PRONET INC /DE/, 10-Q, 1996-08-14

PRONET INC /DE/
10-Q, 1996-08-14
RADIOTELEPHONE COMMUNICATIONS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

-------------

(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------

Commission File Number 0-16029

PRONET INC.
(Exact name of registrant as specified in its charter)

DELAWARE 75-1832168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

6340 LBJ Freeway 75240
Dallas, Texas (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (214-687-2000)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 30, 1996: 11,071,998.

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PRONET INC.

INDEX

PART I. FINANCIAL INFORMATION

PAGE
----
Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets at June 30, 1996 and
December 31, 1995. . . . . . . . . . . . . . . . . . . . 1

Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1996 and 1995. . . . 2

Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 1996 and 1995. . . . 3

Notes to Consolidated Financial Statements. . . . . . . . 4

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations. . . . 9

PART II. OTHER INFORMATION

Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 17

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 17

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PRONET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

JUNE 30, DECEMBER 31,
1996 1995
---------- ----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,556 $ 10,154
Trade accounts receivable, net of allowance for doubtful accounts. . . . . . . 10,884 7,498
Federal income tax receivable - Note E . . . . . . . . . . . . . . . . . . . . 753 990
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,418 1,574
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,820 1,937
---------- ----------
47,431 22,153
EQUIPMENT
Pagers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,780 36,789
Communications equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,888 26,051
Security systems' equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 12,607 11,866
Office and other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 9,948 7,179
---------- ----------
110,223 81,885
Less allowance for depreciation. . . . . . . . . . . . . . . . . . . . . . . . (42,814) (34,203)
---------- ----------
67,409 47,682
GOODWILL AND OTHER ASSETS, net of amortization - Note A. . . . . . . . . . . . 152,912 117,134
---------- ----------
$267,752 $186,969
---------- ----------
---------- ----------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,586 $8,387
Other accrued expenses and liabilities . . . . . . . . . . . . . . . . . . . . 9,246 10,524
---------- ----------
14,832 18,911
LONG-TERM DEBT, less current maturities - Note B . . . . . . . . . . . . . . . 99,355 99,319
DEFERRED CREDITS - Note C. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,180 19,183
STOCKHOLDERS' EQUITY - Note A
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 70
Additional capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,671 56,617
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,941) (5,671)
Less treasury stock at cost. . . . . . . . . . . . . . . . . . . . . . . . . . (1,460) (1,460)
---------- ----------

136,385 49,556
---------- ----------
$267,752 $186,969
---------- ----------
---------- ----------
</TABLE>

See notes to consolidated financial statements.

<PAGE>

PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Service revenues. . . . . . . . . . . . . . . $ 20,926 $ 13,404 $ 41,942 $ 23,892
Product sales . . . . . . . . . . . . . . . . 3,889 2,473 7,035 4,669
--------- --------- --------- ---------
Total revenues. . . . . . . . . . . . . . . . 24,815 15,877 48,977 28,561
Cost of products sold . . . . . . . . . . . . (3,355) (2,530) (6,136) (4,595)
--------- --------- --------- ---------
21,460 13,347 42,841 23,966

COST OF SERVICES
Pager lease and access services . . . . . . . 5,712 3,134 11,224 5,355
Security systems' equipment services. . . . . 315 293 590 540
--------- --------- --------- ---------
6,027 3,427 11,814 5,895
--------- --------- --------- ---------
GROSS MARGIN. . . . . . . . . . . . . . . . . 15,433 9,920 31,027 18,071

EXPENSES
Sales and marketing . . . . . . . . . . . . . 3,876 1,771 7,915 3,412
General and administrative. . . . . . . . . . 6,004 3,803 11,344 6,799
Depreciation and amortization . . . . . . . . 8,425 3,716 17,132 6,461
Nonrecurring charges - Note D . . . . . . . . 7,374 -- 7,374 --
--------- --------- --------- ---------
25,679 9,290 43,765 16,672
--------- --------- --------- ---------
OPERATING INCOME (LOSS) . . . . . . . . . . . (10,246) 630 (12,738) 1,399

OTHER INCOME (EXPENSE)
Interest and other income . . . . . . . . . . 187 82 214 123
Interest expense. . . . . . . . . . . . . . . (3,988) (1,508) (7,646) (1,894)
--------- --------- --------- ---------
(3,801) (1,426) (7,432) (1,771)
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES. . . . . . . . . . . (14,047) (796) (20,170) (372)
Income tax expense (benefit) - Note E. . . . . . 100 (396) 100 (37)
--------- --------- --------- ---------
NET LOSS. . . . . . . . . . . . . . . . . . . $(14,147) $(400) $(20,270) $(335)
--------- --------- --------- ---------
--------- --------- --------- ---------

NET LOSS PER SHARE . . . . . . . . . . . . . . . $(1.76) $(0.06) $(2.65) $(0.05)
--------- --------- --------- ---------
--------- --------- --------- ---------

WEIGHTED AVERAGE SHARES. . . . . . . . . . . . . 8,404 6,159 7,657 6,137
--------- --------- --------- ---------
--------- --------- --------- ---------

</TABLE>

See notes to consolidated financial statements.

<PAGE>

PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
---------- ----------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(20,270) $ (335)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 17,132 6,461
Amortization of discount . . . . . . . . . . . . . . . . . . . 36 --
Deferred tax provision . . . . . . . . . . . . . . . . . . . . -- (53)
Provision for losses on accounts receivable . . . . . . . . . . 696 440
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable. . . . . . . (2,629) 673
Decrease in inventories . . . . . . . . . . . . . . . . . . . 401 146
Increase in other current assets. . . . . . . . . . . . . . . (3,915) (39)
Decrease in other assets. . . . . . . . . . . . . . . . . . . 7,374 --
Decrease in trade payables and
other accrued expenses and liabilities . . . . . . . . . . . (3,141) (3,384)
---------- ----------
Net cash (used in) provided by operating activities . . . . . . (4,316) 3,909
INVESTING ACTIVITIES:
Purchase of equipment, net. . . . . . . . . . . . . . . . . . . (10,519) (3,154)
Purchase of pagers, net of disposals. . . . . . . . . . . . . . (18,221) (637)
Acquisitions, net of cash acquired. . . . . . . . . . . . . . . (32,503) (36,157)
Computer system software, product enhancements
and other intangible assets. . . . . . . . . . . . . . . . . . (668) (647)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (121) 39
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . (62,032) (40,556)
FINANCING ACTIVITIES:
Bank debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 39,900
Senior subordinated debt offering - net . . . . . . . . . . . . -- 95,583
Sale of common stock - net. . . . . . . . . . . . . . . . . . . 94,800 --
Payment on bank debt. . . . . . . . . . . . . . . . . . . . . . (48,000) (49,400)
Exercise of incentive stock options for common stock. . . . . . 66 155
Debt financing costs. . . . . . . . . . . . . . . . . . . . . . (8,768) (1,469)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (348) (63)
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . 85,750 84,706
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . 19,402 48,059
CASH AND CASH EQUIVALENTS:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . 10,154 666
---------- ----------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,556 $ 48,725
---------- ----------
---------- ----------

</TABLE>

See notes to consolidated financial statements.

<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 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 six month period
ended June 30, 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):

JUNE 30, DECEMBER 31,
1996 1995
--------- ---------
Goodwill......................... $ 143,616 $ 108,153
Debt financing costs............. 10,604 6,980
Other............................ 14,268 11,267
--------- ---------
168,488 126,400
Less accumulated amortization.... 15,576 9,266
--------- ---------
$ 152,912 $ 117,134
--------- ---------
--------- ---------

Goodwill is amortized using the straight-line method over a fifteen year
term. 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.

NET LOSS PER SHARE: Net loss per share is based on the weighted average
number of common shares outstanding during each period.

RECLASSIFICATION OF FINANCIAL STATEMENTS: The 1995 financial statements
have been reclassified to conform to the 1996 financial statement presentation.

NOTE B - LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

JUNE 30, DECEMBER 31,
1996 1995
--------- ---------
Senior subordinated notes....... $ 99,355 $ 99,319
Revolving line of credit......... -- --
--------- ---------
99,355 99,319

Less current maturities.......... -- --
--------- ---------
$ 99,355 $ 99,319
--------- ---------
--------- ---------

<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CREDIT FACILITIES

In June 1995, the Company entered into an agreement with The First National
Bank of Chicago, as Agent (the "Lender"), making available a $125 million
revolving line of credit (the "1995 Credit Facility") for working capital
purposes and for acquisitions approved by the Lender. Under the terms of the
1995 Credit Facility, the revolving line of credit would convert in February
1997 to a five and one-half year term loan maturing in July 2002. Borrowings
were secured by all assets of the Company and its subsidiaries. The 1995 Credit
Facility required maintenance of certain specified financial and operating
covenants and prohibited the payment of dividends or other distributions on the
Company's common stock (the "Common Stock"). The 1995 Credit Facility also
permitted the issuance of senior subordinated notes and stated 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 1994), the Lender could
request that some portion of the proceeds be used to pay down outstanding
borrowings under the 1995 Credit Facility.

In June 1996, the Company repaid the $48 million outstanding under the 1995
Credit Facility and $92,000 in related termination fees.

Also in June 1996, the Company entered into a new agreement with the Lender
for $300 million senior secured credit facilities, consisting of a $50 million
seven and one-half year revolving credit facility ("Facility A") and a $250
million two year revolving credit facility ("Facility B") which converts to a
term loan for the remaining five and one-half years (Facility A and Facility B
jointly referred to as the "Credit Facilities"). The Credit Facilities are
available to be used to finance non-hostile acquisitions of businesses in paging
services, capital expenditures and general corporate purposes. The borrowings
bear interest, at the Company's designation, at either (i) the Alternate Base
Rate ("ABR") plus a margin of up to 1.25%, or (ii) the Eurodollar Base Rate plus
a margin of up to 2.5%. The term loan will be payable in quarterly
installments, based on the principal amount outstanding on the conversion date,
in amounts ranging from 7% initially to 20%. Loans bearing interest based on
ABR may be prepaid at any time, and loans bearing interest based on the
Eurodollar Rate may not be paid prior to the last day of the applicable interest
period. In addition, an arrangement fee of $250,000 and upfront fees of (i)
1.125% of the Lender's commitment and (ii) .875% of each co-agent's commitment
was paid in June 1996. A commitment fee of either .375% or .5% on the average
daily unused portion of the Credit Facilities is required to be paid quarterly.
Borrowings are secured by all assets of the Company and its subsidiaries. The
Credit Facilities require maintenance of certain specified financial and
operating covenants and prohibit the payment of dividends on the Common Stock.
The Credit Facilities also state 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 June 1996), the Lender can require that
some portion of the proceeds be used to make payments on outstanding borrowings
under the Credit Facilities.

Effective August 13, 1996, the Lender will begin requiring interest
exchange or insurance agreements or other financial accommodations with one or
more financial institutions providing for an agreed upon fixed rate of interest
on at least 50% of the total indebtedness. At June 30, 1996, none of the
outstanding long-term debt was subject to hedging agreements.

NOTE C - DEFERRED CREDITS

Deferred credits consist of the following (in thousands):

JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
Deferred payments............ $ 16,492 $ 18,495
Deferred tax liability....... 688 688
-------- --------
$ 17,180 $ 19,183
-------- --------
-------- --------

<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 Common Stock based on current market value at the
date of payment. During the first six months of 1996, the Company paid $415,000
in cash and issued 287,529 shares of its Common Stock in payment of $7.2 million
of various deferred payments and assumed $5.7 million in deferred payments
related to various acquisitions.

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 and 1995, the Company completed 13 acquisitions at a total cost of $128.2
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. ("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, proceeds from the sale of the senior
subordinated notes and issuances of shares of the Company's Common Stock.

In the second quarter, the Company signed three definitive agreements. The
first definitive agreement involved a merger of the Company and Teletouch
Communications, Inc. ("Teletouch"). The second definitive agreement involved a
merger with Pac-West Telecomm, Inc. and affiliates ("PacWest"). The third
definitive agreement involved the purchase of all of the outstanding capital
stock of Georgialina Communication Company and affiliates ("Georgialina").
Prior to the end of the second quarter, the Company signed a letter of intent to
purchase substantially all of the assets of Ventures in Paging, L.C. ("VIP").
The PacWest and Georgialina transactions will be accounted for as purchases for
an approximate aggregate cost of $31.4 million. As further discussed in "Note G
- - Subsequent Events," the Company announced in the third quarter the termination
of the Teletouch merger and VIP acquisition. Nonrecurring charges of
approximately $7.4 million were recorded in the second quarter as a result of
the Teletouch merger termination. These charges consist primarily of
underwriting, advisory, legal and accounting fees and merger financing costs.

In April 1996, the Company entered into an agreement to purchase a
nationwide license (931.9125 MHz Radio Common Carrier frequency) and
associated system equipment (the "Nationwide License") from Motorola, Inc.
("Motorola") for approximately $43 million. See "Note G -Subsequent Events."

The PacWest and Georgialina acquisitions are expected to close in 1996 and
are subject to various conditions and approvals. The Company anticipates using
its Credit Facilities and shares of its Common Stock to fund these transactions.

<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The pro forma unaudited results of operations for the six months ended June
30, 1996 and 1995, (which include acquisitions closed as of June 30, 1996 and
excludes any pending acquisitions), assuming consummation of the purchases at
the beginning of the periods indicated, are as follows (in thousands, except per
share data):

SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
--------- ---------
Total revenues.......................... $ 49,388 $ 49,970
Net loss................................ (20,434) (4,222)
Net loss per common share............... (2.67) (0.65)

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 and six months ended June 30, 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 two quarters
of 1996, as such tax benefits are not assured beyond a reasonable doubt.

NOTE F - LITIGATION

The Company, its directors, and certain of its officers are defendants in
eight separate actions brought in the United States District Court for the
Northern District of Texas and the District Courts of Dallas County, Texas. The
actions pending in federal court are captioned: WERNER V. PRONET INC., ET AL.,
No. 3-96CV1795-P; BLUM V. PRONET INC., ET AL., No. 3-96CV1845-R; MOLINA V.
PRONET INC., ET AL., No. 3-96CV1972-R; SMITH, ET AL. V. LEHMAN BROTHERS, ET AL.,
No. 3-96CV2116-H; L.L. CAPITAL PARTNERS L.P. V. PRONET INC., ET AL., No. 3-96-
CV-02197-D. The actions pending in state court are captioned: DENNIS V. PRONET
INC., ET AL., No. 96-06509; GREENFIELD V. PRONET INC., ET AL., No. 96-06782-B;
and DRUCKER V. PRONET INC., ET AL., No. 96-06786-L.

Each of these cases purports to be a class action on behalf of a class of
purchasers of the Company's stock. The actions, taken as a group, allege that
the Company violated the Securities Act of 1933, the Securities Exchange Act of
1934 (and Rule 10b-5 thereunder), and certain state statutes and common law
doctrines. All of the actions were filed after the price of the Company's stock
decreased in June 1996. Certain of the actions pertain to an alleged class of
plaintiffs who purchased shares in the Company's $100 million public offering,
which closed on June 5, 1996. Other actions purport to include claims on behalf
of all purchasers of the Company's Common Stock during an alleged class period.
The Company expects that many of the cases will be consolidated into one or more
actions.

The Company will vigorously defend the actions. The Company anticipates
that the plaintiffs will claim substantial damages. Because these cases have
recently been filed, the Company cannot predict the amount of damages, if any.

<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - SUBSEQUENT EVENTS

Effective July 1, 1996, the Company completed the acquisition of a
nationwide license (931.9125 MHz Radio Common Carrier frequency) and associated
system equipment from Motorola, Inc. The network currently includes
approximately 400 base stations and sites in over 220 major U.S. cities.
Management plans to use the license for expansion purposes as well as to develop
strategic marketing alliances. The purchase price of $43 million was financed
by approximately $28 million in proceeds from the Company's recent equity
offering in June and by borrowings of approximately $15 million under the
Company's Credit Facilities.

On July 3, 1996, the Company made payments with Common Stock to satisfy
deferred payments related to two acquisitions closed in 1995. The Company
issued 411,313 shares of its Common Stock to Americom for the $8.7 million
deferred portion of the purchase price of Americom. Additionally, the Company
issued 70,822 shares of its Common Stock to Lewis for $1.5 million of the
deferred portion of the purchase price of Lewis.

On July 25, 1996, the Company along with Teletouch announced the decision
to terminate the Teletouch merger. Under the terms of the $120 million 10 7/8%
senior subordinated notes due 2006 (the "1996 Notes"), the proceeds from the
sale of the 1996 Notes were held in escrow upon completion of the offering in
June 1996. The proceeds of such offering could only be used in connection with
the Teletouch merger, and accordingly, were not recorded on the Company's
financial statements pending the finalization of the merger. As a result of the
termination of the merger agreement with Teletouch, the escrow funds were used
to redeem the notes at 101% of the principal amount of the 1996 Notes at
maturity, plus accrued interest to the date of redemption. Nonrecurring
charges of approximately $7.4 million incurred by the Company in connection
with proposed Teletouch merger were recorded during the three months ended
June 30, 1996. Additionally, the Company announced that it has elected not to
pursue the acquisition of the assets of VIP.

<PAGE>

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
The Company provides wireless messaging services through its paging and
security systems operations. Until 1994, paging services were provided solely to
subscribers 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
anticipated 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. The Company
is one of the seven largest publicly traded paging companies in the United
States, and pro forma for the PacWest and Georgialina acquisitions would have
approximately 1.2 million subscribers at June 30, 1996.

As one of its enhanced wireless communications services, through its
wholly-owned subsidiary, Electronic Tracking Systems Inc. ("ETS"), which
operates under the name of ProNet Tracking Systems ("PTS"), the Company markets
radio-activated electronic tracking security systems primarily to financial
institutions throughout the United States. The systems consist of radio
transmitters, or "TracPacs," which are disguised in items of value. When such
an item is removed from a financial institution without authorization, the
TracPac signals the appropriate law enforcement authorities, who in turn follow
the signal generated by the TracPac to recover the item and apprehend the
suspect.

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 a
disconnect ("churn") rate of approximately 2.9%, compared to an industry average
of approximately 3.1% (source: The State of the U.S. Paging Industry: 1995,
June 1995, Economic and Management Consultants International, Inc.). 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 0.8%.

Currently, service revenues consist of two components - service fees and
unit leasing fees. As the Company pursues its strategy of expanding into new
markets, increasing its coverage within its existing service areas and
broadening its customer base and distribution channels, the percentage of
customers who own and maintain ("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

<PAGE>

do, however, assume all selling, marketing, subscriber management and related
costs that would otherwise be incurred by the Company.

Product sales and costs are also likely to increase as the business mix
shifts in favor of COAM units. The Company's objective is to break even on
product sales, but it may selectively offer discounts due to promotional offers
or competitive pressures.

The Company currently enjoys low operating costs per unit due to the
efficiency of its operations. It expects that the development of its business
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 and nonrecurring charges ("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 the first six months of 1996 and have the
potential to continue the trend in the future.

The following discussion and analysis of financial condition and results of
operations includes the historical results of operations of the Company and the
results of operations from the respective acquisition dates of all acquisitions
completed by the Company during 1994, 1995 and 1996. The results of operations
of PacWest and Georgialina and the acquisition of the Nationwide License are not
reflected in this discussion.

PAGING SYSTEMS' RESULTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------- -------
(in thousands) (in thousands)
Revenues
Service revenues $19,578 $12,092 $39,136 $21,278
Product sales 3,889 2,447 7,013 4,532
------- ------- ------- -------
Total revenues 23,467 14,539 46,149 25,810
Cost of products sold (3,355) (2,526) (6,136) (4,532)
------- ------- ------- -------
Net revenues (1) 20,112 12,013 40,013 21,278
Cost of services (5,712) (3,134) (11,224) (5,355)
------- ------- ------- -------
Gross margin 14,400 8,879 28,789 15,923
Sales and marketing expenses 3,781 1,701 7,737 3,271
General and administrative
expenses 5,839 3,628 11,000 6,435
Depreciation and amortization
expenses 8,015 3,303 16,326 5,631
Nonrecurring charges 7,374 -- 7,374 --
-------- ------- ------- -------
Operating income (loss) $(10,609) $247 $(13,648) $586
------- ------- ------- -------
------- ------- ------- -------
EBITDA $4,780 $3,550 $10,052 $6,217
------- ------- ------- -------
------- ------- ------- -------

(1) Net revenues represent revenues from services, rent and
maintenance plus product sales less cost of products sold.

PAGING SYSTEMS' NET REVENUES for the three and six months ended June 30,
1996 increased 67% to $20.1 million and 88% to $40.0 million, respectively,
from $12.0 million and $21.3 million, respectively, for the

<PAGE>

comparable periods in 1995. Service revenues increased 62% and 84%, to
$19.6 million and $39.1 million, respectively, for the three and six months
ended June 30, 1996, compared to $12.1 million and $21.3 million, respectively,
for the comparable periods in 1995. These increases are primarily attributable
to a growing subscriber base achieved through greater market penetration in
existing markets and 15 acquisitions during that time period. Pagers in service
increased 74% to 1,107,444 at June 30, 1996 from 636,701 at June 30, 1995. The
increase in pagers in service was primarily the result of these recent
acquisitions. In 1994 and 1995, most of the Company's growth in pagers in
service was from acquisitions. In addition, internal growth accounted for
approximately 68,222 units during the quarter ended June 30, 1996, which
represents year over year, internal growth rate of approximately 32%. The
Company believes that this internal growth rate will continue due to ongoing
commercial paging activity.

ARPU was $6.09 for the quarter ended June 30, 1996 compared to $7.14 for
the quarter ended June 30, 1995. This decrease was due to a further shift in the
Company's subscriber base from direct to indirect distribution channels which
tend to generate lower revenues per subscriber. The Company's subscriber base
was 74% COAM at June 30, 1996 compared to 66% at June 30, 1995. The Company
believes that ARPU will continue to decrease, although at a slower rate, as the
Company expands its indirect distribution channels.

PRODUCT SALES LESS COST OF PRODUCTS SOLD was $534,000 and $877,000 for the
three and six months ended June 30, 1996, compared to a loss of ($79,000) and at
breakeven for the comparable periods 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 reclassification, 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) and $28.8 million (72% of
paging systems' net revenues) for the three and six months ended June 30, 1996,
compared to $8.9 million (74% of paging systems' net revenues) and $15.9 million
(75% of paging systems' net revenues) for the comparable periods in 1995. The
decrease in gross margin as a percentage of paging systems' net revenues was due
to the increased expenses related to recent acquisitions and the buildout of the
Company's regional SuperCenters, primarily consisting of telephone, salaries,
office rent, tower rent, pager parts, alpha access fees and third party access
fees. The Company currently anticipates that these margins will decrease
slightly in the short term, but will increase in the future as cost efficiencies
and integration savings are achieved. The cost of services increased to
$5.7 million and $11.2 million for the three and six months ended June 30, 1996,
compared to $3.1 million and $5.4 million for the comparable periods 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 $3.8 million (19% of
paging systems' net revenues) and $7.7 million (19% of paging systems' net
revenues) for the three and six months ended June 30, 1996, compared to $1.7
million (14% of paging systems' net revenues) and $3.3 million (15% of paging
systems' net revenues) for the comparable periods 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 five at June 30, 1995, to 37 at June 30,
1996), the majority of expenses of which are sales and marketing, and increased
advertising, salaries, commissions and travel expenses. These expenses as a
percentage of paging systems' net revenues may increase slightly in the future
due to the Company's focus on expanding its retail distribution channel.

PAGING SYSTEMS' GENERAL AND ADMINISTRATIVE EXPENSES were $5.8 million (29%
of paging systems' net revenues) and $11.0 million (28% of paging systems' net
revenues) for the three and six months ended June 30, 1996, compared to $3.6
million (30% of paging systems' net revenues) and $6.4 million (30% of paging
systems' net revenues) for the comparable periods in 1995. The decrease as a
percentage of paging systems' net revenues was due to savings resulting from the
integration of certain acquisitions completed since June 1995 into the
SuperCenter structure, as well as the increase in the number of retail store
locations referred to above. While retail stores operate 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

<PAGE>

revenues are expected to decrease slightly over time as a result of general and
administrative expenses being spread across a larger subscriber base as well as
savings resulting from the continuing integration of recent acquisitions.

PAGING SYSTEMS' DEPRECIATION AND AMORTIZATION EXPENSES for the three and
six months ended June 30, 1996 increased 143% to $8.0 million and 190% to $16.3
million, respectively, from $3.3 million and $5.6 million for the comparable
periods in 1995. The increase was primarily due to the amortization of
intangibles arising from the acquisitions. The increase in 1996 was also due to
the reclassification of costs associated with pagers 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 to continue
in the near term as a result of acquisitions and continued capital investment in
paging equipment to support the Company's growth.

PAGING SYSTEMS' NONRECURRING CHARGES were $7.4 million for the three and
six months ended June 30, 1996. These costs represent nonrecurring costs
related to the terminated Teletouch merger and related planned financing,
consisting primarily of underwriting, advisory, legal and accounting fees and
merger financing costs.

EBITDA for paging systems' operations was $4.8 million (24% of paging
systems' net revenues) and $10.1 million (25% of paging systems' net revenues)
for the three and six months ended June 30, 1996, compared to $3.6 million (30%
of paging systems' net revenues) and $6.2 million (29% of paging systems' net
revenues) for the comparable periods in 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 and six
months ending June 30, 1996 compared to the respective periods in 1995 as well
as the buildout of the Company's SuperCenters, consisting primarily of salary,
telephone, access and tower rent expenses. 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 AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues
Service revenues. . . . . . . . . . . . . . . $1,348 $1,312 $2,806 $2,614
Product sales . . . . . . . . . . . . . . . . -- 26 22 137
------ ------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . . 1,348 1,338 2,828 2,751
Cost of products sold. . . . . . . . . . . . . . . -- (4) -- (63)
------ ------ ------ ------
Net revenues (1) . . . . . . . . . . . . . . . . . 1,348 1,334 2,828 2,688
Cost of services . . . . . . . . . . . . . . . . . (315) (293) (590) (540)
------ ------ ------ ------
Gross margin . . . . . . . . . . . . . . . . . . . 1,033 1,041 2,238 2,148
Sales and marketing expenses . . . . . . . . . . . 95 70 178 141
General and administrative expenses. . . . . . . . 165 175 344 364
Depreciation and amortization expenses . . . . . . 410 413 806 830
------ ------ ------ ------
Operating income . . . . . . . . . . . . . . . . . $ 363 $ 383 $ 910 $ 813
------ ------ ------ ------
------ ------ ------ ------
EBITDA . . . . . . . . . . . . . . . . . . . . . . $ 773 $ 796 $1,716 $1,643
------ ------ ------ ------
------ ------ ------ ------
</TABLE>

(1) Net revenues represent revenues from services, rent and maintenance
plus product sales less cost of products sold.

SECURITY SYSTEMS' TOTAL REVENUES increased 1% to $1.3 million and 3% to
$2.8 million for the three and six months ended June 30, 1996, from $1.3 million
and $2.8 million for the comparable periods in 1995. The increase

<PAGE>

was due to the installation of seven new systems since June 30, 1995, as well as
expansion of and additional penetration in existing markets. The number of
TracPacs in service increased 9% to 29,329 at June 30, 1996, from 27,015 at June
30, 1995.

SECURITY SYSTEMS' OPERATING INCOME was $363,000 and $910,000 for the three
and six months ended June 30, 1996, compared to $383,000 and $813,000 for the
same periods in 1995. The decrease for the three months ended June 30, 1996 was
primarily a result of a decreased product sales and increased sales and
marketing expenses. The increase in operating income for the six months ended
June 30, 1996 resulted primarily from increased revenues.

EBITDA for the security systems' operations was $773,000 (57% of security
systems' net revenues) and $1.7 million (61% of security systems' service
revenues) for the three and six months ended June 30, 1996, compared to $796,000
(60% of security systems' net revenues) and $1.6 million (61% of security
systems' net revenues) for the same periods in 1995. The decrease in EBITDA as a
percentage of net revenues for the three months ended June 30, 1996 was
primarily a result of decreased products sales and increased cost of services as
previously discussed.

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 senior
subordinated notes in 1995 and changes in the outstanding amounts under the
revolving line of credit. Interest expense increased for the three months and
six months ended June 30, 1996 from prior periods primarily as a result of
interest on the senior subordinated notes. Interest expense is expected to
fluctuate based on changes in the outstanding amounts under the revolving line
of credit.

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 and six months ended June 30, 1996, the differences between the
U.S. Federal statutory tax rate and the effective rate in the Company's
historical financial statements are 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 the Company's stock
acquired through incentive stock options and an allowance provided against the
three and six months ended June 30, 1996 operating loss which may not be
realizable within the statutory time frame. 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 used in
operating activities was $4.3 million for the six months ended June 30, 1996,
compared to net cash provided by operating activities of $3.9 million for the
comparable period in 1995. The decrease in net cash provided by operating
activities was primarily due to increases in net loss, accounts receivable and
other current assets, offset by increases in depreciation and amortization, the
provision for losses on accounts receivable, and trade payables and other
accrued expenses and liabilities and decreases in inventories and other assets.
The acquisitions prior to June 1995 were financed with borrowings under the
Company's revolving line of credit. Proceeds from the sale of the senior
subordinated notes issued in 1995 were used to repay all indebtedness
outstanding under the 1995 Credit Facility and to fund the remaining
acquisitions in 1995. The Company funded $7.3 million of the cash for the
acquisitions of Sun, SigNet Raleigh, Page One, AGR, Total and Williams in 1996
with proceeds from the sale of the senior subordinated notes issued in 1995,
with the remaining amounts financed with borrowings under the 1995 Credit
Facility. The purchase of the Nationwide License in July 1996 was funded

<PAGE>

with $28 million from the Company's equity offering in June proceeds and $15
million with borrowings under its Credit Facilities. The Company anticipates
that its ongoing capital needs, including the acquisitions of PacWest and
Georgialina, will be funded with borrowings under its Credit Facilities, net
cash generated by operations and the issuance of shares of the Company's Common
Stock.

CAPITAL EXPENDITURES

As of June 30, 1996, the Company had invested $87.7 million in system
equipment and pagers for its major metropolitan markets and $12.6 million in
system equipment and TracPacs for its 33 security systems.

Capital expenditures for paging systems' equipment was $9.7 million for
the six months ended June 30, 1996 compared to $2.5 million for the
comparable period in 1995 (excluding assets acquired pursuant to the
acquisitions completed since June 1995), primarily due to expansion of the
Company's commercial paging operations in Philadelphia, Florida and Texas.
Capital expenditures for security systems' equipment and TracPacs for the six
months ended June 30, 1996 was $803,000 compared to $664,000 for the
comparable period in 1995.

At June 30, 1996, the Company had invested $2.4 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 third 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 and
borrowings under the Credit Facilities. Although the Company had no material
binding commitments to acquire capital equipment at June 30, 1996, the Company
anticipates capital expenditures for the remainder of 1996 to be $8.6 million
(excluding assets acquired pursuant to the pending acquisitions and the
Nationwide License) for the purchase of system equipment for its current paging
systems operations and $1.3 million for the manufacture of TracPacs and the
purchase of system equipment for its security systems' operations.

CREDIT FACILITIES

In June 1996, the Company repaid the $48 million outstanding under the 1995
Credit Facility and $92,000 in related termination fees.

Also in June 1996, the Company entered into new agreement with the First
National Bank of Chicago, as Agent for $300 million senior secured credit
facilities, consisting of a $50 million seven and one-half year revolving credit
facility and a $250 million two year revolving credit facility which converts to
a term loan for the remaining five and one-half years. The Credit Facilities
are available to be used to finance non-hostile acquisitions of businesses in
paging services, capital expenditures and general corporate purposes. The
borrowings bear interest, at the Company's designation, at either (i) the ABR
plus a margin of up to 1.25%, or (ii) the Eurodollar Base Rate plus a margin of
up to 2.5%. The term loan will be payable in quarterly installments, based on
the principal amount outstanding on the conversion date, in amounts ranging from
7% initially to 20%. Loans bearing interest based on ABR may be prepaid at any
time, and loans bearing interest based on the Eurodollar Rate may not be paid
prior to the last day of the applicable interest period. In addition, an
arrangement fee of $250,000 and upfront fees of (i) 1.125% of the Lender's
commitment and (ii) .875% of each co-agent's commitment was paid in June 1996.
A commitment fee of either .375% or .5% on the average daily unused portion of
the Credit Facilities is required to be paid quarterly.

SENIOR SUBORDINATED NOTES

In June 1995, the Company completed a Rule 144A Offering of $100 million
principal amount of its 11 7/8% senior subordinated notes (the "1995 Notes") due
2005. Proceeds to the Company from the sale of the 1995

<PAGE>

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 1995 Credit
Facility. The Company 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 1995 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
1995 Notes. The indenture also contains certain covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, engage in transactions with affiliates, sell assets
and engage in certain other transactions. Interest on the 1995 Notes is payable
in cash semi-annually on each June 15 and December 15, commencing December 15,
1995. The 1995 Notes will not be redeemable at the Company's option prior to
June 15, 2000.

The Company filed a Form S-4 Registration Statement (the "1995 S-4") on
July 7, 1995 to register the 1995 Notes with the SEC under the Securities Act of
1933, as amended. On October 6, 1995, the SEC declared the 1995 S-4 effective.

COMMON STOCK OFFERING

In June 1996, the Company issued four million shares of its Common Stock
(the "Offering") at a price of $25 per share. The net proceeds to the Company
from the Offering, after deducting commissions and offering expenses were
approximately $94.8 million. In June, the Company used approximately $48
million of the net proceeds of the Offering to repay all outstanding
indebtedness under the 1995 Credit Facility, $3 million to pay bank fees for the
Credit Facilities, $6 million to pay interest due on the 1995 Notes, and $8
million to fund interest, penalty and underwriters fees for the 1996 Notes. In
July 1996, the Company used approximately $28 million of the Offering proceeds
to purchase the Nationwide License. The remaining proceeds were used to fund
acquisitions and general operating needs. If the Offering had occurred as of
the beginning of 1996, net loss per share would have been $(1.84) for the six
months ended June 30, 1996.

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 and
1995, the Company completed 13 acquisitions at a total cost of $128.2 million.
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
Company's revolving line of credit, proceeds from the sale of the 1995 Notes and
issuances of shares of the Common Stock. In 1996, the Company signed definitive
agreements with Georgialina and PacWest. These transactions are expected to
close in 1996 for an approximate aggregate cost of $31.4 million. These
transactions will be funded with the issuance of shares of the Company's Common
Stock and borrowings under its Credit Facilities. These transactions are subject
to various conditions and approvals.

At June 30, 1996, the Company had deferred payments outstanding related
to various 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. During the first
six months of 1996, the Company paid $415,000 in cash and issued 287,529
shares of its Common Stock in payment of $7.2 million of various deferred
payments and assumed $5.7 million in deferred payments related to various
acquisitions.

<PAGE>

LITIGATION

The final outcome of the issues subject to litigation as described in
"Note F - Litigation" to the Consolidated Financial Statements could have a
material adverse effect on the Company's results of operations during fiscal
year 1996 or subsequent periods. Because these cases have recently been
filed, the Company cannot predict the amount of damages, if any.

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 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 "Risks Associated with Business Activities"
included in the Form 10-K for the Company filed with the SEC on March 1, 1996.

<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS.

<PAGE>

10.1 - Form of Indemnification Agreement between the Company and certain of
the Company's Directors (filed as an exhibit to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (File No. 33-14956) filed
July 10, 1987, and incorporated herein by reference).
10.2 - Deferred Compensation Plan of the Company (filed as an exhibit to
Amendment No. 2 to the Company's Registration Statement on Form S-1
(File No. 33-14956) filed July 15, 1987, and incorporated herein by
reference).
10.3 - 1987 Stock Option Plan of the Company (filed as an exhibit to
Amendment No. 4 to the Company's Registration Statement on Form S-1
(File No. 33-14956) filed July 29, 1987, and incorporated herein by
reference).
10.4 - Agreement dated June 15, 1988, between the Company and Texas
Instruments Incorporated for the acquisition of assets including the
use of patents, technology and software related to ProNet Tracking
Systems (filed as an exhibit to the Company's Current Report on Form
8-K, dated July 21, 1988, and incorporated herein by reference).
10.5 - Nonqualified Stock Option Agreement of the Company dated May 22, 1991
(filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991, and incorporated herein by
reference).
10.6 - Non-Employee Director Stock Option Plan of the Company (filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991, and incorporated herein by reference).
10.7 - Stock Purchase Agreement dated September 24, 1993, by and between the
Company and Contact Communications, Inc. (filed as an exhibit to the
Company's Current Report on Form 8-K, dated March 1, 1994, and
incorporated herein by reference).
10.8 - Amendment Letter No. One to Stock Purchase Agreement dated October 20,
1993, by and between the Company and Contact Communications, Inc.
(filed as an exhibit to the Company's Current Report on Form 8-K,
dated March 1, 1994, and incorporated herein by reference).
10.9 - Amendment Letter No. Two to Stock Purchase Agreement dated January 4,
1994, by and between the Company and Contact Communications, Inc.
(filed as an exhibit to the Company's Current Report on Form 8-K,
dated March 1, 1994, and incorporated herein by reference).
10.10 - Amendment Letter No. Three to Stock Purchase Agreement dated March 1,
1994, by and between the Company and Contact Communications, Inc.
(filed as an exhibit to the Company's Current Report on Form 8-K,
dated March 1, 1994, and incorporated herein by reference).
10.11 - 1994 Employee Stock Purchase Plan of the Company (filed as an exhibit
to the Company's Proxy Statement filed April 26, 1994, and
incorporated herein by reference).
10.12 - Stock Purchase Agreement dated April 20, 1995, regarding the
acquisition of the outstanding capital stock of Metropolitan Houston
Paging Services, Inc., ("Metropolitan") by and among Contact
Communications Inc., Metropolitan and the shareholders of Metropolitan
(filed as an exhibit to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1995, and incorporated herein
by reference).
10.13 - Form PS-58 Split Dollar Agreement between the Company and each of its
executive officers (filed as an exhibit to the Company's Registration
Statement on Form S-2 (File No. 33-85696) filed October 28, 1994, and
incorporated herein by reference).
10.14 - Employment Agreement dated May 18, 1994, by and between the Company
and Jackie R. Kimzey (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and
incorporated herein by reference).
10.15 - Employment Agreement dated May 18, 1994, by and between the Company
and David J. Vucina (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and
incorporated herein by reference).
10.16 - Change in Control Agreement dated May 18, 1994, by and between the
Company and Bo Bernard (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and
incorporated herein by reference).
10.17 - Change in Control Agreement dated May 18, 1994, by and between the
Company and Jan E. Gaulding (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1994, and incorporated herein by reference).

<PAGE>

10.18 - Change in Control Agreement dated May 18, 1994, by and between the
Company and Jeffery Owens (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1994, and incorporated herein by reference).
10.19 - Change in Control Agreement dated January 17, 1995, by and between the
Company and Mark A. Solls (filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference).
10.20 - Asset Purchase Agreement dated May 24, 1995, regarding the acquisition
of substantially all of the paging assets of Americom Paging
Corporation, by and among the Company, Gregory W. Hadley, Mo Shebaclo
and American 900 Paging, Inc. dba Americom Paging Corporation (filed
as an exhibit to the Company's Current Report on Form 8-K, dated July
7, 1995, and incorporated herein by reference).
10.21 - Amended and Restated Credit Agreement dated February 9, 1995, by and
among the Company, The First National Bank of Chicago, as Agent, and
the Lenders party thereto (filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference).
10.22 - Waiver, Consent and Amendment No. 1 dated as of June 12, 1995 by and
among the Company, The First National Bank of Chicago, as Agent, and
the Lenders party thereto (filed as an exhibit to the Company's
Registration Statement on Form S-4 (File No. 33-60925) filed July 7,
1995, and incorporated herein by reference).
10.23 - Office Lease Agreement by and between the Company and Carter-Crowley
Properties, Inc., as Landlord (filed as an exhibit to the Company's
Current Report on Form 8-K, dated July 5, 1995, and incorporated
herein by reference).
10.24 - Stock Purchase Agreement dated October 6, 1995, regarding the
acquisition of all of the outstanding capital stock of Apple
Communication, Inc., by and among CCI, Apple Communication, Inc., and
Salvatore Zarcone and Jill DiFoggio (filed as an exhibit to the
Company's Current Report on 8-K, dated January 16, 1996, and
incorporated herein by reference).
10.25 - Stock Purchase Agreement dated November 22, 1995, regarding the
acquisition of all of the outstanding capital stock of Cobbwells, Inc.
d/b/a Page One, by and among the Company, CCI, Cobbwells, Inc. d/b/a
Page One, James H. Cobb, III and Warren K. Wells (filed as an exhibit
to the Company's Current Report on 8-K, dated January 16, 1996, and
incorporated herein by reference).
10.26 - 1995 Long-Term Incentive Plan of the Company (filed as an exhibit to
the Company's Proxy Statement filed April 24, 1995, and incorporated
herein by reference).
10.27 - Voting Agreement by and among the Company and Continental Illinois
Venture Corporation, CIVC Partners I, GM Holdings, LLC, Rainbow
Resources, Inc., Robert McMurrey and G. David Higginbotham, dated as
of April 15, 1996 (filed as an exhibit to the Company's Schedule 13D
filed April 26, 1996, and incorporated by reference).
10.28 - Agreement and Plan of Merger by and among the Company, ProNet
Subsidiary, Inc. and Teletouch Communications, Inc., dated as of April
15, 1996 (filed as an exhibit to the Company's Schedule 13D filed
April 26, 1996, and incorporated by reference).
10.29 - Asset Purchase Agreement dated April 19, 1996, regarding the purchase
of a nationwide data transmission license and associated system
equipment from EMBARC Communication Services, Inc., by and among
Contact Communications Inc., the Company, EMBARC Communication
Services, Inc. and Motorola Inc. (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1996, and incorporated herein by reference).
10.30 - Stock Purchase Agreement dated April 24, 1996, regarding the
acquisition of all of the outstanding capital stock of Strategic
Products Corporation, by and among the Company, Strategic Products
Corporation, John K. LaRue and Keith Bussman (filed as an exhibit to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996, and incorporated herein by reference).
10.31 - Merger Agreement dated April 24, 1996, by and among the Company, Pac-
West Telecomm, Inc., John K. LaRue, William E. Koch and Bay Alarm
Company (filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996, and incorporated
herein by reference).
10.32* - Termination Agreement and Release by and among the Company, ProNet
Subsidiary, Inc. and Teletouch Communications, Inc., dated as of July
24, 1995.

<PAGE>

(b) - Reports on Form 8-K: On April 4, 1996, the Company filed a Current
Report on Form 8-K relating to pro forma financial information. On
May 6, 1996, the Company filed a Current Report on Form 8-K related to
the financials of ProNet's completed acquisitions. On May 29, 1996,
the Company filed a Current Report on Form 8-K related to action of
the Federal Communications Commission. On June 4, 1996, the Company
filed a Current Report on Form 8-K related to pro forma financial
information for the Offering and 1996 Notes.

- ---------------------------
* Filed herewith.

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

PRONET INC.
(Registrant)

DATE: August 14, 1996 By: /s/ JAN E. GAULDING
-----------------------------
Jan E. Gaulding
SENIOR VICE PRESIDENT,
TREASURER AND CHIEF
FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)

<PAGE>

EXHIBIT INDEX

EXHIBIT DESCRIPTION NUMBER
NUMBER

3.1 - Restated Certificate of Incorporation dated July 31, 1987
(filed as an exhibit to the Company's Registration Statement
on Form S-4 (File No. 33-60925) filed July 7, 1995, and
incorporated herein by reference).
3.2 - Certificate of Designation of Series A Junior Participating
Preferred Stock dated April 11, 1995 (filed as part of the
Company's Registration Statement on Form 8-A dated April 7, 1995,
and incorporated herein by reference).
3.3 - Certificate of Amendment to Restated Certificate of Incorporation
dated June 12, 1995 (filed as an exhibit to the Company's Current
Report on Form 8-K, dated July 5, 1995, and incorporated herein by
reference).
3.4 - Restated Bylaws of the Company, as amended (filed as an exhibit to
the Company's Current Report on Form 8-K filed April 19, 1995, and
incorporated herein by reference).
4.1 - Indenture, dated as of June 15, 1995, between the Company and First
Interstate Bank of Texas, N.A., as Trustee (filed as an exhibit
to the Company's Current Report on Form 8-K, dated July 5, 1995,
and incorporated herein by reference).
4.2 - Registration Rights Agreement, dated as of June 15, 1995, between
the Company, Lehman Brothers, Inc., Alex. Brown & & Sons
Incorporated and Paine Webber Incorporated (filed as an exhibit
to the Company's Registration Statement on Form S-4
(File No. 33-0925) filed July 7, 1995, and incorporated herein by
reference).
4.3 - Rights Agreement, dated as of April 5, 1995, between the Company
and Chemical Shareholder Services Group, Inc., as Rights Agent,
specifying the terms of the rights to purchase the Company's
Series A Junior Participating Preferred Stock, and the exhibits
thereto (filed as an exhibit to the Company's Registration
Statement on Form 8-A dated April 7, 1995, and incorporated herein
by reference).
10.1 - Form of Indemnification Agreement between the Company and certain
of the Company's Directors (filed as an exhibit to Amendment
No. 1 to the Company's Registration Statement on Form S-1 (File No.
33-14956) filed July 10, 1987, and incorporated herein by
reference).
10.2 - Deferred Compensation Plan of the Company (filed as an exhibit to
Amendment No. 2 to the Company's Registration Statement on
Form S-1 (File No. 33-14956) filed July 15, 1987, and
incorporated herein by reference).
10.3 - 1987 Stock Option Plan of the Company (filed as an exhibit to
Amendment No. 4 to the Company's Registration Statement on
Form S-1 (File No. 33-14956) filed July 29, 1987, and incorporated
herein by reference).
10.4 - Agreement dated June 15, 1988, between the Company and Texas
Instruments Incorporated for the acquisition of assets including
the use of patents, technology and software related to ProNet
Tracking Systems (filed as an exhibit to the Company's Current
Report on Form 8-K, dated July 21, 1988, and incorporated herein
by reference).
10.5 - Nonqualified Stock Option Agreement of the Company dated
May 22, 1991 (filed as an exhibit to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991, and incorporated
herein by reference).
10.6 - Non-Employee Director Stock Option Plan of the Company (filed as
an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991, and incorporated herein by reference).
10.7 - Stock Purchase Agreement dated September 24, 1993, by and between
the Company and Contact Communications, Inc. (filed as an exhibit
to the Company's Current Report on Form 8-K, dated March 1, 1994,
and incorporated herein by reference).
10.8 - Amendment Letter No. One to Stock Purchase Agreement dated
October 20, 1993, by and between the Company and Contact
Communications, Inc. (filed as an exhibit to the

<PAGE>

Company's Current Report on Form 8-K, dated March 1, 1994, and
incorporated herein by reference).
10.9 - Amendment Letter No. Two to Stock Purchase Agreement dated
January 4, 1994, by and between the Company and Contact
Communications, Inc. (filed as an exhibit to the Company's Current
Report on Form 8-K, dated March 1, 1994, and incorporated herein
by reference).
10.10 - Amendment Letter No. Three to Stock Purchase Agreement dated
March 1, 1994, by and between the Company and Contact
Communications, Inc. (filed as an exhibit to the Company's Current
Report on Form 8-K, dated March 1, 1994, and incorporated herein
by reference).
10.11 - 1994 Employee Stock Purchase Plan of the Company (filed as an
exhibit to the Company's Proxy Statement filed April 26, 1994, and
incorporated herein by reference).
10.12 - Stock Purchase Agreement dated April 20, 1995, regarding the
acquisition of the outstanding capital stock of Metropolitan
Houston Paging Services, Inc., ("Metropolitan") by and among
Contact Communications Inc., Metropolitan and the shareholders of
Metropolitan (filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 1995, and
incorporated herein by reference).
10.13 - Form PS-58 Split Dollar Agreement between the Company and each of
its executive officers (filed as an exhibit to the Company's
Registration Statement on Form S-2 (File No. 33-85696) filed
October 28, 1994, and incorporated herein by reference).
10.14 - Employment Agreement dated May 18, 1994, by and between the Company
and Jackie R. Kimzey (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1994, and incorporated herein by reference).
10.15 - Employment Agreement dated May 18, 1994, by and between the Company
and David J. Vucina (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and
incorporated herein by reference).
10.16 - Change in Control Agreement dated May 18, 1994, by and between the
Company and Bo Bernard (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1994, and incorporated herein by reference).
10.17 - Change in Control Agreement dated May 18, 1994, by and between the
Company and Jan E. Gaulding (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1994, and incorporated herein by reference).
10.18 - Change in Control Agreement dated May 18, 1994, by and between the
Company and Jeffery Owens (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1994, and incorporated herein by reference).
10.19 - Change in Control Agreement dated January 17, 1995, by and between
the Company and Mark A. Solls (filed as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994,
and incorporated herein by reference).
10.20 - Asset Purchase Agreement dated May 24, 1995, regarding the
acquisition of substantially all of the paging assets of Americom
Paging Corporation, by and among the Company, Gregory W. Hadley, Mo
Shebaclo and American 900 Paging, Inc. dba Americom Paging
Corporation (filed as an exhibit to the Company's Current Report on
Form 8-K, dated July 7, 1995, and incorporated herein by
reference).
10.21 - Amended and Restated Credit Agreement dated February 9, 1995, by
and among the Company, The First National Bank of Chicago, as
Agent, and the Lenders party thereto (filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference).
10.22 - Waiver, Consent and Amendment No. 1 dated as of June 12, 1995 by
and among the Company, The First National Bank of Chicago, as
Agent, and the Lenders party thereto (filed as an exhibit to the
Company's Registration Statement on Form S-4 (File No. 33-60925)
filed July 7, 1995, and incorporated herein by reference).
10.23 - Office Lease Agreement by and between the Company and Carter-
Crowley Properties, Inc., as Landlord (filed as an exhibit to the
Company's Current Report on Form 8-K, dated July 5, 1995, and
incorporated herein by reference).

<PAGE>

10.24 - Stock Purchase Agreement dated October 6, 1995, regarding the
acquisition of all of the outstanding capital stock of Apple
Communication, Inc., by and among CCI, Apple Communication, Inc.,
and Salvatore Zarcone and Jill DiFoggio (filed as an exhibit to the
Company's Current Report on 8-K, dated January 16, 1996, and
incorporated herein by reference).
10.25 - Stock Purchase Agreement dated November 22, 1995, regarding the
acquisition of all of the outstanding capital stock of Cobbwells,
Inc. d/b/a Page One, by and among the Company, CCI, Cobbwells, Inc.
d/b/a Page One, James H. Cobb, III and Warren K. Wells (filed as an
exhibit to the Company's Current Report on 8-K, dated January 16,
1996, and incorporated herein by reference).
10.26 - 1995 Long-Term Incentive Plan of the Company (filed as an exhibit
to the Company's Proxy Statement filed April 24, 1995, and
incorporated herein by reference).
10.27 - Voting Agreement by and among the Company and Continental Illinois
Venture Corporation, CIVC Partners I, GM Holdings, LLC, Rainbow
Resources, Inc., Robert McMurrey and G. David Higginbotham, dated
as of April 15, 1996 (filed as an exhibit to the Company's Schedule
13D filed April 26, 1996, and incorporated by reference).
10.28 - Agreement and Plan of Merger by and among the Company, ProNet
Subsidiary, Inc. and Teletouch Communications, Inc., dated as of
April 15, 1996 (filed as an exhibit to the Company's Schedule 13D
filed April 26, 1996, and incorporated by reference).
10.29 - Asset Purchase Agreement dated April 19, 1996, regarding the
purchase of a nationwide data transmission license and associated
system equipment from EMBARC Communication Services, Inc., by and
among Contact Communications Inc., the Company, EMBARC
Communication Services, Inc. and Motorola Inc. (filed as an exhibit
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996, and incorporated herein by reference).
10.30 - Stock Purchase Agreement dated April 24, 1996, regarding the
acquisition of all of the outstanding capital stock of Strategic
Products Corporation, by and among the Company, Strategic Products
Corporation, John K. LaRue and Keith Bussman (filed as an exhibit
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996, and incorporated herein by reference).
10.31 - Merger Agreement dated April 24, 1996, by and among the Company,
Pac-West Telecomm, Inc., John K. LaRue, William E. Koch and Bay
Alarm Company (filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1996,
and incorporated herein by reference).
10.32* - Termination Agreement and Release by and among the Company, ProNet
Subsidiary, Inc. and Teletouch Communications, Inc., dated as of
July 24, 1995.
27* - Financial Data Schedule .

- -------------------------------
* Filed herewith.

<PAGE>
TERMINATION AGREEMENT AND RELEASE

This Termination Agreement and Release dated July 24, 1995 (this
"Agreement") is by and among ProNet Inc., a Delaware corporation ("ProNet"),
ProNet Subsidiary, Inc., a Delaware corporation and direct wholly owned
subsidiary of ProNet ("Merger Sub"), and Teletouch Communications, Inc., a
Delaware corporation ( the "Company"). ProNet and Merger Sub are sometimes
collectively referred to herein as the "ProNet Companies."

WHEREAS, the parties hereto are the parties to that certain Agreement and
Plan of Merge dated April 15, 1996, as amended (the "Merger Agreement'); and

WHEREAS, the parties hereto desire to terminate the Merger Agreement in all
respects;

NOW THEREFORE, in consideration of the foregoing, the parties hereto agree
as follows:

1. TERMINATION. The parties hereto acknowledge and agree that the Merger
Agreement, including, without limitation, Sections 5.05(d), 8.05 and 9.01, is
hereby terminated in all respects and shall have no further force or effect.

2. RELEASE BY PRONET COMPANIES. For and in consideration of the mutual
covenants set forth in this Agreement, and except with respect to the matters
referenced in Sections 4 and 5 hereof, the ProNet Companies hereby agree to and
do release and discharge the Company from any and all claims, claims for
attorneys' fees, claims for compensatory and punitive damages, consequential
damages, losses, expenses, costs, demands, actions, and causes of action, of
every kind and nature, known or unknown, existing or claimed to exist, arising
out of or in any way connected with any actual or alleged act, conduct,
practice, procedure, term, condition, privilege, standard, system, limitation,
statement (oral or written), representation, incident, or event related or
pertaining to the Merger Agreement, whether designed, intended or unintentional,
including without limitation (a) any claims that could be asserted under the
common law, including any contract claims, (b) any claims that could be asserted
under any federal or state statute, (c) any claims that could be asserted under
any federal or state regulation, (d) any other claims of whatever kind or
character and (e) any claim for reimbursement of any expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby,
including without limitation, expenses under Section 8.05 of the Merger
Agreement. The ProNet Companies covenant and agree not to sue the Company for
any of the matters herein released

3. RELEASE BY COMPANY. For and in consideration of the mutual covenants
set forth in this Agreement, and except with respect to the matters referenced
in Sections 4 and 5 hereof, the Company hereby agrees to and does release and
discharge the ProNet Companies from any and all claims, claims for attorneys'
fees, claims for compensatory and punitive damages, consequential damages,
damages, losses, expenses, costs, demands, actions, and causes of action, of
every kind and nature, known or unknown, existing or claimed to exist, arising
out of or in any way connected with any actual or alleged act, conduct,
practice, procedure, term, condition, privilege, standard, system, limitation,
statement (oral or written), representation, incident, or event related or
pertaining to the

<PAGE>

Merger Agreement, whether designed, intended or unintentional, including without
limitation (a) any claims that could be asserted under the common law, including
any contract claims, (b) any claims that could be asserted under any federal or
state statute, (c) any claims that could be asserted under any federal or state
regulation, (d) any other claims of whatever kind or character and (e) any claim
for reimbursement of any expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby, including without
limitation, expenses under section 8.05 of the Merger Agreement. The Company
covenants and agrees not to sue the ProNet Companies for any of the matters
herein released.

4. CERTAIN COMMUNICATIONS. ProNet and the Company shall consult with
each other before issuing any press release or otherwise making any written or
electronic public statements with respect to the other party, this Agreement or
the Merger Agreement and shall not issue any such press release or make any such
written or electronic public statement without the prior consent of the other
party. In addition, the parties hereto agree that they shall not make any
disparaging comments about the other in any statement to a third party or in any
public announcement.

5. VIP TRANSACTION. ProNet hereby assigns the letter of intent dated as
of May 1, 1996 (which has expired by its terms), between Contact Communications
Inc., a Delaware corporation and wholly owned subsidiary of ProNet and Ventures
in Paging, L.L.C. ("VIP") regarding the acquisition of the paging assets of VIP
and certain affiliated parties and any and all rights ProNet has against VIP or
the former owners of VIP and hereby agrees that it will not, directly or
indirectly, pursue or consummate any transaction related to the paging assets of
VIP and those certain affiliated parties or the stock thereof. Teletouch may
unilaterally reject such assignment by written notice to ProNet within 10
business days of the date hereof. ProNet further agrees to take all action
(without incurring any out-of-pocket expenses which are not de minimus)
necessary or reasonably requested by Teletouch in furtherance of the foregoing
paragraph (including, without limitation, cooperating in all filings and
applications with the Federal Communications Commission and, subject to the
consent of VIP, providing Teletouch with copies of all materials provided by VIP
to ProNet to aid ProNet's diligence process).

6. CONFIDENTIALITY; RETURN OF INFORMATION. The parties hereto (the
ProNet Companies being considered one party for the purposes of this section)
shall hold in confidence all nonpublic information received from the other party
to this Agreement unless required to be disclosed by law or until such time as
such information is otherwise publicly available and each party will deliver to
the other party all documents, work papers and other materials (including
copies) obtained by such party or on its behalf from the other party as a result
of the Merger Agreement or in connection therewith, whether so obtained before
or after the execution thereof. Each party will destroy any notes, analyses,
compilations, studies or other documents prepared by such party, its directors,
officers, shareholders, employees, agents, advisors, lenders, contractors,
subsidiaries, affiliates or representatives which contain or otherwise reflect
or are generated from such information.

7. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware without respect to conflict
of law principles.

<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.

PRONET INC.

By: /S/ MARK A. SOLLS
----------------------------------------

Name: MARK A. SOLLS
--------------------------------------
Title: VICE PRESIDENT
--------------------------------------
PRONET SUBSIDIARY, INC.

By: /s/ MARK A. SOLLS
---------------------------------------
Name: MARK A. SOLLS
---------------------------------------
Title: VICE PRESIDENT
--------------------------------------
TELETOUCH COMMUNICATIONS, INC.

By: /s/ ROBERT M. McMURREY
---------------------------------------
Name: ROBERT M. McMURREY
---------------------------------------
Title: CEO
--------------------------------------

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR PRONET INC FOR THE SIX MONTHS ENDED JUNE 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 29,556
<SECURITIES> 0
<RECEIVABLES> 11,870
<ALLOWANCES> 986
<INVENTORY> 2,418
<CURRENT-ASSETS> 47,431
<PP&E> 110,223
<DEPRECIATION> 42,814
<TOTAL-ASSETS> 267,752
<CURRENT-LIABILITIES> 14,832
<BONDS> 99,355
0
0
<COMMON> 115
<OTHER-SE> 136,270
<TOTAL-LIABILITY-AND-EQUITY> 267,752
<SALES> 48,977
<TOTAL-REVENUES> 48,977
<CGS> 6,136
<TOTAL-COSTS> 17,950
<OTHER-EXPENSES> 43,765
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,646
<INCOME-PRETAX> (20,170)
<INCOME-TAX> (100)
<INCOME-CONTINUING> (20,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,270)
<EPS-PRIMARY> (2.65)
<EPS-DILUTED> (2.65)

</TABLE>