----------- -----------
23,049 2,471 25,520
Goodwill and other assets, net........... 88,011 79,445 167,456
-------------- ----------- -----------
Total assets............................. 120,373 79,110 199,483
Current liabilities...................... 5,466 (620) 4,846
Long-term debt........................... 94,655 (94,655) --
-------------- ----------- -----------
Net assets............................... $ 20,252 $ 174,385 $ 194,637
-------------- ----------- -----------
-------------- ----------- -----------
</TABLE>
The accompanying ProNet summary pro forma condensed consolidated statements
of operations for the year ended December 31, 1995 and for the three months
ended March 31, 1996, have been prepared by combining the pro forma results of
ProNet and Teletouch for such respective periods and reflect the following
adjustments:
(G) The pro forma adjustment to sales, general and administrative
expenses represents expenses that would not have been incurred had the
Teletouch Acquisition occurred at the beginning of the periods presented.
The cost savings relate to decreased salaries (primarily due to reductions
in senior management), office rent and professional fees.
(H) Pro forma adjustments are made to the statements of operations to
reflect additional depreciation and amortization expense based on the fair
value of the assets acquired as if the Teletouch Acquisition had occurred at
the beginning of the periods presented. Pro forma depreciation is computed
using the straight-line method over the remaining estimated useful lives of
the assets. Goodwill is amortized using the straight-line method over a
15-year term.
21
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(I) Interest expense is comprised of interest on the Credit Facility,
the Existing Notes, the Notes and the Deferred Payments, plus the commitment
fee on the Credit Facility. Pro forma adjustments reflect (i) the reversals
of interest expense of $2.1 million for the three months ended March 31,
1996 and $7.5 million for the year ended December 31, 1995 on debt of the
Acquisitions not assumed by the Company and (ii) increase in interest
expense due to the sale of the Notes at an annual rate of 10 7/8%. Interest
expense on the Deferred Payments is provided as required by the definitive
agreements or letters of intent.
(J) 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. No tax benefits were recorded because the realization of
net operating losses is not assured beyond a reasonable doubt. Therefore, a
pro forma adjustment was made to eliminate any tax benefits associated with
the Acquisitions.
The pro forma condensed consolidated financial information presented is not
necessarily indicative of either the results of operations that would have
occurred had the Acquisitions taken place at the beginning of the periods
presented or of future results of operations of the combined operations.
22
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data should be read in conjunction with the
Company's pro forma consolidated condensed financial statements and historical
consolidated financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. The historical statement of operations
and balance sheet data as of and for each of the years in the five-year period
ended December 31, 1995 have been derived from the financial statements of the
Company audited by Ernst & Young LLP, independent auditors. The selected
financial data as of March 31, 1996 and for the three-month periods ended March
31, 1995 and 1996 have been derived from unaudited financial statements included
elsewhere herein. In the opinion of management, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation have
been made. The selected quarterly information should be read in conjunction with
the financial statements and notes thereto included and incorporated elsewhere
herein. The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results for the full 1996 fiscal year. The pro
forma financial information does not purport to represent what the results of
operations or financial position would have been had the Acquisitions occurred
on the dates indicated or for any future period or date.
23
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------ (UNAUDITED)
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995 (1) 1995 1996 1996 (1)
------- ------- ------- ------- ------- --------- ------- ----------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE, RATIO, UNIT, AND PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues (2).................. $15,084 $16,845 $19,234 $33,079 $56,108 $ 133,474 $10,488 $21,016 $34,536
Product sales (3)..................... 1,466 1,855 2,040 6,639 10,036 24,478 2,196 3,146 5,377
------- ------- ------- ------- ------- --------- ------- ----------- ----------
Total revenues...................... 16,550 18,700 21,274 39,718 66,144 157,952 12,684 24,162 39,913
Depreciation and amortization
expense.............................. 3,748 4,077 4,656 8,574 18,662 50,473 2,745 8,707 14,668
Operating income (loss)............... 1,223 1,834 2,732 3,189 (270) (5,278) 769 (2,492) (3,468)
Interest expense...................... 425 310 292 1,774 8,640 21,760 386 3,659 6,824
Income (loss) before extraordinary
item................................. 794 1,754 1,574 693 (7,697) (25,409) 66 (6,124) (10,255)
Net income (loss)..................... 1,312 1,754 1,574 693 (7,697) (25,409) 66 (6,124) (10,255)
OTHER DATA:
Pagers in service at end of period.... 103,157 114,356 130,000 353,830 856,302 1,401,522 404,713 1,039,222 1,459,942
TracPacs in service at end of
period............................... 13,846 19,210 25,841 27,595 27,548 27,548 27,106 28,409 28,409
Pagers in service per employee (4).... 570 880 1,000 1,325 1,619 1,222 1,289 1,531 1,249
ARPU-Paging (5)....................... $ 10.64 $ 10.48 $ 10.23 $ 8.51 $ 6.57 $ 6.97 $ 8.26 $ 6.69 $ 7.59
ARPU-TracPac (6)...................... 15.00 14.75 15.90 16.52 15.90 15.90 15.86 17.41 17.41
Operating, selling, general and
administrative costs per paging
subscriber (7)....................... 6.82 7.80 7.91 5.08 4.78 5.06 5.94 5.02 5.25
Cash flow from operating activities
(8).................................. 3,493 6,720 7,144 9,821 12,298 26,397 (344) 7,651 9,481
EBITDA (9)............................ 4,971 5,911 7,388 11,763 18,392 45,195 3,514 6,215 11,200
EBITDA margin (10).................... 32% 34% 36% 36% 32% 34% 33% 29% 32%
Capital expenditures (11)............. $ 4,193 $ 5,523 $ 5,497 $ 5,777 $17,528 $ 32,500 $ 926 $ 5,811 $ 13,385
Ratio of earnings to fixed charges
(12)................................. 4.1x 6.1x 8.7x 1.8x -- -- 1.9x -- --
Ratio of EBITDA to interest expense... 11.7 19.1 25.3 6.6 2.1x 2.1x 9.1 1.7x 1.6x
Ratio of total debt to EBITDA (13).... 1.0 0.6 0.5 0.9 6.4 5.3 2.1 7.0 5.4
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------
(UNAUDITED)
PRO FORMA
AS ADJUSTED
ACTUAL (14)
--------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 2,089 $ 1,000
Working capital (deficit)........................................................... (9,784) (10,202)
Total assets........................................................................ 230,830 511,915
Total debt.......................................................................... 148,031 241,431
Total liabilities................................................................... 175,136 274,167
Total stockholders' equity.......................................................... 55,694 237,748
</TABLE>
24
<PAGE>
NOTES TO SELECTED FINANCIAL AND OPERATING DATA
(1) Assumes consummation of the Offerings and the application of the net
proceeds therefrom as if each had occurred at the beginning of the
respective periods. Also gives effect to the Acquisitions. In the event that
the Company does not complete the Concurrent Offering, the Company
anticipates that it will seek additional debt or equity financing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(2) Service revenues consist of fixed monthly, quarterly, annual and bi-annual
service and leasing fees.
(3) Product sales include pager and paging equipment sales and other security
systems' income.
(4) Calculated by dividing pagers in service at the end of each period by the
number of employees at the end of such period presented. This calculation
excludes employees directly related to the security systems' business.
(5) ARPU-Paging (average revenue per paging unit) is calculated by dividing
paging systems' average monthly service revenues for the last quarter of the
period by the average of the number of pagers in service at the beginning of
such months.
(6) 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.
(7) Calculated by dividing the sum of the cost of pager lease and access fees
and selling, general and administrative expenses for the last month in the
period by the number of pagers in service at the beginning of such month.
(8) 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.
(9) EBITDA is earnings before other income (expense), income taxes, depreciation
and amortization. Other income (expense) consists primarily of interest
expense. EBITDA does not represent 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 (loss),
cash flows from operating activities or other measures of liquidity
determined in accordance with generally accepted accounting principles.
(10) Calculated by dividing EBITDA by the remainder of total revenues less cost
of products sold for the period presented.
(11) Includes communications equipment valued at $6 million associated with the
acquisition of the Nationwide License for the year ended December 31, 1995
and for the three months ended March 31, 1996, in each case on a pro forma
basis, and excludes the cost of the Acquisitions.
(12) 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, except that the pro forma
ratio for the three months ended March 31, 1996 is based on annualized
EBITDA.
(13) The ratio of earnings to fixed charges is calculated as the sum of income
before taxes plus fixed charges, divided by fixed charges. Fixed charges
consist of interest expense including amortization of deferred financing
costs. For the year ended December 31, 1995, for the three months ended
March 31, 1996 and on a pro forma basis for the year ended December 31, 1995
and the three months ended March 31, 1996, earnings were insufficient to
cover fixed charges by $7.6 million, $6.1 million, $25.3 million and $10.3
million, respectively.
(14) Gives effect to the Pending Acquisitions and the acquisition of the
Nationwide License as if they had occurred on March 31, 1996 and assumes
consummation of the Offerings and the application of the net proceeds
therefrom as if each had occurred on March 31, 1996. In the event that the
Company does not complete the Concurrent Offering, the Company anticipates
that it will seek additional debt or equity financing. If the Balance Sheet
Data were adjusted only for the consummation of the Offering, the
application of the net proceeds therefrom, the Pending Acquisitions, the
acquisition of the Nationwide License, and the incurrence of such additional
debt financing as may be necessary to complete such transactions, the
Company's Pro Forma As Adjusted Cash and cash equivalents, Working capital,
Total assets, Total debt, Total liabilities and Total stockholders' equity
on March 31, 1996 would have been $1.0 million, $(10.2) million, $511.9
million, $336.3 million, $369.0 million, and $142.9 million respectively.
25
<PAGE>
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
subcribers in the healthcare industry. Beginning in 1994, the Company broadened
its operating focus through the acquisition of paging businesses serving the
general commercial marketplace. As a result of the Completed Acquisitions and
Pending Acquisitions, the Company's results of operations for prior periods may
not be indicative of future performance.
The Company is a leading provider of paging services in major metropolitan
markets in the United States and 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 SuperCenters are
located in New York, Chicago, Houston, Charlotte and Los Angeles. Pro forma for
the Pending Acquisitions, the Company will be the fifth largest publicly traded
paging company in the United States, with approximately 1.5 million subscribers
at March 31, 1996.
In both its paging and security systems operations, the Company builds and
operates communications systems and generates revenues from the sale and lease
of pagers, Intelligent Processing Terminal ("IPT") systems and security devices
and related access fees. The Company's revenues are derived primarily from fixed
monthly, quarterly, annual and bi-annual fees charged to customers for paging
and security tracking services. While a subscriber remains in service, operating
results benefit from this recurring monthly revenue stream with minimal
requirements for additional selling expenses or other fixed costs. However,
certain variable costs such as telephone and equipment charges are directly
related to the number of pagers in service.
Each month a percentage of the customer base disconnects service for a
variety of reasons. ProNet does, however, place substantial emphasis on customer
care and quality of service and as a result its paging business currently has
one of the lowest monthly disconnect ("churn") rates in the paging industry --
approximately 2.1%, compared to an industry average of approximately 2.8%
(source: June 1995 EMCI, Inc. industry survey for the years 1990 to 1994). Churn
is the number of customers disconnecting service each month as a percentage of
the total subscriber base. Although the Company's current disconnect rate is
below the industry average, there can be no assurance that the Company will not
experience an increase in its churn rate, which may adversely affect the
Company's results of operations. The Company's monthly churn rate in the
security tracking business is lower than in its paging business -- currently
approximately 1.0%.
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 ("COAM") 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.
26
<PAGE>
The Company currently enjoys low operating costs per unit due to the
efficiency of its operations. It expects that the continued development of its
business within and 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 is 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. Non-cash and financing-related charges for the
Company's acquisition program 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 include the historical results of operations of the Company and the
results of operations from the respective acquisition dates of all aquisitions
completed by ProNet during 1994 and 1995. The results of the operations of
Teletouch, the ProNet Pending Acquisitions and the acquisition of the Nationwide
License are not reflected in this discussion.
PAGING SYSTEMS' RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues
Service revenues............................................................... $ 19,558 $ 9,187
Product sales.................................................................. 3,124 2,085
--------- ---------
Total revenues................................................................... 22,682 11,272
Cost of products sold............................................................ (2,781) (2,007)
--------- ---------
Net revenues (1)................................................................. 19,901 9,265
Cost of services................................................................. (5,512) (2,220)
--------- ---------
Gross margin..................................................................... 14,389 7,045
Sales and marketing expenses..................................................... 3,956 1,571
General and administrative expenses.............................................. 5,161 2,807
Depreciation and amortization expenses........................................... 8,311 2,329
--------- ---------
Operating income................................................................. $ (3,039) $ 338
--------- ---------
--------- ---------
EBITDA........................................................................... $ 5,272 $ 2,667
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Net revenues represent revenues from services, rent and maintenance plus
product sales less cost of products sold.
PAGING SYSTEMS' NET REVENUES for the quarter ended March 31, 1996 increased
to $19.9 million, a 115% increase from $9.3 million for the quarter ended March
31, 1995. For the quarter ended March 31, 1996, service revenues increased to
$19.6 million, a 113% increase from $9.2 million for the comparable period in
1995. These increases are primarily attributable to a growing subscriber base
achieved through greater market penetration in existing markets and the
additions of Carrier, Metropolitan, All City, Americom, Lewis, Gold Coast,
Paging & Cellular, Apple, SigNet Raleigh, Sun, Page One, AGR, Total and Williams
(collectively, the "Acquisitions Completed since March 1995"). Pagers
27
<PAGE>
in service increased 157% to 1,039,222 at March 31, 1996 from 404,713 at March
31, 1995. The increase in pagers in service was primarily the result of the
Acquisitions Completed since March 1995. In 1994 and 1995, most of the Company's
growth in pagers in service was from acquisitions. In addition, internal growth
accounted for approximately 58,420 units during the quarter ended March 31,
1996, which represents a year over year, annualized internal growth rate of
approximately 41%. The Company believes that this internal growth rate will
continue due to ongoing commercial paging activity.
ARPU was $6.69 for the quarter ended March 31, 1996 compared to $8.26 for
the quarter ended March 31, 1995. This decrease was due to a further shift in
the Company's subscriber base from leased to COAM pagers, which do not generate
leasing fees. The Company's subscriber base was 72% COAM at March 31, 1996
compared to 53% at March 31, 1995. The Company believes that ARPU will continue
to decrease, although at a slower rate, as the Company expands its reseller
operations, which tend to generate lower revenues per subscriber.
PRODUCT SALES LESS COST OF PRODUCTS SOLD was $343,000 for the quarter ended
March 31, 1996, compared to $78,000 for the comparable period in 1995. The
margin increased in 1996 primarily due to increases in product sales, partially
offset by depreciation on pagers. Beginning in October 1995, the Company began
recording all purchases of pagers as part of pager equipment and depreciating
these pagers accordingly. Due to this change, management anticipates that the
margin on pager sales will increase in the short-term. Management also
anticipates that the Company's margins may vary from market to market due to
competition and other factors.
PAGING SYSTEMS' GROSS MARGIN (net revenues less cost of services) was $14.4
million (72% of paging systems' net revenues) for the three months ended March
31, 1996, compared to $7.0 million (76% of paging systems' net revenues) for the
comparable period in 1995. The decrease in gross margin as a percentage of
paging systems' net revenues was due to the increased expenses related to
increased acquisition activity and the buildout of the Company's regional
SuperCenters. The Company currently anticipates that these margins will decrease
in the short term, but will increase in the future as cost efficiencies and
integration savings are achieved. The cost of services increased to $5.5 million
for the three months ended March 31, 1996, compared to $2.2 million for the
comparable period of the prior year, as a result of the increased costs of
servicing a substantially larger subscriber base resulting from both internal
growth and acquisitions.
PAGING SYSTEMS' SALES AND MARKETING EXPENSES were $4.0 million (20% of
paging systems' net revenues) for the three months ended March 31, 1996,
compared to $1.6 million (17% of paging systems' net revenues) for the
comparable period of the prior year. The increase as a percentage of paging
systems' net revenues was due to the increase in the number of retail stores
(from four at March 31, 1995, to 37 at March 31, 1996), the majority of expenses
of which are sales and marketing, and increased advertising expenses. These
expenses as a percentage of paging systems' net revenues are not expected to
change significantly in the future due to the Company's focus on expanding its
retail distribution channel.
PAGING SYSTEMS' GENERAL AND ADMINISTRATIVE EXPENSES were $5.2 million (26%
of paging systems' net revenues) for the quarter ended March 31, 1996, compared
to $2.8 million (30% of paging systems' net revenues) for the comparable period
in 1995. The decrease as a percentage of paging systems' net revenues was due to
savings resulting from the consolidation of certain of the Acquisitions
Completed since March 1995 into the SuperCenter structure, as well as the
increase in the number of retail store locations referred to above. While retail
stores are operated with higher sales and marketing expenses than other methods
of distribution, these expenses are at least partially offset with lower general
and administrative expenses. These expenses as a percentage of net revenues are
expected to decrease slightly over time 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 and the Company's
focus on expanding its retail distribution channel.
28
<PAGE>
PAGING SYSTEMS' DEPRECIATION AND AMORTIZATION EXPENSES for the three months
ended March 31, 1996 were $8.3 million, a 257% increase from $2.3 million for
the comparable period in 1995. The increase was primarily due to the
amortization of intangibles arising from the Acquisitions Completed since March
1995. The increase in 1996 was also due to a change in the method of recording
pager purchases in 1995. Beginning in October 1995, the Company began recording
all purchases of pagers as part of paging equipment and depreciating those
pagers accordingly. The Company expects this trend in depreciation and
amortization expenses 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 paging systems' operations was $5.3 million (26% of paging
systems' net revenues) for the three months ended March 31, 1996, compared to
$2.7 million (29% of paging systems' net revenues) for the three months ended
March 31, 1995. The decrease in EBITDA as a percentage of net revenues was
primarily the result of increased expenses related to the increased level of
acquisition activity for the three months ending March 31, 1996 compared to the
three months ending March 31, 1995 as well as the buildout of the Company's
SuperCenters. The Company believes EBITDA margins may decrease in the short term
as a result of future acquisitions of commercial paging operations, but will
thereafter increase over time as the Company integrates the acquired operations,
spreads its costs over a larger subscriber base and achieves resulting economies
of scale and operating efficiencies.
SECURITY SYSTEMS' RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues
Service revenues................................................................. $ 1,458 $ 1,301
Product sales.................................................................... 22 111
--------- ---------
Total revenues..................................................................... 1,480 1,412
Cost of products sold.............................................................. -- (59)
--------- ---------
Net revenues (1)................................................................... 1,480 1,353
Cost of services................................................................... (275) (246)
--------- ---------
Gross margin....................................................................... 1,205 1,107
Sales and marketing expenses....................................................... 83 71
General and administrative expenses................................................ 179 189
Depreciation and amortization expenses............................................. 396 416
--------- ---------
Operating income................................................................... $ 547 $ 431
--------- ---------
--------- ---------
EBITDA............................................................................. $ 943 $ 847
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Net revenues represent revenues from services, rent and maintenance plus
product sales less cost of products sold.
SECURITY SYSTEMS' NET REVENUES increased 9% to $1.5 million for the three
months ended March 31, 1996, from $1.4 million for the comparable period in
1995. The increase was due to the installation of six new systems since March
31, 1995, as well as expansion of and additional penetration in existing
markets. The number of TracPacs in service increased 5% to 28,409 at March 31,
1996, from 27,106 at March 31, 1995.
29
<PAGE>
PRODUCT SALES LESS COST OF PRODUCTS SOLD was $22,000 for the three months
ended March 31, 1996, compared to $52,000 for the comparable period in 1995. 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.
SECURITY SYSTEMS' GROSS MARGIN was $1.2 million (81% of security systems'
net revenues) for the three months ended March 31, 1996, compared to $1.1
million (82% of security systems' net revenues) for the comparable period in
1995. 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 $83,000 (6% of security
systems' net revenues) for the three months ended March 31, 1996, compared to
$71,000 (5% of security systems' net revenues) for the comparable period in
1995. The Company currently 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 $179,000 (12% of
security systems'
net revenues) for the three months ended March 31, 1996, compared to $189,000
(14% of security systems' net revenues) for the comparable period in 1995. This
decrease in general and administrative expenses was the result of the decreased
corporate overhead as a result of the Company's expanded paging operations. The
Company currently believes that general and administrative expenses will grow at
a slower rate than security systems' net revenues and therefore should represent
a decreasing percentage 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. Depreciation and amortization expenses for security
systems' operations were $396,000 for the quarter ended March 31, 1996 (27% of
security systems' service revenues), compared to $416,000 (32% of security
systems' service revenues) for the comparable period in 1995. These decreases
were a result of certain fixed assets that were fully depreciated 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 the security systems' operations was $943,000 (64% of security
systems' net revenues) for the three months ended March 31, 1996, compared to
$847,000 (63% of security systems' net revenues) for the same period in 1995.
This increase was primarily due to increases in net revenues and decreases in
general and administrative expenses as described above.
30
<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 acquired operations. Net revenues increased to
$51.3 million in 1995 from $27.9 million in 1994 and from $15.6 million in 1993.
These increases were 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 ProNet 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 31, 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
31
<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 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 and 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 ProNet 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 are 34%
for 1995, 25% for 1994 and 22% in 1993. The increase was primarily due to the
amortization of intangibles arising from certain of the ProNet 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. Pagers previously classified as
inventories in the prior year financial statements have
32
<PAGE>
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 SuperCenters. The Company believes that EBITDA margin may
decrease in the short term 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 in 1995 compared to
$94,000 and $324,000 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.
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
33
<PAGE>
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 was 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 and $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 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 percentage 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 was $3.2 million (60% of security
systems' net revenues) in 1995, $3.1 million (59% of security systems' net
revenues) in 1994 and $2.5 million (54% of security systems' net revenues) in
1993. These increases were 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 the issuance of the Existing Notes
and changes in the outstanding amounts under the Credit Facility. Interest
expense increased in the first quarter of 1996 primarily as a result of interest
due on the Existing Notes and increased borrowings under the Credit Facility.
Interest expense is expected to increase in the future as a result of interest
due on additional borrowings under the Credit Facility and the issuance of the
Notes.
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 three months ended March 31, 1996, the differences between the U.S.
Federal statutory tax rate and the effective rate in the Company's historical
financial statements reflect the amortization of goodwill related to stock
acquisitions, which is not deductible for tax purposes, additional compensation
expense (for tax purposes) for certain sales of Common Stock acquired through
incentive stock options and an allowance provided against the current year
operating loss which may not be realizable within the statutory time frame.
34
<PAGE>
The Company anticipates that in the future the primary difference between the
statutory and effective rates will continue to be the amortization of goodwill
related to stock acquisitions. Further, the Company does not anticipate
recording any tax benefit in the near future from the net operating losses
because the realization of such tax benefits are not assured beyond a reasonable
doubt.
LIQUIDITY AND CAPITAL RESOURCES
During 1995 and 1996, the Company financed the majority of its growth, other
than acquisitions, through internally generated funds. Net cash provided by
operating activities was $7.7 million for the three months ended March 31, 1996,
compared to $(344,000) for the comparable period in 1995. The increase in net
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 and a decrease in
inventories, offset by an increase in accounts receivable and a decrease in net
income. The acquisitions of Signet Charlotte, Carrier, Metropolitan and All City
in 1995 were financed with borrowings under the Credit Facility. Proceeds from
the sale of the Existing Notes were used to repay all indebtedness outstanding
under the Credit Facility 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 required for the acquisitions of Sun, SigNet Raleigh, Page One, AGR,
Total and Williams in 1996 with proceeds from the sale of the Existing Notes and
funded the remaining amounts with borrowings under the Credit Facility. The
Company anticipates that its ongoing capital needs, including the Pending
Acquisitions and the purchase of the Nationwide License, will be funded with
proceeds from the Offerings. The Company has received a commitment letter from
First Chicago to amend the Credit Facility to extend the maturity and to
increase the amount of available credit to $300 million thereunder. See "--
Credit Facility" below.
CAPITAL EXPENDITURES
As of March 31, 1996, the Company had invested $79.2 million in system
equipment and pagers for its major metropolitan markets and $12.3 million in
system equipment and TracPacs for its 32 security systems.
Capital expenditures for paging systems' equipment were $5.3 million for the
three months ended March 31, 1996 compared to $599,000 for the comparable period
in 1995 (excluding assets acquired pursuant to the Acquisitions Completed since
March 1995), primarily due to expansion of the Company's commercial paging
operations in Philadelphia. Capital expenditures for security systems' equipment
and TracPacs for the three months ended March 31, 1996 were $496,000 compared to
$328,000 for the comparable period in 1995.
At March 31, 1996, the Company had invested $2.2 million in inventories,
compared to $1.6 million at December 31, 1995. The increase was a result of
higher security systems inventory in 1996 for planned installations of new
security systems in the second quarter of 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 March 31, 1996, the Company anticipates capital expenditures for
the remainder of 1996 to be $19.0 million (of which $6.0 million is attributable
to system equipment associated with the Nationwide License) for the purchase of
system equipment for its current paging systems' operations and $1.6 million for
the manufacture of TracPacs and the purchase of system equipment for its
security systems' operations.
CREDIT FACILITY
The Credit Facility is a $125 million revolving line of credit which, in
February 1997, will convert to a five and one-half year term loan maturing in
July 2002. The term loan may be repaid at any time and will be payable in
quarterly installments, based on the principal amount outstanding on the
conversion date, in amounts ranging from 3.25% initially to 5.75% over five and
one-half years.
35
<PAGE>
The Company has received a commitment letter from First Chicago to amend the
Credit Facility to consist of a $50 million revolving credit facility maturing
in seven and one-half years and a $250 million revolving credit facility that
would convert to a term loan in two years and mature five and one-half years
after such conversion. The term loan could be repaid at any time and would be
paid in quarterly installments, based on the principal amount outstanding on the
conversion date, in amounts ranging from 1.75% initially to 5.00% over five and
one-half years. The borrowings would bear interest, at the Company's
designation, at either (i) the greater of First Chicago's corporate base rate or
the Federal Funds Rate, plus a margin of up to 1.25%, or (ii) LIBOR, plus a
margin of up to 2.5%. In addition, a commitment fee would be required on the
revolving line of credit ranging from .375% to .5% per annum computed on the
daily unused portion of the available loan commitment. There can be no assurance
that the Credit Facility will be so amended.
EXISTING NOTES
In June 1995 the Company completed an offering of $100 million principal
amount of its Existing Notes. Proceeds to the Company from the sale of the
Existing 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 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 Existing Notes are general unsecured obligations of the Company and are
subordinated to all existing and future senior debt of the Company. The Existing
Notes Indenture provides that the Company may not incur any debt that is
subordinate in right of payment to senior debt and senior in right of payment to
the Existing Notes. The Existing Notes Indenture also contains certain covenants
that, among other things, limit the ability of the Company and its subsidiaries
to incur indebtedness, pay dividends, engage in transactions with affiliates,
sell assets and engage in certain other transactions. Interest on the Existing
Notes is payable in cash semi-annually on each June 15 and December 15,
commencing December 15, 1995. The Existing Notes will not be redeemable at the
Company's option prior to June 15, 2000.
ACQUISITIONS
In 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 Communications,
Inc. ("Contact"), substantially all of the paging assets of Radio Call Company,
Inc. ("Radio Call") and High Tech Communications Corp. ("High Tech") and
substantially all of the Chicago-area paging assets of the RCC division of
Chicago Communication Service, Inc. ("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 Charlotte, Carrier, All City, Americom, Lewis, Gold
Coast and Paging & Cellular and all the outstanding capital stock of
Metropolitan and Apple for $9.0 million, $6.5 million, $6.4 million, $17.5
million, $5.6 million, $2.3 million, $9.5 million, $21.0 million and $13.0
million, respectively. In the first quarter of 1996, the Company acquired
substantially all of the paging assets of Sun for $2.3 million and SigNet
Raleigh for $8.7 million and all of the outstanding capital stock of Page One
for $19.7 million, AGR for $6.5 million, Total for $2.2 million and Williams for
$2.7 million. The 19 completed acquisitions were accounted for as purchases and
funded by borrowings under the Credit Facility, proceeds from the sale of the
Existing Notes and issuances of shares of Common Stock. In 1996, the Company
signed letters of intent or definitive agreements with Georgialina, PacWest,
Teletouch and VIP and agreed to acquire the Nationwide License. The Pending
Acquisitions are expected to close in 1996 for an approximate aggregate cost of
$229.5 million. A portion of the Pending Acquisitions will be funded with
proceeds of the Offerings. The Pending Acquisitions and the acquisition of the
Nationwide License are subject to various conditions and approvals.
36
<PAGE>
At March 31, 1996, the Company had deferred payments outstanding related to
the All City (which was paid effective May 1, 1996), Americom, Lewis, SigNet
Raleigh and Page One acquisitions which are due and payable one year from the
closing of the respective transactions. The balances are payable, at the
Company's obligation or discretion, either in cash or shares of the Company's
Common Stock based on current market value at the date of payment.
In January 1996, the Company paid in cash the $200,000 deferred portion of
the purchase price of High Tech. In February and April 1996, the Company issued
a total of 172,535 shares of its Common Stock and paid in cash $13,000 to Signet
Charlotte for the $4.2 million deferred portion of the purchase price of Signet
Charlotte. In March 1996, the Company issued 114,994 shares of Common Stock to
Carrier in payment of the $3.0 million deferred portion of the purchase price of
Carrier.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1996, the Company adopted 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 did not have a material effect on the Company's financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein 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,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability to
consummate such transactions and achieve such events or 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, regulatory approvals, 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 "Risk Factors." See "Risk
Factors."
37
<PAGE>
BUSINESS
OVERVIEW
ProNet is one of the fastest growing providers of wireless messaging
services in the United States. The Company's subscriber base has grown through
both acquisitions and internal growth at annual rates of 14%, 172% and 142% in
1993, 1994 and 1995, respectively. Over this time period, the Company has
migrated its business focus from servicing primarily the healthcare industry to
broader commercial and retail markets. Since March 1, 1994, the Company has
completed 19 acquisitions, adding 678,200 subscribers. Additionally, the Company
has focused on and generated internal growth in its paging subscriber base of
36% and 41% for the 12 months ended December 31, 1995 and March 31, 1996,
respectively. Upon completion by the Company of the Teletouch Acquisition, the
acquisition of the Nationwide License and the other Pending Acquisitions
described herein, the Company will be the fifth largest publicly traded paging
company in the United States, with approximately 1.5 million subscribers at
March 31, 1996.
Upon completion of the Pending Acquisitions and the acquisition of the
Nationwide License, the Company will offer local, regional and nationwide paging
services in 25 states covering 72% of the population of the United States. The
Company has focused its business development around five geographic regions
serviced by communication "SuperCenters" which are located in Charlotte,
Chicago, Houston, Los Angeles and New York. This geographically concentrated
operating and expansion strategy allows the Company to develop regional critical
mass, undertake cost-effective incremental expansion and selectively access
markets which feature the size, growth rates, demographic groups, types of
businesses and competitive dynamics that indicate significant potential demand
for the Company's current and future products and services. In addition, by
developing a heavy concentration of subscribers in each geographic region, the
Company is able to maintain one of the lowest cost operating structures in the
paging industry.
The Company believes that it has solidified its position as one of the
leading wireless messaging providers in the United States with the execution in
April 1996 of definitive agreements to purchase the Nationwide License and to
acquire Teletouch, both of which will enhance and augment the Company's
SuperCenter expansion strategy. The acquisition of the Nationwide License will
provide the Company with the ability to use an exclusive nationwide frequency as
a platform to expand on a cost-effective basis into attractive markets within
and contiguous to the Company's SuperCenters. The Nationwide License will also
position the Company to develop regional and national distribution alliances
with a variety of other communications service providers. In addition, the
Nationwide License allows the Company the flexibility to focus on acquisition
candidates that offer distribution enhancements, economies of scale and market
expansion opportunities rather than acquisitions that would supplement the
Company's spectrum resources.
With 310,720 subscribers (pro forma for the Teletouch Pending Acquisitions),
Teletouch is a geographically concentrated provider of paging services in
medium-sized markets in the southern United States (Alabama, Arkansas,
Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas). Teletouch
enjoys a leading position in its markets, which generally are subject to less
competition than major metropolitan centers. Teletouch subscribers generate
higher ARPU than is considered typical for larger, more competitive metropolitan
markets. The Company believes that the Teletouch Acquisition will strengthen the
Company's competitive position in the southern United States as a result of
increased scale, expanded contiguous signal and sales coverage and increased
retail distribution. Management also believes that the Teletouch Acquisition
will strengthen ProNet's position as a low cost provider because (i) the
resulting increase in the subscriber base of the Company's Houston and Charlotte
SuperCenters will allow the Company to benefit from significant operating
leverage and (ii) the integration of Teletouch's operating and administrative
functions will allow for the removal of redundant overhead costs.
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<PAGE>
Set forth below is a table showing the Company's SuperCenters and the number
of pagers in service in each market as of March 31, 1996, after giving effect to
the Pending Acquisitions:
<TABLE>
<CAPTION>
NUMBER OF PAGERS IN
SERVICE AT MARCH 31,
SUPERCENTER 1996
- ---------------------------------------- ------------------------
REGION OPERATION CENTER PRONET PRO FORMA
- ---------------------- ---------------- ----------- -----------
<S> <C> <C> <C>
Midwest Chicago 157,796 157,796
Northeast New York 291,724 291,724
South Central Houston 313,310 612,030
Southeast Charlotte 231,681 308,681
West Los Angeles 44,711 89,711
----------- -----------
Total 1,039,222 1,459,942
----------- -----------
----------- -----------
</TABLE>
BACKGROUND
The Company was founded in 1982 and, prior to March 1994, provided paging
services solely to the healthcare industry. 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 March 31, 1996, the Company's security systems consisted of 28,409
TracPacs in service, which represented 6% of total revenues for the first
quarter of 1996. See "-- Security Systems' Operations."
In 1993, ProNet management recognized that its operating expertise combined
with its presence in key major metropolitan markets presented an opportunity to
capitalize on the growing demand for pagers among both business users and the
population at large. In order to penetrate this market, management defined and
articulated a three-phase growth plan that, over a two-year period, would
position the Company as a leading provider of wireless messaging services. In
Phase I (completed in 1995), the Company (i) identified SuperCenter locations
and initiated the construction of facilities, (ii) focused on internal growth of
its subscriber base by targeting non-medical subscribers, (iii) targeted
acquisitions that could be executed in a cost-effective manner and which
collectively would create a critical mass of subscribers in each region and (iv)
obtained debt and equity capital to fund business development. As a result of
the completion of Phase I, a substantial majority of the Company's current
customers are non-healthcare subscribers. Phase II, initiated in 1994, includes
(i) the completion of the construction of SuperCenter facilities, (ii) the
efficient integration of acquisitions into SuperCenter operations, (iii) the
identification of acquisitions that complement existing operations and (iv)
emphasis on internal growth of the enlarged subscriber base. The Company
believes that Phase II will be substantially complete by mid 1996.
Phase III, initiated in the fourth quarter of 1995, seeks to capitalize on
the critical mass of subscribers and the spectrum, distribution resources and
marketing expertise that the Company has built to date. Management believes that
execution of Phase III will solidify the Company's position as a leading
provider of wireless messaging services and will result in accelerated growth in
subscribers and cash flow. Key elements of the Company's strategy are outlined
below.
STRATEGY
SUPERCENTER EXPANSION. ProNet's management intends to continue to focus its
operations on specific geographic regions anchored by its five SuperCenters.
Management believes that focusing the Company's planned growth strategy around
its SuperCenters allows the Company to maximize its cash flow. All sales and
marketing, customer service and support (including billing and collections) and
technical functions are managed and executed in the SuperCenters. This strategy
allows the Company to realize the benefits of operational consolidation while
maintaining the flexibility to react to local market developments. Future
subscriber growth in each region will be generated by both
39
<PAGE>
increased penetration of existing markets and expansion of operations into areas
within and contiguous to the SuperCenters. Market expansions planned for 1996
include Philadelphia (Northeast SuperCenter), Miami, Tampa and Orlando
(Southeast SuperCenter), and San Diego (West SuperCenter). Upon completion of
the acquisition of, and future buildout for, the Nationwide License, the Company
will be able to provide customers with nationwide service and expand the
coverage of the SuperCenters to contiguous markets in a cost-effective manner.
INCREASED PENETRATION OF SELECTED DISTRIBUTION CHANNELS. ProNet utilizes a
variety of distribution channels including resellers, a direct sales force and
Company-operated retail stores. Distribution strategies and channel emphasis are
tailored to each market to accommodate varying demographics and customer and
competitive profiles. The Company focuses on developing innovative marketing
programs in what management believes are the most effective and profitable
distribution channels. Recent initiatives have placed particular emphasis on the
reseller and retail distribution channels in order to capture market share in
the rapidly growing consumer segment of the market. Developments have included
the recent introduction of a branded direct retail distribution channel, which
includes 37 locations primarily in Texas, North Carolina, Florida and Georgia,
and the initiation of the highly innovative "Partners Program" designed to
promote exclusivity and guaranteed sales levels in the reseller channel. See "--
Sales and Marketing." Upon completion of the Teletouch Acquisition and the
acquisition of the Nationwide License, ProNet's leadership role in the industry,
growing scale, network capacity and national spectrum should allow the Company
to develop attractive partnerships with businesses outside the paging industry
(such as cellular, long distance and cable operators) that are seeking to
enhance their own product offerings by marketing and reselling paging services.
The Company believes that development of this distribution channel will enhance
subscriber growth at minimal incremental cost.
SELECTIVE STRATEGIC ACQUISITIONS. Historically, a substantial portion of
the growth in the Company's subscriber base has resulted from strategic
acquisitions that have enhanced the Company's geographic coverage and augmented
its frequency resources. The acquisition of the Nationwide License will
eliminate the need to seek acquisitions that would supplement the Company's
spectrum resources. The Company therefore intends to focus its acquisition
efforts on paging properties that offer primarily distribution enhancements,
economies of scale and market expansion opportunities. The Company's acquisition
strategy will encompass the selective acquisition of (i) additional companies in
existing SuperCenter regions that are complementary to existing operations and
(ii) companies with signal and market coverage contiguous to existing
SuperCenter regions. For example, the Company's recently announced PacWest
acquisition will supplement existing operations, adding subscribers to the
Company's West SuperCenter, and will provide the Company with a California-wide
network, while the Teletouch Acquisition offers expansion into new geographic
areas contiguous to operations already managed by the Company's Charlotte and
Houston SuperCenters. 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 March 1, 1994, the Company has completed the purchase of 19 paging
operations.
ENHANCED WIRELESS AND PCS SERVICES AND PRODUCTS. ProNet currently offers a
number of enhanced wireless products and services in addition to basic numeric
and alphanumeric paging services, including voice-mail, simultaneous group
paging, news and sports highlights, stock quotes, remote alpha entry and other
specialized marketing applications. The Company also offers to large corporate
accounts a proprietary IPT system that is capable of managing a company's
in-house and wide-area paging requirements within a single system. ProNet's
security systems, consisting of TracPacs, tracking receivers and the recently
announced CampusTrac, provide wireless solutions to the specialized personal
security and asset recovery needs of consumers, various governmental agencies
and business customers. See "-- Security Systems' Operations." The Company
intends to offer its customers narrowband PCS ("NPCS") voice and data services
as they become available and management is working proactively to determine
which NPCS services will have the greatest consumer appeal and what will be the
most cost-effective means of offering them to its subscribers. In this regard,
the
40
<PAGE>
Company is currently pursuing a number of strategic relationships that will
enable it to provide voice, two-way data and location identification services
without incurring the significant up-front capital costs associated with the
construction of an NPCS network. In this regard, the Company has agreed to
resell PCS Development Corporation's voice paging product when it becomes
commercially available in 1997. The Company also continues to evaluate the
benefits and costs associated with owning NPCS spectrum and may selectively bid
for spectrum in upcoming Major Trading Areas auctions. The Company's
participation in the auctions, if any, will likely be accomplished with partners
by an investment in a separately capitalized entity, which will allow the
Company to minimize its investment risk.
MANAGEMENT TEAM EXPANSION. In order to support its rapid growth, the
Company expects to continue to selectively expand its senior management team and
focus on ongoing training and career development of its mid-level managers and
field employees. Recent new hires have included senior managers at the corporate
level with direct responsibility for marketing and sales, retail development,
new market expansion and investor relations. SuperCenter management teams
encompass operations, sales and technical directors in each location. As the
Company grows, management believes that it is critical to improve the skills of
its staff, to foster teamwork and to create incentives for employees at all
levels of the Company. To achieve these goals, the Company also plans to
introduce several new training programs in 1996 designed to further enhance
management skills and to promote career progression and development.
PAGING INDUSTRY OVERVIEW
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 represent a penetration rate of approximately 14% of
the population. This growth rate is expected to continue and industry analysts
estimate that 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 towards 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 have the
ability to send a message back from the subscriber 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.
Throughout its history, the paging industry has been characterized by
substantial growth and technological change. 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, over 65% of the estimated
number of pagers in service in the United States are currently provided by the
10 largest companies in the industry, including ProNet. However, several
thousand other small 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.
Over the past decade, traditional paging services have advanced rapidly from
tone-only and analog pagers to sophisticated digital alphanumeric devices.
Paralleling this product evolution and a reduction in related service and
product costs, the market for paging services has grown from a base of largely
specialized users, such as doctors and business people having time sensitive
needs, to the mass consumer market.
41
<PAGE>
Although the paging services industry continues to be characterized by
technological advances, certain basic characteristics are common to most one-way
paging technology. Paging provides communication links 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. 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. Compared to a cellular telephone, a pager is smaller,
lighter, 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.
While paging has historically been a one-way communication service,
technological advances are now providing opportunities for the development of
advanced two-way wireless messaging services. With the introduction of this new
technology platform, the opportunity exists for the development of two-way,
interactive messaging services that will include "confirmation" or "response"
paging.
The wireless industry in general, and the paging industry in particular, are
expected to experience robust subscriber growth into the next decade.
Continually evolving technology in the paging industry is expected to drive
subscriber growth as users demand more sophisticated products and services. The
penetration into the mass markets is expected to continue as retail distribution
expands and as local, regional and national non-paging telecommunication service
providers seek to offer paging services to be bundled with their own products.
PAGING OPERATIONS
SUPERCENTER OPERATING MODEL
The Company has organized its operations around its five SuperCenters to
achieve (i) a high level of operating leverage, (ii) regionally-oriented
marketing and customer service, (iii) a regional management focus and (iv)
maximum efficiency from operating and engineering systems. Each SuperCenter is
led by an experienced management team including an area vice president and
directors of sales, operations and engineering. Each SuperCenter employs common
technology, operating systems and software applications to foster uniform
operating procedures that maximize operating efficiencies and operating leverage
for the Company as a whole. Overlaid on the SuperCenter structure is a national
corporate office of approximately 75 employees that focuses on maximizing the
efficiencies of the SuperCenters, setting the strategic direction of the
Company, developing new product initiatives, overseeing acquisitions, raising
capital and addressing other company-wide issues. This operating model has been
critical to the Company's ability to rapidly and successfully integrate the 19
acquisitions completed since March 1994 and to achieve one of the lowest cost
structures in the paging industry.
PAGING SERVICES
The Company currently provides various types of paging services primarily
utilizing two different types of pagers: (i) 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 (ii) alphanumeric display pagers, which allow the
subscriber to receive and store text messages. The Company's paging systems are
equipped to provide each type of paging service in all of its markets. As of
March 31, 1996, digital display pagers accounted for more than 90% of the
Company's pagers in service.
Although the Company has historically marketed its services under a variety
of brands as a result of its acquisitions, in conjunction with the adoption of
its new corporate logo, all non-retail paging services will be marketed under
the brand "ProNet Communications." The Company believes that the adoption of a
uniform marketing logo will leverage ProNet's brand identity. New acquisitions
will be converted to this brand within 120 days after closing. The Company
intends to market its retail paging services under the name "Teletouch" upon
completion of the Teletouch Acquisition, thereby leveraging the brand identity
enjoyed by Teletouch.
42
<PAGE>
Subscribers 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. Volume
discounts on lease costs and access fees are typically offered to large unit
volume subscribers. 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 COAM pager ranging from $2.00 to $15.00. As the appeal of the
paging product among non-business subscribers has grown, the Company has
expanded its reseller and retail distribution channels to capture the consumer
segment of the market.
The Company follows a strategy that focuses on selling rather than leasing
pagers and therefore incurs capital investment only with leased pagers.
Resellers and many retail subscribers tend to purchase, rather than lease,
paging equipment. As the penetration of these channels grows, the Company's ARPU
will be reduced because such subscribers will not generate leasing revenues. As
of March 31, 1996, approximately 73% of total units in service were COAM pagers,
which compares to an industry average of approximately 56%. The Company believes
that, by pursuing a COAM strategy, it can achieve significantly improved capital
efficiency and higher quality cash flows than a number of its competitors who
follow a strategy focused on purchasing pagers and then leasing them to
subscribers. The Company believes that its COAM strategy provides additional
benefits, including reduced risk of technological obsolescence, credit loss and
pager recovery, and an overall reduction in disconnect rates.
<TABLE>
<CAPTION>
OWNERSHIP OF PAGERS IN SERVICE
--------------------------------------------------------------------------------
DECEMBER 31,
------------------------------------------------------
MARCH 31, 1996 (1)
----------------------- 1995 (2) 1994 (3) 1993
PRO FORMA PRO FORMA ---------------- ---------------- ----------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
--------- ----------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Company-owned and leased to subscribers........... 391,014 27% 280,339 33% 165,359 47% 106,600 82%
COAM:
Direct.......................................... 95,352 6 44,418 5 20,163 6 23,400 18
Retail stores................................... 233,276 16 46,934 5 1,675 0 -- --
Resellers....................................... 740,300 51 484,611 57 166,633 47 -- --
--------- --- ------- ------- ------- ------- ------- -------
Total......................................... 1,459,942 100% 856,302 100% 353,830 100% 130,000 100%
--------- --- ------- ------- ------- ------- ------- -------
--------- --- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------------
(1) Includes approximately 124,500 pagers in service acquired in the Sun,
SigNet Raleigh, Page One, AGR, Total and Williams acquisitions in 1996, and
approximately 420,720 pagers in service to be acquired in the Pending
Acquisitions.
(2) Includes approximately 373,700 pagers in service acquired in the ProNet
Completed Acquisitions consummated in 1995.
(3) Includes approximately 180,000 pagers in service acquired in 1994.
MARKETING AND DISTRIBUTION
The Company continues to expand and diversify its distribution channels in
order to target a broad cross-section of potential subscribers. The Company's
direct sales force primarily targets medium-sized and large corporate accounts.
As the consumer market for paging products has developed, the Company has added
significant resources to its reseller and retail distribution channels in order
to capitalize on this fast growing market segment.
DIRECT SALES FORCE. The Company recruits, trains and manages its own sales
force of 87 representatives, whom it believes are distinguished by their
extensive training and low turnover. The decentralization of the Company's sales
force gives the representatives the flexibility to react and adapt to changes
within their specific region and provides the Company with an advantage over its
competitors that operate highly centralized direct sales forces. The direct
sales force is supported
43
<PAGE>
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 pages 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. The use of this channel allows the Company
to broaden its distribution reach as resellers generally market to segments of
the population that could not be cost efficiently targeted by the Company's
direct sales force or retail channels (E.G., certain small businesses, ethnic
groups or individual consumers). Typically, 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. As a
result, this sales channel generates attractive incremental cash flow and
enables the Company to increase operating efficiencies and to lower per unit
costs by 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. Reseller units represent approximately 51% of the
Company's subscribers on a pro forma basis at March 31, 1996.
RESELLER PROGRAMS AND ALLIANCES. The Company recently unveiled two
innovative programs aimed at creating close ties with its resellers, maximizing
penetration and minimizing churn in the reseller channel. The "Pinnacle Partner"
program targets the country's largest resellers who can generate at least 1,200
net subscriber additions per month and the "Preferred Program" is aimed at
smaller resellers generating up to 750 net subscriber additions per month. The
purpose of these programs is to capitalize on the Company's traditional strength
in the reseller channel by entering into one-year and five-year distribution
contracts with resellers that encourage the resellers to use ProNet exclusively
through preferential pricing, administrative and systems support and, for
resellers in the Pinnacle Partner program, participation in the Company's
equity. These programs are intended to commit resellers to ProNet, accelerate
subscriber growth, create distribution alliances for all products and services
and generate predictable cash flows.
RETAIL OUTLETS. The Company focuses its retail distribution on
Company-operated stores. The Company believes that this distribution channel
offers an excellent opportunity to access the general consumer marketplace and
increase subscriber penetration. The Company believes that Company-operated
stores increase "walk-in" traffic, particularly from non-business users, and
provide more extensive customer service, thus minimizing subscriber churn.
Furthermore, the Company believes that its stores are generally less costly to
establish than centralized office locations. This retail strategy enables the
Company to enter new markets or expand in existing markets with lower initial
capital expenditures and start-up costs. The Company operated 37 stores at March
31, 1996 and intends to expand this distribution channel aggressively.
REGIONAL AND NATIONAL ALLIANCES. The Company intends to utilize the
Nationwide License and the Company's ability to offer national spectrum and
presence to focus on developing regional and super-regional alliances and
distribution relationships with large retailers and resellers with broad
geographic focus. Management believes that the addition of nationwide spectrum
through the acquisition of the Nationwide License will allow the Company to
develop attractive relationships with businesses outside the paging industry,
such as telephone companies, cellular companies, cable distributors and other
communications-related businesses with significant monthly revenue-generating
subscriber bases, that may seek to enhance their own product offerings by
marketing and reselling paging services.
44
<PAGE>
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 and contiguous
to its SuperCenters. Since this announcement, the Company has purchased or
entered into agreements to purchase the paging operations described below:
<TABLE>
<CAPTION>
PAGERS IN
ACQUISITION LOCATION(S) STATUS OF ACQUISITION SERVICE (1) PURCHASE PRICE
- ------------------------------------------------ ------------------- --------------------- ------------- --------------
<S> <C> <C> <C> <C>
COMPLETED
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 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 (20) 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 Completed 678,200 $170.4 million
------------- --------------
PENDING
Georgialina Georgia Letter of intent 26,000 $ 11.6 million
signed 4-02-96
Teletouch Texas and Southeast Definitive agreement 310,720(3) 192.0 million
signed 4-16-96
PacWest California Definitive agreement 45,000 19.8 million
signed 4-25-96
VIP Oklahoma Letter of intent 39,000 6.1 million
signed 5-1-96
------------- --------------
Total Pending 420,720 229.5 million
------------- --------------
Total Completed and Pending 1,098,920 $399.9 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) Includes the Teletouch Pending Acquisitions.
The Company employs a variety of criteria in evaluating acquisitions of
commercial paging businesses. An ideal acquisition candidate is located in a
growth area within or contiguous to one or more of the Company's targeted
regions and demonstrates a number of the following operating characteristics:
excellent spectrum resources; good distribution channel penetrations; the
potential for rapid subscriber growth once managed by ProNet; and the
opportunity to achieve operating and financial efficiencies when integrated into
the SuperCenters. Following completion of an acquisition,
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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 SuperCenters and
common information system. While the Company's policy is to fully integrate new
acquisitions into its SuperCenters within a 150-day period, in many cases, the
Company has been able to substantially integrate acquisitions within 90 days.
The Company believes that many 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 TELETOUCH ACQUISITION
On April 16, 1996, the Company entered into an agreement and plan of merger
(the "Teletouch Agreement") with Teletouch, a publicly traded paging company,
whereby the Company will acquire Teletouch for approximately $192 million
(consisting of the issuance of approximately $80 million in Common Stock, the
assumption of approximately $95 million in indebtedness, net of cash acquired,
and the redemption of approximately $17 million in preferred stock). See "The
Teletouch Agreement." Teletouch and its various predecessor corporations have
held FCC licenses and operated paging operations and two-way mobile
communications services in Texas since 1967. On December 21, 1994, Teletouch
completed an initial public offering, the proceeds of which were used in part to
finance Teletouch's acquisition of Beepers Plus and Waco. Pro forma for such
acquisitions, Teletouch provided service to 56,000 subscribers at the time of
its initial public offering. On August 3, 1995, Teletouch completed the
acquisition of Dial-A-Page, an Arkansas-based paging provider with approximately
100,000 subscribers located in Arkansas, Mississippi, Missouri, North Florida,
North Texas, and Tennessee. The acquisition increased Teletouch's subscriber
base to approximately 164,000. Pro forma for the completion of the Teletouch
Pending Acquisitions, Teletouch would have had 310,720 pagers in service at
March 31, 1996 and would have generated approximately $3.6 million in EBITDA for
its fiscal quarter ended February 28, 1996.
The Teletouch Acquisition will allow ProNet to expand into markets
contiguous to its South Central and Southeastern SuperCenters and will give the
Company a leading presence in medium-sized markets that have substantial growth
potential, but in which it would be costly to construct a new system.
THE ACQUISITION OF THE NATIONWIDE LICENSE
On April 19, 1996, the Company entered into a definitive agreement to
purchase the Nationwide License and certain related assets for $43 million in
cash. The Nationwide License is a nationwide one-way paging license on the
931.9125 MHz frequency covering the United States. Such related assets include
approximately 400 transmitters in 200 metropolitan markets. The Company expects
to be able to enhance significantly the coverage of the Nationwide License with
minimal incremental capital spending by adding the nationwide frequency to its
existing local transmitters.
The Company will utilize the Nationwide License to provide a variety of
paging services. The acquisition of the Nationwide License provides the Company
with a national geographic footprint. Management believes that in addition to
having the ability to efficiently expand within and around the SuperCenters, the
Nationwide License will enhance the Company's ability to develop attractive
partnerships with potential national and super-regional distribution and
reseller partners. The national spectrum provides the Company the opportunity to
market its own nationwide paging services rather than reselling those of others
while avoiding the potential negative impact of any regulatory freeze or delay
in the issuance of new paging licenses in the United States.
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, have a modular
design that allows significant future expansion by adding or replacing modules
rather than replacing the entire terminal.
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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.
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, the
reliability and performance of its paging systems and its status as a low-cost
provider of paging services.
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 local 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 NPCS, 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.
SECURITY SYSTEMS' OPERATIONS
GENERAL
The Company's security systems' services are provided through the Company's
wholly owned subsidiary, Electronic Tracking Systems Inc., which operates under
the name of ProNet Tracking Systems. The Company markets radio-activated
electronic tracking security systems primarily to
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financial institutions throughout the United States and Puerto Rico. The systems
consist of 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 and Puerto Rico. The Company had 28,409
TracPacs under lease to its customers as of March 31, 1996. 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.
In March 1996, the Company unveiled its strategy to expand its product line
to target the personal security market. The first product to be offered will be
CampusTrac (to be launched in 1998), which will provide affordable security
tracking on university campuses. The Company believes that there is substantial
demand for security and location services and that its established presence in
the messaging and tracking markets will afford it a competitive advantage.
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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MANAGEMENT
The Company's directors and executive officers and their positions with the
Company are as follows:
<TABLE>
<CAPTION>
NAME POSITION(S) HELD
- ---------------------------------------------- ----------------------------------------------
<S> <C>
Jackie R. Kimzey.............................. Chairman of the Board, Chief Executive Officer
and Director
David J. Vucina............................... President, Chief Operating Officer and
Director
Thomas V. Bruns............................... Director
Harvey B. Cash................................ Director
Edward E. Jungerman........................... Director
Mark C. Masur................................. Director
Bo Bernard.................................... Executive Vice President
Jan E. Gaulding............................... Senior Vice President, Treasurer and Chief
Financial Officer
Jeffery A. Owens.............................. Senior Vice President and Chief Technology
Officer
Mark A. Solls................................. Vice President, General Counsel and Secretary
</TABLE>
MR. KIMZEY, age 43, is a founder of the Company and has been a director of
the Company since 1983. Mr. Kimzey has been Chairman of the Board of the Company
since March 1990 and Chief Executive Officer of the Company since May 1983. Mr.
Kimzey served as President of the Company from May 1983 until May 1991.
MR. VUCINA, age 42, has been a director of the Company since May 1994. Mr.
Vucina joined the Company in August 1988 as Executive Vice President of the
Company and President and Chief Operating Officer of ProNet Medical
Communications, the Company's medical communications division. In 1991, Mr.
Vucina was elected President and Chief Operating Officer of the Company and is
responsible for the Company's paging operations.
MR. BRUNS, age 63, has been a director of the Company since May 1991. Mr.
Bruns has been Chairman of the Board of Zaun Equipment Company, a power
equipment distribution company, since 1986.
MR. CASH, age 57, has been a director of the Company since 1982. Mr. Cash
was Chairman of the Board of the Company from 1982 until March 1990. Mr. Cash is
currently general partner of Berry Cash Southwest Partnership, a venture capital
fund. Mr. Cash is Chairman of the Board of Cyrix Corporation, a publicly held
microprocessor company, and currently also serves on the Boards of Directors of
the following public companies: i2 Technologies, Inc., a provider of supply
chain management software; Aurora Electronics, Inc., a distributor of recycled
integrated circuit boards and computer components; Benchmarq Microelectronics,
Inc., a developer of chips and chipsets for portable electronic devices; AMX
Corporation, a manufacturer of remote control systems; and Heritage Media
Corporation, an owner and operator of radio and television stations.
MR. JUNGERMAN, age 53, has been a director of the Company since May 1992.
Mr. Jungerman has been President of Impulse Telecommunications Corporation, a
strategic telecommunications consulting firm, since 1986. He has over 25 years
of experience in the telecommunications field, including senior executive
positions at Northern Telecom, Inc. and private, start-up ventures in the
specialized advanced telecommunications services field.
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MR. MASUR, age 42, has been a director of the Company since 1984. Mr. Masur
co-founded and since September 1988 has been a general partner of O'Donnell &
Masur, a venture capital partnership.
MR. BERNARD, age 50, is a founder of the Company. He served as Senior Vice
President of the Company from May 1983 until July 1991, at which time, he was
elected Executive Vice President of the Company. Mr. Bernard is responsible for
expansion programs for the Company.
MS. GAULDING, age 41, joined the Company in March 1984 and served as Vice
President -- Finance, Treasurer and Chief Financial Officer until January 1994
at which time she was elected Senior Vice President, Treasurer and Chief
Financial Officer of the Company. Ms. Gaulding served as Secretary of the
Company from February 1986 until December 1994. As Chief Financial Officer, Ms.
Gaulding has primary responsibility for the Company's financial, treasury,
accounting, human resources and information systems functions. Ms. Gaulding is a
certified public accountant.
MR. OWENS, age 42, joined the Company in 1984 as Vice President --
Engineering and served in that capacity until January 1996 at which time he was
elected Senior Vice President and Chief Technology Officer of the Company. Mr.
Owens is responsible for the Company's strategic technology and engineering
functions.
MR. SOLLS, age 40, joined the Company as Vice President, Secretary and
General Counsel in 1994. From February 1993 until joining the Company, Mr. Solls
engaged in the private practice of law. From November 1990 until February 1993,
Mr. Solls served as Senior Vice President, Secretary and General Counsel of
Maxum Health Corp., a provider of medical diagnostic services.
In connection with the Teletouch Agreement, the Company has agreed to
nominate a designee of Continental Illinois Venture Corporation ("CIVC") (a
significant stockholder of Teletouch) and Robert M. McMurrey, Teletouch's Chief
Executive Officer, as directors of the Company. See "The Teletouch Agreement."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1996,
regarding the amount and nature of the beneficial ownership of the Company's
Common Stock by (i) each person known to the Company to be the beneficial owner
of more than five percent of the outstanding shares of Common Stock, (ii) each
of the Company's directors, (iii) certain executive officers of the Company, and
(iv) all of the Company's directors and executive officers as a group. Except as
otherwise noted, the persons named in the table have sole voting and investment
power in the shares of Common Stock shown as beneficially owned by such persons.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AS OF MARCH 31, 1996
------------------------------------------
NUMBER OF SHARES PERCENT OF OUTSTANDING
NAME OF BENEFICIAL OWNER OF COMMON STOCK COMMON STOCK
- -------------------------------------------------------- ----------------- -----------------------
<S> <C> <C>
Principal Stockholders:
J.&W. Seligman & Co. Inc. (1)......................... 429,674 6.08%
Oppenheimer Funds, Inc. (2)........................... 358,000 5.06
Directors and Executive Officers:
Bo Bernard (3)........................................ 120,113 1.68
Thomas V. Bruns (4)................................... 8,333 *
Harvey B. Cash (5).................................... 28,333 *
Jan E. Gaulding (6)................................... 74,850 1.05
Edward E. Jungerman (4)............................... 8,333 *
Jackie R. Kimzey (7).................................. 150,189 2.11
Mark C. Masur (8)..................................... 76,833 1.09
Mark A. Solls (9)..................................... 5,182 *
David J. Vucina (10).................................. 47,469 *
All directors and executive officers as a group (10
persons) (11).......................................... 592,384 7.96
</TABLE>
- ------------------------
* Represents less than 1% of the shares outstanding.
(1) J.&W. Seligman & Co. Inc. has beneficial ownership with sole voting power
with respect to 302,580 shares and sole dispositive power with respect to
all 429,674 shares. The business address of J.&W. Seligman & Co. Inc. is 100
Park Avenue, New York, New York 10017.
(2) The business address of Oppenheimer Funds, Inc. is Two World Trade Center,
Suite 3400, New York, New York 10048.
(3) Includes 61,000 shares subject to currently exercisable options or options
exercisable with 60 days after March 31, 1996 and 714 shares beneficially
owned by Mr. Bernard's child.
(4) Represents shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996.
(5) Includes 8,333 shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996.
(6) Includes 59,325 shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996.
(7) Includes 46,000 shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996 and 61,000 shares
beneficially owned by Mr. Kimzey's children.
(8) Includes 8,333 shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996 and 60,000 shares
beneficially owned by Silver Creek Fund, of which Mr. Masur is the sole
general partner. Mr. Masur has sole voting and investment power in the
shares beneficially owned by such partnership.
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(9) Includes 5,000 shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996.
(10) Includes 46,500 shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996.
(11) Includes 313,157 shares subject to currently exercisable options or options
exercisable within 60 days after March 31, 1996.
The Company anticipates that, upon consummation of the Teletouch Agreement
(as defined below), CIVC, a significant stockholder of Teletouch, will own in
excess of five percent of the Company's Common Stock. See "The Teletouch
Agreement."
THE TELETOUCH AGREEMENT
On April 16, 1996, the Company, ProNet Subsidiary, Inc., a wholly owned
subsidiary of the Company ("ProNet Subsidiary"), and Teletouch entered into an
Agreement and Plan of Merger (the "Teletouch Agreement"). The Teletouch
Agreement provides that Teletouch will be merged with and into ProNet Subsidiary
and that the surviving corporation in the merger will be named Teletouch
Communications, Inc. and will be a wholly-owned subsidiary of the Company.
CONSIDERATION. Pursuant to the terms of the Teletouch Agreement, each share
of Teletouch common stock, par value $.001 per share ("Teletouch Common Stock"),
other than shares of Teletouch Common Stock held by certain specified parties
(the "Affiliated Stockholders") including Teletouch's principal stockholder,
CIVC, and Teletouch's executive officers, will be converted into the right to
receive a number of shares of Common Stock equal to the greater of (i) the
number of shares of Common Stock to be received by the Affiliated Stockholders
(as provided below) and (ii) the number of shares of Common Stock having a value
of $5.50. The Teletouch Agreement provides that each share of Teletouch Common
Stock held by the Affiliated Stockholders will be converted into the right to
receive that fraction of one share of Common Stock equal to the quotient (the
"Affiliated Stockholder Common Stock Exchange Ratio") obtained by dividing $5.00
by the average closing price of the Common Stock for the 20 trading days
beginning 22 trading days prior to the scheduled closing of the Teletouch
Acquisition (the "Average Closing Price"); PROVIDED, HOWEVER, that if the
Average Closing Price is greater than $26.94, then the Affiliated Stockholder
Common Stock Exchange Ratio shall be 0.1856; and PROVIDED FURTHER, that if the
Average Closing Price is less than $24.37, then the Affiliated Stockholder
Common Stock Exchange Ratio will be 0.20517.
The Teletouch Agreement further provides that each share of Teletouch Series
B Preferred Stock, par value $.001 per share ("Teletouch Series B Preferred"),
will be converted into the right to receive six times the number of shares of
Common Stock issuable upon the conversion of a share of Teletouch Common Stock
held by an Affiliated Stockholder. Assuming an Average Closing Price of $29 1/4
(the approximate average closing price of the Common Stock for the 20 trading
days prior to and including May 3, 1996), each Affiliated Stockholder would
receive 0.1856 of one share of Common Stock for each share of Teletouch Common
Stock owned or available upon the exercise of options and the conversion of
warrants for Teletouch Common Stock, each other holder of Teletouch Common Stock
would receive 0.1880 of one share of Common Stock for each share of Teletouch
Common Stock owned, and each holder of Teletouch Series B Preferred, which is
held entirely by Affiliated Stockholders, would receive 1.114 shares of Common
Stock for each share of Teletouch Series B Preferred owned. Assuming further
that all of the outstanding warrants to purchase shares of Teletouch capital
stock are exercised and that the proceeds from such exercise are applied to the
repurchase of Teletouch Common Stock at $5.50 per share, the net number of
shares of Common Stock issuable to Teletouch stockholders would be approximately
2,719,000, representing 19.2% of the total Common Stock outstanding pro forma
for the Concurrent Offering.
The Teletouch Agreement also provides that Teletouch has the right to
terminate the Teletouch Agreement if the Average Closing Price is less than
$20.75; PROVIDED, HOWEVER, that ProNet has the
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<PAGE>
option, but not the obligation, to prevent such termination by providing
additional shares of Common Stock so that the Affiliated Stockholder Common
Stock Exchange Ratio will be equal to the quotient obtained by dividing $4.26 by
the Average Closing Price. Pursuant to the terms of the Teletouch Agreement,
each share of Teletouch Series A Preferred Stock, par value $.001 per share
("Teletouch Series A Preferred"), shall be converted into the right to receive
cash in the amount of $1,000 per share plus all accrued but unpaid dividends on
such share as of July 31, 1996. The aggregate amount of cash payable to the
holders of Teletouch Series A Preferred will be $17,447,000, assuming that the
Teletouch Acquisition closes on or after July 31, 1996.
TERMINATION. The Teletouch Agreement may be terminated under certain
circumstances including, without limitation, (i) by Teletouch, if the Company's
stockholders do not approve the Teletouch Acquisition and the Teletouch
Agreement, (ii) by the Company, if the board of directors of Teletouch changes
its recommendation of the Teletouch Acquisition or if a tender offer or exchange
offer for outstanding shares of Teletouch Common Stock is commenced and the
board of directors of Teletouch does not recommend that Teletouch's stockholders
tender their shares in such tender offer, (iii) by Teletouch, if the board of
directors of the Company changes its recommendation of the Teletouch
Acquisition, (iv) by Teletouch, if the Company fails to file a registration
statement (including a proxy statement/prospectus) (the "S-4 Registration
Statement") with respect to the shares of Common Stock to be issued in
connection with the Teletouch Acquisition by June 15, 1996, (v) by Teletouch, if
the Company fails to mail the proxy statement/prospectus relating to the
Teletouch Agreement to Teletouch's and the Company's stockholders within five
days after the Securities and Exchange Commission (the "Commission") declares
the S-4 Registration Statement effective, and (vi) by Teletouch or the Company
before such proxy statement/prospectus is placed in the mail, if a material
adverse change in the business of the other party has occurred prior to such
date.
CLOSING CONDITIONS; VOTING AGREEMENT. The completion of the Teletouch
Acquisition is subject to certain conditions, including the approval of both the
Company's and Teletouch's stockholders, the expiration or termination of the
required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and receipt of applicable FCC approvals. The Company and
the Affiliated Stockholders entered into a Voting Agreement, dated as of April
15, 1996 (the "Teletouch Voting Agreement"), pursuant to which the Affiliated
Stockholders agreed to vote all of their Teletouch voting securities for the
approval and adoption of the Teletouch Agreement and the Teletouch Aquisition
and against any proposal or other matter that may interfere or be inconsistent
with the Teletouch Acquisition. In addition, each Affiliated Stockholder agreed
not to initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, directly or
indirectly, any inquiries or the making of any proposal or offer relating to, or
that may reasonably be expected to lead to, any competing or alternate
transaction to the Teletouch Acquisition.
STOCKHOLDERS AGREEMENT. Assuming an Average Closing Price of $29 1/4, upon
the closing of the Teletouch Acquisition, the Affiliated Stockholders will own
approximately 2,006,000 shares of Common Stock or approximately 14.2% (and CIVC
will own approximately 1,425,000 shares of Common Stock or approximately 10.1%)
of the outstanding Common Stock pro forma for the Concurrent Offering and
assuming exercise of all warrants to purchase Teletouch capital stock, which, on
a fully diluted basis, represent the right to purchase 10,628,000 shares of
Teletouch Common Stock, and the application of the proceeds from the exercise of
such warrants to repurchase Teletouch Common Stock at $5.50 per share.
Concurrently with the execution of the Teletouch Agreement, ProNet entered into
a stockholders agreement (the "Stockholders Agreement") with certain of the
Affiliated Stockholders, including CIVC, which will become effective upon the
closing of the Teletouch Acquisition. Under the terms of the Stockholders
Agreement, the applicable Affiliated Stockholders have agreed, among other
things, (i) not to transfer any of the shares of Common Stock to be issued to
them in the Teletouch Acquisition for a period of one year, and (ii) for a
period of four years after the Teletouch Acquisition, not to (a) acquire,
directly or indirectly, any additional ProNet voting securities, or (b) engage
in any proxy contests or similar activities with respect to the election of
members of the
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Company's board of directors. Under the terms of the Voting Agreement, the
Company has agreed to cause its board of directors to nominate a designee of
CIVC for election as a director of the Company until the earlier of such time as
CIVC beneficially owns less than (i) 50% of the Common Stock it receives in the
Teletouch Acquisition or (ii) five percent of the voting securities of the
Company then outstanding. CIVC has designated Marcus D. Wedner, an officer of
CIVC, as its initial nominee. The Company also agreed to cause its board of
directors to nominate Robert M. McMurrey, the Chairman and Chief Executive
Officer of Teletouch, for election as a director of the Company until the
earlier of such time as Mr. McMurrey beneficially owns less than (i) 25% of the
Common Stock he receives in the Teletouch Acquisition or (ii) the third
anniversary of the closing of the Teletouch Acquisition.
DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
In February 1995, the Company amended and restated its former credit
facility with First Chicago, increasing its existing $52 million revolving line
of credit to $125 million. The Company uses the Credit Facility for working
capital purposes and for acquisitions approved by the lenders under the Credit
Facility (the "Lenders"). Borrowings by the Company are guaranteed by the
Company's subsidiaries and are secured by all of the assets of the Company and
its subsidiaries. The availability of advances under the Credit Facility is
conditioned on the continued maintenance of certain specified financial and
operating covenants, including a prohibition on the payment of dividends or
other distributions on the Common Stock. A portion of the proceeds of the
Offerings will be used to repay a portion of the outstanding balances under the
Credit Facility. Immediately following the completion of the Offerings, the
Company expects to have up to $16.2 million in borrowing availability under the
Credit Facility. See "Use of Proceeds."
The Credit Facility consists of a revolving line of credit which, in
February 1997, will convert to a five and one half year term loan maturing in
July 2002. The term loan may be repaid at any time and will be payable in
quarterly installments, based on the principal amount outstanding on the
conversion date, in amounts ranging from 3.25% initially to 5.75% quarterly over
five and one half years. The borrowings bear interest, at the Company's
designation, at either (i) the greater of First Chicago's corporate base rate or
the Federal Funds Rate, plus a margin of up to 1.25%, or (ii) LIBOR, plus a
margin of up to 2.5%. In addition, 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.
The Credit Facility requires that the interest expense on 50% of the
aggregate principal amount of outstanding indebtedness of the Company be
effectively fixed at a prevailing market rate through either (i) the issuance of
indebtedness bearing interest at a fixed rate or (ii) interest exchange or
insurance agreements to effectively convert a portion of its floating rate debt
to a fixed rate basis. At March 31, 1996, none of the outstanding borrowings
under the Credit Facility were subject to hedging agreements.
The Company has received a commitment letter from First Chicago to amend the
Credit Facility to consist of a $50 million revolving credit facility maturing
in seven and one-half years and a $250 million revolving credit facility that
would convert to a term loan in two years and mature five and one-half years
after such conversion. The term loan could be repaid at any time and would be
paid in quarterly installments, based on the principal amount outstanding on the
conversion date, in amounts ranging from 1.75% initially to 5.00% over five and
one-half years. The borrowings would bear interest, at the Company's
designation, at either (i) the greater of First Chicago's corporate base rate or
the Federal Funds Rate, plus a margin of up to 1.25%, or (ii) LIBOR, plus a
margin of up to 2.5%. In addition, a commitment fee would be required on the
revolving line of credit ranging from .375% to .5% per annum computed on the
daily unused portion of the available loan commitment. There can be no assurance
that the Credit Facility will be so amended.
54
<PAGE>
EXISTING NOTES
In June 1995, the Company sold $100 million in aggregate principal amount of
the Existing Notes. The Company used the proceeds to (i) repay the outstanding
balance of approximately $49.4 million under the Credit Facility, (ii) fund the
cash portion of the purchase price of certain acquisitions and (iii) purchase
frequency rights, 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 Existing Notes are redeemable, in whole or in
part, at the option of the Company at any time on or after June 15, 2000 at the
following redemption prices (plus accrued interest to the redemption date):
<TABLE>
<CAPTION>
IF REDEEMED DURING THE 12-MONTH
PERIOD BEGINNING JUNE 15, PRICE
- ----------------------------------------------------------------------- -----------
<S> <C>
2000................................................................... 105.938%
2001................................................................... 103.958%
2002................................................................... 101.979%
2003 and 2004.......................................................... 100.000%
</TABLE>
Upon a Change of Control (as defined in the Existing Notes Indenture), the
Company will be required to offer to repurchase all outstanding Existing Notes
at a purchase price of 101% of the principal amount thereof plus accrued
interest, if any, promptly after the occurrence of a Change of Control.
The Existing Notes represent general unsecured senior subordinated
obligations of the Company, are subordinated to all existing and future senior
debt of the Company, and are equal in right of payment to the Notes. The
Existing Notes Indenture provides that the Company will not incur any debt that
is subordinate and junior in right of payment to any debt of the Company and
senior in right of payment to the Existing Notes.
The following constitute events of default under the Existing Notes
Indenture: (i) failure to pay any interest on any Existing Note when due,
continued for 30 days; (ii) failure to pay principal of (or premium, if any, on)
any Existing Note when due; (iii) default in the payment of principal and
interest on Existing Notes required to be purchased pursuant to an Offer to
Purchase (as defined in the Existing Notes Indenture) or Change of Control when
due and payable; (iv) failure to perform or comply with the provisions regarding
mergers, consolidations and certain sales and purchases of assets; (v) failure
to perform or the breach of any other covenant or warranty of the Company in the
Existing Notes Indenture, continued for 60 days after notice; (vi) a default
under any bonds, debentures, notes or other evidences of indebtedness of the
Company or its subsidiaries or under any mortgages, indentures or instruments
under which there may be issued or by which there may be secured or evidenced
any indebtedness by the Company or any of its subsidiaries, in any case with a
principal amount of at least $5 million outstanding, which shall have resulted
in such indebtedness becoming or being declared accelerated or which shall
constitute the failure to pay principal when due at the stated maturity of such
indebtedness; (vii) the failure by the Company or any of its subsidiaries to pay
final judgments aggregating in excess of $5 million, which judgments are not
paid, discharged or stayed for a period of 60 days; and (viii) certain events in
bankruptcy, insolvency or reorganization affecting the Company or any of its
subsidiaries.
55
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture, to be dated as of June 5,
1996 (the "Indenture"), between the Company and Bank One, Columbus, N.A., as
trustee (the "Trustee"). The Trustee will initially act as paying agent under
the Indenture. The following summaries of certain provisions of the Indenture do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Indenture. Capitalized terms
not otherwise defined below or elsewhere in this Prospectus have the meanings
given to them in the Indenture. See "Certain Definitions." The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), as in effect on the date of the Indenture.
The Notes will be general unsecured senior subordinated obligations of the
Company, will be subordinate and junior in right of payment to all existing and
future Senior Debt of the Company and will rank PARI PASSU with the Existing
Notes.
Subject to the provisions set forth under "-- Escrow of Proceeds; Special
Redemption," the Notes will be limited to an aggregate principal amount of $120
million and will mature in 2006.
Interest on the Notes will be payable in cash semi-annually, on each March
15 and September 15 (each an "Interest Payment Date"), commencing September 15,
1996, to the persons in whose names the Notes are registered at the close of
business on the preceding March 1 and September 1, as the case may be. Interest
will accrue from the most recent Interest Payment Date to which interest has
been paid or duly provided for or, if no interest has been paid or duly provided
for, commencing September 15, 1996. Interest will be computed on the basis of a
360-day year of twelve 30-day months. The Notes will bear interest until
maturity at the rate set forth on the cover page of this Prospectus.
The Notes are issuable only in registered form, without coupons, in
denominations of $1,000 or any integral multiple thereof. Unless otherwise
designated by the Company, the Company's office or agency will be the corporate
trust office of the Trustee. (Section4.2)
SUBORDINATION
The Notes will, to the extent set forth in the Indenture, be subordinate in
right of payment to the prior payment in full of all Senior Debt. Upon any
payment or distribution of assets of the Company to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceedings of the Company, the holders of Senior Debt will first be entitled to
receive payment in full of principal of (and premium, if any) and interest on
such Senior Debt before the holders of Notes are entitled to receive any payment
of principal of (and premium, if any) or interest on the Notes or on account of
the purchase or redemption or other acquisition of Notes by the Company or any
subsidiary of the Company. In the event that notwithstanding the foregoing, the
Trustee or the holder of any Note receives any payment or distribution of assets
of the Company of any kind or character (excluding shares of Capital Stock of
the Company or securities of the Company provided for in a plan of
reorganization or readjustment which are subordinate in right of payment to all
Senior Debt to substantially the same extent as the Notes are so subordinated)
before all the Senior Debt is paid in full, then such payment or distribution
will be required to be paid over or delivered forthwith to the trustee in
bankruptcy or other Person making payment or distribution of assets of the
Company for application to the payment of all Senior Debt remaining unpaid, to
the extent necessary to pay the Senior Debt in full. (Section11.2)
The Company may not make any payments on account of the Notes or on account
of the purchase or redemption or other acquisition of Notes if there shall have
occurred and be continuing a default in the payment of principal of (or premium,
if any) or interest on Senior Debt, the payment of commitment or facility fees,
letter of credit fees and agency fees under the Credit Facility, and payments
with respect to letter of credit reimbursement arrangements with one or more
lenders under the Credit Facility when due (a "Senior Payment Default"). In
addition, if any default (other than a Senior
56
<PAGE>
Payment Default) with respect to any Senior Debt permitting, or which with the
giving of notice or lapse of time (or both) would permit, the holders thereof
(or a trustee on behalf thereof) to accelerate the maturity thereof (a "Senior
Nonmonetary Default") has occurred and is continuing and the Company and the
Trustee have received written notice thereof from the agent bank for the Credit
Facility or from an authorized person on behalf of any Designated Senior Debt,
then the Company may not make any payments on account of the Notes or on account
of the purchase or redemption or other acquisition of Notes for a period (a
"blockage period") commencing on the date the Company and the Trustee receive
such written notice and ending on the earlier of (x) 179 days after such date
and (y) the date, if any, on which the Senior Debt to which such default relates
is discharged or such default is waived or otherwise cured. In any event, not
more than one blockage period may be commenced during any period of 360
consecutive days, and there shall be a period of at least 181 consecutive days
in each period of 360 consecutive days when no blockage period is in effect. No
Senior Nonmonetary Default that existed or was continuing on the date of the
commencement of any blockage period with respect to the Senior Debt initiating
such blockage period will be, or can be, made the basis for the commencement of
a subsequent blockage period, unless such default has been cured or waived for a
period of not less than 90 consecutive days. In the event that, notwithstanding
the foregoing, the Company makes any payment to the Trustee or the holder of any
Note prohibited by the subordination provisions, then such payment will be
required to be paid over and delivered forthwith to the holders of the Senior
Debt remaining unpaid, to the extent necessary to pay in full all the Senior
Debt. (Section11.2) For the purposes hereof, "Designated Senior Debt" means any
Senior Debt (other than under the Credit Facility) in an original principal
amount of not less than $5 million where the instrument governing such Senior
Debt expressly states that such Debt is "Designated Senior Debt" for purposes of
the Indenture and a Board Resolution setting forth such designation by the
Company has been filed with the Trustee. (Section1.1)
By reason of such subordination, in the event of insolvency, creditors of
the Company who are not holders of Senior Debt or of the Notes may recover less,
ratably, than holders of Senior Debt and may recover more, ratably, than the
holders of the Notes.
The subordination provisions described above will cease to be applicable to
the Notes upon any defeasance or covenant defeasance of the Notes as described
below under "Defeasance." (Article 8)
As of March 31, 1996, after giving pro forma effect to the Pending
Acquisitions and the acquisition of the Nationwide License, the Concurrent
Offering and the sale of the Notes and the application of the proceeds
therefrom, the Company would have had approximately $22 million of Senior Debt
outstanding. See "Use of Proceeds" and "Capitalization." The Company may from
time to time hereafter incur additional Debt constituting Senior Debt under the
Credit Facility or otherwise, subject to the provisions of "Limitation on
Consolidated Debt" described below.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to September
15, 2001. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to but not including
the applicable redemption date, if redeemed during the twelve-month period
beginning on September 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2001............................................................................. 105.438%
2002............................................................................. 103.625%
2003............................................................................. 101.813%
2004 and thereafter.............................................................. 100.000%
</TABLE>
The Notes will not have the benefit of any sinking fund payment obligations.
57
<PAGE>
ESCROW OF PROCEEDS; SPECIAL REDEMPTION
The proceeds of the Offering (net of the underwriting discount) will be
deposited with Bank One, Texas, N.A., as escrow agent (the "Escrow Agent"), and
simultaneously the Company will deposit with the Escrow Agent an additional
amount such that the total amount held by the Escrow Agent (the "Escrowed
Amounts") equals 101% of the principal amount of the Notes at maturity plus the
amount that would accrue as interest thereon from the issue date of the Notes
(the "Issue Date") to the first Interest Payment Date on the Notes (the "First
Interest Payment Date"). If the Teletouch Acquisition has not been consummated
by September 10, 1996, the Company will deposit with the Escrow Agent the amount
that would accrue as interest on $120,000,000 principal amount of the Notes from
the First Interest Payment Date through December 16, 1996. The Escrow Agent will
hold such amounts in escrow, pursuant to an agreement between the Company, the
Trustee and the Escrow Agent (the "Escrow Agreement"). At the time of the
completion of the Teletouch Acquisition, the Escrowed Amounts will be released
to the Company and the Escrow Agreement will terminate, provided that (a) the
Company is not then, and after giving effect to such release would not then be,
in default under financial covenants set forth in the Indentures and (b) a
payment default under the Credit Facility or the Indentures shall not have
occurred and be continuing.
If the Company shall determine, in its sole judgment, that the Teletouch
Acquisition will not be consummated by December 6, 1996, the Company may, at its
option, redeem all, but not less than all, of the Notes (the "Special
Redemption") at a redemption price equal to 101% of the principal amount of the
Notes plus the amount that would accrue as interest in respect of $120,000,000
principal amount of the Notes from the Issue Date to the date of the Special
Redemption (the "Special Redemption Price") and direct the Escrow Agent to pay
the Special Redemption Price to the holders of the Notes. In addition, a Special
Redemption shall mandatorily occur at the Special Redemption Price (i) on
December 16, 1996 if the Teletouch Acquisition has not been consummated by
December 6, 1996, (ii) upon the occurrence of an Event of Default under clause
(h) of the definition of "Events of Default" below or (iii) on September 15,
1996, if, on or prior to September 10, 1996, the Company has not deposited with
the Escrow Agent an amount equal to the interest calculated on $120,000,000
principal amount of the Notes from the First Interest Payment Date through
December 16, 1996.
Pending the release of the Escrowed Amounts to the Company or a Special
Redemption, the Escrowed Amounts will be held by the Escrow Agent and shall be
invested in certain obligations which are marketable direct obligations of the
United States of America or obligations fully guaranteed by the United States of
America, with maturities that correspond with the estimated timing of payments
under the Escrow Agreement, but in any event not to exceed 90 days. All earnings
on such investments shall inure to the benefit of the Company and shall be
released to the Company at the time of the consummation of the Teletouch
Acquisition or upon the occurrence of a Special Redemption.
At the time of their original issuance, the Company's obligations on the
Notes will consist of (1) the obligation to pay interest calculated on
$120,000,000 principal amount of Notes through the earlier of the First Interest
Payment Date or the date of any Special Redemption and, if the Teletouch
Acquisition has not been consummated on September 10, 1996, the obligation to
pay interest calculated on $120,000,000 aggregate principal amount of Notes
through the earlier of December 16, 1996 or the date of a Special Redemption and
(2) the obligation to instruct the Escrow Agent to pay the Escrowed Amounts to
the holders of the Notes in the event of a Special Redemption. At the time of
the release of the Escrowed Amounts to the Company upon the completion of the
Teletouch Acquisition, the Notes automatically will convert into an obligation
of the Company to pay principal, premium (if any) and interest with respect to
$120,000,000 principal amount. Until such time, the Company will have no
obligation to make payment on the Notes except as described above, and the
holders of the Notes may look only to the escrow account for payment of
additional amounts.
Notice of a Special Redemption will be mailed not less than three business
days prior to the date of the Special Redemption.
58
<PAGE>
Prior to the release of the Escrowed Amounts to the Company or a Special
Redemption, if the Company is required to consummate an offer to purchase Notes
following an Asset Disposition or a Change of Control Offer, the Escrow Agent
(rather than the Company) shall deposit with the Trustee or paying agent
Escrowed Amounts sufficient to pay the purchase price for such Notes. See
"-- Certain Covenants -- Limitation on Certain Asset Dispositions" and "--
Change of Control."
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed or to be purchased pursuant
to any purchase offer required under the Indenture, at any time, selection of
Notes for redemption or purchase will be made by the Trustee in such manner as
in its sole discretion it shall deem fair and appropriate, PROVIDED, that no
Notes with a principal amount of $1,000 or less shall be redeemed or purchased
in part. Notice of redemption shall be mailed by first class mail at least 30
but not more than 60 days before the redemption date to each holder of Notes to
be redeemed at the last address for such holder then shown on the registry
books. If any Note is to be redeemed in part only, the notice of redemption that
relates to such Note shall state the portion of the principal amount to be
redeemed. A new Note in principal amount equal to the unredeemed or unpurchased
portion will be issued in the name of the holder thereof upon cancellation of
the original Note. On and after the redemption or purchase date, interest will
cease to accrue on the Notes or portions of them called for redemption or
purchase.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON CONSOLIDATED DEBT
The Company may not, and may not permit its Subsidiaries to, directly or
indirectly, create, incur, assume, become liable for or guarantee the payment of
(collectively, "incur") any Debt (including Acquired Debt), provided, however,
that the Company may incur Debt (including Acquired Debt) and may permit a
Subsidiary to incur Acquired Debt if immediately thereafter the ratio of the
aggregate principal amount of Debt of the Company and its Subsidiaries
outstanding as of the most recent available quarterly or annual balance sheet to
the product of four times Pro Forma Consolidated Cash Flow for the preceding
full fiscal quarter, determined on a pro forma basis as if any such Debt had
been incurred and the proceeds thereof had been applied at the beginning of such
fiscal quarter, would be less than 6.0 to 1.
Notwithstanding the foregoing, the Company may, and may permit its
Subsidiaries to, incur the following without regard to the foregoing limitation
and without duplication: (i) Debt of the Company under the Credit Facility in an
aggregate principal amount not to exceed $125 million at any one time
outstanding; (ii) Guarantees by Subsidiaries of Debt of the Company under the
Credit Facility; (iii) Debt of the Company evidenced by the Notes; (iv) Debt
owed by the Company to any wholly owned Subsidiary of the Company or owed by any
wholly owned Subsidiary of the Company to the Company or any other wholly owned
Subsidiary of the Company (but only so long as such Debt is held by the Company
or such wholly owned Subsidiary); (v) Debt outstanding on the date the Notes are
originally issued under the Indenture; (vi) Debt arising from the honoring by a
bank or other financial institution of a check, draft or similar instrument
drawn against insufficient funds in the ordinary course of business, provided
that such Debt is extinguished within two Business Days of its incurrence; (vii)
Refinancing Debt; and (viii) renewals of Guarantees permitted by clause (ii)
above. (Section 4.9)
For purposes of determining any particular amount of Debt under this
covenant, Guarantees of (or obligations with respect to letters of credit
supporting) Debt otherwise included in the determination of such amount shall
not also be included. For the purpose of determining compliance with this
covenant, (A) in the event that an item of Debt meets the criteria of more than
one of the types of Debt described in the above clauses, the Company, in its
sole discretion, shall classify such item of Debt and only be required to
include the amount and type of such Debt in one of such clauses; and (B) the
amount of Debt issued at a price which is less than the principal amount thereof
shall be equal to the amount of the liability in respect thereof determined in
accordance with generally accepted accounting principles. (Section 4.9)
59
<PAGE>
LIMITATION ON CERTAIN DEBT
So long as any of the Notes are outstanding the Company will not incur or
suffer to exist any Debt (other than (i) the Notes and (ii) any pari passu Debt)
that is by its terms subordinate in right of payment to any other Debt of the
Company unless such Debt is also subordinate by its terms in right of payment to
the Notes. (Section 4.10)
LIMITATION ON RESTRICTED PAYMENTS
The Company may not, and may not permit any of its Subsidiaries to, (i)
directly or indirectly, declare or pay any dividend, or make any distribution,
in respect of its Capital Stock or to the holders thereof (including pursuant to
a merger or consolidation of the Company, but excluding any dividends or
distributions payable solely in shares of its Capital Stock (other than
Redeemable Stock)) or in options, warrants or other rights to acquire its
Capital Stock (other than Redeemable Stock)), other than dividends or
distributions payable to the Company or any wholly owned Subsidiary of the
Company, or by a Subsidiary of the Company to a holder who is not the Company or
a wholly owned Subsidiary of the Company, provided that such dividend or
distribution is paid to all of the holders of the Capital Stock of the payor of
such dividend, pro rata in accordance with their respective interests, (ii)
directly or indirectly, purchase, redeem or otherwise acquire or retire for
value (a) any Capital Stock of the Company or any Related Person or (b) any
options, warrants, or rights to purchase or acquire shares of Capital Stock of
the Company or any Related Person, (iii) make any loan, advance, capital
contribution to or investment in, or payment on a Guarantee of any obligation
of, any Affiliate or any Related Person (other than the Company or a Subsidiary
of the Company), inclusive of any loan, advance, capital contribution to or
investment in, or payment on a Guarantee of any obligation of, any Affiliate or
Related Person by the Company pursuant to a transaction whereby any such
Affiliate or Related Person becomes an Affiliate or Related Person, but
exclusive of any loan, advance, capital contribution to or investment in, or
payment on a Guarantee of any obligation of, any Person by the Company or a
Subsidiary of the Company pursuant to a transaction whereby any such Person
becomes a Subsidiary of the Company, in each case unless otherwise prohibited by
the terms of the Indenture, or (iv) redeem, defease, repurchase, retire or
otherwise acquire or retire for value prior to any scheduled maturity, repayment
or sinking fund payment (other than with the proceeds of Refinancing Debt) Debt
of the Company which is subordinate in right of payment to the Notes (each of
clauses (i) through (iv) being a "Restricted Payment"), if at the time of such
Restricted Payment, or after giving effect thereto (1) an Event of Default, or
an event that with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, shall have occurred and be continuing, (2) the
Company could not incur $1.00 of additional Debt under the first paragraph of
the "Limitation on Consolidated Debt" covenant, above, or (3) the aggregate of
all Restricted Payments from the date of the Indenture exceeds the sum of (a)
the remainder of (x) 100% of cumulative Consolidated Cash Flow after June 30,
1996 through the last day of the last full fiscal quarter immediately preceding
such Restricted Payment for which quarterly or annual financial statements of
the Company are available minus (y) the product of 2.0 times cumulative
Consolidated Fixed Charges after June 30, 1996 through the last day of the last
full fiscal quarter immediately preceding such Restricted Payment for which
quarterly or annual financial statements of the Company are available; and (b)
100% of the aggregate net proceeds from the issuance, after June 30, 1996, of
Capital Stock (other than Redeemable Stock) of the Company and options, warrants
or other rights on Capital Stock (other than Redeemable Stock) of the Company
and the principal amount of Debt of the Company that has been converted, after
June 30, 1996, into Capital Stock (other than Redeemable Stock) of the Company.
The foregoing provision will not be violated by reason of (i) the payment of
any dividend within 60 days after declaration thereof if at the declaration date
such payment would have complied with the foregoing provision; (ii) the
purchase, redemption, acquisition or retirement of any shares of Capital Stock
of the Company in exchange for, or out of the net proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other shares of
Capital Stock (other than Redeemable Stock) of the Company; (iii) the purchase,
redemption, defeasance or other acquisition or retirement of Debt of the Company
which is subordinate in right of payment to the Notes, in exchange for, by
60
<PAGE>
conversion into, or out of the net proceeds of, a substantially concurrent (a)
issue or sale (other than to a Subsidiary) of Capital Stock (other than
Redeemable Stock) of the Company, or (b) incurrence of Refinancing Debt with
respect to such subordinated Debt; or (iv) investments in telecommunications
businesses in an aggregate amount not exceeding $20.0 million; provided that no
Default or Event of Default shall have occurred and be continuing at the time,
or shall occur as a result, of any of the actions contemplated in clauses (ii)
and (iii) above. Any payment made pursuant to clauses (i) through (iii) (other
than subclause (iii)(b)) of this paragraph shall be a Restricted Payment for
purposes of calculating aggregate Restricted Payments under the preceding
paragraph. (Section 4.11)
LIMITATION ON DISTRIBUTIONS BY AND TRANSFERS TO SUBSIDIARIES, ETC.
The Company may not, and may not permit any Subsidiary of the Company to,
create, assume or otherwise suffer to exist any encumbrance or restriction on
the ability of any Subsidiary of the Company to (i) pay, directly or indirectly,
dividends or make any other distributions in respect of its Capital Stock or pay
any Debt or other obligation owed to the Company or any other Subsidiary of the
Company; (ii) make loans or advances to the Company or any Subsidiary of the
Company; or (iii) transfer any of its property or assets to the Company or a
Subsidiary of the Company. Notwithstanding the foregoing, the Company may, and
may permit any of its Subsidiaries to, create, assume or otherwise suffer to
exist any such encumbrances or restrictions on the ability of any Subsidiary of
the Company if and to the extent (i) subject to the provision described under
"Limitation on Mergers, Consolidations and Certain Sales of Assets," such
encumbrance or restriction existed prior to the time any Person became a
Subsidiary of the Company and such restriction or encumbrance was not incurred
in anticipation of such acquisition of such Person by the Company; (ii) subject
to the provisions described under "Limitation on Mergers, Consolidations and
Certain Sales of Assets," "Limitation on Certain Asset Dispositions" and
"Limitation on Issuances and Sales of Capital Stock of Subsidiaries," such
encumbrance or restriction exists by reason of a customary merger or acquisition
agreement for the purchase or acquisition of the stock or assets of the Company
or any of its Subsidiaries by another Person; (iii) such encumbrance or
restriction is contained in an operating lease for real property and is
effective only upon the occurrence and during the continuance of a default in
the payment of rent; (iv) such encumbrance or restriction is the result of
applicable corporate law or regulation relating to the payment of dividends or
distributions; (v) such encumbrance or restriction is the result of applicable
statute, regulation or administrative rule which restricts the transfer of
licenses or permits; and (vi) such encumbrance or restriction is contained in
the Credit Facility on the date of the Indenture, including any amendment,
modification, supplementation, restatement or replacement of such Credit
Facility, provided that the terms and conditions of such amendment,
modification, supplementation, restatement or replacement in respect of such
encumbrance or restriction are not less favorable to the holders of the Notes
than the terms and conditions in respect of such encumbrance or restriction of
the Credit Facility on the date of the Indenture. (Section 4.12)
LIMITATION ON LIENS
The Company will not, and will not permit any Subsidiary of the Company to,
create, incur, assume or suffer to exist any Lien (other than Permitted Liens)
upon or in respect of any of its property or assets to secure any Debt which is
pari passu with or subordinate in right of payment to the Notes, unless the
Notes are secured equally and ratably simultaneously with or prior to the
creation, incurrence or assumption of such Lien; PROVIDED, HOWEVER, that if such
Debt is expressly subordinate to the Notes, the Lien securing such subordinated
Debt shall be subordinate and junior to the Lien securing the Notes with the
same relative priority as such subordinated Debt shall have with respect to the
Notes. (Section 4.13)
LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Company may not, and may not permit any Subsidiary of the Company to,
directly or indirectly, enter into any transaction or series of transactions
after the date of the Indenture with any Affiliate or Related Person (other than
the Company or a wholly owned Subsidiary of the Company), unless (i) such
transaction or series of transactions is on terms no less favorable to the
Company or
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<PAGE>
such Subsidiary than those that could be obtained in a comparable arm's-length
transaction with an entity that is not an Affiliate or a Related Person; and
(ii) if such transaction or series of transactions involves aggregate
consideration in excess of $1 million, then such transaction or series of
transactions is approved by a majority of the Board of Directors of the Company,
including the approval of a majority of the independent, disinterested
directors, and is evidenced by a resolution of the Board of Directors of the
Company. Any such transaction or series of transactions shall be conclusively
deemed to be on terms no less favorable to the Company or such Subsidiary than
those that could be obtained in an arm's-length transaction if such transaction
or transactions are approved by a majority of the Board of Directors of the
Company, including a majority of the independent disinterested directors, and
are evidenced by a resolution of the Board of Directors of the Company. (Section
4.14)
This covenant will not apply to (a) transactions between the Company or any
of its Subsidiaries and any employee of the Company or any of its Subsidiaries
that are entered into in the ordinary course of business, (b) the payment of
reasonable and customary regular fees and expenses to directors of the Company,
(c) the making of indemnification, contribution or similar payments to any
director or officer of the Company or any Subsidiary of the Company under the
Company's or such Subsidiary's charter or bylaws (as each may be amended after
the date of this Prospectus) or any indemnification or similar agreement between
the Company or any such Subsidiary and any of its directors or officers
(collectively, the "Indemnification Agreements") or (d) the entering into any
Indemnification Agreements with any current or future directors or officers of
the Company or any Subsidiary of the Company. (Section 4.14)
LIMITATION ON CERTAIN ASSET DISPOSITIONS
The Company may not, and may not permit any Subsidiary of the Company to,
make any Asset Disposition in one or more transactions unless: (i) the Company
(or such Subsidiary, as the case may be) receives consideration at the time of
such Asset Disposition at least equal to the fair market value for the assets
sold or disposed of as determined by the Board of Directors of the Company; (ii)
at least 80% of the consideration for such Asset Disposition consists of cash or
readily marketable cash equivalents or the assumption of Senior Debt or pari
passu Debt of the Company and release from all liability on such Senior Debt or
pari passu Debt; and (iii) all Net Available Proceeds of such Asset Disposition,
less any amounts invested within 180 days of such Asset Disposition in assets
related to the business of the Company, are applied within 180 days of such
Asset Disposition, (a) first, to the permanent reduction of any Debt then
outstanding under the Credit Facility to the extent the terms of the Credit
Facility require such application or prohibit prepayment of the Notes, (b)
second, to the repayment of any other Senior Debt to the extent the terms of
such Debt require such application or prohibit prepayment of the Notes, and (c)
third, to the extent remaining Net Available Proceeds, together with any
remaining Net Available Proceeds from any prior Asset Disposition, exceed $3
million, to make an offer to purchase ("Offer to Purchase"), on a pro rata basis
according to their respective principal amounts then outstanding (or accreted
value, as the case may be), the outstanding Notes and pari passu Debt, at 100%
of their principal amount (or accreted value, as the case may be) plus accrued
interest to the date of the purchase.
Notwithstanding the foregoing, the Company shall not be required to
repurchase or redeem Notes or to repay other Debt pursuant to clause (iii) above
until the Net Available Proceeds from any Asset Disposition together with the
Net Available Proceeds from any prior Asset Disposition not otherwise applied in
accordance with clauses (a), (b) or (c) of the preceding paragraph, less any
amounts invested within 180 days of such disposition or dispositions in assets
related to the business of the Company, exceed $5 million. To the extent that
the aggregate purchase price of the Notes tendered pursuant to such an offer to
purchase is less than the aggregate purchase price offered in such offer, the
Company may use such shortfall for general corporate purposes. The Company shall
not be entitled to any credit against such obligation to purchase Notes for the
principal amount of any Notes acquired by the Company other than pursuant to
such offer to purchase. These provisions will not apply to a transaction which
is permitted under the provisions described under "Limitation on Mergers,
Consolidations and Certain Sales of Assets." (Section 4.15)
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Subject to the provisions described under "Limitation on Mergers,
Consolidations and Certain Sales of Assets" below, the provisions of this
covenant shall not apply to any Asset Disposition which is part of an Asset
Exchange Transaction if (i) the Board of Directors of the Company shall
determine that the Asset Exchange Transaction is fair and reasonable to, and in
the best interests of, the Company, which determination shall be evidenced by a
resolution of the Board of Directors of the Company filed with the Trustee and
(ii) in the event (a) the properties and assets of the Company or a Subsidiary
of the Company to be transferred in such Asset Exchange Transaction or the
properties and assets of the Subsidiary of the Company whose Capital Stock is
being transferred in such Asset Exchange Transaction represent $5 million or
more as reflected in the most recent quarterly or annual consolidated balance
sheet of the Company and its Subsidiaries prior to such Asset Exchange
Transaction and (b) such transfer is made to an Affiliate or Related Person, the
Company shall have obtained the written opinion of an independent financial
advisor stating that the Asset Exchange Transaction is fair to the Company from
a financial point of view or the determination under (i) above shall have been
made by a majority of the disinterested directors of the Company. (Section 4.15)
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF SUBSIDIARIES
The Company (i) shall not, and shall not permit any Subsidiary of the
Company to, transfer, convey, sell, lease or otherwise dispose of any Capital
Stock of such or any other Subsidiary to any Person (other than the Company or a
wholly owned Subsidiary) unless such transfer, conveyance, sale, lease or other
disposition is of all the Capital Stock of such Subsidiary owned by the Company
or such other Subsidiary and the Net Available Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
"Limitation on Certain Asset Dispositions" and (ii) shall not permit any
Subsidiary to issue shares of its Capital Stock (other than directors'
qualifying shares), or securities convertible into, or warrants, rights or
options to subscribe for or purchase shares of, its Capital Stock to any Person
other than the Company or a wholly owned Subsidiary of the Company. (Section
4.16)
LIMITATION ON MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company (i) may not consolidate with or merge into any other Person or
permit any other Person to consolidate with or merge into the Company or any
Subsidiary of the Company (in a transaction in which such Subsidiary remains a
Subsidiary of the Company); (ii) may not, directly or indirectly, transfer,
convey, sell, lease or otherwise dispose of all or substantially all of its
assets; (iii) may not, and may not permit any Subsidiary of the Company to,
directly or indirectly, acquire Capital Stock of any other Person such that such
Person becomes a Subsidiary of the Company; and (iv) may not, and may not permit
any Subsidiary of the Company to, directly or indirectly, purchase, lease or
otherwise acquire (x) all or substantially all of the assets or (y) any existing
business (whether existing as a separate entity, subsidiary, division, unit or
otherwise) of any Person unless: (1) immediately before and after giving effect
to such transaction and treating any Debt incurred by the Company or a
Subsidiary of the Company as a result of such transaction as having been
incurred by the Company or such Subsidiary at the time of the transaction, no
Event of Default or event that with the passing of time or the giving of notice,
or both, shall constitute an Event of Default, shall have occurred and be
continuing; (2) in a transaction in which the Company does not survive or in
which the Company conveys, sells, leases or otherwise disposes of all or
substantially all of its assets, the successor entity to the Company is
organized under the laws of the United States or any State thereof or the
District of Columbia and expressly assumes, by a supplemental Indenture executed
and delivered to the Trustee in form satisfactory to the Trustee, all of the
Company's obligations under the Indenture; and (3) immediately after giving
effect to such transaction, the Company or the successor entity to the Company
could incur at least $1.00 of additional Debt pursuant to the first paragraph of
the "Limitation on Consolidated Debt" covenant above; PROVIDED, HOWEVER, that
the provisions of this clause (3) shall not apply to transactions described in
clauses (i) through (iv) above which are (x) between the Company and one or more
of its wholly owned Subsidiaries or (y) between two or more wholly owned
Subsidiaries of the Company.
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Notwithstanding clause (3) above, the Company or any Subsidiary of the
Company may acquire the Capital Stock of a Person in a transaction in which such
Person becomes a Subsidiary of the Company or directly or indirectly purchase,
lease or otherwise acquire (x) all or substantially all of the assets or (y) any
existing business (whether existing as a separate entity, subsidiary, division,
unit or otherwise) of any Person so long as (a) the sum of the consideration
paid for such Capital Stock or assets and the Debt assumed in connection
therewith plus the sum of the aggregate amount of consideration paid for all
other such acquisitions consummated during the twelve-month period immediately
preceding the date of such acquisition and the Debt incurred in connection
therewith does not exceed 5% of Consolidated Tangible Assets of the Company
immediately prior to such acquisition. (Article 5)
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes shall
have the right to require that the Company repurchase such holder's Notes, in
whole or in part (equal to $1,000 or integral multiples of $1,000), at a
repurchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of repurchase, pursuant to the
offer described in the succeeding paragraph (the "Change of Control Offer").
Within 30 days following any Change of Control, the Company shall mail a
notice to each holder with a copy to the Trustee stating: (i) that a Change of
Control has occurred and that such holder has the right to require the Company
to repurchase such holder's Notes, in whole or in part (equal to $1,000 or
integral multiples of $1,000), at a repurchase price in cash equal to 101% of
the principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase; (ii) the circumstances and relevant facts regarding such
Change of Control (including relevant information with respect to the
transaction giving rise to such Change of Control and, if applicable,
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (iii) the
repurchase date (which shall be not earlier than 30 days or later than 60 days
from the date such notice is mailed) (the "Repurchase Date"); (iv) that any Note
not tendered will continue to accrue interest; (v) that any Note accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest
after the Repurchase Date; (vi) subject to certain conditions, that holders
electing to have a Note purchased pursuant to a Change of Control Offer will be
required to surrender the Note, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Note completed, to the paying agent (which
may be the Company) at the address specified in the notice prior to the close of
business on the Repurchase Date; (vii) that holders will be entitled to withdraw
their election if the paying agent receives, not later than the close of
business on the third business day (or such shorter periods as may be required
by applicable law) preceding the Repurchase Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of Notes the holder delivered for purchase, and a statement that such
holder is withdrawing his election to have such Notes purchased; and (viii) that
holders which elect to have their Notes purchased only in part will be issued
new Notes in a principal amount equal to the unpurchased portion of the Notes
surrendered.
On the Repurchase Date, the Company shall (i) accept for payment Notes or
portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit
with the Trustee or a paying agent (or segregate, if the Company is acting as
its own paying agent) money sufficient to pay the purchase price of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee Notes so accepted, together with an officers' certificate stating the
Notes or portions thereof which are thereby tendered to the Company. The Trustee
or a paying agent shall promptly mail to the holders of Notes such accepted
payment in an amount equal to the purchase price and promptly authenticate and
mail to such holders a new Note in a principal amount equal to any unpurchased
portion of the Note surrendered. The Company will publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Repurchase
Date. (Section 4.17)
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In the event a Change of Control occurs and any repurchase pursuant to the
foregoing constitutes a "tender offer" for purposes of Rule 14e-1 under the
Exchange Act, the Company will comply with the requirements of Rule 14e-1 as
then in effect, to the extent applicable, and any other applicable securities
laws or regulations with respect to such repurchase. The Change of Control
provisions described above may deter certain mergers, tender offers and other
takeover attempts involving the Company.
The Company's ability to repurchase Notes upon a Change of Control may be
limited by the terms of its then existing contractual obligations. The Credit
Facility provides that the repurchase of the Notes upon a Change of Control will
constitute a default under the Credit Facility, and any future credit agreements
or other agreements relating to Senior Debt may contain similar provisions. If
the Company makes a Change of Control Offer following a Change of Control, the
Company may not have adequate financial resources to repurchase all Notes
tendered. The Company's failure to repurchase tendered Notes or to make a Change
of Control Offer following a Change of Control would constitute an Event of
Default under the Indenture, but the subordination provisions in the Indenture
would likely restrict payments to the Holders of Notes.
EVENTS OF DEFAULT
The following are Events of Default with respect to the Notes: (a) failure
to pay any interest on any Note when due, continued for 30 days; (b) failure to
pay principal of (or premium, if any, on) any Note when due; (c) default in the
payment of principal and interest on Notes required to be purchased pursuant to
an Offer to Purchase as described under "Limitation on Certain Asset
Dispositions" and "Change of Control" when due and payable; (d) failure to
perform or comply with the provisions described under "Limitation on Mergers,
Consolidations and Certain Sales of Assets"; (e) failure to perform or breach of
any other covenant or warranty of the Company in the Indenture, continued for 60
days after written notice from the Trustee or holders of at least 25% in
principal amount of the outstanding Notes as provided in the Indenture; (f) a
default shall have occurred under any bonds, debentures, notes or other
evidences of indebtedness of the Company or any Subsidiary of the Company or
under any mortgages, indentures or instruments under which there may be issued
or by which there may be secured or evidenced any indebtedness by the Company or
any Subsidiary of the Company, in any case with a principal amount of at least
$5 million outstanding, and such indebtedness already is due and payable in full
or such default has resulted in the acceleration of the maturity of such
indebtedness, in each case after a period of five days during which period such
default shall not have been cured or such acceleration shall not have been
rescinded; (g) the rendering of a final judgment or judgments (not subject to
appeal) against the Company or any of its Subsidiaries in an aggregate amount in
excess of $5 million which remain unstayed, in effect and unpaid for a period of
60 consecutive days thereafter; and (h) certain events in bankruptcy, insolvency
or reorganization affecting the Company or any Subsidiary of the Company.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any of the holders, unless such holders shall
have offered to the Trustee reasonable indemnity. Subject to such provisions for
the indemnification of the Trustee, the holders of a majority in aggregate
principal amount of the outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee. (Section
6.1)
If an Event of Default (other than Events of Default with respect to certain
events of bankruptcy, insolvency or reorganization affecting the Company or any
Subsidiary of the Company) shall occur and be continuing, either the Trustee or
the holders of at least 25% in aggregate principal amount of the outstanding
Notes may accelerate the maturity of all Notes; PROVIDED, HOWEVER, that after
such acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of outstanding Notes may,
under certain circumstances, rescind and annul such acceleration if all Events
of Default, other than the non-payment of accelerated principal, have been cured
or waived as provided in the Indenture. If a specified Event of Default with
respect to
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a certain event of bankruptcy, insolvency or reorganization affecting the
Company or any Subsidiary of the Company occurs, the principal of the Notes then
outstanding shall become immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of the Notes. (Section 6.2)
For information as to waiver of defaults, see "Modification and Waiver."
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (Section 6.6) However, such limitations do not apply to a suit instituted
by a holder of a Note for enforcement of payment of the principal of (and
premium, if any) or interest on such Note on or after the respective due dates
expressed in such Note. (Section 6.7)
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance. (Section 4.4)
DEFEASANCE
The Indenture will provide that (A) if applicable, the Company will be
discharged from any and all obligations in respect of the outstanding Notes
(including the provisions described under "Subordination") or (B) if applicable,
the Company may omit to comply with certain restrictive covenants, and that such
omission shall not be deemed to be an Event of Default under the Indenture and
the Notes, in either case (A) or (B) upon irrevocable deposit with the Trustee,
in trust, of money and/or U.S. government obligations which will provide money
in an amount sufficient in the opinion of a nationally recognized firm of
independent certified public accountants to pay the principal of and premium, if
any, and each installment of interest, if any, on the outstanding Notes. With
respect to clause (B), the obligations under the Indenture other than with
respect to such covenants and the Events of Default other than the Event of
Default relating to such covenants above shall remain in full force and effect.
Such trust may only be established if, among other things (i) with respect to
clause (A), the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or there has been a change in law, which in an
opinion of counsel to the Company provides that holders of the Notes will not
recognize gain or loss for Federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to Federal income tax on
the same amount, in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred; or, with
respect to clause (B), the Company has delivered to the Trustee an opinion of
counsel to the Company to the effect that the holders of the Notes will not
recognize gain or loss for Federal income tax purposes as a result of such
deposit and defeasance and will be subject to Federal income tax on the same
amount, in the same manner and at the same times as would have been the case if
such deposit and defeasance had not occurred; (ii) no Event of Default or event
that with the passing of time or the giving of notice, or both, shall constitute
an Event of Default shall have occurred or be continuing; (iii) no default on
any Senior Debt shall have occurred and be continuing; and (iv) certain other
customary conditions precedent are satisfied. (Article 8)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of a majority in aggregate principal
amount of the outstanding Notes; PROVIDED, HOWEVER, that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby, (a) change the stated maturity of the principal of, or any
installment of interest on, any Note, (b) reduce the principal amount of (or the
premium) or interest on, any Note, (c) change the place or currency of payment
of principal of (or the premium) or interest on any Note, (d) impair the right
to institute suit for the enforcement of any payment on or with
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respect to any Note, (e) reduce the above-stated percentage of outstanding Notes
necessary to modify or amend the Indenture, (f) reduce the percentage of
aggregate principal amount of outstanding Notes necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, (h) modify any of the provisions of
the Indenture relating to the subordination of the Notes in a manner adverse to
such holders, or (i) following the mailing of an offer with respect to an Offer
to Purchase the Notes as described under "Limitation on Certain Asset
Dispositions" and "Change of Control," modify the Indenture with respect to such
Offer to Purchase in a manner adverse to such holders. (SectionSection 9.1, 9.2)
The holders of a majority in aggregate principal amount of the outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. (Section 9.2) The holders of a majority in aggregate principal
amount of the outstanding Notes may waive any past default under the Indenture,
except a default in the payment of principal, premium, if any, or interest.
(Section 6.4)
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Trustee and to the holders of Notes (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereon by the Company's certified independent accountants and
(ii) all current reports that would be required to be filed with the Commission
on Form 8-K if the Company were required to file such reports. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availablity (unless the Commission will not accept such a filing) and
make such information available to securities analysts and prospective investors
upon request. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, it will furnish to the holders, and to securities analysts
and prospective investors upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.(Section 4.7)
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the continuance of an Event of Default, the Trustee
will exercise such rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
(Section 7.1)
The Indenture contains limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company or any Affiliate; PROVIDED HOWEVER, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (Section 1.1)
"Acquired Debt" means (i) Debt of a Person existing at the time such Person
was acquired (by merger, consolidation or otherwise) by the Company or a
Subsidiary of the Company, PROVIDED that such Debt was not incurred in
connection with or in contemplation of the acquisition of such Person
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and (ii) every obligation of such Person issued as the deferred purchase price,
to the extent payable within one year, of property (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business).
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Subsidiaries (including
a consolidation or merger or other sale of any such Subsidiary with, into or to
another Person in a transaction in which such Subsidiary ceases to be a
Subsidiary, but excluding a disposition by a Subsidiary of such Person to such
Person or a wholly owned Subsidiary of such Person or by such Person to a wholly
owned Subsidiary of such Person, and excluding the creation of a lien, pledge or
security interest) of (i) shares of Capital Stock (other than directors'
qualifying shares) or other ownership interests of a Subsidiary of such Person,
(ii) substantially all of the assets of such Person or any of its Subsidiaries
representing a division or line of business or (iii) other assets or rights of
such Person or any of its Subsidiaries outside of the ordinary course of
business, in any case where the consideration received by such Person or a
Subsidiary of such Person exceeds $1 million.
"Asset Exchange Transaction" means (i) any transaction pursuant to which
properties or assets of the Company or a Subsidiary of the Company constituting
a paging system within a geographically identifiable area and related properties
and assets (an "Identifiable Paging System") or all of the shares of Capital
Stock of a Subsidiary of the Company, the properties and assets of which
constitute an Identifiable Paging System, are to be exchanged for properties or
assets constituting an Identifiable Paging System of another Person or all of
the shares of Capital Stock of another Person the properties and assets of which
constitute an Identifiable Paging System or (ii) any transaction pursuant to
which licenses for frequencies (for purposes other than paging) or related
agreements and related properties or assets of the Company or a Subsidiary of
the Company ("Non-Paging Licenses") or all of the shares of Capital Stock of a
Subsidiary of the Company, the properties and assets of which constitute Non-
Paging Licenses, are to be exchanged for properties or assets constituting
Non-Paging Licenses of another Person or all of the shares of Capital Stock of
another Person the properties and assets of which constitute Non-Paging
Licenses.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the interest rate
implicit in the lease, compounded semiannually) of the obligation of the lessee
of the property subject to such sale and leaseback transaction for rental
payments during the remaining term of the lease included in such transaction
including any period for which such lease has been extended or may, at the
option of the lessor, be extended or until the earliest date on which the lessee
may terminate such lease without penalty or upon payment of penalty (in which
case the rental payments shall include such penalty), after excluding all
amounts required to be paid on account of maintenance and repairs, insurance,
taxes, assessments, water, utilities and similar charges.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Debt arrangements conveying the
right to use) real or personal property of such Person which is required to be
classified and accounted for as a capital lease or a liability on the face of a
balance sheet of such Person in accordance with generally accepted accounting
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principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
participation or other equivalents (however designated) of corporate stock of
such Person.
"Change of Control" means the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of persons or entities shall have become the beneficial owner of a
majority of the securities of the Company ordinarily having the right to vote in
the election of directors; (ii) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any directors who are members of such
Board of Directors of the Company on the date hereof and any new directors whose
election by such Board of Directors of the Company or whose nomination for
election by the stockholders of the Company was approved by a vote of 66 2/3% of
the directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office; (iii) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all,
or substantially all, the assets of the Company to any person or entity or group
(as so defined) of persons, or entities (other than any wholly owned Subsidiary
of the Company); or (iv) the merger or consolidation of the Company with or into
another corporation or the merger of another corporation into the Company with
the effect that immediately after such transaction any person or entity or group
(as so defined) of persons or entities shall have become the beneficial owner of
securities of the surviving corporation of such merger or consolidation
representing a majority of the combined voting power of the outstanding
securities of the surviving corporation ordinarily having the right to vote in
the election of directors.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow" of any Person means for any period the Consolidated
Net Income of such Person for such period increased by (i) Consolidated Interest
Expense of such Person for such period, plus (ii) the consolidated income tax
expense of such Person for such period, plus (iii) the consolidated depreciation
and amortization expense included in the income statement of such Person and its
consolidated Subsidiaries for such period, plus (iv) other non-cash charges
deducted from consolidated revenues in determining Consolidated Net Income for
such period, minus (v) non-cash items increasing Consolidated Net Income for
such period.
"Consolidated Fixed Charges" of any Person means for any period Consolidated
Interest Expense plus Preferred Stock dividends declared and payable in cash.
"Consolidated Interest Expense" of any Person means for any period the
consolidated interest expense included in a consolidated income statement
(without deduction of interest income) of such Person and its consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments of fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees with respect to interest rate swap
or similar agreements or foreign currency hedge, exchange or similar agreements,
other than fees or charges related to the acquisition or termination thereof
which are not allocable to interest expense in accordance with generally
accepted accounting principles; and (iv) the interest component of Capital Lease
Obligations.
"Consolidated Net Income" of any Person means for any period the
consolidated net income (or loss) of such Person and its Subsidiaries for such
period determined in accordance with generally
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<PAGE>
accepted accounting principles; PROVIDED, that there shall be excluded therefrom
(i) the net income (but not the net loss) of any consolidated Subsidiary of such
Person which is subject to restrictions which prevent the payment of dividends
and the making of distributions (by loans, advances, intercompany transfers or
otherwise) to such Person to the extent of such restrictions, (ii) the net
income (or loss) of any Person that is not a consolidated Subsidiary of such
Person except to the extent of the amount of dividends or other distributions
actually paid to such Person by such other Person during such period, (iii)
gains or losses on Asset Dispositions by such Person or its consolidated
Subsidiaries and (iv) all extraordinary gains and extraordinary losses.
"Consolidated Tangible Assets" of any Person means, at any date, on a
consolidated basis, the gross book value determined in accordance with generally
accepted accounting principles of all its property both real and personal, less
(i) the net book value of all its licenses, patents, patent applications,
copyrights, trademarks, trade names, goodwill, non-compete agreements or
organizational expenses and other like intangibles, (ii) unamortized Debt
discount and expense, (iii) all reserves for depreciation, obsolescence,
depletion and amortization of its properties and (iv) all proper reserves which
in accordance with generally accepted accounting principles should be provided
in connection with the business conducted by such Person.
"Credit Facility" means the credit agreement dated as of June 30, 1994,
between the Company and The First National Bank of Chicago, as amended and
restated as of February 9, 1995, and further amended as of June 12, 1995 and
April 19, 1996, and as the same may be amended (including any amendment and
restatement thereof), modified, supplemented, restated or replaced from time to
time.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person, and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (iv) every obligation of such Person issued or assumed
as the deferred purchase price of property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every Capital Lease Obligation of such Person, (vi) Attributable
Debt of such Person, (vii) the maximum fixed redemption or repurchase price of
Redeemable Stock of such Person at the time of determination, and (viii) every
obligation of the type referred to in clauses (i) through (vii) of another
Person and all dividends of another Person the payment of which, in either case,
such Person has Guaranteed or for which such Person is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise.
"Guaranty" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing or having the economic effect of guaranteeing any Debt
of any other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including, without limitation, any obligation of such Person (i)
to purchase or pay (or advance or supply funds for the purchase or payment of)
such Debt or to purchase (or to advance or supply funds for the purchase of) any
security for the payment of such Debt, (ii) to purchase property, securities or
services for the purpose of assuring the holder of such Debt of the payment of
such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and "Guaranteed," "Guaranteeing"
and "Guarantor" shall have meanings correlative to the foregoing); PROVIDED,
HOWEVER, that the Guaranty by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, security interest, lien, charge, encumbrance of any kind in
respect of such properties or assets or other security agreement (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
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"Net Available Proceeds" from any Asset Disposition by any Person means cash
or readily marketable cash equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but excluding
any other consideration received in the form of assumption by the acquiree of
Debt or other obligations relating to such properties or assets or received in
any other noncash form) therefrom by such Person, net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred and
all federal, state, provincial, foreign and local taxes required to be accrued
as a liability as a consequence of such Asset Disposition, (ii) all payments
made by such Person or its Subsidiaries on any Debt which is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or which must by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition or by applicable law be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments made to minority interest holders in Subsidiaries of such Person or
joint ventures as a result of such Asset Disposition, and (iv) a reasonable
reserve for the after-tax costs of any indemnification payments (fixed or
contingent) attributable to the seller's indemnities to the purchaser undertaken
by the Company or any of its Subsidiaries in connection with such Asset
Disposition.
"Permitted Liens" means: (i) Liens incurred and pledges and deposits made in
the ordinary course of business in connection with liability insurance, workers'
compensation, unemployment insurance, old-age pensions, and other social
security benefits other than in respect of employee benefit plans subject to
ERISA; (ii) Liens securing performance, surety, and appeal bonds and other
obligations of like nature incurred in the ordinary course of business; (iii)
Liens on goods and documents securing trade letters of credit; (iv) Liens
imposed by law, such as carriers', warehousemen's, mechanics', materialmen's,
and vendor's liens, incurred in the ordinary course of business and securing
obligations which are not yet due or which are being contested in good faith by
appropriate proceedings; (v) Liens securing the payment of taxes, assessments,
and governmental charges or levies (a) either (1) not delinquent or (2) being
contested in good faith by appropriate legal or administrative proceedings and
(b) as to which adequate reserves shall have been established on the books of
the relevant corporation in conformity with generally accepted accounting
principles; (vi) zoning restrictions, easements, rights of way, reciprocal
easement agreements, operating agreements, covenants, conditions or restrictions
on the use of any parcel of property that are routinely granted in real estate
transactions or do not interfere in any material respect with the ordinary
conduct of the business of the Company and its Subsidiaries or the value of such
property for the purpose of such business; (vii) purchase money Liens upon any
property or equipment acquired or held in the ordinary course of business to
secure Debt incurred prior to, at the time of, or within 60 days after the
acquisition of such property or equipment solely for the purpose of financing
the acquisition of such property or equipment; (viii) Liens on property existing
at the time such property is acquired and Liens on the assets of any Subsidiary
of the Company at the time such Subsidiary is acquired, provided such Liens
apply only to such acquired property; (ix) Liens existing as of the date of the
Indenture; (x) Liens securing Debt incurred for the purpose of financing all or
any part of the cost of acquiring assets (whether by merger, consolidation,
purchase of assets or otherwise), PROVIDED that such Debt is incurred prior to,
at the time of, or within 60 days after the acquisition of such assets solely
for the purpose of financing the acquisition of such assets in compliance with
the provision described under "Limitation on Consolidated Debt" covenant above;
(xi) any attachment or judgment Lien, unless the judgment it secures would
constitute an Event of Default; (xii) Liens with respect to assets of a
Subsidiary granted by such Subsidiary to the Company to secure Debt owing to the
Company; (xiii) right of banks to set off deposits against debts owed to said
banks; (xiv) any interest or title of a lessor in property of the Company or a
Subsidiary of the Company subject to any capitalized lease or operating lease,
as each are defined under generally accepted accounting principles; (xv) other
Liens incidental to the conduct of the business of the Company or any of its
Subsidiaries, as the case may be, or the ownership of their assets that do not
materially detract from the value of the property of the Company or a Subsidiary
of the Company subject thereto; (xvi) Liens in addition to the foregoing
securing Debt not to exceed, together with Attributable Debt in connection with
sale-leaseback transactions, $500,000 in the aggregate outstanding at any time;
and (xvii) without limiting the
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ability of the Company or any of its Subsidiaries to create, incur, assume, or
suffer to exist any Lien otherwise permitted under any of the foregoing clauses,
any extension, renewal, or replacement, in whole or in part, of any Lien
described in the foregoing clauses; PROVIDED, HOWEVER, that any such extension,
renewal, or replacement Lien is limited to the property or assets covered by the
Lien extended, renewed, or replaced or substitute property or assets, the value
of which is determined by the Board of Directors of the Company to be not
materially greater than the value of the property or assets for which the
substitute property or assets are substituted.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Pro Forma Consolidated Cash Flow" of any Person means for any period the
Consolidated Cash Flow of such Person for such period calculated on a pro forma
basis to give effect to any Asset Disposition or acquisition of assets not in
the ordinary course of business (including acquisitions of other Persons by
merger, consolidation or purchase of Capital Stock) during such period as if
such Asset Disposition or acquisition had taken place on the first day of such
period.
"Redeemable Stock" means any equity security that by its terms or otherwise
is required to be redeemed prior to the stated maturity of the Notes, or is
redeemable at the option of the holder thereof at any time prior to the stated
maturity of the Notes.
"Refinancing Debt" means any Debt of the Company that renews, refunds or
extends any Debt of the Company or a Subsidiary of the Company, in any case in
an amount not to exceed the outstanding principal amount of the Debt so
refinanced plus the amount of any premium required to be paid in connection with
such refinancing pursuant to the terms of the debt refinanced or the amount of
any premium reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase, plus
the expenses of the Company incurred in connection with such refinancing,
PROVIDED that, (A) in the case of any refinancing of the Notes or any pari passu
Debt, such Refinancing Debt is made pari passu or subordinate in right of
payment to the Notes, (B) in the case of any refinancing of Debt that is
subordinate in right of payment to the Notes, such Refinancing Debt is made
subordinate in right of payment to the Notes, and (C) such Refinancing Debt does
not require the payment of all or a portion of the principal thereof (whether
pursuant to purchase, redemption, repayment, defeasance, retirement, prepayment,
sinking fund payment, payment at stated maturity or otherwise) prior to the
final scheduled maturity of the Debt being renewed, refunded or extended.
"Related Person" means any Person owning (i) 5% or more of the outstanding
Common Stock of the Company or a Subsidiary of the Company or (ii) 5% or more of
the Voting Stock of the Company or a Subsidiary of the Company.
"Senior Debt" means (i) the principal of (and premium, if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding) on, penalties
and any obligation of the Company for reimbursement, indemnities and fees
relating to, Debt outstanding pursuant to the Credit Facility, (ii) all other
Debt of the Company referred to in the definition of Debt other than clauses
(vii) and (viii) (with respect to clause (vii) of such definition) thereof,
(iii) payment obligations of the Company under interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements required by
the Credit Facility, where the counterparty to such agreement is a lender under
the Credit Facility, and (iv) all renewals, extensions, modifications,
refinancings, refundings and amendments of any Debt or payment obligations
referred to in clause (i), (ii), or (iii) above (including, without limitation,
any interest rate swap or similar
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agreements or foreign currency hedge, exchange or similar agreements that are
entered into by the Company for the purpose of modifying, terminating or hedging
any agreement that constitutes Senior Debt under clause (iii) above whether or
not such modification, termination or hedge was required by the Credit Facility
and whether or not the counterparty to such agreement is a lender or former
lender under such Credit Facility), unless, in the case of any particular Debt
referred to above, (a) such Debt is owed to a Subsidiary of the Company, (b) the
instrument creating or evidencing the same or pursuant to which the same is
outstanding expressly provides that such Debt is not superior in right of
payment to the Notes, (c) such Debt is incurred in violation of the Indenture,
or (d) such Debt is by its terms subordinate in right of payment in respect of
any other Debt of the Company.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person, or by such Person
and one or more other Subsidiaries thereof or (ii) any other Person (other than
a corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and power to direct the policies,
management and affairs thereof; PROVIDED, that an Unrestricted Subsidiary shall
not be deemed to be a Subsidiary of the Company for purposes of the Indenture.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary of the Company (other than as provided below but
including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary, PROVIDED, that (a) either (x) the Subsidiary to be so designated has
total assets of $10,000 or less or (y) immediately after giving effect to such
designation, the Company could incur $1.00 of additional Debt pursuant to the
first paragraph of the "Limitation on Consolidated Debt" covenant and (b)
immediately after giving effect to such designation, the Company could make an
additional Restricted Payment of $1.00 pursuant to the first paragraph of the
"Limitation of Restricted Payments" covenant above; PROVIDED that the holders of
Debt thereof do not have direct or indirect recourse against the Company or any
Subsidiary of the Company and neither the Company nor any Subsidiary of the
Company otherwise has liability, for any payment obligations in respect of such
Debt. The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Subsidiary, PROVIDED, that immediately after giving effect to
such designation, the Company could incur $1.00 of additional Debt pursuant to
the first paragraph of the "Limitation on Consolidated Debt" covenant. Any such
designation by the Board of Directors of the Company shall be evidenced by
filing with the Trustee a certified copy of the resolution of the Board of
Directors of the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complies with the foregoing
conditions.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will initially be issued in the form of one Global Note (the
"Global Note") held in book-entry form. The Global Note will be deposited on the
date of the closing of the sale of the Notes offered hereby (the "Closing Date")
with, or on behalf of, The Depository Trust Company ("DTC" or the "Depository")
and registered in the name of Cede & Co., as nominee of the Depository (such
nominee being referred to herein as the "Global Note holder").
DTC has advised the Company that it is a limited-purpose trust company that
was created to hold securities for its participating organizations
(collectively, the "Participants" or the "Depository's
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Participants") and to facilitate the clearance and settlement of transactions in
such securities between Participants through electronic book-entry changes in
accounts of its Participants. The Depository's Participants include securities
brokers and dealers (including the Underwriters), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants" or the
"Depository's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depository only through the Depository's Participants or the Depository's
Indirect Participants.
So long as the Global Note holder is the registered owner of any Notes, the
Global Note holder will be considered the sole holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depository or for maintaining, supervising or reviewing
any records of the Depository relating to the Notes.
A Global Note may not be transferred except as a whole by DTC to a nominee
of DTC. A Global Note representing Notes is exchangeable only if (1) DTC
notifies the Company that it is unwilling or unable to continue as a Depository
for such Global Note or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act, (2) the Company in its sole discretion
determines that all such Global Notes shall be exchangeable or (3) there shall
have occurred and be continuing an Event of Default or an event which with the
giving of notice or lapse of time or both would constitute an Event of Default
with respect to the Notes represented by such Global Notes. Any Global Note that
is exchangeable pursuant to the preceding sentence shall be exchangeable for
certificates in definitive form representing Notes in authorized denominations
and registered in such names as the Depository holding such Global Note shall
direct. Subject to the foregoing, the Global Note is not exchangeable, except
for a Global Note of like denomination to be registered in the name of the
Depository or its nominee.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note holder in its capacity as the registered holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names the Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of the Notes (including principal,
premium, if any, or interest). The Company believes, however, that it is
currently the policy of the Depository to immediately credit the accounts of the
relevant Participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant security as shown on
the records of the Depository. Payments by the Depository's Participants and the
Depository's Indirect Participants to the beneficial owners of the Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depository's Participants or the Depository's Indirect
Participants.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest will be made by the
Company in immediately available funds or the equivalent, so long as DTC
continues to make the Same-Day Funds Settlement System available to the Company.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Notes
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity in the Notes will therefore be required by DTC to settle in
immediately available funds. No assurance can be given to the effect, if any, of
settlement in immediately available funds on trading activity in the Notes.
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UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the underwriting agreement (the
"Underwriting Agreement"), to purchase from the Company, and the Company has
agreed to sell to the Underwriters, the principal amount of Notes set forth
opposite their respective names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
- -------------------------------------------------------------------------------------- ----------------
<S> <C>
Lehman Brothers Inc................................................................... $ 60,000,000
Donaldson, Lufkin & Jenrette Securities Corporation................................... 27,000,000
Goldman, Sachs & Co................................................................... 27,000,000
First Chicago Capital Markets, Inc.................................................... 6,000,000
----------------
Total............................................................................. $ 120,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Notes are subject to certain conditions, and that if any Notes
are purchased by the Underwriters pursuant to the Underwriting Agreement, all of
the Notes agreed to be purchased by the Underwriters pursuant to the
Underwriting Agreement must be so purchased. The closing of the Offering is not
conditioned upon the closing of the Concurrent Offering.
The Company has been advised by the Underwriters that they propose to offer
the Notes offered hereby initially at the public offering price set forth on the
cover page of this Prospectus and to certain selected dealers (who may include
the Underwriters) at such public offering price less a concession not to exceed
0.25% of the principal amount of the Notes. The Underwriters or such selected
dealers may reallow a commission to certain other dealers not to exceed 0.125%
of the principal amount of the Notes. After the initial public offering of the
Notes, the public offering price, the concession to selected dealers and the
reallowance to other dealers may be changed by the Underwriters.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), or to contribute to
payments that the Underwriters may be required to make in respect thereof.
There is no public market for the Notes and the Company has no plans to
apply for listing of the Notes on any national securities exchange or for
quotation of the Notes on any automated quotation system. The Company has been
advised by certain of the Underwriters that they currently intend to make a
market in the Notes; however, such Underwriters are not obligated to do so. Any
such market-making may be discontinued at any time, for any reason, without
notice. If any of such Underwriters ceases to act as a market maker for the
Notes for any reason, there can be no assurance that another firm or person will
make a market in the Notes. There can be no assurance that an active market for
the Notes will develop or, if a market does develop, at what prices the Notes
will trade.
Lehman Brothers Inc., Donaldson, Lufkin & Jenrette Securities Corporation
and Goldman, Sachs & Co. are Underwriters of the Concurrent Offering and will
receive compensation for such services. Lehman Brothers Inc. is acting as the
Company's financial advisor in connection with the Teletouch Acquisition. An
affiliate of First Chicago Capital Markets, Inc. is one of the lenders under the
Credit Facility. The Company and Lehman Brothers Inc. anticipate that an
affiliate of Lehman Brothers Inc. will become a lender under the Credit
Facility, as it may be amended. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Vinson & Elkins L.L.P., Dallas, Texas, and certain legal matters will be
passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership
which includes professional corporations), New York, New York.
EXPERTS
The consolidated financial statements of ProNet Inc. for the three years
ended December 31, 1995, appearing in ProNet Inc.'s Annual Report on Form 10-K
have been audited by Ernst & Young LLP, independent auditors, as indicated in
their report thereon included therein. Such consolidated financial statements
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of Teletouch Communications, Inc., Dial-A-Page,
Inc. and the Paging Divisions of Pac-West Telecomm, Inc. and Subsidiary have
been audited by Ernst & Young LLP, independent auditors, as indicated in their
reports thereon included herein. Such financial statements are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Russell's Communications, Inc. dba LaPageCo,
have been audited by DeRouen & Wells, independent auditors, as indicated in
their report thereon included herein. Such financial statement are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Warren Communications, Inc. have been audited by
Wright, Moore, Dehart, Dupuis & Hutchinson, independent auditors, as indicated
in their report thereon included herein. Such financial statements are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of AACS Communications, Inc. have been audited by
Spillar, Mitcham, Eaton & Bicknell, L.L.P., independent auditors, as indicated
in their report thereon included herein. Such financial statements are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Hyde's Stay In Touch, Inc. have been audited by
James N. Rachel, independent auditor, as indicated in his report thereon
included herein. Such financial statements are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Metropolitan Houston Paging Services, Inc. have
been audited by Arthur Andersen & Co. LLP, independent auditors, as indicated in
their report thereon included herein. Such financial statements are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Ventures in Paging, Inc. have been audited by
Sartain Fischbein & Co., independent auditors, as indicated in their report
thereon included herein. Such financial statements are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Paging and Cellular of Texas (a sole
proprietorship), Americom Paging Corporation, and Sun Paging Communications
incorporated herein by reference to the extent and for the periods indicated in
their reports have been audited by KPMG Peat Marwick LLP, independent auditors,
as indicated in their reports thereon and incorporated by reference herein in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Apple Communication, Inc., SigNet Paging of
Raleigh, Inc., A.G.R. Electronics, Inc. and Affiliates, and Cobbwells, Inc., dba
Page One Messaging Services incorporated herein by reference to the extent and
for the periods indicated in their reports have been audited by Ernst & Young
LLP, independent auditors, as indicated in their reports thereon and
incorporated by reference herein in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Company can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such reports, proxy statements and other information concerning the
Company are also available for inspection at the offices of the Nasdaq National
Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which were
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference: (i) Current Report on Form 8-K filed March 16,
1995; (ii) Current Report on Form 8-K filed April 17, 1995; (iii) Current Report
on Form 8-K filed April 19, 1995; (iv) Current Report on Form 8-K/ A filed May
12, 1995; (v) Current Report on Form 8-K filed May 18, 1995; (vi) Current Report
on Form 8-K filed May 19, 1995; (vii) Current Report on Form 8-K/A filed June 2,
1995; (viii) Current Report on Form 8-K filed June 2, 1995; (ix) Current Report
on Form 8-K filed July 5, 1995; (x) Current Report on Form 8-K filed July 7,
1995; (xi) Current Report on Form 8-K filed September 15, 1995; (xii) Current
Report on Form 8-K/A filed October 3, 1995; (xiii) Current Report on Form
8-K/A-2 filed October 5, 1995; (xiv) Annual Report on Form 10-K for the fiscal
year ended December 31, 1995; (xv) Current Report on Form 8-K filed January 16,
1996; (xvi) Current Report on Form 8-K filed April 4, 1996; (xvii) Annual Report
on Form 10-K/A for the fiscal year ended December 31, 1995, filed April 29,
1996; (xviii) Current Report on Form 8-K filed May 6, 1996; (xix) Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996; and (xx) Current
Report on Form 8-K filed May 29, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents which are incorporated by reference herein,
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Requests should be directed to
Mark A. Solls, Vice President, General Counsel and Secretary, at the Company's
principal executive offices.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PRO FORMA FINANCIAL STATEMENTS:
Basis of Presentation.................................................................................. F-3
ProNet Inc. and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996....... F-5
ProNet Inc. and Subsidiaries Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 1995......................................................................... F-6
Three Months Ended March 31, 1996.................................................................... F-7
ProNet Inc. and Subsidiaries Notes to Pro Forma Condensed Consolidated Financial Statements............ F-20
PRONET INC. AND SUBSIDIARIES:
Report of Independent Auditors......................................................................... F-29
Consolidated Balance Sheets as of December 31, 1995 and 1994........................................... F-30
Consolidated Statements of Operations for the Years Ended December 31, 1995,
1994 and 1993......................................................................................... F-31
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993............. F-32
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993... F-33
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995..................... F-48
Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995 (unaudited)... F-49
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 (unaudited)... F-50
THE PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
Report of Independent Auditors......................................................................... F-54
Statements of Assets and Liabilities and Divisional Equity as of November 30, 1995 and February 29,
1996 (unaudited)...................................................................................... F-55
Statements of Operations for the Year Ended November 30, 1995 and for the Three Months Ended February
29, 1996 (unaudited) and February 28, 1995 (unaudited)................................................ F-56
Statements of Divisional Equity for the Years Ended November 30, 1995 and the Three Months Ended
February 29, 1996 (unaudited)......................................................................... F-57
Statements of Cash Flows for the Years Ended November 30, 1995 and for the Three Months Ended February
29, 1996 (unaudited) and February 28, 1995 (unaudited)................................................ F-58
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
Report of Independent Auditors......................................................................... F-63
Consolidated Balance Sheets as of May 31, 1995 and 1994................................................ F-64
Consolidated Statements of Income for the Years Ended May 31, 1995,
1994 and 1993......................................................................................... F-65
Consolidated Statements of Shareholders' Equity for the Years Ended May 31, 1995, 1994 and 1993........ F-66
Consolidated Statements of Cash Flows for the Years Ended May 31, 1995, 1994
and 1993.............................................................................................. F-67
Condensed Consolidated Balance Sheets as of February 29, 1996 (unaudited) and May 31, 1995............. F-78
Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended February 29,
1996 and February 28, 1995 (unaudited)................................................................ F-79
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 29, 1996 and
February 28, 1995 (unaudited)......................................................................... F-80
DIAL-A-PAGE, INC.
Report of Independent Auditors......................................................................... F-84
Balance Sheets as of December 31, 1994 and July 31, 1995............................................... F-85
Statements of Operations for the Years Ended December 31, 1994 and 1993 and the Seven Months Ended July
31, 1995.............................................................................................. F-86
Statements of Stockholders' Deficit for the Years Ended December 31, 1994 and 1993 and the Seven Months
Ended July 31, 1995................................................................................... F-87
Statements of Cash Flows for the Years Ended December 31, 1994 and 1993 and the Seven Months Ended July
31, 1995.............................................................................................. F-88
RUSSELL'S COMMUNICATIONS, INC. DBA LAPAGECO
Independent Auditors' Report........................................................................... F-94
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).................................. F-95
Statements of Operations for the Year Ended December 31, 1995 and for the Three Months Ended March 31,
1996 and 1995 (unaudited)............................................................................. F-96
Statements of Retained Earnings for the Year Ended December 31, 1995 and the Three Months Ended March
31, 1996 (unaudited).................................................................................. F-97
Statements of Cash Flows for the Year Ended December 31, 1995 and for the Three Months Ended March 31,
1996 and 1995 (unaudited)............................................................................. F-98
WARREN COMMUNICATIONS, INC.
Independent Auditors' Report........................................................................... F-103
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).................................. F-104
Statements of Income for the Year Ended December 31, 1995 and for the Three Months Ended March 31, 1996
and 1995 (unaudited).................................................................................. F-105
Statements of Retained Earnings (Deficits) for the Year Ended December 31, 1995 and the Three Months
Ended March 31, 1996 (unaudited)...................................................................... F-106
Statements of Cash Flows for the Year Ended December 31, 1995 and for the Three Months Ended March 31,
1996 and 1995 (unaudited)............................................................................. F-107
AACS COMMUNICATIONS, INC.
Independent Auditors' Report........................................................................... F-111
Balance Sheet as of December 31, 1995.................................................................. F-112
Income Statement for the Year Ended December 31, 1995.................................................. F-113
Statement of Retained Earnings for the Year Ended December 31, 1995.................................... F-114
Statement of Cash Flows for the Year Ended December 31, 1995........................................... F-115
HYDE'S STAY IN TOUCH, INC.
Independent Auditors' Report........................................................................... F-118
Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).................................. F-119
Statements of Income for the Year Ended December 31, 1995 and for the Three Months Ended March 31, 1996
and 1995 (unaudited).................................................................................. F-120
Statements of Retained Earnings for the Year Ended December 31, 1995 and the Three Months Ended March
31, 1996 (unaudited).................................................................................. F-121
Statements of Cash Flows for the Year Ended December 31, 1995 and for the Three Months Ended March 31,
1996 and 1995 (unaudited)............................................................................. F-122
</TABLE>
F-2
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The Pro Forma Condensed Consolidated Statements of Operations assume the
acquisition of the ProNet Completed Acquisitions, the ProNet Pending
Acquisitions, Teletouch, the Teletouch Pending Acquisitions and the Teletouch
Completed Acquisitions as if they had occurred at the beginning of the period
presented. The Acquisitions are explained in graphic form below:
<TABLE>
<CAPTION>
"ACQUISITIONS"
- -----------------------------------------------------------------------------------------------------------
"PRONET ACQUISITIONS" "TELETOUCH ACQUISITION"
- ----------------------------------------- ----------------------------------------------------------------
"PENDING ACQUISITIONS"
----------------------------------------------------------------
"PRONET COMPLETED "PRONET PENDING "TELETOUCH PENDING "TELETOUCH COMPLETED
ACQUISITIONS" ACQUISITIONS" "TELETOUCH" ACQUISITIONS" ACQUISITIONS"
- ------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Signet Charlotte Georgialina Teletouch Premier Beepers Plus
Carrier PacWest LaPageCo Waco
Metropolitan VIP Oklahoma Dial-A-Page
All City Cimarron
Americom Stay in Touch
Gold Coast AACS
Lewis Warren
Paging & Cellular
Apple
Sun
SigNet Raleigh
Page One
AGR
Total
Williams
</TABLE>
The accompanying unaudited pro forma condensed consolidated balance sheet of
the Company at March 31, 1996, combines the historical consolidated balance
sheet of the Company, the ProNet Pending Acquisitions, Teletouch and the
Teletouch Pending Acquisitions as if the acquisitions and the acquisition of the
Nationwide License had occurred on March 31, 1996 and assumes that the
Acquisitions were funded with the proceeds of the Existing Notes and the
Offerings. The accompanying unaudited pro forma condensed consolidated balance
sheet of the Company, excluding Teletouch, combines the historical consolidated
balance sheet of the Company and the balance sheets of the ProNet Pending
Acquisitions as if the acquisitions had occurred on March 31, 1996. The
accompanying unaudited pro forma condensed consolidated balance sheet of
Teletouch combines the historical consolidated balance sheet of the Teletouch
and the balance sheets of the Teletouch Pending Acquisitions as if the
acquisitions had occurred on March 31, 1996.
The accompanying unaudited pro forma condensed consolidated statement of
operations of the Company for the year ended December 31, 1995, combines the pro
forma consolidated statement of operations of the Company and Teletouch as if
the Teletouch Acquisition had occurred on January 1, 1995, and assumes that the
Acquisitions were funded with the proceeds of the the Existing Notes. The
accompanying unaudited pro forma condensed statement of operations of the
Company, excluding Teletouch, for the year ended December 31, 1995, combines the
historical consolidated statement of operations of the Company and the
statements of operations of the ProNet Acquisitions as if the ProNet
Acquisitions had occurred on January 1, 1995. The accompanying unaudited pro
forma condensed statement of operations of Teletouch for the year ended December
31, 1995, combines the historical consolidated statement of operations of
Teletouch and the statements of operations of the Teletouch Pending Acquisitions
and the Teletouch Completed Acquisitions as if the Teletouch Pending
Acquisitions and Teletouch Completed Acquisitions had occurred on January 1,
1995.
The accompanying unaudited pro forma condensed consolidated statement of
operations of the Company for the three months ended March 31, 1996, combines
the pro forma consolidated statement
F-3
<PAGE>
of operations of the Company, AGR, Total, Williams, the ProNet Pending
Acquisitions and the Teletouch Acquisition as if these acquisitions had occurred
on January 1, 1996, and assumes that the acquisitions were funded with the
proceeds of the Offerings and the Existing Notes. The accompanying unaudited pro
forma condensed consolidated statement of operations of the Company, excluding
Teletouch, for the three months ended March 31, 1996, combines the historical
statement of operations of the Company and the statements of operations of the
AGR, Total, Williams and the ProNet Pending Acquisitions as if the acquisitions
had occurred on January 1, 1996. The accompanying unaudited pro forma condensed
consolidated statement of operations of Teletouch for the three months ended
March 31, 1996, combines the historical statement of operations of Teletouch and
the statements of operations of the Teletouch Pending Acquisitions as if the
acquisitions had occurred on January 1, 1996.
The pro forma condensed consolidated financial statements do not purport to
represent what the Company's results of operations would have been had the
Acquisitions occurred on the dates indicated or for any future period or date.
The pro forma adjustments give effect to available information and assumptions
that management believes are reasonable. The pro forma condensed consolidated
financial statements should be read in conjunction with the Company's historical
consolidated financial statements and the financial statements of certain
Acquisitions and the notes thereto included or incorporated elsewhere herein.
F-4
<PAGE>
PRONET INC. AND SUBSIDIARIES
SUMMARY PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
-------------------------
TELETOUCH PRO FORMA PRO FORMA
PRONET (1) (2) ADJUSTMENTS FOOTNOTE CONSOLIDATED
----------- ------------ ------------ ------------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets.............................. $ 19,040 $ 9,313 $ (6,507) (O),(P),(Q),(R) $ 21,846
Equipment
Pagers.................................... 50,334 6,977 1,462 (R),(T) 58,773
Communications equipment.................. 41,516 16,409 (2,774) (R) 55,151
Security systems' equipment............... 12,304 -- -- 12,304
Office and other.......................... 9,451 4,177 (731) (R) 12,897
----------- ------------ ------------ ------------
113,605 27,563 (2,043) 139,125
Less allowance for depreciation........... 38,614 4,514 (4,514) (R) 38,614
----------- ------------ ------------ ------------
74,991 23,049 2,471 100,511
Goodwill and other assets, net.............. 217,284 88,011 84,263 (O),(R),(S),(T) 389,558
----------- ------------ ------------ ------------
TOTAL ASSETS................................ $ 311,315 $ 120,373 $ 80,227 $ 511,915
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................... $ 28,242 $ 5,466 $ (1,660) (P),(Q) $ 32,048
Deferred payments........................... 16,694 -- -- 16,694
Long-term debt, less current maturities..... 199,997 93,148 (68,408) (O),(P),(Q) 224,737
Deferred tax liabilities.................... 688 1,507 (1,507) (R) 688
Shareholders' equity (deficit).............. 65,694 20,252 151,802 (O),(Q),(R) 237,748
----------- ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY..................................... $ 311,315 $ 120,373 $ 80,227 $ 511,915
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
- ------------------------
(1) See Schedule A for detail.
(2) See Schedule D for detail.
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-5
<PAGE>
PRONET INC. AND SUBSIDIARIES
SUMMARY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
-------------------------
TELETOUCH PRO FORMA PRO FORMA
PRONET (1) (2) ADJUSTMENTS FOOTNOTE CONSOLIDATED
----------- ------------ ----------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Service revenues.............................. $ 95,588 $ 37,886 $ -- $ 133,474
Product sales................................. 18,003 6,475 -- 24,478
----------- ------------ ----------- ------------
Total revenues.............................. 113,591 44,361 -- 157,952
Cost of products sold......................... (18,417) (7,083) -- (25,500)
----------- ------------ ----------- ------------
95,174 37,278 -- 132,452
COST OF SERVICES................................ 22,761 6,188 (98) (U) 28,851
----------- ------------ ----------- ------------
GROSS MARGIN.................................. 72,413 31,090 98 103,601
EXPENSES
Sales, general and administrative............. 43,463 16,575 (1,632) (U) 58,406
Depreciation and amortization................. 33,106 11,886 5,481 (V) 50,473
----------- ------------ ----------- ------------
76,569 28,461 3,849 108,879
----------- ------------ ----------- ------------
OPERATING INCOME (LOSS)..................... (4,156) 2,629 (3,751) (5,278)
OTHER INCOME (EXPENSE)
Interest expense.............................. (10,514) (5,653) (5,593) (W) (21,760)
Interest and other income..................... 1,630 61 -- 1,691
----------- ------------ ----------- ------------
(8,884) (5,592) (5,593) (20,069)
LOSS BEFORE INCOME TAXES.................... (13,040) (2,963) (9,344) (25,347)
Provision (benefit) for income taxes............ 62 (1,370) 1,370 (X) 62
----------- ------------ ----------- ------------
NET LOSS.................................... $ (13,102) $ (1,593) $ (10,714) $ (25,409)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
- ------------------------
(1) See Schedule B for detail.
(2) See Schedule E for detail.
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-6
<PAGE>
PRONET INC. AND SUBSIDIARIES
SUMMARY PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
-------------------------
TELETOUCH PRO FORMA PRO FORMA
PRONET (1) (2) ADJUSTMENTS FOOTNOTE CONSOLIDATED
----------- ------------ ----------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Service revenues............................... $ 24,461 $ 10,075 $ -- $ 34,536
Product sales.................................. 3,857 1,520 -- 5,377
----------- ------------ ----------- ------------
Total revenues............................... 28,318 11,595 -- 39,913
Cost of products sold.......................... (3,555) (1,793) 179 (V) (5,169)
----------- ------------ ----------- ------------
24,763 9,802 179 34,744
COST OF SERVICES................................. 6,509 2,002 (25) (U) 8,486
----------- ------------ ----------- ------------
GROSS MARGIN................................. 18,254 7,800 204 26,258
EXPENSES
Sales, general and administrative.............. 11,233 4,233 (408) (U) 15,058
Depreciation and amortization.................. 10,384 2,998 1,286 (V) 14,668
----------- ------------ ----------- ------------
21,617 7,231 878 29,726
----------- ------------ ----------- ------------
OPERATING INCOME (LOSS)...................... (3,363) 569 (674) (3,468)
OTHER INCOME (EXPENSES)
Interest expense............................... (3,830) (1,927) (1,067) (W) (6,824)
Interest and other income...................... 47 (10) -- 37
----------- ------------ ----------- ------------
(3,783) (1,937) (1,067) (6,787)
LOSS BEFORE INCOME TAXES..................... (7,146) (1,368) (1,741) (10,255)
Provision (benefit) for income taxes........... -- (601) 601 (X) --
----------- ------------ ----------- ------------
NET LOSS..................................... $ (7,146) $ (767) $ (2,342) $ (10,255)
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
- ------------------------
(1) See Schedule C for detail.
(2) See Schedule F for detail.
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-7
<PAGE>
SCHEDULE A
PRONET INC. AND SUBSIDIARIES (EXCLUDING TELETOUCH)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------ PRO FORMA PRO FORMA
PRONET PACWEST GEORGIALINA VIP ADJUSTMENTS FOOTNOTE CONSOLIDATED
--------- ----------- ------------- --------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets......................... $ 17,673 $ 316 $ 842 $ 346 $ (137) (B) $ 19,040
Equipment
Pagers............................... 47,485 2,300 1,525 398 (1,374) (B)(D) 50,334
Communications equipment............. 31,689 4,656 456 1,198 3,517 (B)(E) 41,516
Security systems' equipment.......... 12,304 -- -- -- -- 12,304
Office and other..................... 9,024 105 470 119 (267) (B) 9,451
--------- ----------- ------------- --------- ----------- ------------
100,502 7,061 2,451 1,715 1,876 113,605
Less allowance for depreciation...... 38,614 2,693 672 673 (4,038) (B) 38,614
--------- ----------- ------------- --------- ----------- ------------
61,888 4,368 1,779 1,042 5,914 74,991
Goodwill and other assets, net......... 151,269 100 800 21 65,094 (B)(C)(D)(E) 217,284
--------- ----------- ------------- --------- ----------- ------------
TOTAL ASSETS........................... $ 230,830 $ 4,784 $ 3,421 $ 1,409 $ 70,871 $ 311,315
--------- ----------- ------------- --------- ----------- ------------
--------- ----------- ------------- --------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.................... $ 27,457 $ 1,454 $ 573 $ 85 $ (1,327) (B) $ 28,242
Deferred payments...................... 16,694 -- -- -- -- 16,694
Long-term debt, less current
maturities............................ 130,297 2,843 2,595 177 64,085 (A)(B)(E) 199,997
Deferred tax liabilities............... 688 150 -- -- (150) (B) 688
Shareholders' equity (deficit)......... 55,694 337 253 1,147 8,263 (A)(B) 65,694
--------- ----------- ------------- --------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................ $ 230,830 $ 4,784 $ 3,421 $ 1,409 $ 70,871 $ 311,315
--------- ----------- ------------- --------- ----------- ------------
--------- ----------- ------------- --------- ----------- ------------
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-8
<PAGE>
SCHEDULE B
PRONET INC. AND SUBSIDIARIES (EXCLUDING TELETOUCH)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL RESULTS
------------------------------------------- PRO FORMA ADJUSTMENTS
PRONET PRONET -----------------------------------
COMPLETED PENDING PRONET PRONET
ACQUISITIONS ACQUISITIONS COMPLETED PENDING PRO FORMA
PRONET (1) (2) ACQUISITIONS ACQUISITIONS FOOTNOTE CONSOLIDATED
--------- --------------- --------------- ----------- ----------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Service revenues........... $ 56,108 $ 28,448 $ 11,224 $ (192) $ -- (F) $ 95,588
Product sales.............. 10,036 5,293 2,674 -- -- 18,003
--------- --------------- --------------- ----------- ----------- ------------
Total revenues........... 66,144 33,741 13,898 (192) -- 113,591
Cost of products sold...... (9,421) (6,071) (2,925) -- -- (18,417)
--------- --------------- --------------- ----------- ----------- ------------
56,723 27,670 10,973 (192) -- 95,174
COST OF SERVICES............. 14,396 5,743 2,622 -- -- 22,761
--------- --------------- --------------- ------------
GROSS MARGIN............. 42,327 21,927 8,351 (192) -- 72,413
EXPENSES
Sales, general and
administrative............ 23,935 15,992 6,582 (2,195) (851) (G) 43,463
Depreciation and
amortization.............. 18,662 3,020 1,388 5,645 4,391 (H) 33,106
--------- --------------- --------------- ----------- ----------- ------------
42,597 19,012 7,970 3,450 3,540 76,569
--------- --------------- --------------- ----------- ----------- ------------
OPERATING INCOME
(LOSS).................. (270) 2,915 381 (3,642) (3,540) (4,156)
OTHER INCOME (EXPENSE)
Interest expense........... (8,640) (1,252) (622) -- -- (10,514)
Interest and other income.. 1,291 339 -- -- -- 1,630
--------- --------------- --------------- ----------- ----------- ------------
(7,349) (913) (622) -- -- (8,884)
INCOME (LOSS) BEFORE
INCOME TAXES............ (7,619) 2,002 (241) (3,642) (3,540) (13,040)
Provision (benefit) for
income taxes.............. 78 193 (209) -- -- 62
--------- --------------- --------------- ----------- ----------- ------------
NET INCOME (LOSS)........ $ (7,697) $ 1,809 $ (32) $ (3,642) $ (3,540) $ (13,102)
--------- --------------- --------------- ----------- ----------- ------------
--------- --------------- --------------- ----------- ----------- ------------
</TABLE>
- ------------------------------
(1) See Schedule H for detail
(2) See Schedule I for detail
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-9
<PAGE>
SCHEDULE C
PRONET INC. AND SUBSIDIARIES (EXCLUDING TELETOUCH)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ONE MONTH ENDED THREE MONTHS ENDED
JANUARY 31, 1996 MARCH 31, 1996
---------------------- ----------------------------
PRONET AGR TOTAL WILLIAMS SUBTOTAL PACWEST GEORGIALINA VIP SUBTOTAL
------- ---- ----- -------- -------- ------- ----------- ---- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Service revenues...................... $21,016 $198 $ 69 $ 87 $21,370 $1,524 $1,058 $509 $3,091
Product sales......................... 3,146 6 36 14 3,202 242 185 228 655
------- ---- ----- -------- -------- ------- ----------- ---- --------
Total revenues...................... 24,162 204 105 101 24,572 1,766 1,243 737 3,746
Cost of products sold................. (2,781) (64) (92) (8) (2,945) (223) (260) (213) (696)
------- ---- ----- -------- -------- ------- ----------- ---- --------
21,381 140 13 93 21,627 1,543 983 524 3,050
COST OF SERVICES........................ 5,787 21 23 13 5,844 274 252 139 665
------- ---- ----- -------- -------- ------- ----------- ---- --------
GROSS MARGIN.......................... 15,594 119 (10) 80 15,783 1,269 731 385 2,385
EXPENSES
Sales, general and administrative..... 9,379 126 46 75 9,626 1,159 523 174 1,856
Depreciation and amortization......... 8,707 16 2 8 8,733 257 102 45 404
------- ---- ----- -------- -------- ------- ----------- ---- --------
18,086 142 48 83 18,359 1,416 625 219 2,260
------- ---- ----- -------- -------- ------- ----------- ---- --------
OPERATING INCOME (LOSS)............... (2,492) (23) (58) (3) (2,576) (147) 106 166 125
OTHER INCOME (EXPENSE)
Interest expense...................... (3,659) (6) (1) (5) (3,671) (97) (54) (8) (159)
Interest and other income............. 27 1 4 3 35 -- 12 -- 12
------- ---- ----- -------- -------- ------- ----------- ---- --------
(3,632) (5) 3 (2) (3,636) (97) (42) (8) (147)
INCOME (LOSS) BEFORE INCOME TAXES... (6,124) (28) (55) (5) (6,212) (244) 64 158 (22)
Provision (benefit) for income
taxes................................ -- -- -- -- -- (99) -- -- (99)
------- ---- ----- -------- -------- ------- ----------- ---- --------
NET INCOME (LOSS)................... $(6,124) $(28) $ (55) $ (5) $(6,212) $ (145) $ 64 $158 $ 77
------- ---- ----- -------- -------- ------- ----------- ---- --------
------- ---- ----- -------- -------- ------- ----------- ---- --------
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------
PRONET
AGR, TOTAL, PENDING PRO FORMA
WILLIAMS ACQUISITIONS FOOTNOTE CONSOLIDATED
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
REVENUES
Service revenues...................... -$- $-- $24,461
Product sales......................... -- -- 3,857
----- ------------ ------------
Total revenues...................... -- -- 28,318
Cost of products sold................. 16 70 (H) (3,555)
----- ------------ ------------
16 70 24,763
COST OF SERVICES........................ -- -- 6,509
----- ------------ ------------
GROSS MARGIN.......................... 16 70 18,254
EXPENSES
Sales, general and administrative..... (36) (213) (G) 11,233
Depreciation and amortization......... 80 1,167 (H) 10,384
----- ------------ ------------
44 954 21,617
----- ------------ ------------
OPERATING INCOME (LOSS)............... (28) (884) (3,363)
OTHER INCOME (EXPENSE)
Interest expense...................... -- -- (3,830)
Interest and other income............. -- -- 47
----- ------------ ------------
-- -- (3,783)
INCOME (LOSS) BEFORE INCOME TAXES... (28) (884) (7,146)
Provision (benefit) for income
taxes................................ -- 99 --
----- ------------ ------------
NET INCOME (LOSS)................... $(28) $ (983) $(7,146)
----- ------------ ------------
----- ------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-10
<PAGE>
SCHEDULE D
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
TELETOUCH
FEBRUARY 29, PENDING
1996 ACQUISITIONS PRO FORMA PRO FORMA
TELETOUCH (1) ADJUSTMENTS FOOTNOTE CONSOLIDATED
---------------- --------------- ----------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets......................... $ 8,394 $ 2,086 $ (1,167) (J) $ 9,313
Equipment
Pagers............................... 5,401 2,050 (474) (J) 6,977
Communications equipment............. 14,853 3,286 (1,730) (J) 16,409
Office and other..................... 3,918 470 (211) (J) 4,177
-------- ------- ----------- ------------
24,172 5,806 (2,415) 27,563
Less allowance for depreciation...... 4,514 2,320 (2,320) (J) 4,514
-------- ------- ----------- ------------
19,658 3,486 (95) 23,049
Goodwill and other assets, net......... 57,512 291 30,208 (J)(K) 88,011
-------- ------- ----------- ------------
TOTAL ASSETS........................... $ 85,564 $ 5,863 $ 28,946 $ 120,373
-------- ------- ----------- ------------
-------- ------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.................... $ 5,313 $ 1,376 $ (1,223) (J) $ 5,466
Long-term debt, less current
maturities............................ 58,492 1,903 32,753 (I)(J) 93,148
Deferred tax liabilities............... 1,507 59 (59) (J) 1,507
Shareholders' equity (deficit)......... 20,252 2,525 (2,525) (J) 20,252
-------- ------- ----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................ $ 85,564 $ 5,863 $ 28,946 $ 120,373
-------- ------- ----------- ------------
-------- ------- ----------- ------------
</TABLE>
- ------------------------
(1) See Schedule G for detail
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-11
<PAGE>
SCHEDULE E
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL RESULTS
----------------------------------------------------- PRO FORMA ADJUSTMENTS
12 MONTHS TELETOUCH TELETOUCH ---------------------------------------
ENDED COMPLETED PENDING TELETOUCH TELETOUCH
NOVEMBER 30, 1995 ACQUISITIONS ACQUISITIONS COMPLETED PENDING
TELETOUCH (1) (2) ACQUISITIONS ACQUISITIONS FOOTNOTE
------------------- --------------- --------------- ------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Service revenues..... $ 18,233 $ 11,366 $ 8,287 $ -- $ --
Product sales........ 2,693 1,247 2,535 -- --
-------- --------------- --------------- ------ -------------
Total revenues..... 20,926 12,613 10,822 -- --
Cost of products
sold................ (3,854) (866) (2,363) -- --
-------- --------------- --------------- ------ -------------
17,072 11,747 8,459 -- --
COST OF SERVICES....... 3,469 1,775 944 -- --
-------- --------------- ---------------
GROSS MARGIN........ 13,603 9,972 7,515 -- --
EXPENSES
Sales, general and
administrative...... 8,046 5,401 4,524 (864) (532) (L)
Depreciation and
amortization........ 5,542 2,989 564 1,589 1,202 (M)
-------- --------------- --------------- ------ -------------
13,588 8,390 5,088 725 670
-------- --------------- --------------- ------ -------------
OPERATING INCOME
(LOSS)............. 15 1,582 2,427 (725) (670)
OTHER INCOME (EXPENSE)
Interest expense..... (3,999) (1,253) (401) -- --
Interest and other
income.............. -- 7 54 -- --
-------- --------------- --------------- ------ -------------
(3,999) (1,246) (347) -- --
INCOME (LOSS) BEFORE
INCOME TAXES....... (3,984) 336 2,080 (725) (670)
Provision (benefit) for
income taxes.......... (1,062) -- 41 (128) (221) (N)
-------- --------------- --------------- ------ -------------
NET INCOME (LOSS)... $ (2,922) $ 336 $ 2,039 $ (597) $ (449)
-------- --------------- --------------- ------ -------------
-------- --------------- --------------- ------ -------------
<CAPTION>
PRO FORMA
CONSOLIDATED
-------------
<S> <C>
REVENUES
Service revenues..... $ 37,886
Product sales........ 6,475
-------------
Total revenues..... 44,361
Cost of products
sold................ (7,083)
-------------
37,278
COST OF SERVICES....... 6,188
-------------
GROSS MARGIN........ 31,090
EXPENSES
Sales, general and
administrative...... 16,575
Depreciation and
amortization........ 11,886
-------------
28,461
-------------
OPERATING INCOME
(LOSS)............. 2,629
OTHER INCOME (EXPENSE)
Interest expense..... (5,653)
Interest and other
income.............. 61
-------------
(5,592)
INCOME (LOSS) BEFORE
INCOME TAXES....... (2,963)
Provision (benefit) for
income taxes.......... (1,370)
-------------
NET INCOME (LOSS)... $ (1,593)
-------------
-------------
</TABLE>
- ----------------------------------
(1) See Schedule J for detail
(2) See Schedule K for detail
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-12
<PAGE>
SCHEDULE F
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL RESULTS
---------------------------------
3 MONTHS PRO FORMA ADJUSTMENT
ENDED TELETOUCH --------------------------
FEBRUARY 29, PENDING TELETOUCH
1996 ACQUISITIONS PENDING PRO FORMA
TELETOUCH (1) ACQUISITIONS FOOTNOTE CONSOLIDATED
---------------- --------------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Service revenues...................... $ 7,790 $ 2,285 $ -- $ 10,075
Product sales......................... 815 705 -- 1,520
------- ------- ------ ------------
Total revenues...................... 8,605 2,990 -- 11,595
Cost of products sold................. (1,214) (579) -- (1,793)
------- ------- ------ ------------
7,391 2,411 -- 9,802
COST OF SERVICES........................ 1,706 296 -- 2,002
------- ------- ------------
GROSS MARGIN........................ 5,685 2,115 -- 7,800
EXPENSES
Sales, general and administrative..... 3,155 1,211 (133) (L) 4,233
Depreciation and amortization......... 2,562 136 300 (M) 2,998
------- ------- ------ ------------
5,717 1,347 167 7,231
------- ------- ------ ------------
OPERATING INCOME (LOSS)............. (32) 768 (167) 569
OTHER INCOME (EXPENSE)
Interest expense...................... (1,844) (83) -- (1,927)
Interest and other income............. -- (10) -- (10)
------- ------- ------ ------------
(1,844) (93) -- (1,937)
INCOME (LOSS) BEFORE INCOME TAXES... (1,876) 675 (167) (1,368)
Provision (benefit) for income
taxes................................ (563) 12 (50) (N) (601)
------- ------- ------ ------------
NET INCOME (LOSS)................... $ (1,313) $ 663 $ (117) $ (767)
------- ------- ------ ------------
------- ------- ------ ------------
</TABLE>
- ------------------------
(1) See Schedule L for detail
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-13
<PAGE>
SCHEDULE G
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
TELETOUCH PENDING ACQUISITIONS
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
TELETOUCH
STAY IN PENDING
PREMIER LAPAGECO OKLAHOMA CIMARRON TOUCH AACS WARREN ACQUISITIONS
------- -------- -------- -------- ------- ---- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets................................... $ 557 $ 96 $184 $ 24 $ 864 $102 $259 $2,086
Equipment
Pagers......................................... 1,584 -- 31 -- 114 -- 321 2,050
Communications equipment....................... 406 389 284 101 1,391 496 219 3,286
Office and other............................... 312 7 11 -- 88 -- 52 470
------- -------- -------- -------- ------- ---- ------ ------------
2,302 396 326 101 1,593 496 592 5,806
Less allowance for depreciation................ 487 219 81 21 786 479 247 2,320
------- -------- -------- -------- ------- ---- ------ ------------
1,815 177 245 80 807 17 345 3,486
Goodwill and other assets, net................... 193 10 9 -- 29 50 -- 291
------- -------- -------- -------- ------- ---- ------ ------------
TOTAL ASSETS..................................... $ 2,565 $283 $438 $104 $ 1,700 $169 $604 $5,863
------- -------- -------- -------- ------- ---- ------ ------------
------- -------- -------- -------- ------- ---- ------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.............................. $ 714 $ 68 $ 1 $ 75 $ 145 $-- $373 $1,376
Long-term debt, less current maturities.......... 1,303 121 -- -- 312 -- 167 1,903
Deferred tax liabilities......................... 59 -- -- -- -- -- -- 59
Shareholders' equity (deficit)................... 489 94 437 29 1,243 169 64 2,525
------- -------- -------- -------- ------- ---- ------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $ 2,565 $283 $438 $104 $ 1,700 $169 $604 $5,863
------- -------- -------- -------- ------- ---- ------ ------------
------- -------- -------- -------- ------- ---- ------ ------------
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-14
<PAGE>
SCHEDULE H
PRONET INC. AND SUBSIDIARIES
PRONET COMPLETED ACQUISITIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
TWO
MONTHS THREE SIX
ENDED MONTHS MONTHS EIGHT MONTHS NINE MONTHS
FEB. 28, ENDED FOUR MONTHS ENDED ENDED ENDED AUGUST ENDED SEPT.
1995 MARCH 31, APRIL 30, 1995 JUNE 30, 31, 1995 30, 1995
--------- 1995 ------------------ 1995 -------------- -----------
SIGNET --------- METRO- -------- GOLD PAGING &
CHARLOTTE CARRIER POLITAN ALL CITY AMERICOM COAST LEWIS CELLULAR
--------- --------- ------- -------- -------- ----- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Service revenues......................... $ 872 $ 532 $ 1,870 $ 1,139 $1,810 $ 427 $ 932 $3,016
Product sales............................ 109 197 50 47 430 -- 780 1,161
--------- --------- ------- -------- -------- ----- ------ -----------
Total revenues......................... 981 729 1,920 1,186 2,240 427 1,712 4,177
Cost of products sold.................... (109) (179) (54) -- (259) -- (490) (887)
--------- --------- ------- -------- -------- ----- ------ -----------
872 550 1,866 1,186 1,981 427 1,222 3,290
COST OF SERVICES........................... 273 59 514 272 371 99 48 1,078
--------- --------- ------- -------- -------- ----- ------ -----------
GROSS MARGIN........................... 599 491 1,352 914 1,610 328 1,174 2,212
EXPENSES
Sales, general and administrative........ 367 286 592 511 782 160 650 1,122
Depreciation and amortization............ 17 54 215 292 209 51 88 492
--------- --------- ------- -------- -------- ----- ------ -----------
384 340 807 803 991 211 738 1,614
--------- --------- ------- -------- -------- ----- ------ -----------
OPERATING INCOME (LOSS)................ 215 151 545 111 619 117 436 598
OTHER INCOME (EXPENSE)
Interest expense......................... (54) (26) -- (528) (4) -- (4) (300)
Interest and other income................ 2 1 20 -- 97 -- 20 13
--------- --------- ------- -------- -------- ----- ------ -----------
(52) (25) 20 (528) 93 -- 16 (287)
INCOME (LOSS) BEFORE INCOME TAXES...... 163 126 565 (417) 712 117 452 311
Provision (benefit) for income taxes..... -- 1 192 -- -- -- -- --
--------- --------- ------- -------- -------- ----- ------ -----------
NET INCOME (LOSS)...................... $ 163 $ 125 $ 373 $ (417) $ 712 $ 117 $ 452 $ 311
--------- --------- ------- -------- -------- ----- ------ -----------
--------- --------- ------- -------- -------- ----- ------ -----------
<CAPTION>
ELEVEN
MONTHS
ENDED
NOV.
30, YEAR ENDED DECEMBER 31, 1995
1995 --------------------------------------------------- PRONET
------- SIGNET PAGE COMPLETED
APPLE SUN RALEIGH ONE AGR TOTAL WILLIAMS ACQUISITIONS
------- ------ ------- ------- ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Service revenues......................... $ 4,358 $1,528 $ 2,900 $ 4,864 $2,377 $ 784 $1,039 $28,448
Product sales............................ 846 246 146 722 72 322 165 5,293
------- ------ ------- ------- ------ ------ -------- ------------
Total revenues......................... 5,204 1,774 3,046 5,586 2,449 1,106 1,204 33,741
Cost of products sold.................... (1,153) (286) (123) (1,216) (772) (442) (101) (6,071)
------- ------ ------- ------- ------ ------ -------- ------------
4,051 1,488 2,923 4,370 1,677 664 1,103 27,670
COST OF SERVICES........................... 395 445 700 776 247 313 153 5,743
------- ------ ------- ------- ------ ------ -------- ------------
GROSS MARGIN........................... 3,656 1,043 2,223 3,594 1,430 351 950 21,927
EXPENSES
Sales, general and administrative........ 2,861 1,102 1,479 3,142 1,510 528 900 15,992
Depreciation and amortization............ 96 425 419 360 187 17 98 3,020
------- ------ ------- ------- ------ ------ -------- ------------
2,957 1,527 1,898 3,502 1,697 545 998 19,012
------- ------ ------- ------- ------ ------ -------- ------------
OPERATING INCOME (LOSS)................ 699 (484) 325 92 (267) (194) (48) 2,915
OTHER INCOME (EXPENSE)
Interest expense......................... -- -- (78) (123) (68) (13) (54) (1,252)
Interest and other income................ -- -- 48 1 8 90 39 339
------- ------ ------- ------- ------ ------ -------- ------------
-- -- (30) (122) (60) 77 (15) (913)
INCOME (LOSS) BEFORE INCOME TAXES...... 699 (484) 295 (30) (327) (117) (63) 2,002
Provision (benefit) for income taxes..... -- -- -- -- -- -- -- 193
------- ------ ------- ------- ------ ------ -------- ------------
NET INCOME (LOSS)...................... $ 699 $ (484) $ 295 $ (30) $ (327) $ (117) $ (63) $ 1,809
------- ------ ------- ------- ------ ------ -------- ------------
------- ------ ------- ------- ------ ------ -------- ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-15
<PAGE>
SCHEDULE I
PRONET INC. AND SUBSIDIARIES
PRONET PENDING ACQUISITIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRONET
PENDING
PACWEST GEORGIALINA VIP ACQUISITIONS
------------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Service revenues........................................... $ 5,724 $ 3,865 $ 1,635 $ 11,224
Product sales.............................................. 1,015 789 870 2,674
------------- ----------- --------- -----------
Total revenues........................................... 6,739 4,654 2,505 13,898
Cost of products sold...................................... (874) (1,218) (833) (2,925)
------------- ----------- --------- -----------
5,865 3,436 1,672 10,973
COST OF SERVICES............................................. 1,233 898 491 2,622
------------- ----------- --------- -----------
GROSS MARGIN............................................... 4,632 2,538 1,181 8,351
EXPENSES
Sales, general and administrative.......................... 3,970 1,998 614 6,582
Depreciation and amortization.............................. 856 383 149 1,388
------------- ----------- --------- -----------
4,826 2,381 763 7,970
------------- ----------- --------- -----------
OPERATING INCOME (LOSS).................................. (194) 157 418 381
OTHER INCOME (EXPENSE)
Interest expense........................................... (381) (221) (20) (622)
Interest and other income.................................. -- (1) 1 --
------------- ----------- --------- -----------
(381) (222) (19) (622)
INCOME (LOSS) BEFORE INCOME TAXES........................ (575) (65) 399 (241)
Provision (benefit) for income taxes....................... (209) -- -- (209)
------------- ----------- --------- -----------
NET INCOME (LOSS)........................................ $ (366) $ (65) $ 399 $ (32)
------------- ----------- --------- -----------
------------- ----------- --------- -----------
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-16
<PAGE>
SCHEDULE J
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
TELETOUCH COMPLETED ACQUISITIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
ONE MONTH EIGHT MONTHS
ONE MONTH ENDED DEC. 31, ENDED JULY 31,
ENDED DEC. 31, 1994 1995
1994 -------------- -------------- TELETOUCH
--------------- BEEPERS DIAL-A- COMPLETED
WACO PLUS PAGE ACQUISITIONS
--------------- -------------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES
Service revenues.......................................... $127 $ 660 $10,579 $11,366
Product sales............................................. 17 104 1,126 1,247
----- ------ -------------- ------------
Total revenues.......................................... 144 764 11,705 12,613
Cost of products sold..................................... (18) (163) (685) (866)
----- ------ -------------- ------------
126 601 11,020 11,747
COST OF SERVICES............................................ 16 76 1,683 1,775
----- ------ -------------- ------------
GROSS MARGIN............................................ 110 525 9,337 9,972
EXPENSES
Sales, general and administrative......................... 70 227 5,104 5,401
Depreciation and amortization............................. 10 82 2,897 2,989
----- ------ -------------- ------------
80 309 8,001 8,390
----- ------ -------------- ------------
OPERATING INCOME (LOSS)................................. 30 216 1,336 1,582
OTHER INCOME (EXPENSE)
Interest expense.......................................... (1) (38) (1,214) (1,253)
Interest and other income................................. 3 -- 4 7
----- ------ -------------- ------------
2 (38) (1,210) (1,246)
INCOME (LOSS) BEFORE INCOME TAXES....................... 32 178 126 336
Provision (benefit) for income taxes...................... -- -- -- --
----- ------ -------------- ------------
NET INCOME (LOSS)....................................... $ 32 $ 178 $ 126 $ 336
----- ------ -------------- ------------
----- ------ -------------- ------------
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-17
<PAGE>
SCHEDULE K
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
TELETOUCH PENDING ACQUISITIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
STAY IN
PREMIER LAPAGECO OKLAHOMA CIMARRON TOUCH AACS
----------- ------------- ----------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Service revenues............................ $ 1,369 $ 542 $ 655 $ 471 $ 3,250 $ 622
Product sales............................... 859 -- 465 52 883 --
----------- ----- ----------- ----------- --------- -----
Total revenues............................ 2,228 542 1,120 523 4,133 622
Cost of products sold....................... (309) -- (462) (298) (1,031) --
----------- ----- ----------- ----------- --------- -----
1,919 542 658 225 3,102 622
COST OF SERVICES.............................. 115 52 112 29 312 87
----------- ----- ----------- ----------- --------- -----
GROSS MARGINS............................. 1,804 490 546 196 2,790 535
EXPENSES
Sales, general and administrative........... 1,405 361 78 141 1,657 195
Depreciation and amortization............... 185 47 -- 20 195 24
----------- ----- ----------- ----------- --------- -----
1,590 408 78 161 1,852 219
----------- ----- ----------- ----------- --------- -----
OPERATING INCOME (LOSS)................... 214 82 468 35 938 316
OTHER INCOME (EXPENSE)
Interest expense............................ (234) (22) -- -- (66) --
Interest and other income................... 4 (5) -- -- 17 30
----------- ----- ----------- ----------- --------- -----
(230) (27) -- -- (49) 30
INCOME (LOSS) BEFORE INCOME
TAXES.................................... (16) 55 468 35 889 346
Provision (benefit) for income taxes........ 22 11 -- 8 -- --
----------- ----- ----------- ----------- --------- -----
NET INCOME (LOSS)......................... $ (38) $ 44 $ 468 $ 27 $ 889 $ 346
----------- ----- ----------- ----------- --------- -----
----------- ----- ----------- ----------- --------- -----
<CAPTION>
TELETOUCH
PENDING
WARREN ACQUISITIONS
----------- -----------
<S> <C> <C>
REVENUES
Service revenues............................ $ 1,378 $ 8,287
Product sales............................... 276 2,535
----------- -----------
Total revenues............................ 1,654 10,822
Cost of products sold....................... (263) (2,363)
----------- -----------
1,391 8,459
COST OF SERVICES.............................. 237 944
----------- -----------
GROSS MARGINS............................. 1,154 7,515
EXPENSES
Sales, general and administrative........... 687 4,524
Depreciation and amortization............... 93 564
----------- -----------
780 5,088
----------- -----------
OPERATING INCOME (LOSS)................... 374 2,427
OTHER INCOME (EXPENSE)
Interest expense............................ (79) (401)
Interest and other income................... 8 54
----------- -----------
(71) (347)
INCOME (LOSS) BEFORE INCOME
TAXES.................................... 303 2,080
Provision (benefit) for income taxes........ -- 41
----------- -----------
NET INCOME (LOSS)......................... $ 303 $ 2,039
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-18
<PAGE>
SCHEDULE L
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
TELETOUCH PENDING ACQUISITIONS
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
TELETOUCH
STAY IN PENDING
PREMIER LAPAGECO OKLAHOMA CIMARRON TOUCH AACS WARREN ACQUISITIONS
------- -------- -------- -------- ------- ---- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Service revenues.............................. $408 $156 $164 $118 $ 908 $153 $378 $2,285
Product sales................................. 308 -- 116 13 236 -- 32 705
------- -------- -------- -------- ------- ---- ------ ------------
Total revenues.............................. 716 156 280 131 1,144 153 410 2,990
Cost of product sold.......................... (89) -- (116) (75) (238) -- (61) (579)
------- -------- -------- -------- ------- ---- ------ ------------
627 156 164 56 906 153 349 2,411
COST OF SERVICES................................ 45 17 28 7 119 21 59 296
------- -------- -------- -------- ------- ---- ------ ------------
GROSS MARGIN................................ 582 139 136 49 787 132 290 2,115
EXPENSES
Sales, general and administrative............. 393 90 20 35 447 55 171 1,211
Depreciation and amortization................. 41 17 -- 5 45 3 25 136
------- -------- -------- -------- ------- ---- ------ ------------
434 107 20 40 492 58 196 1,347
------- -------- -------- -------- ------- ---- ------ ------------
OPERATING INCOME (LOSS)..................... 148 32 116 9 295 74 94 768
OTHER INCOME (EXPENSE)
Interest expense.............................. (51) (4) -- -- (9) -- (19) (83)
Interest and other income..................... 1 5 -- -- (16) -- -- (10)
------- -------- -------- -------- ------- ---- ------ ------------
(50) 1 -- -- (25) -- (19) (93)
INCOME (LOSS) BEFORE INCOME
TAXES...................................... 98 33 116 9 270 74 75 675
Provision for income taxes.................... -- 10 -- 2 -- -- -- 12
------- -------- -------- -------- ------- ---- ------ ------------
NET INCOME (LOSS)........................... $ 98 $ 23 $116 $ 7 $ 270 $74 $ 75 $ 663
------- -------- -------- -------- ------- ---- ------ ------------
------- -------- -------- -------- ------- ---- ------ ------------
</TABLE>
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
F-19
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On March 1, 1995, the Company purchased substantially all of the paging
assets of Signet Charlotte for approximately $9.0 million, comprised of
approximately $4.8 million paid in cash at closing and a $4.2 million deferred
payment. On April 1, 1995, the Company completed the purchase of substantially
all of the paging assets of Carrier for approximately $6.5 million, comprised of
approximately $3.5 million paid in cash at closing and a deferred payment of
approximately $3.0 million. Effective May 1, 1995, the Company completed the
acquisition of all the outstanding capital stock of Metropolitan for
approximately $21.0 million paid in cash at closing. Also effective May 1, 1995,
the Company completed the purchase of substantially all of the paging assets of
All City for approximately $6.4 million, comprised of approximately $6.0 million
paid in cash at closing and a $350,000 deferred payment. Effective July 1, 1995,
the Company completed the purchase of substantially all of the paging assets of
Americom for approximately $17.5 million, comprised of approximately $8.8
million paid in cash at closing and a deferred payment of $8.7 million. On
September 1, 1995, the Company completed the purchase of substantially all of
the paging assets of Lewis for approximately $5.6 million, comprised of
approximately $3.5 million paid in cash at closing and a $2.1 million deferred
payment. On September 1, 1995, the Company completed the purchase of
substantially all of the paging assets of Gold Coast for approximately $2.3
million paid in cash at closing. Effective October 1, 1995, the Company
completed the acquisition of substantially all of the paging assets of Paging &
Cellular for approximately $9.5 million paid in cash at closing. On December 1,
1995, the Company completed the acquisition of all of the outstanding capital
stock of Apple for approximately $13.0 million, comprised of approximately $8.5
million paid in cash and approximately $4.5 million in stock at closing.
Effective December 31, 1995, the Company completed the acquisition of
substantially all of the paging assets of Sun for approximately $2.3 million
paid in cash at closing. Effective January 1, 1996, the Company completed two
acquisitions. The Company acquired substantially all of the paging assets of
SigNet Raleigh for approximately $8.7 million, comprised of approximately $4.7
million paid in cash at closing and delivery of $3.2 million in common stock of
the Company at closing and a $800,000 deferred payment. Also, the Company
completed the purchase of substantially all of the outstanding capital stock of
Page One for approximately $19.7 million, comprised of approximately $14.8
million paid in cash at closing and a $4.9 million deferred payment. Effective
February 1, 1996, the Company completed three additional acquisitions. The
Company acquired all of the outstanding capital stock of AGR for approximately
$6.5 million paid in cash at closing, Total for approximately $2.2 million,
comprised of approximately $400,000 paid in cash and $1.8 million in common
stock of the Company at closing, and Williams for $2.7 million paid in cash at
closing. In addition, upon the final grant of certain licenses, the Company will
pay an additional $1.5 million for AGR and $400,000 for Total. These
acquisitions were accounted for as purchases and were financed with the proceeds
of the Existing Notes and/or borrowings under the Company's credit facility. The
results of operations for the ProNet Completed Acquisitions are included in the
actual results of operations of the Company from the respective dates of
acquisition, and the historical balance sheet of the Company at March 31, 1996
includes these acquisitions.
In April 1996, the Company signed a letter of intent to purchase all of the
outstanding capital stock of Georgialina for an amount to be determined based
upon the terms of the agreement. Also in April 1996, the Company signed a
definitive agreement to purchase all of the outstanding capital stock of PacWest
and another definitive agreement to acquire all the outstanding capital stock of
Teletouch. In May 1996, the Company signed a letter of intent to purchase
substantially all of the assets of VIP. These transactions will be accounted for
as purchases for an approximate aggregate cost of $229.5 million. Also in April
1996, the Company entered into an agreement to purchase the Nationwide License
for approximately $43 million. These transactions are expected to close in 1996
and are subject to various conditions and approvals. The Company anticipates
these acquisitions will be funded with proceeds from the Offerings.
F-20
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All deferred payments listed above are due one year from the closing of the
respective transactions and are payable, at the Company's discretion, either in
cash or shares of the Company's Common Stock based on market value at the date
of payment.
On December 29, 1994, Teletouch acquired substantially all of the non-cash
assets and assumed certain liabilities of Waco for approximately $2.9 million.
Also on December 29, 1994, Teletouch acquired certain assets, liabilities and
stock of Beepers Plus for approximately $17.7 million paid in cash. On August 3,
1995, Teletouch acquired substantially all of the non-cash assets and assumed
certain liabilities of Dial-A-Page for approximately $49.8 million. These
acquisitions were accounted for as purchases and were funded with proceeds from
debt and equity financings.
In April 1996, Teletouch signed definitive agreements or letters of intent
to purchase substantially all of the paging assets of Warren, Stay in Touch,
Cimarron and Oklahoma all of the outstanding capital stock of AACS, LaPageCo and
Premier. These transactions are expected to close in 1996 and are subject to
various conditions and approvals. They will be accounted for as purchases for an
approximate aggregate cost of $34.3 million.
The unaudited pro forma condensed statements of operations reflect the
transactions as though the Acquisitions had been acquired at the beginning of
the periods presented. The Company and the Acquisitions, except for Gold Coast,
Teletouch, Premier and PacWest, operated on a December 31 fiscal year basis.
Gold Coast operated on a June 30 fiscal year basis. Teletouch operates on a May
31 fiscal year basis. Teletouch's results of operations for the six months ended
November 30, 1995, were combined with the results of operations for the six
months ended May 31, 1995, to reflect the year ended November 30, 1995. Premier
operates on a March 31 fiscal year basis. PacWest operates on a November 30
fiscal year basis. The respective results of operations for Signet Charlotte,
Carrier, Metropolitan, All City, Americom, Gold Coast, Lewis, Paging & Cellular
and Apple from January 1, 1995, to the dates of the respective acquisitions were
combined with the actual results of operations of the Company, Sun, SigNet
Raleigh, Page One, AGR, Total, Williams, Georgialina and VIP for the year ended
December 31, 1995 and the results of operations of PacWest for the twelve months
ended November 30, 1995, to determine the pro forma results of operations for
ProNet for the year ended December 31, 1995. The respective results of
operations for Waco, Beepers Plus and Dial-A-Page from November 30, 1994, to the
dates of the respective acquisitions and Premier, LaPageCo, Oklahoma, Cimarron,
Stay in Touch, AACS and Warren for the year ended December 31, 1995, were
combined with the actual results of operations of Teletouch for the twelve
months ended November 30, 1995, to determine the pro forma results of operations
for Teletouch for the year ended December 31, 1995. The respective results of
operations of AGR, Total and Williams from the date of acquisition were combined
with the actual results of operations of the Company, Georgialina and VIP for
the three months ended March 31, 1996 and the results of operations of PacWest
for the three months ended February 29, 1996, to determine the pro forma results
of operations for ProNet for the three months ended March 31, 1996. The
respective results of operations of Premier, LaPageCo, Oklahoma, Cimarron, Stay
in Touch, AACS and Warren for the three months ended March 31, 1995, were
combined with the results of operations of Teletouch for the three months ended
February 29, 1995, to determine the pro forma results of operations for
Teletouch for the three months ended March 31, 1996.
F-21
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PRONET PRO FORMA FINANCIAL STATEMENTS
The accompanying ProNet pro forma condensed consolidated balance sheet as of
March 31, 1996, has been prepared as if the ProNet Pending Acquisitions had
occurred on that date and reflects the following adjustments:
(A) Pro forma adjustments are made to record the borrowings under the
Credit Facility and the issuance of the Company's Common Stock. The
following is a detail of these adjustments (in thousands):
<TABLE>
<CAPTION>
DEBIT CREDIT
--------- ---------
<S> <C> <C>
Investments in the ProNet Pending Acquisitions............... $ 36,700
Shareholders' equity (deficit)............................. $ 10,000
Long-term debt, less current maturities.................... 26,700
</TABLE>
To record the purchases of the ProNet Pending Acquisitions.
(B) Pro forma adjustments are made to reflect the fair value of those
assets acquired and liabilities assumed as a result of the ProNet Pending
Acquisitions. The Company will not acquire cash or assume certain trade
payables, certain accrued expenses or existing long-term debt. The following
is a detail of these adjustments (in thousands):
<TABLE>
<S> <C> <C>
Long-term debt..................................... $ 5,615
Allowance for depreciation......................... 4,038
Current liabilities................................ 1,327
Deferred tax liabilities........................... 150
Shareholders' equity (deficit)..................... 1,737
Current assets................................... $ 137
Equipment........................................ 4,038
Goodwill and other assets........................ 860
Investments in the ProNet Pending Acquisitions... 7,832
</TABLE>
To reflect the allocation of the purchase price of the ProNet Pending
Acquisitions and to reflect reductions in certain assets not acquired and
liabilities not assumed by the Company.
(C) Pro forma adjustments are made to goodwill equal to the excess of
the applicable purchase price over the fair values assigned to assets
acquired and liabilities assumed. A pro forma adjustment is made to other
assets to record the noncompetition agreements based on amounts stated in
the respective definitive agreements. The following is a detail of these
adjustments (in thousands):
<TABLE>
<S> <C> <C>
Goodwill and other assets........................ $ 28,868
Investments in the ProNet Pending
Acquisitions.................................. $ 28,868
</TABLE>
To record goodwill related to the ProNet Pending Acquisitions.
(D) Pro forma adjustments are made to depreciate pagers according to the
method used by the Company. The following is a detail of these adjustments
(in thousands):
<TABLE>
<S> <C> <C>
Goodwill and other assets............................... $ 86
Pagers................................................ $ 86
</TABLE>
To depreciate pagers related to the ProNet Pending Acquisitions.
F-22
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(E) A pro forma adjustment is made to record the purchase of the
Nationwide License. The following is a detail of this adjustment (in
thousands):
<TABLE>
<CAPTION>
DEBIT CREDIT
--------- ---------
<S> <C> <C>
Communications equipment..................................... $ 6,000
Goodwill and other assets.................................... 37,000
Long-term debt, less current maturities.................... $ 43,000
</TABLE>
To record the purchase of the Nationwide License.
The following is a summary of the fair value assigned to the assets acquired
and liabilities assumed from the ProNet Pending Acquisitions (in thousands):
<TABLE>
<CAPTION>
HISTORICAL COST
------------------------------------- FAIR
PACWEST GEORGIALINA VIP SUBTOTAL ADJUSTMENTS VALUE
----------- ------------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets........ $ 316 $ 842 $ 346 $ 1,504 $ (137) $ 1,367
Equipment
Pagers.............. 2,300 1,525 398 4,223 (1,288) 2,935
Communications
Equipment.......... 4,656 456 1,198 6,310 (2,483) 3,827
Office and other.... 105 470 119 694 (267) 427
----------- ------------- --------- ----------- ----------- ---------
7,061 2,451 1,715 11,227 (4,038) 7,189
Less allowance for
depreciation......... 2,693 672 673 4,038 (4,038) --
----------- ------------- --------- ----------- ----------- ---------
4,368 1,779 1,042 7,189 -- 7,189
Goodwill, net......... -- -- -- -- 28,868 28,868
Other assets, net..... 100 800 21 921 (860) 61
----------- ------------- --------- ----------- ----------- ---------
Total Assets.......... 4,784 3,421 1,409 9,614 27,871 37,485
Current liabilities... 1,454 573 85 2,112 (1,327) 785
Long-term debt........ 2,993 2,595 177 5,765 (5,765) --
----------- ------------- --------- ----------- ----------- ---------
Net assets............ $ 337 $ 253 $ 1,147 $ 1,737 $ 34,963 $ 36,700
----------- ------------- --------- ----------- ----------- ---------
----------- ------------- --------- ----------- ----------- ---------
</TABLE>
The accompanying ProNet pro forma condensed consolidated statement of
operations for the year ended December 31, 1995 and for the three months ended
March 31, 1996, have been prepared by combining the historical results of the
ProNet and the ProNet Acquisitions for such respective periods and reflect the
following adjustments:
(F) A pro forma adjustment is made to reflect the effect on service
revenues related to the segment of the operations of All City not acquired
by the Company.
(G) The pro forma adjustment to sales, general and administrative
expenses represents expenses that would not have been incurred had the
ProNet Acquisitions occurred at the beginning of the periods presented. For
Signet Charlotte, Carrier, All City, Metropolitan, Lewis, Paging & Cellular,
Apple, Sun, SigNet Raleigh, Page One, AGR, Total, Williams, PacWest,
Georgialina and VIP, cost savings relate to decreased salaries (primarily
due to reductions in senior management), office rent, professional fees,
telephone costs and bad debts.
(H) Pro forma adjustments are made to the statements of operations to
reflect additional depreciation and amortization expense based on the fair
value of the assets acquired as if the ProNet Acquisitions had occurred at
the beginning of the periods presented. Pro forma depreciation is computed
using the straight-line method over the remaining estimated useful lives of
the assets. Goodwill is amortized using the straight-line method over a
15-year term.
F-23
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TELETOUCH PRO FORMA FINANCIAL STATEMENTS
The accompanying Teletouch pro forma condensed consolidated balance sheet as
of March 31, 1996, has been prepared as if the Teletouch Pending Acquisitions
had occurred on that date and reflects the following adjustments:
(I) Pro forma adjustments are made to record borrowings assuming
Teletouch obtains a new credit facility to fund the Teletouch Pending
Acquisitions. The following is a detail of these adjustments (in thousands):
<TABLE>
<CAPTION>
DEBIT CREDIT
--------- ---------
<S> <C> <C>
Investments in the Teletouch Pending Acquisitions............ $ 34,281
Long-term debt, less current maturities.................... $ 34,281
</TABLE>
To record the purchases of the Teletouch Pending Acquisitions.
(J) Pro forma adjustments are made to reflect the fair value of those
assets acquired and liabilities assumed as a result of the Teletouch Pending
Acquisitions. Teletouch will not acquire cash or assume certain trade
payables, certain accrued expenses or existing long-term debt. The following
is a detail of these adjustments (in thousands):
<TABLE>
<S> <C> <C>
Goodwill and other assets........................ $ 165
Long-term debt, less current maturities.......... 1,528
Allowance for depreciation....................... 2,320
Current liabilities.............................. 1,223
Deferred tax liabilities......................... 59
Shareholders' equity (deficit)................... 2,525
Current Assets................................. $ 1,167
Equipment...................................... 2,415
Investments in the Teletouch Pending
Acquisitions.................................. 4,238
</TABLE>
To reflect the allocation of the purchase price of the Teletouch Pending
Acquisitions and to reflect reductions in certain assets not acquired and
liabilities not assumed by Teletouch.
(K) Pro forma adjustments are made to goodwill equal to the excess of
the applicable purchase price over the fair values assigned to assets
acquired and liabilities assumed. The following is a detail of these
adjustments (in thousands):
<TABLE>
<S> <C> <C>
Goodwill and other assets........................ $ 30,043
Investments in the Teletouch Pending
Acquisitions.................................. $ 30,043
</TABLE>
To record goodwill related to the Teletouch Pending Acquisitions.
F-24
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a summary of the fair value assigned to the assets acquired
and liabilities assumed from the Teletouch Pending Acquisitions (in thousands):
<TABLE>
<CAPTION>
HISTORICAL COST
-----------------------------------------------------------------------------------------------
STAY IN
PREMIER LAPAGECO OKLAHOMA CIMARRON TOUCH AACS WARREN SUBTOTAL
----------- ------------- ------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets....... $ 557 $ 96 $ 184 $ 24 $ 864 $ 102 $ 259 $ 2,086
Equipment
Pagers............. 1,584 -- 31 -- 114 -- 321 2,050
Communications
Equipment......... 406 389 284 101 1,391 496 219 3,286
Office and other... 312 7 11 -- 88 -- 52 470
----------- ----- ----- ----- ----------- ----- ----- -----------
2,302 396 326 101 1,593 496 592 5,806
Less allowance for
depreciation........ 487 219 81 21 786 479 247 2,320
----------- ----- ----- ----- ----------- ----- ----- -----------
1,815 177 245 80 807 17 345 3,486
Goodwill, net........ -- -- -- -- -- -- -- --
Other assets, net.... 193 10 9 -- 29 50 -- 291
----------- ----- ----- ----- ----------- ----- ----- -----------
Total assets......... 2,565 283 438 104 1,700 169 604 5,863
Current
liabilities......... 714 68 1 75 145 -- 373 1,376
Long-term debt....... 1,362 121 -- -- 312 -- 167 1,962
----------- ----- ----- ----- ----------- ----- ----- -----------
Net assets........... $ 489 $ 94 $ 437 $ 29 $ 1,243 $ 169 $ 64 $ 2,525
----------- ----- ----- ----- ----------- ----- ----- -----------
----------- ----- ----- ----- ----------- ----- ----- -----------
<CAPTION>
FAIR
ADJUSTMENTS VALUE
----------- ---------
<S> <C> <C>
Current assets....... $ (1,167) $ 919
Equipment
Pagers............. (474) 1,576
Communications
Equipment......... (1,730) 1,556
Office and other... (211) 259
----------- ---------
(2,415) 3,391
Less allowance for
depreciation........ (2,320) --
----------- ---------
(95) 3,391
Goodwill, net........ 30,043 30,043
Other assets, net.... (210) 81
----------- ---------
Total assets......... 28,571 34,434
Current
liabilities......... (1,223) 153
Long-term debt....... (1,962) --
----------- ---------
Net assets........... $ 31,751 $ 34,281
----------- ---------
----------- ---------
</TABLE>
The accompanying Teletouch pro forma condensed consolidated statement of
operations for the year ended December 31, 1995 and for the three months ended
March 31, 1996, have been prepared by combining the historical results of
Teletouch and the Teletouch Acquisitions for such respective periods and reflect
the following adjustments:
(L) The pro forma adjustment to sales, general and administrative
expenses represents expenses that would not have been incurred had the
Teletouch Pending Acquisitions and the Teletouch Completed Acquisitions
occurred at the beginning of the periods presented. For Dial-A-Page,
Premier, LaPageCo, Cimarron, Stay in Touch and Warren, cost savings relate
to decreased salaries (primarily due to reductions in senior management),
office rent, and professional fees.
(M) Pro forma adjustments are made to the statements of operations to
reflect additional depreciation and amortization expense based on the fair
value of the assets acquired as if the Teletouch Pending Acquisitions and
the Teletouch Completed Acquisitions had occurred at the beginning of the
periods presented. Pro forma depreciation is computed using the
straight-line method over the remaining estimated useful lives of the
assets. Goodwill is amortized using the straight-line method over a 25-year
term.
(N) The pro forma adjustments reflect the estimated tax impact of the
pro forma adjustments reflected in the Teletouch Completed Acquisitions and
Teletouch Pending Acquisitions. Dial-A-Page, Waco and Beepers Plus were
historically nontaxable entities.
F-25
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The accompanying consolidated pro forma condensed consolidated balance sheet
as of March 31, 1996, has been prepared as if the Teletouch Acquisition had
occurred on that date and reflects the following adjustments:
(O) Pro forma adjustments are made to record the (i) proceeds from the
Offerings and associated issuance expenses and (ii) write-off of the
previous bank debt financing costs. The following is a detail of these
adjustments (in thousands):
<TABLE>
<CAPTION>
DEBIT CREDIT
----------- -----------
<S> <C> <C>
Current assets............................................ $ 207,700
Goodwill and other assets................................. 7,100
Shareholders' equity (deficit)............................ 2,282
Goodwill and other assets............................... $ 2,282
Long-term debt, less current maturities................. 120,000
Shareholders' equity (deficit).......................... 94,800
</TABLE>
To record the proceeds from the Offerings and associated issuance expenses.
(P) Pro forma adjustments are made to record payments on the Credit
Facility. The following is a detail of these adjustments (in thousands):
<TABLE>
<S> <C> <C>
Current liabilities............................ $ 1,040
Long-term debt, less current maturities........ 95,260
Current assets............................... $ 96,300
</TABLE>
To record the payments on the Credit Facility.
(Q) Pro forma adjustments are made to (i) record the use of cash, (ii)
record the payment of Teletouch's debt and (iii) the issuance of stock in
connection with the Teletouch Acquisition. The following is a detail of
these adjustments (in thousands):
<TABLE>
<S> <C> <C>
Shareholders' equity (deficit)................. $ 17,447
Investment in the Teletouch Acquisition........ 83,422
Current liabilities............................ 620
Long-term debt, less current maturities........ 93,148
Current assets............................... $ 115,101
Shareholders' equity (deficit)............... 79,536
</TABLE>
To record the Teletouch Acquisition.
(R) Pro forma adjustments are made to reflect the fair value of those
assets acquired and liabilities assumed in of the Teletouch Acquisition. The
following is a detail of these adjustments (in thousands):
<TABLE>
<S> <C> <C>
Investment in the Teletouch Acquisition........ $ 83,774
Allowance for depreciation..................... 4,514
Deferred tax liabilities....................... 1,507
Shareholders' equity (deficit)................. 2,805
Current Assets............................... $ 2,806
Equipment.................................... 1,864
Goodwill and other assets.................... 87,930
</TABLE>
To reflect the allocation of the purchase price of the Teletouch
Acquisition.
F-26
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(S) Pro forma adjustments are made to goodwill equal to the excess of
the applicable purchase price over the fair values assigned to assets
acquired and liabilities assumed. The following is a detail of these
adjustments (in thousands):
<TABLE>
<CAPTION>
DEBIT CREDIT
----------- -----------
<S> <C> <C>
Goodwill and other assets................................. $ 167,196
Investments in the Teletouch Acquisition................ $ 167,196
</TABLE>
To record goodwill related to the Teletouch Acquisition.
(T) Pro forma adjustments are made to depreciate pagers according to
the method used by the Company. The following is a detail of these
adjustments (in thousands):
<TABLE>
<S> <C> <C>
Goodwill and other assets...................... $179
Pagers....................................... $179
</TABLE>
To depreciate pagers related to the Teletouch Acquisition.
The following is a summary of the fair value assigned to the assets acquired
and liabilities assumed from the Teletouch Acquisition (in thousands):
<TABLE>
<CAPTION>
TELETOUCH ADJUSTMENTS FAIR VALUE
-------------- ----------- -----------
<S> <C> <C> <C>
Current assets........................... $ 9,313 $ (2,806) $ 6,507
Equipment
Pagers................................. 6,977 1,462 8,439
Communications equipment............... 16,409 (2,774) 13,635
Office and other....................... 4,177 (731) 3,446
-------------- ----------- -----------
27,563 (2,043) 25,520
Less allowance for depreciation.......... 4,514 (4,514) --
-------------- ----------- -----------
23,049 2,471 25,520
Goodwill and other assets, net........... 88,011 79,445 167,456
-------------- ----------- -----------
Total assets............................. 120,373 79,110 199,483
Current liabilities...................... 5,466 (620) 4,846
Long-term debt........................... 94,655 (94,655) --
-------------- ----------- -----------
Net assets............................... $ 20,252 $ 174,385 $ 194,637
-------------- ----------- -----------
-------------- ----------- -----------
</TABLE>
The accompanying ProNet pro forma condensed consolidated statement of
operations for the year ended December 31, 1995 and for the three months ended
March 31, 1996, have been prepared by combining the pro forma results of ProNet
and Teletouch for such respective periods and reflect the following adjustments:
(U) The pro forma adjustment to sales, general and administrative
expenses represents expenses that would not have been incurred had the
Teletouch Acquisition occurred at the beginning of the periods presented.
The cost savings relate to decreased salaries (primarily due to reductions
in senior management), office rent and professional fees.
(V) Pro forma adjustments are made to the statements of operations to
reflect additional depreciation and amortization expense based on the fair
value of the assets acquired as if the Teletouch Acquisition had occurred at
the beginning of the periods presented. Pro forma depreciation is computed
using the straight-line method over the remaining estimated useful lives of
the assets. Goodwill is amortized using the straight-line method over a
15-year term.
F-27
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(W) Interest expense is comprised of interest on the Credit Facility,
the Existing Notes, the Notes and the Deferred Payments, plus the commitment
fee on the Credit Facility. Pro forma adjustments reflect (i) the reversals
of interest expense of $2.1 million for the three months ended March 31,
1996 and $7.5 million for the year ended December 31, 1995 on debt of the
Acquisitions not assumed by the Company and (ii) increase in interest
expense due to the sale of the Notes at an annual rate of 10 7/8% and
amortization of related debt issuance costs. Interest expense on the
Deferred Payments is provided as required by the definitive agreements or
letters of intent.
(X) 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. No tax benefits were recorded because the realization of
net operating losses is not assured beyond a reasonable doubt. Therefore, a
pro forma adjustment was made to eliminate any tax benefits associated with
the Acquisitions.
The pro forma condensed consolidated financial information presented is not
necessarily indicative of either the results of operations that would have
occurred had the Acquisitions taken place at the beginning of the periods
presented or of future results of operations of the combined operations.
F-28
<PAGE>
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. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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.
ERNST & YOUNG LLP
Dallas, Texas
February 5, 1996
F-29
<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.
F-30
<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) $ 0.16 $ 0.40
--------- --------- ---------
--------- --------- ---------
WEIGHTED AVERAGE SHARES........................................................ 6,267 4,393 3,982
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-31
<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.
F-32
<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.
F-33
<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.
F-34
<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>
F-35
<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
F-36
<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.
F-37
<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.
F-38
<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) $ --
--------- ---------
--------- ---------
</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.
F-39
<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 $ 14.25 -- 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>
F-40
<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.
F-41
<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).
F-42
<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>
F-43
<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>
F-44
<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>
F-45
<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
F-46
<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.
F-47
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................................... $ 2,089 $ 10,154
Trade accounts receivable, net of allowance for doubtful accounts................................. 10,635 7,498
Federal income tax receivable -- Note E........................................................... 753 990
Inventories....................................................................................... 2,156 1,574
Other current assets.............................................................................. 2,040 1,937
----------- ------------
17,673 22,153
EQUIPMENT
Pagers............................................................................................ 47,485 36,789
Communications equipment.......................................................................... 31,689 26,051
Security systems' equipment....................................................................... 12,304 11,866
Office and other equipment........................................................................ 9,024 7,179
----------- ------------
100,502 81,885
Less allowance for depreciation................................................................... (38,614) (34,203)
----------- ------------
61,888 47,682
GOODWILL AND OTHER ASSETS, net of amortization -- Note A............................................ 151,269 117,134
----------- ------------
$230,830 $186,969
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables.................................................................................... $ 12,033 $ 8,387
Other accrued expenses and liabilities............................................................ 14,384 10,524
Current maturities of long-term debt -- Note B.................................................... 1,040 --
----------- ------------
27,457 18,911
LONG-TERM DEBT, less current maturities -- Note B................................................... 130,297 99,319
DEFERRED CREDITS -- Note C.......................................................................... 17,382 19,183
STOCKHOLDERS' EQUITY -- Note A
Common stock...................................................................................... 75 70
Additional capital................................................................................ 68,874 56,617
Retained deficit.................................................................................. (11,795) (5,671)
Less treasury stock at cost....................................................................... (1,460) (1,460)
----------- ------------
55,694 49,556
----------- ------------
$230,830 $186,969
----------- ------------
----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
REVENUES
Service revenues......................................................................... $ 21,016 $ 10,488
Product sales............................................................................ 3,146 2,196
--------- ---------
Total revenues........................................................................... 24,162 12,684
Cost of products sold.................................................................... (2,781) (2,066)
--------- ---------
21,381 10,618
COST OF SERVICES
Pager lease and access services.......................................................... 5,512 2,220
Security systems' equipment services..................................................... 275 246
--------- ---------
5,787 2,466
--------- ---------
GROSS MARGIN............................................................................. 15,594 8,152
EXPENSES
Sales and marketing...................................................................... 4,039 1,642
General and administrative............................................................... 5,340 2,996
Depreciation and amortization............................................................ 8,707 2,745
--------- ---------
18,086 7,383
--------- ---------
OPERATING INCOME (LOSS).................................................................. (2,492) 769
OTHER INCOME (EXPENSE)
Interest and other income................................................................ 27 41
Interest expense......................................................................... (3,659) (386)
--------- ---------
(3,632) (345)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES........................................................ (6,124) 424
Income tax expense -- Note E............................................................... -- 358
--------- ---------
NET INCOME (LOSS)........................................................................ $ (6,124) $ 66
--------- ---------
--------- ---------
NET INCOME (LOSS) PER SHARE................................................................ $ (0.89) $ 0.01
--------- ---------
--------- ---------
WEIGHTED AVERAGE SHARES.................................................................... 6,909 6,627
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
---------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................................................... $ (6,124) $ 66
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization........................................................... 8,707 2,745
Amortization of discount................................................................ 18 --
Deferred tax provision.................................................................. -- 106
Provision for losses on accounts receivable............................................. 348 208
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable...................................... (2,143) 781
Decrease in inventories............................................................... 625 146
Increase in other current assets...................................................... (104) (220)
Increase (decrease) in trade payables and other accrued expenses and liabilities...... 6,324 (4,176)
---------- ---------
Net cash provided by (used in) operating activities..................................... 7,651 (344)
INVESTING ACTIVITIES:
Purchase of equipment, net.............................................................. (5,811) (926)
Purchase of pagers, net of disposals.................................................... (9,899) 635
Acquisitions, net of cash acquired...................................................... (31,647) (5,434)
Computer system software, product enhancements and other intangible assets.............. (372) (332)
Other................................................................................... (12) 53
---------- ---------
Net cash used in investing activities................................................... (47,741) (6,004)
FINANCING ACTIVITIES:
Proceeds from bank debt................................................................. 32,000 12,400
Exercise of incentive stock options for common stock.................................... 30 111
Debt financing costs.................................................................... (9) (1,391)
Other................................................................................... 4 (69)
---------- ---------
Net cash provided by financing activities............................................... 32,025 11,051
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................................... (8,065) 4,703
CASH AND CASH EQUIVALENTS:
Beginning of period..................................................................... 10,154 666
---------- ---------
End of period........................................................................... $ 2,089 $ 5,369
---------- ---------
---------- ---------
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996
NOTE A -- ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Form 10-K for ProNet Inc. (the "Company") filed with the Securities and
Exchange Commission (the "SEC") on March 1, 1996.
GOODWILL AND OTHER ASSETS: Goodwill and other assets consist of the
following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Goodwill.................................................................... $ 143,286 $ 108,153
Noncompetition agreements................................................... 7,354 4,750
Debt financing costs........................................................ 6,988 6,980
Other....................................................................... 5,967 6,517
----------- ------------
163,595 126,400
Less accumulated amortization............................................... 12,326 9,266
----------- ------------
$ 151,269 $ 117,134
----------- ------------
----------- ------------
</TABLE>
Goodwill is amortized using the straight-line method over a fifteen year
term. 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 amortized over periods not to exceed
the terms of the related agreements.
EQUIPMENT: Beginning in October 1995, the Company began recording and
depreciating all pagers as part of pager equipment.
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.
RECLASSIFICATION OF FINANCIAL STATEMENTS: The 1995 financial statements
have been reclassified to conform to the 1996 financial statement presentation.
F-51
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Senior subordinated notes................................................... $ 99,337 $ 99,319
Revolving line of credit.................................................... 32,000 --
----------- ------------
131,337 99,319
Less current maturities..................................................... (1,040) --
----------- ------------
$ 130,297 $ 99,319
----------- ------------
----------- ------------
</TABLE>
NOTE C -- DEFERRED CREDITS
Deferred credits consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Deferred payments............................................................. $ 16,694 $ 18,495
Deferred tax liability........................................................ 688 688
----------- ------------
$ 17,382 $ 19,183
----------- ------------
----------- ------------
</TABLE>
The Company has deferred payments outstanding related to various completed
acquisitions 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, $.01 par value (the
"Common Stock") based on current market value at the date of payment. In January
1996, the Company paid in cash the $200,000 deferred portion of the purchase
price of High Tech Communications Corp. ("High Tech"). In February 1996, the
Company issued 172,535 shares of its Common Stock and paid in cash $13,000 to
Signet Paging of Charlotte, Inc. ("Signet Charlotte") for payment of the $4.2
million deferred portion of the purchase price of Signet Charlotte. In March
1996, the Company issued 114,994 shares of its Common Stock to Carrier Paging
Systems, Inc. ("Carrier") in payment of the $3.0 million deferred portion of the
purchase price of Carrier.
NOTE D -- 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
Communications, Inc. ("Contact"), substantially all of the of the paging assets
of Radio Call Company, Inc. ("Radio Call") and High Tech and substantially all
of the Chicago-area paging assets of the RCC division of Chicago Communication
Service, Inc., ("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
Charlotte for $9.0 million, Carrier for $6.5 million, All City Communication
Company, Inc. ("All City") for $6.4 million, Americom Paging Corporation
("Americom") for $17.5 million, Lewis Paging, Inc. ("Lewis") for $5.6 million,
Gold Coast Paging, Inc. ("Gold Coast") for $2.3 million and Paging & Cellular of
Texas, a Sole Proprietorship ("Paging & Cellular") for $9.5 million and all the
outstanding capital stock of Metropolitan Houston Paging Services, Inc.
("Metropolitan") for $21.0 million and Apple Communication, Inc. ("Apple") for
$13.0 million. Effective January 1, 1996, the Company acquired substantially all
of the paging assets of Sun Paging Communications ("Sun") and SigNet Paging of
Raleigh, Inc. ("SigNet Raleigh") and all of the outstanding capital stock of
Cobbwells, Inc. dba Page One ("Page One") for $2.3 million, $8.7 million and
$19.7 million, respectively. Effective February 1, 1996, the Company completed
the acquisition of all of the outstanding capital stock of A.G.R. Electronics,
Inc. and affiliates ("AGR"), Total Communication Services, Inc.
F-52
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- ACQUISITIONS (CONTINUED)
("Total") and Williams Metro Communications Corp. and affiliates ("Williams")
for $6.5 million, $2.2 million and $2.7 million, respectively. The nineteen
completed acquisitions were accounted for as purchases and funded by borrowings
under the Company's revolving line of credit (the "Credit Facility"), proceeds
from the sale of the Company's senior subordinated notes (the "Notes") and
issuances of shares of the Company's Common Stock.
The pro forma unaudited results of operations for the three months ended
March 31, 1996 and 1995, (which include acquisitions closed as of March 31,
1996), assuming consummation of the purchases at the beginning of the periods
indicated, are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
----------- ------------
<S> <C> <C>
Total revenues................................................................ $ 24,572 $ 25,086
Net loss...................................................................... (6,304) (1,671)
Net loss per common share..................................................... (0.91) (0.24)
</TABLE>
These pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of the results of operations which actually
would have resulted had the acquisitions been made as of those dates or of
results which may occur in the future.
NOTE E -- INCOME TAXES
For the three months ended March 31, 1996, the primary difference between
the U.S. Federal statutory tax rate and the effective tax rate is the
amortization of goodwill related to stock acquisitions, which is not deductible
for tax purposes. Additionally, no recognition has been given to the potential
future tax benefits from net operating losses incurred in the first quarter of
1996, as such tax benefits are not assured beyond a reasonable doubt.
NOTE F -- SUBSEQUENT EVENTS
In April 1996, the Company signed a letter of intent to purchase all of the
outstanding capital stock of Georgialina Communication Company and affiliates
("Georgialina"). Also in April 1996, the Company signed two definitive
agreements. The first definitive agreement involved the merger of the Company
and Teletouch Communications, Inc. ("Teletouch"). The second definitive
agreement involved a merger with Pac-West Telecomm, Inc. and affiliates
("PacWest"). In May 1996, the Company entered into an agreement to purchase
substantially all of the assets of Ventures in Paging, L.C. ("VIP"). These
transactions will be accounted for as purchases for an approximate aggregate
purchase price of $229.5 million.
Also in April 1996, the Company entered into an agreement to purchase a
nationwide license (931.9125 MHz Radio Common Carrier frequency) and for the
purchase of associated system equipment (the "Nationwide License") from
Motorola, Inc. ("Motorola") for approximately $43 million.
These transactions are expected to close in 1996 and are subject to various
conditions and approvals. The Company has received a commitment letter from the
Lender to amend the Credit Facility to extend the maturity and to increase the
amount of available credit to $300 million.
F-53
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
ProNet Inc.
We have audited the accompanying Statements of Assets and Liabilities and
Divisional Equity of the Paging Divisions of Pac-West Telecomm, Inc. and
Subsidiary (the Company) as of November 30, 1995, and the related statements of
operations, divisional equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities and divisional equity of
the Paging Divisions of Pac-West Telecomm, Inc. and Subsidiary at November 30,
1995, and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
January 26, 1996
F-54
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
STATEMENTS OF ASSETS AND LIABILITIES AND DIVISIONAL EQUITY
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 29,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash.............................................................................................. $ 2,000 $ 6,000
Trade accounts receivable, net of allowance for doubtful accounts of $49,000 and $85,000 in 1995
and 1996, respectively........................................................................... 297,000 275,000
Prepaid expenses and other current assets......................................................... 39,000 35,000
------------ ------------
Total current assets............................................................................ 338,000 316,000
------------ ------------
Equipment, vehicles and leasehold improvements:
Communications equipment.......................................................................... 4,260,000 4,656,000
Pagers............................................................................................ 2,171,000 2,300,000
Office furniture and equipment.................................................................... 52,000 52,000
Vehicles.......................................................................................... 49,000 49,000
Leasehold improvements............................................................................ 4,000 4,000
------------ ------------
6,536,000 7,061,000
Less accumulated depreciation and amortization...................................................... 2,583,000 2,693,000
------------ ------------
3,953,000 4,368,000
------------ ------------
Goodwill and other assets, net of accumulated amortization of $43,000 and $48,000 in 1995 and 1996,
respectively....................................................................................... 105,000 100,000
------------ ------------
Total........................................................................................... $ 4,396,000 $ 4,784,000
------------ ------------
------------ ------------
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable.................................................................................. $ 87,000 $ 96,000
Accrued compensation.............................................................................. 88,000 80,000
Other accrued liabilities......................................................................... 21,000 16,000
Current portion of notes payable.................................................................. 461,000 422,000
Current portion of capital lease obligations...................................................... 716,000 840,000
------------ ------------
Total current liabilities....................................................................... 1,373,000 1,454,000
------------ ------------
Long-term debt:
Notes payable, less current portion............................................................... 599,000 505,000
Capital lease obligations, less current portion................................................... 2,004,000 2,338,000
------------ ------------
Total long-term debt............................................................................ 2,603,000 2,843,000
------------ ------------
Deferred income taxes............................................................................... 150,000 150,000
------------ ------------
Divisional equity................................................................................... 270,000 337,000
------------ ------------
Total........................................................................................... $ 4,396,000 $ 4,784,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-55
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
NOVEMBER 30, FEBRUARY 29, FEBRUARY 28,
1995 1996 1995
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Service revenues.............................................................. $ 5,724,000 $1,524,000 $1,404,000
Product sales................................................................. 1,015,000 242,000 265,000
------------ ------------ ------------
Total revenues................................................................ 6,739,000 1,766,000 1,669,000
Cost of products sold......................................................... (874,000) (223,000) (225,000)
------------ ------------ ------------
5,865,000 1,543,000 1,444,000
Cost of services................................................................ 1,233,000 274,000 243,000
------------ ------------ ------------
Gross margin.................................................................... 4,632,000 1,269,000 1,201,000
Expenses:
Sales and marketing........................................................... 3,118,000 938,000 743,000
General and administrative.................................................... 852,000 221,000 206,000
Depreciation and amortization................................................. 856,000 257,000 201,000
------------ ------------ ------------
4,826,000 1,416,000 1,150,000
------------ ------------ ------------
Operating income (loss)......................................................... (194,000) (147,000) 51,000
Interest expense................................................................ (381,000) (97,000) (74,000)
------------ ------------ ------------
Loss before income taxes........................................................ (575,000) (244,000) (23,000)
Income tax - benefit............................................................ 209,000 99,000 10,000
------------ ------------ ------------
Net loss........................................................................ $ (366,000) $ (145,000) $ (13,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-56
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Balance at December 1, 1994..................................................... $ 399,000
Net loss...................................................................... (366,000)
Cash transfers from parent.................................................... 237,000
------------
Balance at November 30, 1995.................................................... 270,000
Net loss (unaudited).......................................................... (145,000)
Cash transfers from parent.................................................... 212,000
------------
Balance at February 29, 1996 (unaudited)........................................ $ 337,000
------------
------------
</TABLE>
See accompanying notes.
F-57
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
NOVEMBER 30, FEBRUARY 29, FEBRUARY 28,
1995 1996 1995
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................................. $ (366,000) $ (145,000) $ (13,000)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 856,000 257,000 201,000
Provision for bad debts............................................................ 157,000 21,000 52,000
Deferred income taxes.............................................................. 130,000 -- --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable................................. (27,000) 1,000 (18,000)
(Increase) decrease in prepaid expenses and other current assets................. (7,000) 4,000 18,000
Increase (decrease) in accounts payable.......................................... (30,000) 9,000 (68,000)
Increase (decrease) in accrued compensation...................................... 18,000 (8,000) (14,000)
Increase (decrease) other liabilities............................................ 4,000 (4,000) (1,000)
------------ ------------ ------------
Net cash provided by operating activities.............................................. 735,000 135,000 157,000
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of fixed assets............................................................. (1,440,000) (396,000) (359,000)
Purchase of pagers-net............................................................... (234,000) (272,000) --
------------ ------------ ------------
Net cash used in investing activities.................................................. (1,674,000) (668,000) (359,000)
------------ ------------ ------------
FINANCING ACTIVITIES
Borrowings under notes payable and capital leases.................................... 1,744,000 653,000 359,000
Principal payments on notes payable and capital leases............................... (1,062,000) (328,000) (239,000)
Cash transfers from parent........................................................... 237,000 212,000 58,000
------------ ------------ ------------
Net cash provided by financing activities.............................................. 919,000 537,000 178,000
------------ ------------ ------------
Net increase (decrease) in cash........................................................ (20,000) 4,000 (24,000)
Cash at beginning of period............................................................ 22,000 2,000 22,000
------------ ------------ ------------
Cash at end of period.................................................................. $ 2,000 $ 6,000 $ (2,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-58
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1995
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Pac-West Telecomm, Inc. (a California corporation) is engaged in the
business of providing paging services, long-distance telecommunications, and
telephone equipment sales and installation services to business and residential
customers principally within California. Its wholly-owned subsidiary, A Best
Page, Inc. (a Nevada corporation) provides paging services in the Las Vegas,
Nevada area.
On April 25, 1996, Pac-West Telecomm, Inc. entered into an agreement to
merge its paging operations (the Paging Divisions) into ProNet Inc. The acquired
net assets are to include all of the outstanding capital stock of A Best Page,
Inc.
The accompanying Statements of Assets and Liabilities and Divisional Equity
include only the assets and liabilities of the paging services which will be
acquired by or assumed by ProNet Inc., including all the assets and liabilities
of A Best Page, Inc.
The accompanying Statements of Operations include the revenues and expenses
of only the Paging Divisions of Pac-West Telecomm, Inc., plus all of the
revenues and expenses of A Best Page, Inc.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
NOTE 2 -- ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from those estimates.
EQUIPMENT, VEHICLES AND LEASEHOLD IMPROVEMENTS
Equipment, vehicles and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Equipment includes assets acquired
under capital leases. Expenditures for maintenance are charged to expense as
incurred. Upon retirement, the asset cost and the related accumulated
depreciation are removed from the accounts. Costs associated with dispositions
of pagers are reflected as a component of cost of sales and services, whereas
gains and losses associated with dispositions of other equipment, vehicles and
leasehold improvements are reflected as a component of other income (expense).
Depreciation and amortization are computed using the straight-line method based
on the following estimated useful lives and includes amortization of assets
acquired under capital lease:
<TABLE>
<S> <C>
5 to 7
Equipment............................................................. years
Vehicles.............................................................. 5 years
Leasehold improvements................................................ 3 years
</TABLE>
GOODWILL
Intangibles acquired have been capitalized and are being amortized on a
straight-line basis over 10 years.
INCOME TAXES
Deferred taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the marginal
tax rates, using the liability method.
F-59
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995
NOTE 3 -- NOTES PAYABLE AND LINES OF CREDIT
NOTES PAYABLE
Notes payable consists of the following as of November 30, 1995:
<TABLE>
<S> <C>
Contracts payable to finance companies, payable in monthly installments
ranging from approximately $100 to $4,750, including interest at 7.5%
to 13.0%, due at various dates through 1999........................... $ 931,000
Other note payable..................................................... 129,000
----------
1,060,000
Less current portion................................................... 461,000
----------
$ 599,000
----------
----------
</TABLE>
Notes payable are collateralized by certain equipment and vehicles.
At November 30, 1995, aggregate future principal payments on notes payable
are as follows:
<TABLE>
<S> <C>
1996................................................................... $ 461,000
1997................................................................... 296,000
1998................................................................... 206,000
1999................................................................... 16,000
2000 and subsequent.................................................... 81,000
----------
$1,060,000
----------
----------
</TABLE>
Interest paid on notes payable and capital lease obligations during 1995 was
$371,000.
LINES OF CREDIT
Effective August 1995, Pac-West Telecomm, Inc. entered into a two-year
credit agreement with a financial institution, which provides for a line of
credit of 80% of eligible receivables, with a maximum borrowing limit of
$1,500,000. No amounts had been borrowed under this line of credit during fiscal
1995. The line of credit bears interest at the bank's prime rate plus 0.75%. All
of the Paging Divisions accounts receivable are collateral for borrowings under
this line of credit. At November 30, 1995 and February 29, 1996, $845,000 and
$1,051,000, respectively, were available under this line of credit based on
Pac-West Telecomm, Inc.'s borrowing base.
The credit agreement (and related security agreement) contain various
restrictive covenants, including restrictions on the incurrence of new liens and
long-term indebtedness except for the financing of new equipment, the payment of
dividends, the entering into business combinations or mergers, and requirements
to maintain certain financial ratios. Pac-West Telecomm, Inc. has been in
compliance with all the covenants and financial ratios.
In February 1996, Pac-West Telecomm, Inc. received a commitment for up to
$800,000 of equipment financing. Financings under this commitment will be for
terms of up to 60 months. The financing agreement contains a restrictive
condition as to certain consolidations or mergers of Pac-West Telecomm, Inc.
Under this agreement, in February 1996, the Paging Divisions financed $381,000
of equipment under a capital lease.
F-60
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
LEASES
The Paging Divisions lease certain equipment under capital leases. In
addition, certain paging transmitting sites are leased on month-to-month, annual
and long-term noncancelable leases. In most cases, management expects that the
paging transmitting site leases will be renewed or replaced by other leases in
the normal course of business.
All of the paging transmitting site leases, as well as all of the Federal
Communication Commission paging transmitter licenses, in states other than
California and Nevada are in the name of an affiliated company, Strategic
Products Corporation. Pac-West Telecomm, Inc. owns and operates the paging
transmitting equipment at most of these sites, and makes the lease payments on
all the leases.
Future minimum payments under capital leases and noncancelable operating
leases with initial terms in excess of one year are as follows as of November
30, 1995 for the Paging Divisions:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- -----------
<S> <C> <C>
1996........................................................................ $ 967,000 $ 310,000
1997........................................................................ 866,000 135,000
1998........................................................................ 747,000 89,000
1999........................................................................ 516,000 35,000
2000 and subsequent......................................................... 235,000 20,000
------------- -----------
Total minimum lease payments.............................................. 3,331,000 $ 589,000
-----------
-----------
Less amounts representing interest.......................................... (611,000)
-------------
Present value of minimum lease payments..................................... 2,720,000
Less principal portion due within one year.................................. (716,000)
-------------
Principal portion due after one year........................................ $ 2,004,000
-------------
-------------
</TABLE>
Rental expense charged to operations for all operating leases of the Paging
Divisions was approximately $466,000 for 1995.
NOTE 5 -- INCOME TAXES
The income tax provision (benefit) consists of the following for the year
ended November 30, 1995:
<TABLE>
<S> <C>
Current................................................................. $(339,000)
Deferred................................................................ 130,000
---------
$(209,000)
---------
---------
</TABLE>
The income tax benefit reflected in these Statements of Operations is based
on the effective tax rates for Pac-West Telecomm, Inc. and are higher than the
statutory rates due to state income taxes.
A Best Page, Inc. files a separate federal income tax return. No income tax
benefit has been applied to the results of operations of A Best Page, Inc. as it
has net operating loss carryovers totaling approximately $100,000 through 1995.
No recognition has been given in these financial statements to the potential
future tax benefits from these net operating loss carryovers for A Best Page,
Inc. The net operating loss carryovers will begin expiring in 2006.
F-61
<PAGE>
PAGING DIVISIONS OF PAC-WEST TELECOMM, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1995
NOTE 5 -- INCOME TAXES (CONTINUED)
The Deferred income tax liability of $150,000 reflected in these financial
statements represents the allocable portion of Pac-West Telecomm Inc.'s deferred
tax liabilities at November 30, 1995. Deferred tax liabilities arise mainly from
temporary differences that arise from depreciation for federal and state income
taxes versus financial reporting purposes.
NOTE 6 -- ALLOCATION OF CORPORATE EXPENSES
Corporate expenses for accounting, legal, and other general administrative
services are allocated to the Paging Divisions based upon revenue of the
divisions relative to the total revenues of Pac-West Telecomm, Inc. Management
believes this is a reasonable allocation method. Allocated amounts for the year
ended November 30, 1995 and the three months ended February 29, 1996 and
February 28, 1995, were $852,000, $221,000, and $206,000, respectively.
NOTE 8 -- UNAUDITED PERIODS
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
F-62
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Teletouch Communications, Inc.
We have audited the accompanying consolidated balance sheets of Teletouch
Communications, Inc. as of May 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended May 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Teletouch
Communications, Inc. at May 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 May 31, 1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Fort Worth, Texas
August 11, 1995
F-63
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MAY 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Current assets:
Cash...................................................................................... $ 715 $ 61
Accounts receivable, net of allowance of $379 in 1995 and $43 in 1994..................... 1,756 317
Inventories, net of allowance of $56 in 1995 and $63 in 1994.............................. 1,080 108
Federal income tax refund receivable...................................................... 122 --
Deferred income tax assets................................................................ 148 117
Prepaid expenses and other current assets................................................. 248 42
--------- ---------
Total current assets.................................................................... 4,069 645
Property, plant and equipment............................................................... 8,683 2,063
Less accumulated depreciation............................................................... (2,064) (1,457)
--------- ---------
Net property, plant and equipment....................................................... 6,619 606
Intangible and other assets:
Excess of cost over fair value of net assets acquired, net of accumulated amortization of
$964 in 1995 and $712 in 1994............................................................ 11,021 1,068
Debt issue cost........................................................................... 954 --
Deferred costs associated with pending acquisition........................................ 841 --
Other intangible assets, net of accumulated amortization of $866 in 1995 and $28 in
1994..................................................................................... 9,550 42
Long-term receivable and other assets..................................................... 98 19
--------- ---------
Total intangible and other assets....................................................... 22,464 1,129
--------- ---------
Total assets............................................................................ $ 33,152 $ 2,380
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................................... $ 2,114 $ 233
Due to related parties.................................................................... 7 134
Accounts payable.......................................................................... 771 104
Accrued expenses.......................................................................... 892 127
Deferred revenue.......................................................................... 1,279 199
--------- ---------
Total current liabilities............................................................... 5,063 797
Long-term debt, less current portion........................................................ 17,765 564
Due to related parties...................................................................... -- 368
Deferred income tax liability............................................................... 2,965 32
Shareholders' equity:
Preferred stock, $.001 par value.......................................................... -- --
Common stock, $.001 par value............................................................. 5 3
Additional paid-in capital................................................................ 8,893 718
Accumulated deficit....................................................................... (1,487) (50)
Stock subscription receivable............................................................. (52) (52)
--------- ---------
Total shareholders' equity.............................................................. 7,359 619
--------- ---------
Total liabilities and shareholders' equity.............................................. $ 33,152 $ 2,380
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-64
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Pager sales and service revenue................................................... $ 6,608 $ 1,762 $ 1,383
Other sales and service revenue................................................... 2,066 1,503 1,596
Cost of products sold............................................................. (2,084) (766) (695)
--------- --------- ---------
6,590 2,499 2,284
Costs and expenses:
Operating....................................................................... 1,357 920 867
Selling......................................................................... 1,476 427 367
General and administrative...................................................... 2,037 545 468
Depreciation and amortization................................................... 1,822 307 235
--------- --------- ---------
Total costs and expenses.......................................................... 6,692 2,199 1,937
--------- --------- ---------
Operating income (loss)........................................................... (102) 300 347
Interest expense, net........................................................... (1,626) (143) (165)
Consulting expenses associated with strategic planning............................ -- (495) --
Gain on sale of answering service................................................. 103 -- --
--------- --------- ---------
Income (loss) before income taxes................................................. (1,625) (338) 182
Income tax expense (benefit)
Current......................................................................... -- 60 100
Deferred........................................................................ (188) (113) (13)
--------- --------- ---------
(188) (53) 87
--------- --------- ---------
Net income (loss)................................................................. $ (1,437) $ (285) $ 95
--------- --------- ---------
--------- --------- ---------
Primary and fully diluted earnings (loss) per share............................... $ (0.39) $ (0.09) $ 0.03
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-65
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED STOCK
------------------------ PAID-IN EARNINGS SUBSCRIPTION
SHARES AMOUNT CAPITAL (DEFICITS) RECEIVABLE
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at May 31, 1992.......................... 2,250,000 $ 2 $ 172 $ 140 $ --
Net income...................................... -- -- -- 95 --
----------- ----- ----------- ------------ ------
Balance at May 31, 1993........................... 2,250,000 2 172 235 --
Net loss........................................ -- -- -- (285)
Issuance of common stock associated with
strategic planning............................. 430,000 1 546 -- (52)
----------- ----- ----------- ------------ ------
Balance at May 31, 1994........................... 2,680,000 3 718 (50) (52)
Net Loss.......................................... -- -- -- (1,437) --
Issuance of common stock in Note conversion....... 225,225 -- 51 -- --
Interest expense associated with bridge
financing/convertible note....................... -- -- 503 --
Issuance of common stock through public
offering......................................... 2,300,000 2 7,386 -- --
Issuance of common stock to financial advisor..... 20,000 -- 45 -- --
Issuance of common stock in lieu of financing
costs............................................ 47,500 -- 190 -- --
----------- ----- ----------- ------------ ------
Balance at May 31, 1995........................... 5,272,725 $ 5 $ 8,893 $ (1,487) $ (52)
----------- ----- ----------- ------------ ------
----------- ----- ----------- ------------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-66
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................................................. $ (1,437) $ (285) $ 95
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 1,822 307 235
Amortization of debt issue costs............................................... 111 -- --
Consulting expenses associated with strategic planning......................... -- 495 --
Interest expense associated with convertible bridge financing................ 503 -- --
Gain on sale of answering service............................................ (103) --
Deferred income taxes........................................................ (210) (112) (13)
----------- --------- ---------
Net cash provided by operating activities before working capital changes..... 686 405 317
Changes in operating assets and liabilities:
Accounts receivable........................................................ (718) (69) 39
Inventories................................................................ (293) (23) (8)
Prepaid expenses and other current assets.................................. (342) 2 (2)
Accounts payable and accrued expenses...................................... 778 77 4
Deferred revenue........................................................... 148 19 30
----------- --------- ---------
Net cash provided by operating activities.......................................... 259 411 380
----------- --------- ---------
INVESTING ACTIVITIES:
Capital expenditures............................................................. (569) (140) (186)
Acquisition of Beepers Plus and Waco Operations, net of cash acquired............ (23,317) -- --
Deferred costs associated with pending acquisition............................... (689) -- --
Increase in other assets......................................................... (96) -- --
Payments on long-term receivable................................................. 33 31 26
Net proceeds from sale of answering service...................................... 103 -- --
----------- --------- ---------
Net cash used for investing activities............................................. (24,535) (109) (160)
----------- --------- ---------
FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions.................................... 19,392 -- --
Proceeds from new debt........................................................... 1,138 90 199
Payments on long-term debt....................................................... (1,841) (284) (287)
Proceeds from related parties.................................................... 236 107 107
Payments to related parties...................................................... (681) (221) (206)
Debt issue costs................................................................. (702) -- --
Net proceeds from public offering................................................ 7,388 -- --
----------- --------- ---------
Net cash provided (used) by financing activities................................... 24,930 (308) (187)
----------- --------- ---------
Net increase (decrease) in cash.................................................... 654 (6) 33
Cash at beginning of period........................................................ 61 67 34
----------- --------- ---------
Cash at end of period.............................................................. $ 715 $ 61 $ 67
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Teletouch Communications, Inc., and its subsidiaries (the "Company") sells,
installs and services paging and two-way mobile radio communication equipment.
Additionally, the Company leases certain equipment to its customers on a
month-to-month basis.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation. The Company's
former parent (prior to the December 29, 1994 completion of the Company's
initial public offering), Rainbow Resources, Inc., is a Texas holding
corporation established for investment purposes and is wholly-owned by one
individual, an affiliate of the Company. Rainbow's assets are primarily
comprised of its investment in and note receivable from the Company. The
financial statements for the fiscal year ended May 31, 1995 include the results
of operations for Beepers Plus of Memphis, Inc., Beepers Plus of Nashville and
Beepers Plus of Jackson Partnership (collectively "Beepers Plus") and Waco
Communications, Inc. ("WCI") from the acquisition date, December 29, 1994 to
year end.
INVENTORIES
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method. Reserves are provided for estimated losses due to
obsolescence and excess inventories. Inventories consist of pagers held for sale
and spare parts held for resale.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is computed on
the straight-line method based on the following estimated useful lives:
<TABLE>
<S> <C>
Pagers......................................................... 3 years
Towers and equipment........................................... 5-20 years
Buildings and improvements..................................... 10-20 years
Office furniture and fixtures.................................. 5-10 years
</TABLE>
Effective June 1, 1993, Teletouch revised its estimated useful life of
pagers from five years to three years. The Company believes the use of a three
year life will provide for normal depreciation and estimated losses of
equipment. The effect of this change in estimate in 1994 was to increase
depreciation expense by approximately $45,000 and increase the net loss by
$29,700, or $0.01 per share.
INCOME TAXES
Prior to July 1994 the Company was included in the consolidated federal
income tax return of its parent, Rainbow Resources, Inc. In accordance with an
informal arrangement with its former parent, the Company calculated its federal
income tax liability on a stand-alone basis and recognized the liability for
current income taxes as a payable to the consolidated group. Such amounts were
repaid under the terms of amounts due to related parties. Thus, the Company did
not make cash payments of federal income taxes directly to the Internal Revenue
Service previous to August 1994.
Subsequent to July 1994, the Company is no longer consolidated with Rainbow
Resources, Inc. for federal income tax reporting purposes and will begin filing
its own consolidated return. The Company made no cash payments for federal
income taxes during the period August 1994 to May 31, 1995.
F-68
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The components of the Company's significant deferred tax liabilities and
assets result from timing differences in the recognition of depreciation and
amortization, deferred compensation for consulting services and accounts
receivable and inventory reserves.
INTANGIBLE ASSETS
Excess of cost over fair value of net assets acquired and other intangibles
are amortized over 25 years and 5 years, respectively, computed on the
straight-line method. It is the Company's policy to account for intangible
assets at the lower of amortized cost or estimated fair value. On an ongoing
basis, management reviews the valuation and amortization of such assets. As a
part of its ongoing review, management estimates the fair value (generally using
a multiple of earnings based on information relating to purchases of companies
with similar operations) of the Company's intangible assets, taking into
consideration any events and circumstances which might have diminished fair
value or otherwise affected the evaluation. No valuation allowances have been
recorded as a result of these analyses.
The Financial Accounting Standards Board has issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of", which
will require the Company to review for impairment of long-lived assets and
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Generally, if the
sum of expected future undiscounted cash flows of the asset is less than the
carrying amount, an impairment loss is required to be calculated. This Statement
is effective for financial statements for fiscal years beginning after December
15, 1995. The Company has not yet determined the impact of this Statement but
does not expect it to have a material impact on its financial position or
results of operations.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Revenue is recognized as services are provided or the product is delivered
to customers. Billings to customers for services in advance of providing such
services are deferred and recognized as revenue when earned.
The Company's diversified customer base results in a lack of concentration
of credit risk. The Company performs periodic credit evaluations of its
customers to determine individual customer credit risks and has the ability to
terminate services for nonpayment. Credit losses have been within management's
expectations.
EARNINGS (LOSS) PER SHARE
The computation of earnings (loss) per share is based upon the weighted
average number of common shares outstanding during the period plus the dilutive
effect of common shares contingently issuable, primarily from stock options,
exercise of warrants and convertible notes.
The computation reflects additional dilution (anti-dilution in periods of
losses in fiscal years prior to the initial public offering) related to common
stock and warrants issued and stock options granted as though they were issued
and outstanding during all periods presented. For these securities, dilution
arises when the market price at the end of the period (assuming the use of the
initial public offering price of $4 per share for all of fiscal 1994 and 1993
and through December 29, 1994 and market price from this date through May 31,
1995) is higher than the exercise or option price of such securities.
The average number of common shares outstanding plus common stock
equivalents used to calculate earnings per share were 3,686,704 in 1995, and
3,295,225 in 1994 and 1993.
F-69
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------------- -----------
<S> <C> <C>
Note payable to FINOVA Capital Corporation due in the year 2000............ $ 19,475,000 --
Payable to FINOVA Capital Corporation due in 1996.......................... 173,000 --
Note payable to financial advisor at 8% interest, due in 1996.............. 220,000 --
Payable to finance company; varying interest rates (11% to 16%) and due in
monthly installments through 1998; secured by equipment................... -- $ 256,000
Payable to individuals; due in monthly installments through 1996 with
interest at 8% to 12%, secured by property, plant and equipment........... 11,000 541,000
-------------- -----------
19,879,000 797,000
Less current portion....................................................... 2,114,000 233,000
-------------- -----------
$ 17,765,000 $ 564,000
-------------- -----------
-------------- -----------
</TABLE>
Scheduled payments of long-term debt in fiscal years subsequent to May 31,
1995 are as follows:
<TABLE>
<S> <C>
1996.................................................. $ 2,114,000
1997.................................................. 2,565,000
1998.................................................. 2,755,000
1999.................................................. 2,945,000
2000.................................................. 9,500,000
-----------
$19,879,000
-----------
-----------
</TABLE>
In conjunction with its initial public offering as discussed in Note 8, the
Company obtained $200,000 in bridge financing in August 1994 through the
issuance of a $150,000, 8% promissory note and a $50,000, 4% convertible
promissory note. These notes were due and payable 18 months from the date of
their issuance but were immediately due and payable upon closing of the
Company's initial public offering. The holder of the note (a related party at
February 28, 1995) had the option to convert the 4% convertible note, in whole
or in part, into one share of the Company's common stock for each $0.222 of
principal, or 225,225 shares if fully converted. Based on the nature of bridge
financing, the interest rates of 8% and 4% relating to the promissory note and
convertible promissory note, respectively, may not be reflective of the
effective market rate of interest when considering the conversion feature and
terms. Accordingly, interest expense charged to operations in the period the
notes were outstanding considers the estimated fair value of the Company's
common stock on the date the notes were issued, accordingly approximately
$503,000 was charged as interest expense on the notes during the period of
conversion. The $150,000, 8% promissory note was repaid and the $50,000 4%
promissory note was converted into 225,225 shares of Common Stock on December
29, 1994.
In addition to the $200,000 bridge financing discussed above, the Company
borrowed $215,000 in short-term bridge financing in 1995 from unaffiliated
lenders. In consideration for these loans, the Company issued the lenders
unsecured discount notes with a face amount which totaled $293,000, which were
repaid in January 1995.
In December 1994, the Company borrowed $19,392,000, including $19,172,000
payable to FINOVA Capital Corporation (FINOVA) and $220,000 payable under the
Financial advisory agreement as described in Note 7, in connection with the
acquisitions discussed in Note 11.
F-70
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. LONG-TERM DEBT (CONTINUED)
The Company borrowed an additional $950,000 from FINOVA in April 1995.
Subsequent to May 31, 1995, in conjunction with the Dial Acquisition
discussed in Note 11 the Company modified the terms of its existing credit
facility with FINOVA and increased the facility by $35 million. The entire
FINOVA debt, with the exception of the loan fee payable of $173,000, bears
interest at a floating rate of the prime rate plus 2% or the London Interbank
Market Rate (LIBOR), plus 4%. The selection of interest rate method, prime rate
or LIBOR, is made periodically during the life of the loan by the Company. Under
the modified terms, the principal balance of the FINOVA loan will be repaid in
escalating quarterly installments beginning in April 1997 and ending in the
fiscal year 2003.
To obtain the term loan, the Company paid a $1,100,000 fee at closing.
Virtually all assets of the Company secure the term loan; certain cash
requirements and other minimum financial ratios must be maintained over the life
of the loan or the Company is subject to mandatory prepayment terms.
Additionally, the loan provisions prohibit the Company from paying dividends
during the term of the loan.
The Company also borrowed $10 million in 14% Junior Subordinated Notes due
in fiscal year 2003 from Continental Illinois Venture Corporation ("CIVC") and
certain other parties both related and unrelated to CIVC (together with CIVC,
the "CIVC Investors") in August 1995 as described in Note 11.
After giving effect to the new debt subsequent to May 31, 1995, scheduled
payments of long-term debt in fiscal years subsequent to May 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.......................................................... $ 403,000
1997.......................................................... 1,250,000
1998.......................................................... 5,750,000
1999.......................................................... 6,900,000
2000.......................................................... 8,400,000
2001 and thereafter........................................... 37,200,000
-----------
$59,903,000
-----------
-----------
</TABLE>
In accordance with the FINOVA debt agreement, the Company is required to use
interest rate protection agreements to protect at least 50% of the loan for at
least two years against significant increases in interest rates. The Company
entered into an interest rate protection agreement in August 1995. The agreement
protects the Company on a portion of debt against future LIBOR rate increases
above 8.875% through August 1996 and above 7.625% from August 1996 through
August 1997.
Cash paid for interest, including interest to related parties, during 1995,
1994 and 1993 was approximately $943,000, $149,000 and $113,000, respectively.
F-71
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
The Company's property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Land.......................................................... $ 200,000 $ 96,000
Pagers, including pagers held for lease....................... 3,166,000 437,000
Towers and equipment.......................................... 4,097,000 883,000
Buildings and improvements.................................... 422,000 270,000
Office furniture and fixtures................................. 798,000 377,000
-------------- --------------
8,683,000 2,063,000
Accumulated depreciation...................................... (2,064,000) (1,457,000)
-------------- --------------
Net property, plant and equipment............................. $ 6,619,000 $ 606,000
-------------- --------------
-------------- --------------
</TABLE>
NOTE 4. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax basis 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.
The Company has a net operating loss carryforward of approximately $599,000
which is available to reduce future taxable income and will expire in 2010.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax liabilities and assets as of May 31, 1995 and
1994 follow:
<TABLE>
<CAPTION>
1995 1994
------------- -----------
<S> <C> <C>
Deferred income tax liabilities:
Depreciation and amortization methods........................... $ 3,069,000 $ 33,000
Other........................................................... 100,000 --
------------- -----------
Total deferred income tax liabilities............................. 3,169,000 33,000
Deferred income tax assets:
Deferred compensation for consulting services................... -- 82,000
Allowance for doubtful accounts................................. 129,000 15,000
Inventory reserve............................................... 19,000 21,000
Net operating loss carryforward................................. 204,000 --
------------- -----------
Total deferred income tax assets.................................. 352,000 118,000
------------- -----------
Net deferred income tax (asset) liability......................... $ 2,817,000 $ (85,000)
------------- -----------
------------- -----------
</TABLE>
F-72
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INCOME TAXES (CONTINUED)
A reconciliation from the federal statutory income tax rate to the effective
income tax rate for the years 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Statutory income tax rate (benefit)........................... (34.0)% (34.0)% 34.0%
Expenses not deductible for tax purposes, primarily
amortization of intangible assets and nondeductible interest
expense on convertible note (1995) and compensation for
consulting services (1994)................................... 15.5% 17.9% 13.8%
Other......................................................... 6.9% 0.5% --
----- ----- -----
Effective income tax rate (benefit)........................... (11.6)% (15.6)% 47.8%
----- ----- -----
----- ----- -----
</TABLE>
NOTE 5. LEASE COMMITMENTS
The Company leases buildings, transmission towers and equipment under
noncancelable operating leases. Aggregate future minimum rental commitments
under these leases are as follows:
<TABLE>
<S> <C>
1996................................................... $ 427,000
1997................................................... 274,000
1998................................................... 201,000
1999................................................... 129,000
2000................................................... 112,000
2001 and thereafter.................................... 543,000
----------
$1,686,000
----------
----------
</TABLE>
The Company paid rentals of approximately $349,000, $58,000 and $53,000 in
1995, 1994 and 1993, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
Amounts due to related parties at May 31, 1995 and 1994 consist of a note to
Rainbow Resources, Inc. (primarily for federal income tax liabilities) which is
payable in 1996.
NOTE 7. FINANCIAL ADVISORY AGREEMENT
The Company has a financial advisory agreement with its merger and
acquisition financial advisor related to services provided in connection with
the acquisition of Waco Communications, Inc. and Beepers Plus (Memphis,
Nashville and Jackson). This agreement provided for the payment of approximately
$110,000 and the issuance of 20,000 shares of the Company's common stock
relating to the purchase of Waco Communications, Inc. A fee of approximately
$230,000 also was paid to the financial advisor upon the acquisition of Beepers
Plus. In addition, the financial advisor was paid a loan fee of 2%, or $380,000,
of the term loan described in Note 2. Based upon the terms of the financial
advisory agreement, $500,000 of the total amount payable to the financial
advisor was paid at the closing of the acquisitions and the remaining $220,000
will be paid under the terms of an 8% promissory note due in May 1996. The
Company's merger and acquisitions financial advisor has previously provided
valuation services to the Company relating to its common stock.
NOTE 8. CHANGE IN CAPITALIZATION, MERGER AND INITIAL PUBLIC OFFERING
In July 1994, the Teletouch Corporation's ("Predecessor's") Articles of
Incorporation were revised to modify the Company's capital structure. The
authorized shares of common stock were increased from 50,000 to 10,000,000 and
the Board of Directors authorized a $.001 stated value. Additionally, 1,000,000
shares of preferred stock were authorized for future issuance. No terms and
F-73
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. CHANGE IN CAPITALIZATION, MERGER AND INITIAL PUBLIC OFFERING (CONTINUED)
preferences have been established for the preferred stock. Coincident with this
change, the Predecessor approved a 1,499-for-1 common stock split to effect the
change in capitalization. A total of 2,248,500 additional shares of common stock
were issued in connection with the stock split and $171,950 were reclassified
from common stock to additional paid-in capital. All shares and per share
amounts have been retroactively restated to reflect the stock split and change
in capitalization.
In July 1994, the Predecessor formed a wholly-owned subsidiary, Teletouch
Communications, Inc. (Company). The Company's authorized capital structure
allows for the issuance of 25,000,000 shares of common stock with a $0.001 par
value and 5,000,000 shares of preferred stock with a $0.001 par value.
The terms and preferences for a portion of the preferred stock were
determined subsequent to fiscal 1995 and described in Note 11. No terms and
preferences have been established for the remaining portion of preferred stock.
All assets and liabilities of the Predecessor were merged into the Company and
each share of the outstanding common stock of the Predecessor was exchanged for
one share of the Company common stock.
In November 1994, the Company's Board of Directors approved the issuance of
Redeemable Class A Common Stock Purchase Warrants to be issued in contemplation
of the Company's initial public offering as discussed below. Each Class A
Warrant entitles the holder thereof to purchase one share of common stock at an
exercise price of $4.50 for a term commencing immediately after issuance and
expiring five years from the date of issuance. The Company may redeem the Class
A Warrants at $0.10 per warrant, if specified minimum common stock trading
prices are maintained over a stated period. The Company has reserved the shares
underlying the Class A Warrants for future issuance.
On December 29, 1994, the Company consummated the initial public offering
(the "IPO") of its common stock and Redeemable Class A Common Stock Purchase
Warrants ("Class A Warrants"). In the IPO, the Company issued 2,300,000 shares
of common stock and 2,300,000 Class A Warrants (including the securities sold
under the underwriters' over-allotment option, which closed in full on December
30, 1994), which were initially sold together at an initial public offering of
$4.10. Each Class A Warrant carries the right to purchase a share of common
stock for $4.50 and may be redeemed by the Company at $0.10 per warrant if the
closing bid price of the common stock has been at least $5.625 for 15
consecutive trading days. As of May 31, 1995, all 2,300,000 Class A Warrants
remain outstanding. As part of the consideration to the Underwriters for their
services in connection with the public offering described herein, the Company
has agreed to issue to the Underwriters, for nominal consideration, the
Underwriters' Warrants to purchase an aggregate of 200,000 shares of Common
Stock at an exercise price of $5.60 per share and warrants to purchase, at a
price of $.10 per warrant, 200,000 warrants, each of which entitles the holder
to purchase one share of Common Stock on the same terms and conditions as the
Class A Warrants, except that the exercise price shall be $6.30 per share. The
Underwriters' Warrants will be non-redeemable by the Company. The Underwriters'
Warrants are exercisable for a period of four years beginning December 29, 1995.
The Company received net proceeds of approximately $7.4 million from the IPO.
The Company entered into a consulting arrangement effective in January 1994
for strategic business planning and consultation with the same party who
provided $200,000 in bridge financing referred to in Note 2. As a result of the
agreement, approximately $495,000 was charged to expense in fiscal 1994. The
arrangement provides for the issuance of common stock (430,000 shares) at a
subscription price of $0.12 per share and a warrant to purchase common stock
(400,000 shares) at $0.50 per share. The warrant is not exercisable until April
1995 and expires January 2004 and the underlying stock has been reserved for
future issuance of such shares. The estimated fair values in January 1994
assigned to the shares ($0.90 per share) and shares underlying the warrant
($0.90 per
F-74
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. CHANGE IN CAPITALIZATION, MERGER AND INITIAL PUBLIC OFFERING (CONTINUED)
share) to be issued in excess of the subscription or exercise price has been
charged to expense with a corresponding increase in common stock and additional
paid-in capital of $547,000. Additionally, a stock subscription receivable of
$52,000 was recorded for the shares issued in July 1994 and such amount was paid
in full, subsequent to May 31, 1995.
NOTE 9. SALE OF OPERATIONS
In June 1994, Teletouch sold its telephone answering service operations to
an unrelated party for $150,000 and recognized a pre-tax gain of approximately
$103,000. Revenues and operating expense associated with these operations for
the year ending May 31, 1994 were approximately $254,000 and $281,000,
respectively. Revenues and operating expenses for the year ended May 31, 1995
were not material.
NOTE 10. STOCK OPTIONS
The Company's 1994 Stock Option and Stock Appreciation Rights Plan (the
"1994 Plan") was adopted in July 1994 by Teletouch Corporation, and provides for
the granting of options and stock appreciation rights to officers, directors,
employees and consultants to purchase not more than an aggregate of 400,000
shares of Common Stock. The 1994 Plan provides for the grant of options intended
to qualify as "incentive stock options" under the Internal Revenue Code as well
as options which do not qualify under the Code.
The Plan also provides for grants of stock appreciation rights in connection
with the grant of options under the Plan. Upon election to the Board of
Directors, each nonemployee director of the Company is entitled to receive
options to purchase 10,000 shares which become fully vested and exercisable
immediately upon issuance. Through the fiscal year ended May 31, 1995, an
aggregate of 20,000 non-qualified options were issuable to the Company's
directors, exercisable at a price of $3.50 per share. The Company's Board of
Directors administers the Plan and has authority to determine the optionees to
whom awards will be made, the terms of vesting and forfeiture, amount of the
awards and other terms. Under the terms of the Plan, the option price approved
by the Board of Directors shall not be less than the fair market value of the
common stock at date of grant. During July 1994, 160,000 incentive options were
granted to three key employees of the Company under the 1994 plan that vest
ratably over three years and have an exercise price of $3 per share, which
management believes is greater than the estimated fair value of the Company's
common stock at date of grant. No options were exercised during fiscal 1995.
The Company has agreed to engage Sovran Financial Corp. ("SFC"), an
unaffiliated Florida-based company, and one of its officers, to provide investor
and public relations services for the Company subsequent to the Offering. In
consideration for providing such services, SFC receives a monthly retainer and
such officer has received an option to purchase 75,000 shares of Common Stock,
exercisable at a price of $4.80 per share. In addition, the Company plans to
issue an option to purchase an additional 100,000 shares of Common Stock,
exercisable 90 days after the grant at an exercise price equal to 120% of the
fair market value of the Common Stock on the date of grant.
NOTE 11. ACQUISITIONS
On December 29, 1994, the Company consummated a Stock and Asset Purchase
Agreement with Beepers Plus of Memphis, Inc., Beepers Plus of Nashville and
Beepers Plus of Jackson Partnership (collectively "Beepers Plus") to acquire the
stock of Memphis and Nashville and substantially all of the assets and
liabilities of Jackson for $17,679,000 cash, subject to adjustment. The Company
immediately repaid certain of the total liabilities assumed (approximately
$2,980,000 at November 30, 1994). To finance this acquisition, the Company
obtained a $19,000,000 term loan from FINOVA Capital Corporation ("FINOVA"), a
financial institution, and used a portion of the proceeds of the
F-75
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. ACQUISITIONS (CONTINUED)
IPO. To obtain the term loan, the Company paid a $190,000 fee at closing and
will pay a loan fee of $190,000 due on the first anniversary of the loan
closing. Additionally, the Company issued its lender 47,500 shares of Common
Stock at closing of the IPO for additional consideration of $190,000 in
financing fees.
On December 29, 1994, the Company acquired substantially all of the non-cash
assets and assumed certain liabilities of Waco Communications, Inc. (WCI) a
paging service in Waco, Texas for $2,908,000. A portion of the proceeds from the
IPO were used to finance this acquisition.
Pursuant to the terms of an Asset Purchase Agreement dated as of February
16, 1995 and amended and restated on August 3, 1995 (the "Purchase Agreement"),
Teletouch acquired substantially all of the non-cash assets and assumed selected
liabilities of Dial-A-Page, Inc. ("Dial") for a purchase price of approximately
$49.8 million (the "Dial Acquisition"), $46.4 million of which represents the
original purchase price recited in the Purchase Agreement and the balance of
approximately $3.4 million represents the net amount that was payable as a
consequence of the implementation of the adjustment provisions contained in the
Purchase Agreement. Teletouch incurred financing costs and professional fees
incident to the Dial Acquisition and the related financings discussed below, of
approximately $5 million. The Company estimates that of the total purchase price
payable in the Dial Acquisition, for financial reporting purposes, approximately
$15.8 million will be allocated to property, plant and equipment and inventory,
$600,000 to accounts receivable, $29.3 million to specifically identified
intangible assets, $1 million to current liabilities, and $100,000 to other
current assets, with the remaining amount allocated to excess of cost over the
fair value of net assets acquired.
Concurrently with the Dial Acquisition, Teletouch completed the private
placement of debt and equity securities with the CIVC Investors that provided
Teletouch with $25 million in financing in connection with the Dial Acquisition.
The Company issued and designated 15,000 shares of authorized preferred stock as
"Series A 14% Cumulative Preferred Stock" and 617,189 shares as "Series B
Preferred Stock". The CIVC Investors purchased $15 million in initial
liquidation value of 15,000 shares of Teletouch Series A Preferred Stock and $10
million of 14% Junior Subordinated Notes due in 2003 (the "Subordinated Notes").
Dividends on the Series A Preferred Stock and interest on the Subordinated Notes
will each accrue at the rate of 14% per annum. Each share of Series A Preferred
Stock will become convertible into common stock based on a stated formula after
August 3, 2003. The CIVC Investors also received warrants, exercisable at a
nominal price, to purchase approximately 5,066,000 shares of Teletouch common
stock and approximately 617,000 shares of non-voting Series B Preferred Stock.
Each share of Series B Preferred Stock will become convertible into six shares
of Common Stock after two years or earlier upon the occurrence of an event of
default as specified by the purchase agreement. CIVC will have the right, after
two years, to require that its securities be registered for public sale. Also
completed concurrently with the Dial Acquisition was $35 million in additional
senior financing from Teletouch's existing senior lender, FINOVA, to complete
the Dial Acquisition and to provide working capital. Approximately $30 million
was borrowed under the loan of August 3, 1995, leaving $5 million available for
future borrowings. The additional $35 million brings the total senior financing
provided by FINOVA to approximately $55 million.
At May 31, 1995, the Company incurred and capitalized costs of $841,000
related to the Dial Acquisition. These costs will increase the purchase price of
the acquisition.
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the acquisitions (Beepers Plus, Waco
and Dial) and related financing had occurred at June 1, 1993. This summary may
not be indicative of what would have occurred had the acquisition been made as
of this date or of results which may occur in the future. The historical
financial statements used to prepare the summary will reflect the acquisitions
from their effective
F-76
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. ACQUISITIONS (CONTINUED)
date of the acquisition forward, using the purchase method of accounting based
on estimated fair values of assets purchased and liabilities assumed. The
Beepers Plus historical results have been adjusted for the results of the
closing audit at December 29, 1994 based on the terms of the Purchase Agreement.
The pro forma results exclude the operations of Telepage, Inc. prior to its
acquisition by Dial in September, 1994.
<TABLE>
<CAPTION>
YEARS ENDED
MAY 31,
--------------------
(UNAUDITED -- DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994
--------- ---------
<S> <C> <C>
Net revenue................................................................ $ 25,359 $ 17,909
--------- ---------
--------- ---------
Operating income (loss).................................................... $ 358 $ (2,644)
--------- ---------
--------- ---------
Net income (loss).......................................................... $ (7,595) $ (7,704)
--------- ---------
--------- ---------
Primary and fully diluted earnings (loss) per share........................ $ (2.14) $ (2.04)
--------- ---------
--------- ---------
</TABLE>
F-77
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MAY 31, 1995
FEBRUARY 29, ------------
1996
----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 2,612 $ 715
Accounts receivable, net....................................................... 2,720 1,756
Inventories, net............................................................... 2,800 1,080
Federal tax refund receivable.................................................. -- 122
Deferred income tax assets..................................................... 156 148
Prepaid expenses and other current assets...................................... 106 248
-------- ------------
Total current assets......................................................... 8,394 4,069
Property, plant and equipment.................................................... 24,172 8,683
Less accumulated depreciation.................................................... (4,514) (2,064)
-------- ------------
Net property, plant and equipment................................................ 19,658 6,619
Intangible and other assets:
Excess of cost over fair value of net assets acquired, net..................... 18,716 11,021
Debt issue cost................................................................ 3,193 954
Deferred costs associated with acquisition..................................... -- 841
Other intangible assets, net................................................... 35,463 9,550
Long-term receivable and other assets.......................................... 140 98
-------- ------------
Total intangible and other assets............................................ 57,512 22,464
-------- ------------
Total assets................................................................. $ 85,564 $ 33,152
-------- ------------
-------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................................. $ 223 $ 2,114
Due to related parties......................................................... -- 7
Accounts payable............................................................... 1,271 771
Accrued expenses............................................................... 1,779 892
Deferred revenue............................................................... 2,040 1,279
-------- ------------
Total current liabilities.................................................... 5,313 5,063
Long-term debt, less current portion............................................. 58,492 17,765
Deferred income tax liability.................................................... 1,507 2,965
Shareholders' equity:
Series A cumulative preferred stock, $.001 par value........................... 1 --
Series B cumulative preferred stock, $.001 par value........................... 1
Common stock, $.001 par value.................................................. 6 5
Additional paid-in capital..................................................... 24,789 8,893
Accumulated deficit............................................................ (4,545) (1,487)
Stock subscription receivable.................................................. -- (52)
-------- ------------
Total shareholders' equity..................................................... 20,252 7,359
-------- ------------
Total liabilities and shareholders' equity..................................... $ 85,564 $ 33,152
-------- ------------
-------- ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-78
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS -- EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- --------------------
FEB. 29, FEB. 28, FEB. 29, FEB. 28,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pager sales and service revenue...................................... $ 7,955 $ 2,407 $ 20,719 $ 3,497
Other sales and service revenue...................................... 650 562 1,965 1,299
Cost of products sold................................................ (1,214) (749) (3,427) (1,192)
--------- --------- --------- ---------
7,391 2,220 19,257 3,604
Costs and expenses:
Operating.......................................................... 1,706 425 4,239 767
Selling............................................................ 1,219 472 3,282 741
General and administration......................................... 1,936 648 4,970 1,022
Depreciation and amortization...................................... 2,562 838 6,461 1,017
--------- --------- --------- ---------
Total costs and expenses............................................. 7,423 2,383 18,952 3,547
--------- --------- --------- ---------
Operating income (loss).............................................. (32) (163) 305 57
Interest expense, net................................................ (1,844) (562) (4,707) (1,052)
Gain on sale of answering service.................................... -- -- -- 103
--------- --------- --------- ---------
Loss before income taxes............................................. (1,876) (725) (4,402) (892)
--------- --------- --------- ---------
Income tax benefit................................................... (563) (210) (1,345) (118)
--------- --------- --------- ---------
Net loss............................................................. $ (1,313) $ (515) $ (3,057) $ (774)
--------- --------- --------- ---------
Primary and fully diluted loss per share............................. $ (.31) $ (.11) $ (.76) $ (.21)
--------- --------- --------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-79
<PAGE>
TELETOUCH COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................................... $ (3,057) $ (774)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization........................................................ 6,461 1,017
Non cash interest expense and amortization of debt issue costs....................... 1,485 503
Gain on sale of answering service.................................................... -- (103)
Deferred income taxes................................................................ (1,466) (45)
---------- ----------
Net cash provided by operating activities before working capital changes............. 3,423 598
Changes in operating assets and liabilities:
Accounts receivable................................................................ (377) (424)
Inventories........................................................................ (713) (192)
Prepaid expenses and other current assets.......................................... 330 (30)
Accounts payable and accrued expenses.............................................. 912 695
Deferred revenue................................................................... 260 (14)
---------- ----------
Net cash provided by operating activities.......................................... 3,835 633
---------- ----------
INVESTING ACTIVITIES:
Capital expenditures, net.............................................................. (2,272) (248)
Acquisitions, net of cash acquired..................................................... (50,600) (22,565)
Receipts on long-term receivable....................................................... -- 26
Decrease in other assets............................................................... (19) --
Net proceeds from sale of answering service............................................ -- 103
---------- ----------
Net cash used for investing activities............................................... (52,891) (22,684)
---------- ----------
FINANCING ACTIVITIES:
Debt incurred in connection with acquisitions, net of financing costs.................. 35,194 19,392
Payments on long-term debt............................................................. (184) (3,950)
Proceeds from other debt............................................................... -- 381
Proceeds from related parties.......................................................... -- 236
Payments to related parties............................................................ (7) (603)
Stock subscription received............................................................ 52 --
Proceeds from the issuance of Preferred Stock and common stock warrants................ 15,898 --
Net proceeds from initial public offering.............................................. -- 7,450
---------- ----------
Net cash provided by financing activities................................................ 50,953 22,906
---------- ----------
Increase in cash and cash equivalents.................................................... 1,897 855
Cash and cash equivalents at beginning of period......................................... 715 61
---------- ----------
Cash and cash equivalents at end of period............................................... $ 2,612 $ 916
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-80
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Teletouch
Communications, Inc., and its subsidiaries ("Teletouch" or the "Company") for
the periods ended February 29, 1996 and February 28, 1995 have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis. Significant accounting policies followed by the Company were disclosed in
the notes to the financial statements included in the Company's Annual Report on
Form 10-KSB for the year ended May 31, 1995. The balance sheet at May 31, 1995
has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the accompanying condensed consolidated financial
statements contain the material adjustments necessary to present fairly the
financial position of the Company at February 29, 1996 and May 31, 1995 and the
results of its operations and cash flows for the periods ended February 29, 1996
and February 28, 1995. All such adjustments are of a normal recurring nature.
Interim period results are not necessarily indicative of the results to be
achieved for the full year. The financial statements for the periods ended
February 29, 1996 and February 28, 1995 include the results of operations for
companies acquired by Teletouch from the effective date of the acquisition.
2. DEBT ISSUE COSTS
The debt issue costs of the Company ($3,193,000 at February 29, 1996 and
$954,000 at May 31, 1995) reflect costs incurred to obtain the FINOVA and CIVC
financings (see Note 4). These costs are being amortized over the term of the
related debt using the effective interest method.
3. OTHER INTANGIBLE ASSETS
The Company's other intangible assets consisted of the following:
<TABLE>
<CAPTION>
FEBRUARY 29,
1996 MAY 31, 1995
---------------- -------------
<S> <C> <C>
Subscriber bases acquired, net............................ $ 20,022,000 $ 9,378,000
FCC licenses, net......................................... 15,195,000 49,000
Other..................................................... 246,000 123,000
---------------- -------------
$ 35,463,000 $ 9,550,000
---------------- -------------
---------------- -------------
</TABLE>
4. ACQUISITIONS AND RELATED FINANCING
Pursuant to the terms of an Asset Purchase Agreement dated as of February
16, 1995 as amended and restated (the "Purchase Agreement"), Teletouch acquired
on August 3, 1995 substantially all of the non-cash assets and assumed selected
liabilities of Dial-A-Page, Inc. ("Dial") for a purchase price of approximately
$49.8 million (the "Dial Acquisition"), $46.4 million of which represents the
original purchase price specified in the Purchase Agreement and the balance of
approximately $3.4 million represents the net amount that was payable as a
consequence of the implementation of the adjustment provisions contained in the
Purchase Agreement. Teletouch incurred financing costs and professional fees
incident to the Dial Acquisition and the related financings discussed below of
approximately $5 million. Of the total purchase price payable in the Dial
Acquisition, for financial reporting purposes, approximately $14.3 million was
allocated to property, plant and equipment and inventory, $0.6 million to
accounts receivable, $29.4 million to specifically identified intangible assets
(primarily the subscriber base and FCC licenses), $0.9 million to current
liabilities, and $.1 million to other current assets, with the remaining amount
allocated to excess of cost over the fair value of net assets acquired. This
acquisition was accounted for under the purchase method of accounting.
Concurrently with the Dial Acquisition, Teletouch completed the private
placement of debt and equity securities with Continental Illinois Venture
Corporation ("CIVC") and certain other parties
F-81
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ACQUISITIONS AND RELATED FINANCING (CONTINUED)
both related and unrelated to CIVC (together with CIVC, the "CIVC Investors")
under which the CIVC Investors provided Teletouch with $25 million in financing
in connection with the Dial Acquisition. The CIVC Investors purchased $15
million in initial liquidation value of Teletouch Series A Cumulative Preferred
Stock (the "Series A Preferred Stock") valued at $7,016,000 and $10 million face
value of 14% Junior Subordinated Notes valued at $8,004,000, due in August 2003
(the "Subordinated Notes"). Dividends on the Series A Preferred Stock and
interest on the Subordinated Notes will each accrue at the stated rate of 14%
per annum. Each share of Series A Preferred Stock will become convertible into
common stock in August 2003. The CIVC Investors also received warrants, exercis
able at a nominal price, to purchase approximately 5,066,000 shares of Teletouch
common stock and approximately 617,000 shares of Teletouch Series B Preferred
Stock. The warrants were valued at $5,766,000 and $4,214,000 for the common
stock and the Series B Preferred Stock, respectively. Each share of Series B
Preferred Stock is non-voting and will become convertible into six shares of
common stock after two years. Assuming all CIVC Investors warrants and preferred
stock are converted to common stock, such investors would have ownership of
approximately 62% of the Company's common shares outstanding at that time. The
CIVC Investors will have the right, after two years, to require that their
securities be registered for public sale at the Company's expense. The CIVC
Investors also have the right to designate up to three of seven members of
Teletouch's Board of Directors (four of seven after two years, or sooner in the
event of a default under certain operating covenants).
Also completed concurrently with the Dial Acquisition was $35 million in
additional senior financing from Teletouch's existing senior lender, FINOVA
Capital Corporation ("FINOVA"), to complete the Dial Acquisition and to provide
additional working capital. Approximately $30 million was borrowed under the
financing facility, leaving $5 million available for future financings and
working capital needs of the Company. The additional $35 million brings the
total senior financing provided by FINOVA to approximately $55 million.
On December 29, 1994, the Company acquired substantially all of the non-cash
assets and assumed certain liabilities of Waco Communications Inc. ("Waco"), a
paging service in Waco, Texas for approximately $2,908,000 (the "Waco
Acquisition"). Also on December 29, 1994, pursuant to the terms of its Stock and
Asset Purchase Agreement with Beepers Plus of Memphis, Inc. ("Memphis"), Beepers
Plus of Nashville, Inc. ("Nashville") and Beepers Plus of Jackson Partnership
("Jackson") (collectively "Beepers Plus"), the Company acquired the stock of
Memphis and Nashville and substantially all of the assets and liabilities of
Jackson for approximately $17,700,000 cash (the "Beepers Plus Acquisition"). The
Beepers Plus Acquisition and the Waco Acquisition were financed with proceeds
from the Company's initial public offering and a $19 million loan from FINOVA.
The results of operations for Waco and Beepers Plus have been included in the
Teletouch historical financial statements since their acquisition on December
29, 1994. The purchase method of accounting was used to reflect these
acquisitions.
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the acquisitions (Beepers Plus, Waco
and Dial) and related financings had occurred at June 1, 1994. This summary may
not be indicative of what would have occurred had the acquisitions been made as
of June 1, 1994 or of results which may occur in the future. The historical
financial statements used to prepare the summary reflect the acquisitions from
the effective date of the respective acquisitions forward, using the purchase
method of accounting based on estimated fair values of assets purchased and
liabilities assumed. The Beepers Plus historical results have been
F-82
<PAGE>
TELETOUCH COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ACQUISITIONS AND RELATED FINANCING (CONTINUED)
adjusted for the results of the closing audit at December 29, 1994 based on the
terms of the Beepers Plus purchase agreement. The pro forma results exclude the
operations of Telepage Inc. prior to its acquisition by Dial in September, 1994.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
(UNAUDITED) FEB. 29, FEB. 28,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1996 1995
------------ ------------
<S> <C> <C>
Net revenue..................................................... $ 22,177 $ 17,984
Operating income................................................ $ 616 $ 240
Net loss........................................................ $ (4,592) $ (3,724)
Primary and fully diluted earnings (loss) per share............. $ (1.10) $ (1.24)
</TABLE>
5. SHAREHOLDERS' EQUITY
In September 1995 Teletouch received notice from holders of certain warrants
that they have elected to exercise an aggregate of 466,777 Common Stock Purchase
Warrants and 56,867 Series B Preferred Stock Purchase Warrants. In January 1996
Teletouch received notice from holders of certain warrants that they have
elected to exercise an aggregate of 607,914 Common Stock Purchase Warrants and
74,063 Series B Preferred Stock Purchase Warrants. The total number of shares of
Common Stock outstanding after the issuances is 6,347,416. The total number of
shares of Series B Preferred Stock outstanding after the issuance is 130,930.
6. SUBSEQUENT EVENTS
In April 1996 the Company executed definitive agreements to purchase all of
the outstanding common stock of AACS Communications, Inc. for $1.9 million, and
substantially all of the paging assets of Warren Communications, Inc. for $5.0
million, Hyde's Stay-In-Touch Paging Inc. for $15.0 million, Dave Fant Company
(d/b/a/ Oklahoma Radio Systems) for $2.0 million, and Cimarron Paging, Inc. for
$1.8 million, (collectively the "Pending Acquisitions".) The Pending
Acquisitions are expected to close at various times during the fourth quarter of
fiscal year 1996 and the first quarter of fiscal year 1997. The purchase prices
for the Pending Acquisitions are subject to adjustment based on actual financial
performance. For the year ended December 31, 1995, the Pending Acquisitions
collectively had approximately 96,000 pagers in service; $5,986,000 of revenue;
$2,933,000 of operating income; and $2,920,000 of total assets.
The Pending Acquisitions are subject to various conditions including due
diligence, approval by the Board of Directors of the Company and FCC, Regulatory
and other third-party approvals, including approval of FINOVA and the CIVC
Investors. The funds available from the FINOVA Loans are not sufficient to fund
the purchase price of all of the Pending Acquisitions. Accordingly, the Company
is negotiating with several sources for additional capital; however, there can
be no assurance that funds will be available on terms acceptable to the Company
to complete these transactions.
F-83
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Dial-A-Page, Inc.
We have audited the accompanying balance sheets of Dial-A-Page, Inc. as of
July 31, 1995 and December 31, 1994 and the related statements of operations,
stockholders' deficit, and cash flows for the seven months ended July 31, 1995
and the years ended December 31, 1994 and 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of Dial-A-Page, Inc. at July
31, 1995 and December 31, 1994, and the results of its operations and its cash
flows for the seven months ended July 31, 1995 and for the years ended December
31, 1994 and 1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Little Rock, Arkansas
April 26, 1996
F-84
<PAGE>
DIAL-A-PAGE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1994 1995
------------- -------------
<S> <C> <C>
ASSETS (NOTE 2)
Current assets:
Cash............................................................................. $ 848,092 $ 563,275
Accounts receivable, less allowance for uncollectible accounts of $65,000 in 1995
and $22,000 in 1994............................................................. 557,815 570,360
Inventories:
Parts and supplies............................................................. 96,382 96,218
Pagers held for sale........................................................... 368,731 469,414
Prepaid expenses................................................................. 44,731 36,681
------------- -------------
Total current assets............................................................... 1,915,751 1,735,948
------------- -------------
Property and equipment (NOTE 2):
Land............................................................................. 23,355 23,355
Buildings and leasehold improvements............................................. 134,809 158,269
Furniture and fixtures........................................................... 282,240 295,845
Pagers and other equipment....................................................... 14,897,192 17,441,378
------------- -------------
15,337,596 17,918,847
Less accumulated depreciation...................................................... (6,770,525) (8,369,262)
------------- -------------
8,567,071 9,549,585
------------- -------------
Other assets:
Intangible assets (NOTE 8):
Subscriber lists............................................................... 3,169,255 3,169,255
Noncompetition agreements...................................................... 2,806,500 2,806,500
Deferred financing, organization and franchise costs........................... 1,071,911 1,071,911
Excess of cost over fair value of assets acquired.............................. 322,049 322,049
------------- -------------
7,369,715 7,369,715
------------- -------------
Less accumulated amortization.................................................. (1,630,820) (2,371,423)
------------- -------------
5,738,895 4,998,292
Other............................................................................ 227,308 159,518
------------- -------------
5,966,203 5,157,810
------------- -------------
Total assets....................................................................... $ 16,449,025 $ 16,443,343
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable........................................................... $ 590,855 $ 638,586
Accrued expenses................................................................. 216,248 267,624
Accrued interest................................................................. 274,342 67,653
Subscriber deposits.............................................................. 431,451 465,536
Deferred revenue................................................................. 495,598 496,787
Current portion of long-term debt (NOTE 2)....................................... 643,164 1,391,460
Payable to stockholders.......................................................... 287,656 48,933
------------- -------------
Total current liabilities.......................................................... 2,939,314 3,376,579
------------- -------------
Long-term debt, less current portion (NOTE 2)...................................... 17,685,569 16,908,767
------------- -------------
Stockholders' deficit:
Common stock, par value $1 per share, authorized 10,000 shares, issued 1.244
shares.......................................................................... 1,244 1,244
Accumulated deficit.............................................................. (4,059,602) (3,725,747)
------------- -------------
(4,058,358) (3,724,503)
Less treasury stock, at cost (352 shares)........................................ (117,500) (117,500)
------------- -------------
Total stockholders' deficit........................................................ (4,175,858) (3,842,003)
------------- -------------
Total liabilities and stockholders' deficit........................................ $ 16,449,025 $ 16,443,343
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-85
<PAGE>
DIAL-A-PAGE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
----------------------------- ENDED JULY 31,
1994 1993 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Operating revenue:
Pager rental and service........................................ $ 11,489,951 $ 7,587,741 $ 8,854,580
Pager and equipment sales....................................... 1,284,207 787,486 1,143,776
Other........................................................... 576,364 414,150 439,875
-------------- ------------- --------------
13,350,522 8,789,377 10,438,231
-------------- ------------- --------------
Operating cost and expense:
Direct costs of providing services.............................. 1,138,941 903,735 1,138,812
Cost of pager and equipment sales............................... 1,007,668 464,127 625,417
Salaries, wages and benefits (NOTE 4)........................... 3,268,426 2,227,951 2,610,268
Utilities....................................................... 249,063 182,461 196,387
Repairs and maintenance......................................... 411,452 254,086 303,876
Advertising..................................................... 659,562 585,667 301,544
Rent (NOTES 3 AND 6)............................................ 630,035 432,426 488,549
Supplies........................................................ 237,696 169,539 158,945
Insurance....................................................... 104,263 78,365 74,677
Bad debts....................................................... 152,584 97,032 149,979
Other........................................................... 560,612 386,166 465,759
-------------- ------------- --------------
8,420,302 5,781,555 6,514,213
-------------- ------------- --------------
4,930,220 3,007,822 3,924,018
-------------- ------------- --------------
Other expense:
Interest........................................................ 1,226,323 765,716 1,057,109
Depreciation.................................................... 2,210,865 1,561,311 1,779,380
Amortization.................................................... 1,109,975 867,777 740,143
Other........................................................... 34,459 96,012 13,531
-------------- ------------- --------------
4,581,622 3,290,816 3,590,163
-------------- ------------- --------------
Net income (loss)................................................. $ 348,598 $ (282,994) $ 333,855
-------------- ------------- --------------
-------------- ------------- --------------
Earnings (loss) per share (NOTE 7)................................ $ 390.80 $ (317.26) $ 374.28
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See accompanying notes.
F-86
<PAGE>
DIAL-A-PAGE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED TREASURY
SHARES PAR VALUE VALUE STOCK TOTAL
--------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993..................... 1,244 $ 1,244 $ (4,125,206) $ (117,500) $ (4,241,462)
Net loss..................................... -- -- (282,994) -- (282,994)
--------- ----------- -------------- ------------ --------------
Balance at December 31, 1993................... 1,244 1,244 (4,408,200) (117,500) (4,524,456)
Net income................................... -- -- 348,598 -- 348,598
--------- ----------- -------------- ------------ --------------
Balance at December 31, 1994................... 1,244 1,244 (4,059,602) (117,500) (4,175,858)
Net income................................... -- -- 333,855 -- 333,855
--------- ----------- -------------- ------------ --------------
Balance at July 31, 1995....................... 1,244 $ 1,244 $ (3,725,747) $ (117,500) $ (3,842,003)
--------- ----------- -------------- ------------ --------------
--------- ----------- -------------- ------------ --------------
</TABLE>
See accompanying notes.
F-87
<PAGE>
DIAL-A-PAGE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SEVEN MONTHS
----------------------------- ENDED JULY 31,
1994 1993 1995
-------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................... $ 348,598 $ (282,994) $ 333,855
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for doubtful accounts................................. 152,584 97,032 149,979
Depreciation of property and equipment.......................... 2,210,865 1,561,311 1,779,380
Amortization expense............................................ 1,109,975 867,777 740,143
Gain on sale of property and equipment.......................... (1,776) (75,913) (51,072)
Changes in operating assets and liabilities
Accounts receivables.......................................... (470,630) (194,412) (162,524)
Inventories................................................... (163,032) (209,682) (100,519)
Prepaid expenses.............................................. 61,154 (33,791) 8,050
Trade accounts payable........................................ 402,386 15,292 47,731
Accrued expenses and interest................................. 355,724 29,983 (155,313)
Subscriber deposits........................................... 75,057 72,861 34,085
Deferred revenue.............................................. 46,464 116,903 1,189
Receivable/payable from/to stockholders....................... 100,000 -- (224,119)
-------------- ------------- --------------
Net cash provided by operating activities......................... 4,227,369 1,964,367 2,400,865
-------------- ------------- --------------
INVESTING ACTIVITIES
Purchase of Telepage............................................ (4,762,097) -- --
Purchases of property and equipment............................. (3,514,401) (1,805,952) (2,721,190)
Proceeds from sale of property and equipment.................... 77,204 790,095 112,868
Investment in additional franchises and deferred financing
costs.......................................................... (649,990) (82,832) --
Increase in other noncurrent assets............................. (138,784) (21,545) (24,250)
-------------- ------------- --------------
Net cash used in investing activities............................. (8,988,068) (1,120,234) (2,632,572)
-------------- ------------- --------------
FINANCING ACTIVITIES
Proceeds from revolving line of credit and long-term debt....... 8,230,560 170,995 --
Principal payments on revolving line of credit and long-term
debt........................................................... (2,872,977) (1,090,801) (38,506)
Proceeds from notes payable to stockholders..................... -- 117,660 --
Principal payments on notes payable to stockholders............. (26,233) (17,653) (14,604)
-------------- ------------- --------------
Net cash provided by (used in) financing activities............... 5,331,350 (819,799) (53,110)
-------------- ------------- --------------
Net increase (decrease) in cash................................... 570,651 24,334 (284,817)
Cash at beginning of period....................................... 277,441 253,107 848,092
-------------- ------------- --------------
Cash at end of period............................................. $ 848,092 $ 277,441 $ 563,275
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
See accompanying notes.
F-88
<PAGE>
DIAL-A-PAGE, INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company rents and sells communication equipment and provides paging and
mobile phone services throughout the state of Arkansas and surrounding states.
CONCENTRATION OF CREDIT RISK
The majority of the Company's customers are located in Arkansas and
surrounding states. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Customers make deposits for
pager rentals which the Company maintains as a reserve for potential credit
losses or equipment damage.
INVENTORY
Inventory is carried at the lower of costs (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and such cost is depreciated by
the straight-line method for financial reporting purposes over the estimated
useful lives of the individual assets. For tax reporting purposes, accelerated
cost recovery methods are generally used.
The Company generally rents its equipment on a month to month basis. The
Company's investment in equipment under operating leases and equipment held for
lease totaled $8,426,835 less $6,369,547 of accumulated depreciation at July 31,
1995 and $7,485,807 less $4,436,912 of accumulated depreciation at December 31,
1994.
INTANGIBLE ASSETS
Intangible assets are stated at cost, with such cost amortized by the
straight-line method generally as follows:
<TABLE>
<S> <C>
Subscriber lists and noncompetition agreements.................... 5 years
Deferred financing costs.......................................... 8 years
Franchise and organization costs.................................. 10 years
Excess of cost over fair value of assets acquired................. 10 years
</TABLE>
Intangible assets and related accumulated amortization are removed from the
balance sheet when fully amortized.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued Statement No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF. This statement will be adopted in the first quarter of 1996. The
Company does not expect Statement No. 121 to have a significant impact on the
Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
SUPPLEMENTAL CASH FLOW
The Company incurred long-term debt of $10,000 and $347,640 related to
equipment acquired during the seven months ended July 31, 1995 and the year
ended December 31, 1994, respectively.
F-89
<PAGE>
DIAL-A-PAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company operates under Subchapter S of the Internal Revenue Code. As a
result, the Company is not subject to Federal income tax. The stockholders of
the Company include the Company's income or loss in their personal income for
federal income tax purposes.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.
2. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
JULY 31 DECEMBER 31
1995 1994
-------------- --------------
<S> <C> <C>
Senior revolving credit and term loan due in 1999 (1)........ $ 16,535,170 $ 16,535,170
Note payable to John Smith in connection with the purchase of
Telepage, Inc., bearing interest of 8.25% with principal due
in one lump sum on September 9, 1999, collateralized by a
subordinated lien against all property which is subject to
lien under the senior revolving credit and term loan (see
Note 7)..................................................... 1,686,358 1,686,358
Various automobile loans due in monthly installments through
1997 with interest ranging from 7.50% to 11.00%,
collateralized by vehicles with a net book value of
approximately $105,000 at July 31, 1995..................... 54,699 69,205
Other........................................................ 24,000 38,000
-------------- --------------
18,300,227 18,328,733
Less current portion......................................... 1,391,460 643,164
-------------- --------------
$ 16,908,767 $ 17,685,569
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) The stockholders of the Company obtained a revolving credit and term loan
agreement with Fleet National Bank for $19,000,000 which the Company
guarantees. The loan was obtained in order for the stockholders to lend
funds to the Company. A commitment fee is paid quarterly on the daily unused
portion of the balance available to be borrowed at a rate of 1/2% per annum.
$7,000,000 of the outstanding balance bears interest at a fixed rate of
9.99%. The remaining balance bears interest at a variable rate based on the
bank's prime rate plus 2.0% or the bank's certificate of deposit rate plus
3.5%. At July 31, 1995, the variable interest rate was 10.75% on this debt.
The borrowings are collateralized by substantially all assets of the
Company, except for equipment and vehicles specifically pledged to other
debt instruments. The Company must meet certain financial covenants in the
agreement. Management believes the Company was in substantial compliance
with these covenants at July 31, 1995. This debt was paid off on August 3,
1995 (see Note 9.)
F-90
<PAGE>
DIAL-A-PAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. LONG-TERM DEBT (CONTINUED)
Annual maturities of long-term debt were 1996 -- $1,391,460; 1997 --
$2,053,086; 1998 -- $2,407,266; 1999 -- $2,224,725, and 2000 -- $10,223,690.
These maturities are based on the original terms of the various obligations.
Most of the Company's debt was paid off on August 3, 1995 in connection with the
Company's sale to Teletouch. (See Note 9).
During the years ended December 31, 1994 and 1993, the Company paid interest
of approximately $966,000 and $768,000, respectively. During the seven months
ended July 31, 1995, the Company made interest payments of approximately
$1,268,000.
3. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment from related (see Note 6) and
unrelated entities. Rent expense to unrelated parties totaled $446,200 for the
seven months ended July 31, 1995, and $578,000 and $394,000 for the years ended
December 31, 1994 and 1993, respectively. The future minimum rental commitments
as of July 31, 1995 for all noncancelable operating leases with initial terms in
excess of one year are as follows:
<TABLE>
<S> <C>
1995..................................................... $ 262,701
1996..................................................... 188,949
1997..................................................... 106,473
1998..................................................... 54,488
1999..................................................... 18,271
Thereafter............................................... 4,500
---------
$ 635,382
---------
---------
</TABLE>
At December 31, 1994, the Company had commitments of approximately $545,000
relating to the purchase of new computer equipment and computer software. The
Company had no significant capital purchase commitments as of July 31, 1995.
At December 31, 1994 and July 31, 1995, the Company had four lawsuits
pending, resulting from the Company's business activities and personnel matters.
Based on discussion with legal counsel, Management does not believe this
litigation will have a material adverse impact on the Company's financial
position.
4. EMPLOYEE BENEFIT PLAN
During 1992, a pre-tax savings plan (the "Plan") was established for
employees in accordance with the provisions of section 401(k) of the Internal
Revenue Code. Employees who have completed one year of service with the Company,
are over the age of 21, and fulfill the statutory minimum hours of service
(1,000) during the year are eligible to participate in the Plan. Under the Plan,
employees are eligible to contribute up to limits specified by the Internal
Revenue Service, with the Company matching 50% of the first 6% of compensation
contributed by the employee. The Company's matching portion of Plan
contributions resulted in expense of $38,045 for the seven months ended July 31,
1995, and $56,980 and $35,915 for the years ended December 31, 1994 and 1993,
respectively.
5. INCOME TAXES AND S CORPORATION ELECTION
At July 31, 1995, the Company had net operating loss carryforwards from its
previous status as a Subchapter C corporation of approximately $1,078,000 for
financial reporting purposes. For income tax reporting purposes, the Company had
net operating loss carryforwards as a Subchapter C corporation of approximately
$1,279,000 at July 31, 1995 which will expire in varying amounts from 2000
through 2004 if not utilized by the Company as a Subchapter C corporation.
F-91
<PAGE>
DIAL-A-PAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. RELATED PARTY TRANSACTIONS
The notes payable to stockholders include the financing of two airplanes
purchased by the stockholders and then sold to the Company. The notes bear
interest at 8.0% and 8.75% and are due in equal monthly installments of $2,730
and $1,364, including interest, with the balance due in September 1995.
The Company had various amounts due to (from) its stockholders which have
been netted and reported in the payable to stockholders balance in the
accompanying balance sheets.
The Company leases office space and tower sites from related parties. Rent
expense for such leases totaled $42,345 for the seven months ended July 31,
1995, and $52,020 and $38,510 for the years ended December 31, 1994 and 1993,
respectively. The terms of these leases are month-to-month.
7. EARNINGS (LOSS) PER SHARE
The computation of earnings (loss) per share is based upon the weighted
average number of common shares outstanding during each of the periods presented
of 892 shares (1,244 shares issued less 352 shares held in treasury).
8. TELEPAGE, INC. ACQUISITION
On September 1, 1994, the Company acquired Telepage, Inc. in an asset sale
and purchase agreement. Telepage provided paging services primarily in eastern
Arkansas and western Tennessee. The acquisition included the majority of
Telepage's assets including its Federal Communication Commission licenses and
stations, equipment, subscriber lists, and rights under contracts. Certain
assets were excluded from the agreement including cash, real property, and
antenna towers. The total purchase price of $6,448,455 included a cash payment
of $4,762,097 and $1,686,358 five-year, 8.25% note, payable quarterly to the
seller. The cash portion of the purchase price was funded by additional
borrowings under the Company's revolving credit and term loan.
The Telepage purchase price allocation included $2,600,000 for a five-year
noncompetition agreement, $2,225,000 to subscription lists, $1,420,000 to
equipment and fixtures, and $254,000 to excess cost over fair value of assets
acquired. Telepage's operations are included in the accompanying financial
statements from the date of acquisition under the purchase method of accounting.
The excess cost over fair value of assets acquired is amortized on a straight
line method over 10 year. The subscription lists and noncompetition agreement
are amortized on a straight line method over 5 years.
The following unaudited pro forma summary financial information presents the
results of operations of the Company as if the Telepage, Inc. acquisition and
related financing had occurred at January 1, 1993. This summary may not be
indicative of what would have occurred had the acquisition been made as of this
date or of results which may occur in the future. The historical financial
statements used to prepare the summary will reflect the acquisition from the
effective date of the acquisition forward, using the purchase method of
accounting based on estimated fair values of assets purchased and liabilities
assumed. The pro forma results exclude the operations of Telepage, Inc. for the
period June 1994 through August 1994, as the information was not readily
available.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1993 1994
------------ ----------
(UNAUDITED -- DOLLARS IN
THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenue............................................. $ 11,026 $ 14,413
------------ ----------
------------ ----------
Net loss................................................ $ (1,477) $ (408)
------------ ----------
------------ ----------
Loss per share.......................................... $ (1,655.83) $ (457.40)
------------ ----------
------------ ----------
</TABLE>
F-92
<PAGE>
DIAL-A-PAGE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. TELEPAGE, INC. ACQUISITION (CONTINUED)
Proforma adjustments made to the historical data include amortization of
intangibles, depreciation of fair value adjustment of fixed assets, and interest
associated with the note payable to the seller.
9. SUBSEQUENT EVENTS
In February 1995, the Company and its shareholders entered into an asset
purchase agreement (the "Agreement") with Teletouch Communications, Inc. for the
purchase of substantially all assets of Dial-A-Page, Inc. The Agreement states a
total purchase price of $46,350,000, $100,000 of which relates to noncompete
agreements. The acquisition closed on August 3, 1995. Most of the debt
obligations reported in the Company's financial statements were paid off on this
date or shortly thereafter.
F-93
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Management
Teletouch Communications, Inc.
In re: Audit of Russell's Communications, Inc.
We have audited the accompanying balance sheet of Russell's Communications,
Inc., dba LaPageCo, a Louisiana corporation, as of December 31, 1995, and the
related statement of operations, Schedule 1 (general and administrative
expenses), statement of retained earnings, and the statement of cash flows for
the year then ended. These financial statements are the responsibility of you
and the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Russell's Communications,
Inc., dba LaPageCo as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
DEROUEN & WELLS, CPA'S
Baton Rouge, Louisiana
April 22, 1996
F-94
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash $ 47,329 $ 31,594
Accounts receivable -- trade........................................................ 3,357 64,178
------------ ------------
Total current assets.............................................................. 50,686 95,772
------------ ------------
Property and equipment:
Furniture & fixtures................................................................ 6,637 6,637
Equipment........................................................................... 358,550 389,130
------------ ------------
365,187 395,767
Accumulated depreciation............................................................ (112,969) (218,598)
------------ ------------
Net property and equipment........................................................ 252,218 177,169
------------ ------------
Other assets:
Capitalized loan costs.............................................................. 923 851
Prepaid expenses.................................................................... 4,073 3,813
Computer software................................................................... 1,106 1,303
Security deposits................................................................... 1,220 1,220
Investments (at cost)............................................................... 2,571 2,572
------------ ------------
Total other assets................................................................ 9,893 9,759
------------ ------------
Total assets.................................................................... $ 312,797 $ 282,700
------------ ------------
------------ ------------
LIABILITIES & STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................................... $ 7,606 $ 5,707
Payroll taxes....................................................................... 4,893 5,778
Sales tax payable................................................................... 1,261 1,486
Agent deposit....................................................................... 500 500
Due to officers..................................................................... 243 243
Notes payable -- short term......................................................... 45,102 45,102
Income tax payable.................................................................. 14,404 8,424
Deferred tax payable................................................................ 1,567 --
------------ ------------
Total current liabilities......................................................... 75,576 67,240
------------ ------------
Long term liabilities:
Notes payable -- long term.......................................................... 140,989 121,339
Deferred tax payable................................................................ 3,142 --
------------ ------------
Total long term liabilities....................................................... 144,131 121,339
------------ ------------
Total liabilities............................................................... 219,707 188,579
------------ ------------
Stockholder's equity:
Capital stock (no par, 1,000 shares issued and outstanding)......................... 100 100
Treasury stock...................................................................... (50,000) (50,000)
Retained earnings................................................................... 142,990 144,021
------------ ------------
Total stockholder's equity........................................................ 93,090 94,121
------------ ------------
Total liabilities and equity...................................................... $ 312,797 $ 282,700
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the financial statements
F-95
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED 31,
DECEMBER 31, ------------------------
1995 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Income:
Lease and line charge income........................................... $ 541,588 $ 156,784 $ 135,332
------------ ----------- -----------
Total income......................................................... 541,588 156,784 135,332
------------ ----------- -----------
Cost of sales:
Line charges & airtime................................................. 51,912 16,704 10,772
------------ ----------- -----------
Total cost of sales.................................................. 51,912 16,704 10,772
------------ ----------- -----------
Gross profit....................................................... 489,676 140,080 124,560
General and administrative expenses:..................................... 407,650 107,187 96,685
------------ ----------- -----------
Income from operations................................................. 82,026 32,893 27,875
------------ ----------- -----------
Other (income) and expenses:
Interest............................................................... 22,193 5,149 4,594
Interest income........................................................ (2,315) (717) (410)
Disposition of equipment............................................... 8,124 -- 840
Miscellaneous income................................................... (1,161) (3,813) --
------------ ----------- -----------
Total other (income) & expenses.......................................... 26,841 619 5,024
------------ ----------- -----------
Income before income taxes............................................... 55,185 32,274 22,851
------------ ----------- -----------
Provision for income taxes:
Current................................................................ 14,606 9,629 5,715
Deferred............................................................... (3,566) -- --
------------ ----------- -----------
11,040 9,629 5,715
------------ ----------- -----------
Net income............................................................. $ 44,145 $ 22,645 $ 17,136
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See accompanying notes to the financial statements
F-96
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
Beginning retained earnings, December 31, 1994: $ 74,020
<S> <C>
Adjustments to reclassify beginning retained earnings from the income tax basis
of accounting to generally accepted accounting principles:
Deferred tax liability....................................................... (8,275)
Depreciation................................................................. 77,977
Amortization................................................................. 188
Accounts receivable.......................................................... (40,138)
Accounts payable............................................................. (4,927)
---------
Beginning retained earnings, as adjusted......................................... 98,845
Net income, year ended December 31, 1995......................................... 44,145
---------
Ending retained earnings, December 31, 1995...................................... 142,990
---------
---------
Net income (unaudited)........................................................... 22,645
Shareholder distributions (unaudited)............................................ (21,614)
---------
Ending retained earnings, March 31, 1996 (unaudited)............................. $ 144,021
---------
---------
</TABLE>
See accompanying notes to the financial statements
F-97
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED 31,
DECEMBER 31, ------------------------
1995 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net income............................................................. $ 44,145 $ 22,645 $ 17,136
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.......................................... 46,683 16,672 12,394
Loss on disposal of fixed assets....................................... 8,124 -- --
(Increase)/decrease in assets
Accounts receivable.................................................. 5,191 (60,821) (4,470)
Prepaid expenses & other assets...................................... (2,407) 134 33
Investments.......................................................... (2,571) -- (2,571)
Increase/(decrease) in liabilities
Accounts payable..................................................... 2,679 (1,899) 0
Sales tax payable.................................................... 259 225 190
Payroll taxes payable................................................ 1,359 885 1,529
Income taxes payable................................................. 14,552 (5,980) 5,715
Deferred taxes payable............................................... (3,566) (4,709) --
Loans from stockholders.............................................. (9,200) -- --
------------ ----------- -----------
Total adjustments........................................................ 61,103 (55,493) 12,820
------------ ----------- -----------
Net cash provided by (used in) operating activities...................... 105,248 (32,848) 29,956
------------ ----------- -----------
Cash flows from investing activities
Acquisition disposition of property & equipment........................ (75,028) 58,377 (10,468)
Other.................................................................. -- (21,614) --
------------ ----------- -----------
Net cash provided by (used in) investing activities...................... (75,028) 36,763 (10,468)
------------ ----------- -----------
Cash flows from financing activities
Proceeds of long-term borrowing........................................ 125,000 -- --
Repayment of long-term borrowing....................................... (130,870) (19,650) (7,619)
------------ ----------- -----------
Net cash provided by (used in) financing activities...................... (5,870) (19,650) (7,619)
------------ ----------- -----------
Net increase in cash and cash equivalents................................ 24,350 (15,735) 11,869
Cash and cash equivalents at beginning of year........................... 22,979 47,329 22,979
------------ ----------- -----------
Cash and cash equivalents at end of year................................. $ 47,329 $ 31,594 $ 34,848
------------ ----------- -----------
------------ ----------- -----------
Supplemental disclosure of cash flow information
Cash paid during the year:
Interest............................................................. $ 22,193
------------
------------
Income taxes (including accruals).................................... $ 11,040
------------
------------
Supplemental schedule of non-cash investing and financing activities
Debt incurred to purchase equipment.................................... $ 22,112
------------
------------
</TABLE>
See accompanying notes to the financial statements
F-98
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
BATON ROUGE, LA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company provides telecommunication services both to the general public
and to the businesses in the form of pager leasing and pager air time. It is
domiciled in Baton Rouge, La. but provides these services over an extended
region using agreements with other entities to provide network coverage.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
In recording bad debt expense the Company uses the direct write-off method.
Accounts written-off are charged directly to bad debt expense and the accounts
receivable balance is credited. This is not in accordance with generally
accepted accounting principles which require accrual of an allowance for
doubtful receivables. It is consistent, however, with Company policies since
inception, and is in keeping with industry trends to use this method. In
addition, the bulk of receivables are collected within thirty days and any
allowance for doubtful receivables pursuant to generally accepted accounting
principles would be immaterial.
PROPERTY AND EQUIPMENT
For financial statement reporting purposes the Company records depreciation
using the straight line method. Estimated useful lives range from three to seven
years. For income tax purposes the company uses accelerated cost recovery
methods. Estimated useful lives for tax purposes range from three to seven
years.
Depreciation expense for the year ended December 31, 1995 was $45,989,
recapped as follows:
<TABLE>
<S> <C>
Equipment......................................... $ 45,212
Furniture/Fixtures................................ 777
---------
$ 45,989
---------
---------
</TABLE>
Maintenance and repairs are charged to operations when incurred.
DISPOSITIONS
Each year the Company writes off those pagers and equipment that it
considers either obsolete or no longer available for service.
For financial statement reporting purposes the company writes off this
equipment at its net book value. For income tax reporting purposes, the company
writes off these assets at net taxable value. The net book value of such items
written off as of December 31, 1995 for financial statement reporting purposes
was $8,124.
F-99
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
BATON ROUGE, LA
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED TAXES
Deferred taxes are recognized due to the timing differences created between
determining taxes for net income under generally accepted accounting principles
and that determined under tax methodology. As of December 31, 1995 the amounts
giving rise to deferred taxes due to these differences are as follows:
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
Depreciation................................................... $ (3,593)
Accounts Receivable............................................ 6,489
Accounts Payable............................................... 670
---------
Total.......................................................... $ 3,566
---------
---------
</TABLE>
NOTE 2. RELATED PARTY TRANSACTIONS
At December 31, 1995 the Company owed the stockholder an amount totaling
$243. During the year ended December 31, 1995 the Company repaid monies owed to
the stockholder of $9,200. The Company also leased or rented from the
stockholder items of equipment during the year ended December 31, 1995 and
issued IRS form 1099s to the stockholder in the amounts of $3,060 and $8,700.
During the year ended December 31, 1995 the Company paid compensation to the
stockholder and his spouse in the amounts of $48,000 and $22,650, respectively.
During the year ended December 31, 1995 the Company leased a vehicle on behalf
of the stockholder. Monthly rentals at December 31, 1995 totaled $606. The
minimum value of future rentals on the vehicle lease are as follows:
<TABLE>
<S> <C>
1996............................................... $ 7,266
1997............................................... 7,266
1998............................................... 7,266
6,661(Terminal
1999............................................... year)
</TABLE>
NOTE 3. NOTES PAYABLE AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
CURRENT LONG-TERM
--------- -----------
<S> <C> <C>
Note payable to Associates Credit in the original amount of $34,083, dated
5/28/93 payable in monthly installments of $1,033 including interest at 13.2%
per annum, collateralized by equipment (see Note 5)........................... $ 9,635 $ 16,888
Note payable to Associates Credit in the original amount of $7,761, payable in
monthly installments of $234, dated 7/1/94 including interest at 15.918% per
annum, collateralized by equipment............................................ $ 2,183 $ 2,990
Note payable to Associates Credit in the original amount of $7,771, dated
8/1/94 payable in monthly installments of $234 including interest at 15.917%
per annum, collateralized by equipment........................................ $ 2,159 $ 3,188
Note payable to Associates Credit in the original amount of $7,732, dated
7/1/94 payable in monthly installments of $233 including interest at 14.664%
per annum, collateralized by equipment........................................ $ 2,240 $ 2,799
</TABLE>
F-100
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
BATON ROUGE, LA
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 3. NOTES PAYABLE AT DECEMBER 31, 1995 (CONTINUED)
<TABLE>
<CAPTION>
CURRENT LONG-TERM
--------- -----------
Note payable to Associates Credit in the original amount of $7,766, dated
9/29/94 payable in monthly installments of $234 including interest at 15.861%
per annum, collateralized by equipment........................................ $ 2,107 $ 3,569
<S> <C> <C>
Note payable to Associates Credit in the original amount of $3,262, dated
2/22/95, payable in monthly installments of $101 including interest at 16.356%
per annum, collateralized by equipment........................................ $ 857 $ 1,851
Note payable to Associates Credit in the original amount of $1,363, dated
3/29/95, payable in monthly installments of $42 including interest at 17,718%
per annum, collateralized by equipment........................................ $ 340 $ 828
Note payable to Associates Credit in the original amount of $3,464, dated
3/29/95, payable in monthly installments of $107 including interest at 16.480%
per annum, collateralized by equipment........................................ $ 897 $ 2,046
Note payable to Associates Credit in the original amount of $3,469, dated
3/29/95, payable in monthly installments of $107 including interest at 17.718%
per annum, collateralized by equipment........................................ $ 864 $ 2,107
Note payable to Associates Credit in the original amount of $4,034, dated
2/22/95, payable in monthly installments of $125 including interest at 17.590%
per annum, collateralized by equipment........................................ $ 1,021 $ 2,362
Note payable to Associates Credit in the original amount of $3,267, dated
2/26/95, payable in monthly installments of $101 including interest at 16.390%
per annum, collateralized by equipment........................................ $ 689 $ 2,578
Note payable to Associates Credit in the original amount of $3,252, dated
2/26/95, payable in monthly installments of $101 including interest at 16.38%
per annum, collateralized by equipment........................................ $ 686 $ 2,566
Note payable to Hancock Bank in the original amount of $125,000, dated 9/15/95,
payable in monthly installments of $2,625 including interest at 9.5% per
annum, collateralized by equipment............................................ $ 21,424 $ 97,217
--------- -----------
Total........................................................................ $ 45,102 $ 140,989
--------- -----------
--------- -----------
</TABLE>
Long-term debt matures as follows:
<TABLE>
<S> <C>
1997............................................. $ 50,629
1998............................................. 40,635
1999............................................. 29,453
2000............................................. 20,272
2001 and beyond.................................. --
---------
$ 140,989
---------
---------
</TABLE>
F-101
<PAGE>
RUSSELL'S COMMUNICATIONS, INC.
DBA LAPAGECO
BATON ROUGE, LA
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 4. OPERATING LEASES
As of December 31, 1995 the Company leased its premises for the amount of
$875 per month under an agreement that expired that date. The lease agreement
allows for a one year renewal at lessee's option. The Company appears to be
operating on a month-to-month basis with the renewal not having been elected.
The minimum future rentals assuming a one year renewal are as follows:
1996.....................................................$10,500
NOTE 5. CONTINGENCIES
The Company is contingently liable for an amount owed to Associates Credit
on one of its notes payable in the amount of $26,522. The contingency arose from
a guarantee made by the Company on a note to Associates Credit that the Company
shares with an outsider (See Note 3).
NOTE 6. RETAINED EARNINGS
Historically, the Company has presented its financial information on the
income tax basis of accounting. For purposes of the audit for the year end
December 31, 1995, the Company is presenting its financial statements under
generally accepted accounting principles. Beginning retained earnings as of
January 1, 1995 were originally stated under the income tax basis of accounting.
Retained earnings were re-stated for generally accepted accounting principles.
The effect of the adjustment is reflected in the Statement of Retained Earnings.
F-102
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
Warren Communications, Inc.
We have audited the accompanying Balance Sheet of Warren Communications,
Inc. (an S corporation), as of December 31, 1995, and the related Statements of
Income, Retained Earnings and Cash Flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Warren Communications, Inc.
(an S corporation) as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
WRIGHT, MOORE, DEHART,
DUPUIS & HUTCHINSON
Certified Public Accountants
Lafayette, LA
February 14, 1996
F-103
<PAGE>
WARREN COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents......................................................................... $ 68,899 $ 64,614
Accounts Receivable (Net)......................................................................... 44,392 61,276
Other Receivable.................................................................................. 4,870 --
Inventory......................................................................................... 5,041 5,041
Loans to Stockholder -- Current................................................................... 32,590 32,590
------------ -----------
Total Current Assets............................................................................ 155,792 163,521
Property and Equipment
Automobiles....................................................................................... 40,076 40,076
Pagers............................................................................................ 316,149 316,149
Transmitters...................................................................................... 193,618 193,618
Test Equipment.................................................................................... 25,315 25,315
Office Equipment.................................................................................. 11,603 11,603
------------ -----------
Total........................................................................................... 586,761 586,761
Less: Accumulated Depreciation.................................................................... (221,397) (246,597)
------------ -----------
Net Property and Equipment...................................................................... 365,364 340,164
Other Assets
Loans to Stockholder.............................................................................. 100,670 100,670
------------ -----------
Total Assets.................................................................................... $621,826 $604,355
------------ -----------
------------ -----------
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Liabilities
Accounts Payable.................................................................................. $ 59,147 59,147
Unearned Revenues................................................................................. 14,582 14,582
Payroll Taxes Payable............................................................................. 3,211 7,838
Sales Taxes Payable............................................................................... 2,669 2,669
Current Maturities of Long-Term Debt.............................................................. 288,689 288,689
------------ -----------
Total Current Liabilities....................................................................... 368,298 372,925
Long-Term Debt (Less Current Maturities)............................................................ 244,294 166,738
------------ -----------
Total Liabilities............................................................................... 612,592 539,663
Stockholder's Equity
Common Stock (10,000 shares Authorized, No Par Value, 1,000 Shares Issued and Outstanding)........ 1,000 1,000
Retained Earnings................................................................................. 8,234 63,692
------------ -----------
Total Stockholder's Equity...................................................................... 9,234 64,692
------------ -----------
Total Liabilities and Stockholder's Equity...................................................... $621,826 $604,355
------------ -----------
------------ -----------
</TABLE>
The Accompanying Notes are an Integral Part of This Statement.
F-104
<PAGE>
WARREN COMMUNICATIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED MARCH ENDED MARCH
DECEMBER 31, 1995 31, 1996 31, 1995
----------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUES................................................................... $1,653,689 $410,436 $415,938
COST OF REVENUES........................................................... 586,606 120,357 130,822
----------------- -------------- --------------
GROSS PROFIT............................................................... 1,067,083 290,079 285,116
GENERAL AND ADMINISTRATIVE EXPENSES........................................ 693,696 196,197 213,876
----------------- -------------- --------------
INCOME BEFORE OTHER INCOME (EXPENSE)....................................... 373,387 93,882 71,240
OTHER INCOME (EXPENSE).....................................................
Interest Income.......................................................... 8,434 -- --
Interest Expense......................................................... (79,046) (19,338) (25,401)
----------------- -------------- --------------
Total Other Income (Expense)........................................... (70,612) (19,338) (25,401)
----------------- -------------- --------------
NET INCOME................................................................. $ 302,775 $ 74,544 $ 45,839
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
The Accompanying Notes are an Integral Part of This Statement.
F-105
<PAGE>
WARREN COMMUNICATIONS, INC.
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
<TABLE>
<S> <C>
Balance at December 31, 1994.................................................... $ 25,037
Prior Period Adjustments........................................................ (151,586)
---------
Balance at December 31, 1994 Restated........................................... (126,549)
Net Income...................................................................... 302,775
Dividends....................................................................... (167,992)
---------
Balance at December 31, 1995.................................................... 8,234
Net Income (unaudited).......................................................... 74,544
Shareholder Distributions (unaudited)........................................... (19,086)
---------
Balance at March 31, 1996 (unaudited)........................................... $ 63,692
---------
---------
</TABLE>
The Accompanying Notes are an Integral Part of This Statement
F-106
<PAGE>
WARREN COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1995
------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................. $ 302,775 $ 74,544 $ 45,839
------------ ----------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.......................................................................... 92,916 25,200 33,000
Provision for bad debts............................................................... 9,803 -- --
Change in assets and liabilities:
Accounts receivable................................................................... 44,352 (12,014) 26,888
Other receivable...................................................................... 360 -- (2,750)
Inventory............................................................................. (5,041) -- --
Accounts payable...................................................................... 26,841 -- --
Unearned revenues..................................................................... 10,564 -- --
Payroll taxes payable................................................................. 1,164 4,627 (2,506)
Sales tax payable..................................................................... (550) -- --
------------ ----------- ----------
Total Adjustments....................................................................... 180,409 17,813 54,632
------------ ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................................. 483,184 92,357 100,471
------------ ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment.................................................................. (91,211) -- (102,963)
Loans to stockholder.................................................................... (100,000) -- --
Repayment of loans to stockholder....................................................... 19,836 -- --
------------ ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES................................................... (171,375) -- (102,963)
------------ ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt............................................................ 131,299 -- 22,160
Repayment of long-term debt............................................................. (319,004) (77,556) --
Dividends paid.......................................................................... (167,992) (19,086) (1,450)
------------ ----------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..................................... (355,697) (96,642) 20,710
------------ ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (43,888) (4,285) 18,218
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................................ 112,787 68,899 112,786
------------ ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................................. $ 68,899 $ 64,614 $ 131,004
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-107
<PAGE>
WARREN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Warren Communications, Inc. was incorporated on May 1,
1991. The Company is domiciled in Lafayette, Louisiana, and is primarily in
business as a private paging carrier.
The Company generally services commercial, individual and governmental
customers in the South Central Louisiana region.
ACCOUNTS RECEIVABLE -- The Company has established a specific reserve for
uncollectible accounts receivable. The allowance for uncollectible accounts
receivable at December 31, 1995 was $9,803 which equaled bad debt expense for
the year.
INVENTORY -- Inventory consists of new pagers held for resale and is stated
at the lower of cost or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Expenditures for property and equipment which substantially increase the useful
lives of existing assets are capitalized at cost and depreciated. Routine
expenditures for repairs and maintenance are expensed as incurred.
Depreciation is provided principally on the straight-line method over the
useful lives of the assets, which are generally five to seven years for
equipment and vehicles.
INCOME TAXES -- The Company has elected to be taxed under the provision of
Subchapter S of the Internal Revenue Code. Under those provisions, the Company
generally does not pay federal or state corporate income tax on its taxable
income. Instead, the stockholders are liable for individual income tax on the
Company's taxable income.
USE OF ESTIMATES -- 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.
NOTE 2 -- UNEARNED REVENUES
Unearned Revenues represents customer deposits and prepaid lease charges on
pagers and paging service at December 31, 1995.
F-108
<PAGE>
WARREN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
NOTE 3 -- LONG-TERM DEBT
Long-Term debt consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
Note payable to bank secured by accounts receivable and personal guaranty
of stockholder, payable in monthly installments of $3,234 including
interest at bank prime plus 1% (currently 9.5%), maturing April, 1998... $ 80,164
Note payable to bank secured by pagers, payable in monthly installments
of $3,832 including interest at bank prime plus 1% (currently 9.5%),
maturing September, 1996................................................ 29,432
Various notes payable to finance company, secured by pagers, payable in
monthly installments with interest rates varying from 12.1% to 15.43%,
with maturity dates ranging from 1996 through 1998...................... 423,387
---------
Total.................................................................. 532,983
Less: Current Maturities............................................... 288,689
---------
Long-Term Debt......................................................... $ 244,294
---------
---------
</TABLE>
Future Cash Requirements for Long-Term Debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: AMOUNT
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
1996....................................................................................... $ 288,689
1997....................................................................................... 195,335
1998....................................................................................... 48,959
-----------
Total...................................................................................... $ 532,983
-----------
-----------
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company has outstanding non-interest bearing demand loans to stockholder
in the amount of $53,096 at December 31, 1995.
The Company leases the office facility from its stockholder for $4,000 per
month. Lease payments made during 1995 were $45,000.
The Company made a loan to its stockholder during 1995 in the amount of
$100,000 payable in monthly installments of $3,234 including interest at bank
prime plus 1% (currently 9.5%), maturing April, 1998. The principal balance at
December 31, 1995 was $80,164 with the current portion of $32,590 due in 1996.
NOTE 5 -- LEASES
The Company's transmitters are located throughout South Central Louisiana on
towers rented under various leases. Certain of these are noncancelable leases
which will expire in 1996 and are renewable for one-year terms. Other tower
rental leases are on month to month basis.
The Company also has a noncancelable lease for satellite transmission
services and space segment capacity. This lease expires January 1, 2006.
F-109
<PAGE>
WARREN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
NOTE 5 -- LEASES (CONTINUED)
Future minimum rental payments are as follows for the years ending December
31:
<TABLE>
<S> <C>
1996..................................................... $ 51,786
1997..................................................... 28,800
1998..................................................... 28,800
1999..................................................... 28,800
2000 and later........................................... 144,000
---------
Total.................................................... $ 282,186
---------
---------
</TABLE>
NOTE 6 -- PRIOR PERIOD ADJUSTMENTS
Retained Earnings at the beginning of 1995 has been adjusted to reflect the
following changes which had no effect on current period net income:
Accounts Payable were understated by $8,436 at December 31, 1994.
Accumulated Depreciation was corrected to reflect the use of the
straight-line method for recognizing depreciation instead of the modified
accelerated cost recovery system which had been erroneously used in prior years.
Fixed assets were also adjusted for a correction of errors made in capitalizing
certain assets. These changes resulted in an increase to Retained Earnings in
the amount of $55,707.
Other Receivables were understated by $5,230 at December 31, 1994.
Payroll Taxes Payable were overstated by $3,878 at December 31, 1994.
Beginning Retained Earnings were also reduced by the amount of $207,965 to
reflect a correction of capitalized pagers and the related depreciation expense
recorded in prior years. (See Note 7).
NOTE 7 -- LEASED PAGERS
In prior years, the Company capitalized all pager purchases and only
expensed a portion of the amount as Cost of Goods Sold. The capitalized pagers
were not adjusted for items lost, broken, or replaced. At December 31, 1995, the
Company scheduled the pagers which were currently being leased to customers or
held in stock. The records were then adjusted to reflect the documented count of
pagers which existed on that date. The count resulted in a reclassification of
$11,222 from Cost of Goods Sold to Fixed Assets in the current period and a
prior period adjustment as described in Note 6.
NOTE 8 -- CASH FLOW DISCLOSURE
Cash paid during the year for interest was $79,046.
F-110
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
AACS Communications, Inc.
We have audited the accompanying balance sheet of AACS Communications, Inc.
as of December 31, 1995, and the related statements of income, retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AACS Communications, Inc. as
of December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental information presented
after the financial statements is presented for the purpose of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
SPILLAR, MITCHAM, EATON & BICKNELL, L.L.P.
Fort Worth, Texas
March 28, 1996
F-111
<PAGE>
AACS COMMUNICATIONS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
CURRENT ASSETS
<S> <C>
Cash.............................................................................................. $ 100,343
Accounts receivable............................................................................... 18,382
------------
Total Current Assets............................................................................ 118,725
PHYSICAL PROPERTY
Communication equipment........................................................................... 495,813
Accumulated depreciation.......................................................................... (433,495)
------------
Total Physical Property......................................................................... 62,318
OTHER ASSETS
Radio station license............................................................................. 50,003
License amortization.............................................................................. (6,875)
------------
Total Other Assets.............................................................................. 43,128
------------
TOTAL ASSETS................................................................................ $ 224,171
------------
------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................................. $ 11,637
Accrued payroll tax............................................................................... 44
Franchise tax payable............................................................................. 16,382
------------
Total Current Liabilities....................................................................... 28,063
STOCKHOLDERS' EQUITY
Common stock -- 1,000,000 shares authorized, 52,000 issued and outstanding at $1.00 par value..... 52,000
Additional paid-in capital........................................................................ 6,000
Retained earnings................................................................................. 138,108
------------
Total Stockholders' Equity...................................................................... 196,108
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $ 224,171
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-112
<PAGE>
AACS COMMUNICATIONS, INC.
INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
INCOME
<S> <C>
Service fees................................................................ $621,761
OPERATING EXPENSES
Salaries.................................................................... 81,941
Advertising................................................................. 249
Depreciation................................................................ 22,931
Amortization................................................................ 1,250
Dues........................................................................ 735
Insurance................................................................... 12,433
Licenses and permits........................................................ 1,695
Office supplies............................................................. 2,963
Professional fees........................................................... 8,656
Contract labor.............................................................. 100
Rents....................................................................... 93,493
Repairs..................................................................... 6,445
Supplies.................................................................... 5,283
Payroll taxes............................................................... 6,521
Other taxes................................................................. 23,122
Telephone................................................................... 37,375
Travel...................................................................... 510
Utilities................................................................... 173
-----------------
Total Operating Expenses.................................................. 305,875
-----------------
Net Income Before Extraordinary Items..................................... 315,886
EXTRAORDINARY ITEMS...........................................................
Escrow forfeiture........................................................... 100,000
Legal fees in relation to sale of business.................................. (69,675)
-----------------
Total Extraordinary Items................................................. 30,325
-----------------
NET INCOME.............................................................. $346,211
-----------------
-----------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-113
<PAGE>
AACS COMMUNICATIONS, INC.
STATEMENT OF RETAINED EARNINGS
<TABLE>
<S> <C>
Retained earnings at January 1, 1995............................................ $ 106,897
Net income...................................................................... 346,211
Distributions to stockholders................................................... (315,000)
---------
Retained earnings at December 31, 1995.......................................... $ 138,108
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-114
<PAGE>
AACS COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net income........................................................................... $ 346,211
Adjustments to reconcile net income to net cash......................................
Depreciation and amortization...................................................... 24,181
Decrease in accounts receivable.................................................... 5,014
Decrease in deposits............................................................... 400
Decrease in accounts payable....................................................... (3,982)
Decrease in payroll tax payable.................................................... (3,532)
Increase in franchise tax payable.................................................. 4,612
------------
Net Cash Flow Provided by Operating activities..................................... 372,904
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of physical property........................................................ (689)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on amount payable to stockholders......................................... (62,469)
Distributions to stockholders........................................................ (315,000)
------------
Net Cash Flow Used in Financing Activities......................................... (377,469)
------------
NET DECREASE IN CASH................................................................... (5,254)
CASH AT THE BEGINNING OF THE YEAR...................................................... 105,597
------------
CASH AT THE END OF THE YEAR............................................................ $ 100,343
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-115
<PAGE>
AACS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
ORGANIZATION
AACS Communications, Inc. is a Texas corporation that has elected S
Corporation status. The Corporation contracts to sell through outside agents,
air time and phone numbers used for paging services in Fort Worth/Dallas and
Houston.
SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is recorded on a
straight-line basis over the useful lives of the assets. All equipment is being
depreciated using 10 years as the useful life.
AMORTIZATION
The Corporation acquired a radio station license in 1990. The license is
being amortized using the straight-line method over 40 years.
ALLOWANCE FOR BAD DEBTS
All accounts receivables are considered collectible as of December 31, 1995.
Any uncollectible amounts were written off directly to sales during the year.
FEDERAL INCOME TAX
The shareholders of the Corporation have elected that the corporation be
taxed as a S Corporation under Internal Revenue Service regulations. Under these
regulations the Corporation is not liable for federal income taxes. The income
of the Corporation is allocated to the stockholders in their ownership ratio and
taxed at the individual level.
EXTRAORDINARY ITEMS
During 1995 the Corporation received $100,000 that was deposited in escrow
with the expectation that the Company was to be sold. The sale did not occur and
per the contract the Company retained the money.
During 1995, the Company has expended $69,675 in legal fees in attempts to
sell the Company's assets and arrange for license transfers.
GOING CONCERN
The Corporation is currently in negotiation to sell its assets.
LEASES
The Corporation leases office space in Arlington and Houston, Texas. Both
leases are month-to-month and total $1,003.
The Corporation leases radio antenna tower space from a number of Antenna
owners. Contracts for these leases expire at various times. Monthly expenditures
amount to approximately $5,500.
Noncancelable leases that have remaining lease terms are repayable in the
following amounts.
<TABLE>
<S> <C>
1996.............................................. $ 39,739
1997.............................................. 31,070
1998.............................................. 3,455
</TABLE>
RISKS AND UNCERTAINTIES
The Corporation's existence relies on the continued use and popularity of
personal pagers.
F-116
<PAGE>
AACS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
RELATED PARTY TRANSACTIONS
The Corporation leases antenna tower space from Bell Communications, Inc.
Bell Communications, Inc. is 100% owned by a 1/3 owner of AACS Communications,
Inc. The total paid in 1995 was $5,084. The lease is month to month.
F-117
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholders of Hyde's Stay In Touch, Inc.
I have audited the accompanying Balance Sheet of Hyde's Stay In Touch, Inc.
as of December 31, 1995 and the related statements of Income, Retained Earnings
and Cash Flows for the year then ended. These financial statements are the
responsibility of the Company's management. My responsibilitiy is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hyde's Stay In Touch, Inc. as
of December 31, 1995 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
JAMES N. RACHEL
Shreveport, Louisiana
April 22, 1996
F-118
<PAGE>
HYDE'S STAY IN TOUCH, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current Assets
Cash.............................................................................................. $ 66,147 $ 342,940
Investments....................................................................................... 116,231 109,905
Accounts receivable............................................................................... 382,498 411,281
Inventory......................................................................................... 265,141 114,249
Prepaid expenses.................................................................................. 6,976 18,916
------------ -----------
Total Current Assets............................................................................ 836,993 997,291
------------ -----------
Property and Equipment, net......................................................................... 710,171 691,937
------------ -----------
Other Assets:
Loan fees, net.................................................................................... 8,335 7,711
Deposits.......................................................................................... 2,730 2,730
------------ -----------
Total Other Assets.............................................................................. 11,065 10,441
------------ -----------
Total assets........................................................................................ $ 1,558,229 $ 1,699,669
------------ -----------
------------ -----------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current Liabilities:
Accounts payable.................................................................................. $ 24,183 $ 3,150
Accrued expenses.................................................................................. 27,859 22,105
Current installments of capital lease obligations................................................. 1,982 859
Current maturity of long term debt................................................................ 125,794 119,200
------------ -----------
Total Current Liabilities....................................................................... 179,818 145,314
------------ -----------
Long Term Liabilities:
Long term debt, excluding current portion......................................................... 335,510 311,568
------------ -----------
Total Liabilities............................................................................... 515,328 456,882
Stockholders' Equity:
Common stock...................................................................................... 1,000 1,000
Retained earnings................................................................................. 1,041,901 1,241,787
------------ -----------
Total Stockholder's Equity...................................................................... 1,042,901 1,242,787
------------ -----------
Total Liabilities and Stockholders' Equity.......................................................... $ 1,558,229 $ 1,699,669
------------ -----------
------------ -----------
</TABLE>
See Accompanying Notes and Auditor's Report
F-119
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, ENDED MARCH ENDED MARCH
1995 31, 1996 31, 1995
------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Income
Fees and airtime, net........................................... $ 2,932,833 $ 829,417 $ 904,613
Pager, hardware, and accessory sales............................ 835,434 217,406 --
Dealer airtime.................................................. 275,390 78,690 66,900
Dealer hardware sales........................................... 47,039 16,348 --
Trade income.................................................... 42,409 1,922 8,170
------------- -------------- --------------
Total Income.................................................. 4,133,105 1,143,783 979,683
Cost of Goods Sold................................................ 1,342,645 357,116 297,903
------------- -------------- --------------
Gross Profit.................................................... 2,790,460 786,667 681,780
Operating Expenses, net........................................... 1,851,764 508,260 422,580
------------- -------------- --------------
Income From Operations............................................ 938,696 278,407 259,200
------------- -------------- --------------
Other Income (Expense)
Interest income................................................. 4,670 92 1,495
Unrealized gain on investment................................... 7,871 -- --
Other income.................................................... 20,591 484 212
Rent income..................................................... 4,764 -- 1,191
Loss on sale of assets.......................................... (21,136) -- (1,093)
Interest expense................................................ (66,161) (9,004) (13,736)
------------- -------------- --------------
Total Other Income (Expense).................................. (49,401) (8,428) (11,931)
------------- -------------- --------------
Net Income........................................................ $ 889,295 $ 269,979 $ 247,269
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
See Accompanying Notes and Auditor's Report
F-120
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF RETAINED EARNINGS
<TABLE>
<S> <C>
Beginning Retained Earnings at December 31, 1994............................... $ 501,972
Net Income..................................................................... 889,295
Shareholder Distributions...................................................... (349,366)
----------
Ending Retained Earnings at December 31, 1995.................................. 1,041,901
Net Income (unaudited)......................................................... 269,979
Shareholder Distributions (unaudited).......................................... (70,093)
----------
Ending Retained Earnings at March 31, 1996 (unaudited)......................... $1,241,787
----------
----------
</TABLE>
See Accompanying Notes and Auditor's Report
F-121
<PAGE>
HYDE'S STAY IN TOUCH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEAR ENDED ------------------------
DECEMBER 31, 1995 1996 1995
----------------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash Flow From Operating Activities:
Net income........................................................ $ 889,295 $ 269,979 $ 247,269
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization.................................................. 2,500 624 625
Depreciation.................................................. 192,731 44,361 38,375
(Increase) Decrease in:
Accounts receivable........................................... (104,445) (28,783) (50,947)
Inventory..................................................... (49,807) 150,892 7,384
Prepaid expenses.............................................. (6,976) (11,940) --
Increase (Decrease) in:
Accounts payable.............................................. (112,836) (21,033) (86,347)
Accrued expenses.............................................. 7,083 (5,754) (10,527)
----------------- ----------- -----------
Net Cash Provided by Operating Activities................... 817,545 398,346 145,832
----------------- ----------- -----------
Cash Flows From Investing Activities:
Acquisition of fixed assets....................................... (273,731) (26,127) (14,596)
Sale of fixed assets.............................................. 5,595 -- --
Shareholder distributions......................................... (349,366) (70,093) (83,227)
----------------- ----------- -----------
Net Cash Used in Investing Activities....................... (617,502) (96,220) (97,823)
----------------- ----------- -----------
Cash Flows From Financing Activities:
Principal reduction of debt....................................... (218,171) (31,659) (8,907)
Loan proceeds..................................................... 20,000 -- --
----------------- ----------- -----------
Net Cash Used in Financing Activities....................... (198,171) (31,659) (8,907)
----------------- ----------- -----------
Net Increase In Cash................................................ 1,872 270,467 39,102
Beginning Cash...................................................... 180,506 182,378 180,506
----------------- ----------- -----------
Ending Cash......................................................... $ 182,378 $ 452,845 $ 219,608
----------------- ----------- -----------
----------------- ----------- -----------
</TABLE>
See Accompanying Notes and Auditor's Report
F-122
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
The Company was organized in 1988 and is licensed by the Federal
Communications Commission (FCC) as a private paging carrier. It specializes in
one-way communications through a net working of UHF MHz frequencies and VHF MHz
frequencies. The business provides state of the art paging and voice mail
services to over 28,000 subscribers. The Company's coverage area includes
Eastern Texas, all of the State of Louisiana and portions of Mississippi.
ACCOUNTING METHOD
The accrual method of accounting is used for both financial and income tax
reporting purposes.
CASH
For purposes of the financial statement of cash flows, the Company considers
cash in operating bank accounts, cash on hand, and all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
INVESTMENTS
Investments consist of shares of an Eaton Vance Classic National Muncipals
Fund. This investment is held as a trading asset and is stated at market value.
A market adjustment of $7,871 is included in current years earnings. Net
interest earned on these securities is included as interest income.
ACCOUNTS RECEIVABLE
All accounts receivable at December 31, 1995 are considered by management to
be collectible. All accounts or portions of accounts considered to be
uncollectible are adjusted to sales each month.
INVENTORY
Inventory consists of pagers, which are valued at the lower of cost or
market, with cost determined on a first-in, first-out basis.
LOAN FEES, NET
The Company is amortizing an SBA loan fee of $12,502 over sixty months. At
December 31, 1995, forty months remain to be amortized.
PROPERTY AND EQUIPMENT, NET
Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are expensed as incurred while renewals and betterments are
capitalized.
Depreciation and amortization have been provided using the straight line
method over the useful lives of the assets as follows:
<TABLE>
<S> <C>
Office furniture and fixtures.......................................... 10 years
Vehicles............................................................... 8 years
Leased equipment....................................................... 3 years
Machinery and equipment................................................ 5-10 years
Leasehold improvements................................................. 10-40 years
</TABLE>
Leased equipment consists of pagers which are leased to customers on a
monthly basis. These pagers are added to a leased pool on an annual basis. The
pool is then depreciated over a three year period.
Depreciation for the year ended December 31, 1995 amounted to $192,731.
F-123
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company prebills clients monthly for services. The billings are mailed
prior to the end of the month for services of the next month. The financial
statements reflect twelve monthly billing cycles. Revenue is recognized when the
bills are created. The Company offers a significant discount to customers for
prepayment of annual service. This prepayment is recognized as income in full
when received.
INCOME TAXES
Under the provisions of the Internal Revenue Code, the Company has elected
to be taxed as an "S" corporation. Under such election, the Company's federal
taxable income or loss and tax credits are passed through to the individual
stockholders.
NOTE 2 -- INVENTORY
Inventory consists of various types of pagers held in each of the six
business locations the Company operates. The total value at lower of cost or
market at December 31, 1995 was $265,141.
NOTE 3 -- PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<S> <C>
Office furniture and fixtures.......................................... $ 37,475
Vehicles............................................................... 13,423
Leased equipment....................................................... 660,207
Machinery and equipment................................................ 727,484
Leasehold improvements................................................. 36,397
----------
1,474,986
Less: Accumulated depreciation......................................... 764,815
----------
$ 710,171
----------
----------
</TABLE>
NOTE 4 -- PREPAID EXPENSES
Prepaid expenses consist of the following:
<TABLE>
<S> <C>
Prepaid insurance.......................................................... $ 6,468
Prepaid expansion expense.................................................. 508
---------
$ 6,976
---------
---------
</TABLE>
NOTE 5 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<S> <C>
Interest payable.......................................................... $ 16,782
Sales tax payable......................................................... 10,711
Payroll tax payable....................................................... 366
---------
$ 27,859
---------
---------
</TABLE>
F-124
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 6 -- LEASE COMMITMENTS
The Company leases telephone equipment under a capital lease. The economic
substance of the lease is that the Company is financing the acquisition of the
equipment through a lease and, accordingly, it is recorded in the Company's
assets and liabilities. The Company also leases building facilities under
agreements which have been classified as operating leases.
Future lease commitments under capital and operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
YEAR ENDED LEASE OPERATING
DECEMBER 31 OBLIGATION LEASES
- --------------------------------------------------------- ----------- -------------
<S> <C> <C>
1996..................................................... $ 2,137 $ 24,487
1997..................................................... -- 5,733
1998..................................................... -- 951
1999..................................................... -- --
2000..................................................... -- --
----------- -------------
Total minimum lease payments............................. 2,137 $ 31,171
-------------
-------------
Less future interest..................................... (155)
-----------
Capital lease obligation................................. 1,982
Current portion.......................................... (1,982)
-----------
Long term portion........................................ $ --
-----------
-----------
</TABLE>
The Company rents space on several transmission towers throughout its
coverage area. The rentals are verbal and on a month to month basis. Industry
standard is sixty days notice to vacate.
Total rental expense on the operating leases for the year ended December 31,
1995 was $84,486. Interest expense of the capital lease obligation for the year
ended was $694.
NOTE 7 -- LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<S> <C>
Note payable to Commercial National Bank in Shreveport,
Louisiana, a $200,000 revolving line of credit maturing April
30, 1996, at a variable interest rate. This note is
collateralized by common stock of Hyde's Stay in Touch, Inc.,
accounts receivable, and personal guaranty of Robert D. Hyde,
Jr. and Shirley Hyde............................................ $ --
Note payable to Commercial National Bank in Shreveport,
Louisiana, payable in monthly installments of $13,180 including
interest at 8.00% through March 27, 1999. This note is a U.S.
Small Business Administration loan and is collateralized by
equipment, inventory, accounts receivable, and personal guaranty
of Robert D. Hyde, Jr. and Shirley Hyde......................... 461,304
---------
Total long term debt........................................... $ 461,304
Current portion................................................ (125,794)
---------
Long term portion.............................................. $ 335,510
---------
---------
</TABLE>
The interest expense from notes payable for the year ended December 31, 1995
was $49,237.
F-125
<PAGE>
HYDE'S STAY IN TOUCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 7 -- LONG TERM DEBT (CONTINUED)
Maturities of the note for each of the five years succeeding December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 125,794
1997........................................................... 136,235
1998........................................................... 147,543
1999........................................................... 51,732
2000........................................................... --
</TABLE>
NOTE 8 -- CAPITAL STOCK
The capital stock consists of 1000 authorized shares of no par value common
stock. The only shares issued and outstanding at December 31, 1995 were 100
shares issued to Robert D. Hyde, Jr.
NOTE 9 -- RELATED PARTY TRANSACTIONS
Payments made by the Company to the shareholder during the year were charged
to wages, administrative fees, or shareholder distributions. At December 31,
1995 there were no receivables from or payables to the shareholder.
NOTE 10 -- CASH FLOW INFORMATION
The total interest paid for cash flow purposes for the year ended December
31, 1995 was $49,379.
NOTE 11 -- UNAUDITED PERIODS
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
F-126
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL TO, OR A
SOLICITATION OF AN OFFER TO BUY FROM, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................ 3
Risk Factors...................................... 9
Use of Proceeds................................... 13
Capitalization.................................... 14
Summary Pro Forma Condensed Consolidated Financial
Statements....................................... 15
Selected Financial and Operating Data............. 23
Management's Discussion and Analysis of Financial
Condition and Results of
Operations....................................... 26
Business.......................................... 38
Management........................................ 49
Principal Stockholders............................ 51
The Teletouch Agreement........................... 52
Description of Other Indebtedness................. 54
Description of Notes.............................. 56
Underwriting...................................... 75
Legal Matters..................................... 76
Experts........................................... 76
Available Information............................. 77
Incorporation of Certain Information by
Reference........................................ 77
Index to Financial Statements..................... F-1
</TABLE>
$120,000,000
[LOGO]
10 7/8% SENIOR SUBORDINATED
NOTES DUE 2006
---------------------
PROSPECTUS
May 31, 1996
---------------------
LEHMAN BROTHERS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
FIRST CHICAGO CAPITAL MARKETS, INC.
- ---------------------------------------------
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