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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from .............. to ................
Commission File 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
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-687-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1997, was approximately $58,642,972. As of
February 28, 1997, there were 12,567,274 outstanding shares of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be furnished
to stockholders in connection with its 1997 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
ProNet Inc. ("ProNet" or the "Company") is a solutions-oriented
organization dedicated to individualized customer service which has
concentrated on identifying market opportunities in the wireless
communications market where it can provide users with enhanced wireless
services. The Company focuses its activities in five geographic regions or
communication "SuperCenters" centered in 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 Stockton, California. At
December 31, 1996, the Company had 1,270,954 pagers in service, which was the
seventh largest domestic subscriber base of all publicly traded paging
companies in the United States. Below is a table showing the Company's
SuperCenters and the number of pagers in service in each market at December
31, 1996:
SUPERCENTER
-------------------------------- NUMBER OF PAGERS
REGION OPERATION CENTER IN SERVICE
------------- ---------------- ----------
Midwest Chicago 147,742
Northeast New York 310,280
South Central Houston 398,059
Southeast Charlotte 294,625
West Stockton 120,248
---------
Total 1,270,954
---------
---------
The Company is a Delaware corporation founded in 1982. Prior to 1994,
the Company provided paging services solely to the healthcare industry. By
using proprietary technologies to manage the under-served market of both the
in-house and wide-area paging requirements of hospitals, the Company quickly
became one of the premier providers 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. At December 31, 1996, the Company's security systems
consisted of 29,501 miniature radio transmitters, or "TracPacs," in service.
See "Security Systems' Operations."
In 1993, ProNet management recognized 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 an acquisition
growth plan that would position the Company as a leading provider of wireless
messaging services. Since 1994, the Company has completed 23 acquisitions
including the acquisition of a nationwide paging license. As a result of
these acquisitions, most of the Company's current subscribers are consumers
and business users.
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To date, the Company has completed the following acquisitions:
<TABLE>
ACQUISITION DEFINED NAME DATE CLOSED
- ----------- ------------ -----------
<S> <C> <C>
Contact Communications, Inc. "Contact" March 1994
Radio Call Company, Inc. "Radio Call" August 1994
RCC division of Chicago Communication
Service, Inc. "ChiComm" August 1994
High Tech Communications Corp. "High Tech" December 1994
Signet Paging of Charlotte, Inc. "Signet Charlotte" March 1995
Carrier Paging Systems, Inc. "Carrier" April 1995
Metropolitan Houston Paging Services, Inc. "Metropolitan" May 1995
All City Communication Company, Inc. "All City" May 1995
Americom Paging Corporation "Americom" July 1995
Lewis Paging, Inc. "Lewis" September 1995
Gold Coast Paging, Inc. "Gold Coast" September 1995
Paging & Cellular of Texas "Paging & Cellular" October 1995
Apple Communication, Inc. "Apple" December 1995
Sun Paging Communications "Sun" January 1996
SigNet Paging of Raleigh, Inc. "SigNet Raleigh" January 1996
Cobbwells, Inc. dba Page One "Page One" January 1996
A.G.R. Electronics, Inc. and affiliates "AGR" February 1996
Total Communication Services, Inc. "Total" February 1996
Williams Metro Communications Corp.
and affiliates "Williams" February 1996
Georgialina Communication Company
and affiliates "Georgialina" October 1996
Paging Divisions of CalPage
(formerly Pac-West Telecomm, Inc.) "CalPage" October 1996
Modern Communication Corp. and
Personal Communications, Inc. "Modern" March 1997
</TABLE>
The above acquisitions (excluding Modern) are collectively referred to as the
"Completed Acquisitions". The Completed Acquisitions and the acquisition of
Modern are collectively referred to as the "Acquisitions". Also in 1996, the
Company completed the purchase of a nationwide paging license (931.9125 MHz
Radio Common Carrier frequency) and associated system equipment (the "Nationwide
License").
STRATEGY
The objective of the Company's strategy is to enhance the Company's
current position as a solutions-oriented organization dedicated to
individualized customer service focused on identifying market opportunities
in the wireless communications market where it can provide users with
enhanced wireless services. Key elements of the Company's strategy include
(i) following a disciplined internal growth model that is designed to
maximize the financial return from subscriber additions; (ii) leveraging the
existing regional SuperCenters to maintain and improve its low-cost operating
structure; (iii) further refining its channels of distribution by introducing
customized programs that capitalize on its value-added and solutions-oriented
expertise; and, (iv) offering a variety of enhanced wireless products and
services that enhance the utility of the product and service to the end-users.
DISCIPLINED INTERNAL GROWTH MODEL
Management intends to continue to follow a disciplined internal growth
model that is designed to maximize the financial return from subscriber
additions. Management establishes discipline by selling long-term contracts
(one to five years) to customers and by focusing the majority of its efforts
around additions that require the customer to
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purchase the pager. When the customer buys the pager, it lowers the
Company's capital expenditure requirements which in turn provides more cash
flow per subscriber. By following this disciplined growth model, the Company
hopes to maximize its ability to generate cash flow.
LEVERAGE SUPERCENTER STRUCTURE
The Company intends to continue to focus its operations around specific
geographic regions anchored by its five SuperCenters. Management believes
that focusing on the existing SuperCenter structure provides the Company with
the opportunity to increase operating efficiencies, build scale and maximize
cash flow as a result of servicing more business through the same cost
structure. This configuration provides the Company an opportunity to
leverage the existing structure by spreading fixed costs over a larger
revenue and subscriber base. All sales and marketing, customer service and
support (including billing and collections) and technical functions are
managed and executed in the SuperCenters. This regionalized structure allows
the Company to realize the benefits of operational consolidation while
maintaining the flexibility to react to local market developments. By
leveraging this existing structure, the Company strives to maintain or
improve its current low-cost operating structure.
DISTRIBUTION
ProNet utilizes a variety of distribution channels, including a direct
sales force, Company-owned retail stores and resellers. Distribution strategies
and channel emphasis are tailored to each market to accommodate varying
demographics and customer and competitive profiles. The Company focuses on
developing programs unique to each channel. The Company has certain programs in
place with its resellers and plans to expand its direct sales distribution in
1997, specifically through its major accounts division and Company-owned retail
stores.
Historically, the Company differentiated itself by applying a
value-added solutions-oriented approach to its hospital customers. In 1997,
the Company will focus on applying these same strategies and products to large
commercial accounts using the Nationwide License as a foundation and
capitalizing on its expertise in selling to and maintaining these large
accounts. Also in 1997, the number of the Company's stores will be expanded
from 45 and will be transitioned to a uniform name and logo - ProNet
Communications TO GO! This will provide greater standardization in this
channel and will develop the Company's brand identity. The Company also
stresses value-added benefits through this channel by its consultative sales
approach and post-sale follow-up calls to the customer.
ENHANCED PRODUCTS AND SERVICES
The Company's new product strategy is to focus on services that will
enhance the utility of the product and service to the end-users. The Company
believes that by adding additional information to a service with which the
user is already familiar, it will increase the convenience, safety or
financial position of the end-user. Thus, the product will have a positive
impact on the subscriber.
Currently, the Company is either developing or is currently marketing
several of these enhanced products. The Company's proprietary Intelligent
Processing Terminal ("IPT") system for large corporate accounts is a
communications system capable of managing both a company's in-house and
wide-area paging requirements within a single system. This
Windows-Registered Trademark-based product automatically processes and
distributes paging traffic as it manages the details of monitoring and
accounting, including inventory control, usage records, billing and immediate
pager activation and changeouts. The IPT can be further enhanced by
integrating one or more specialized software packages developed by the
Company. These specialized software packages enable the user to integrate a
monitoring interface, an on-line directory system and a nurse call interface,
to name a few. The Company's IPT system and related product line will be
marketed to commercial entities as well as hospitals in an effort to assist
those entities in providing an efficient, cost effective paging network. See
"Paging Operations - Enhanced Services." The Company is currently developing
a name-based numeric paging product which will begin the migration of a
subscriber from basic numeric to alphanumeric service by providing additional
information -the callers name - to that user via the same input method used
for a numeric pager (the telephone). 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.
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ProNet's security systems provide wireless solutions to the specialized
asset recovery needs of various governmental agencies and business customers.
"CampusTrac" is a personal safety and security product that is being marketed to
campus environments (universities and hospitals) to ensure the safety of end-
users (students, faculty and employees). See "Security Systems' Operations".
The Company did not participate in the spectrum auctions for two-way
narrowband personal communication services ("NPCS") or in the development of
two-way services or products, but will resell such services and products as
it deems appropriate.
PAGING INDUSTRY OVERVIEW
The paging industry has been in existence since 1949 when the Federal
Communications Commission ("FCC") allocated a group of radio frequencies for
use in providing one-way and two-way types of mobile communications services.
Throughout its history, the paging industry has been characterized by
substantial growth 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, approximately 64% of the estimated
number of pagers in service in the United States are currently served 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 which will provide the Company with potential acquisition and
growth opportunities.
Industry sources indicate that the number of pagers in service in the
United States has been growing at a compound annual rate of approximately 29%
over the last five years and that there are currently approximately 42 million
pagers in service in the United States, which represent a penetration rate of
over 15% of the population. Industry analysts estimate there will be
approximately 60 million paging subscribers in the United States by the year
2000. Factors that are expected to contribute to this growth include
(i) increasing mobility of the population, (ii) movement toward a service-based
economy, (iii) growing consumer awareness of the benefits of mobile
communications, (iv) technical advances in equipment and services offered, and
(v) continuing price efficiencies in equipment and services offered.
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 services 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.
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 a 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
instead 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. Current developments in the
paging industry include new paging services such as name-based numeric
paging, "confirmation" or "response" paging, which sends a message from the
subscriber back to the paging system to confirm the receipt of a paging
message, digitized voice paging, two-way paging and notebook and sub-notebook
computer wireless data applications.
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PAGING OPERATIONS
SUPERCENTER OPERATING MODEL
The Company has organized its operations around its five regional
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 a regional 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 55 employees that focuses on
maximizing the efficiencies of the SuperCenters, setting the strategic direction
of the Company, developing new product initiatives, 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 Company's
acquisitions and to achieve one of the lowest operating cost structures in the
paging industry.
PAGING SERVICES
BASIC SERVICES The Company currently provides various types of paging
services 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. At December 31, 1996, digital display pagers accounted for more than
90% of the Company's pagers in service.
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 marketing of retail paging services
is currently being converted to the brand "ProNet Communications TO GO!".
The Company believes that the adoption of these two marketing logos will
leverage ProNet's brand identity.
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.
Leasing rates, access fees and purchase prices vary by market, service type
and the volume of pagers purchased or leased by the subscriber. The total
monthly fee for a customer owned and maintained ("COAM") pager is generally
less than the total monthly fee for a leased pager, depending upon the
optional features selected, since no rental charges are included for the COAM
pager. 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 for its reseller and retail distribution
channels that focuses on selling rather than leasing pagers and therefore
limits capital investment in these distribution channels. At December 31,
1996, approximately 76% of total units in service were COAM pagers, which
compares to an industry average of approximately 55-60%. The Company
believes that by pursuing a COAM strategy for its reseller and retail
distribution channels, it can achieve greater capital efficiency and cash
flows than a strategy focused on purchasing pagers and then leasing them to
subscribers. The Company believes the benefits of a COAM structure reduce
the risks of technological obsolescence and credit loss. The Company targets
small to medium-sized businesses and large corporate accounts through its
direct sales distribution channel. Many businesses tend to lease rather than
purchase paging equipment to reduce their capital investment. The Company
uses a lease strategy for businesses because these customers generally have
longer contract terms and higher unit volumes than consumers, which tend to
offset the capital investment for the leased pagers.
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<TABLE>
OWNERSHIP OF PAGERS IN SERVICE
-------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
------------------ ---------------- ----------------
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
--------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Company-owned and leased to subscribers. . . 299,187 24% 280,339 33% 165,359 47%
COAM:
Direct . . . . . . . . . . . . . . . . . . 77,085 6 44,418 5 20,163 6
Retail . . . . . . . . . . . . . . . . . . 140,454 11 46,934 5 1,675 0
Resellers. . . . . . . . . . . . . . . . . 754,228 59 484,611 57 166,633 47
--------- --- ------- --- ------- ---
Total . . . . . . . . . . . . . . . . . 1,270,954 100% 856,302 100% 353,830 100%
--------- --- ------- --- ------- ---
--------- --- ------- --- ------- ---
</TABLE>
ENHANCED SERVICES. The Company currently offers a number of enhanced
products and services. In 1988, recognizing the need for a comprehensive,
fully integrated facilities-based communication system, the Company
introduced its IPT, a multi-tasking communications system capable of
managing, within a single system, both the in-house and wide-area paging
requirements of a business. The IPT is a sophisticated paging terminal
located at the business facility and is designed to distribute pager traffic
over multiple frequencies simultaneously. With the IPT, the user controls the
processing and distribution of paging traffic and manages its pager database
through statistical analysis of paging traffic and pager inventory control
tools. The Company provides enhancements to the IPT such as voice messaging,
automated telephone answering services and facility and equipment monitoring
capabilities. The Company had 131 IPT'S installed and in operation at
December 31, 1996. The Company also offers value-added paging services such
as voice-mail, simultaneous group paging, news and sports highlights, stock
quotes, remote alpha entry and other specialized marketing applications.
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 small to medium-sized
businesses and large corporate accounts. The Company targets consumers
through its resellers and Company-owned retail stores.
DIRECT SALES FORCE. The Company recruits, trains and manages its own direct
sales force. The regionalization of the Company's sales force gives its
representatives the flexibility to react and adapt to changes within their
specific marketplace. The direct sales force is supported through a variety of
communications, advertising and media resources which promote the Company's
paging services through telemarketing, direct mail, billboard, radio, print and
yellow page advertising. Referrals from existing subscriber accounts are also
solicited as sources for direct sales.
RESELLERS. In addition to offering paging services directly to end users,
the Company also provides commercial paging services indirectly through
marketing agreements with resellers. The Company sells pagers to these third
parties who, in turn, lease or resell the pagers to their own subscribers and
resell the Company's paging services. The use of this channel allows the
Company to broaden its distribution as resellers generally market to segments
of the population that could not be as 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 offered 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. Resellers bear the economic burden of pager
capital investment, direct selling expense and certain administrative costs.
As a result, this sales channel enables the Company to increase operating
efficiencies and to lower per unit costs by amortizing its network
infrastructure investment over a larger subscriber base. The Company offers
programs aimed at creating close ties with its resellers. These programs
reward resellers who generate certain levels of net subscriber additions with
competitive pricing, administrative and/or systems support and, for certain
resellers, an opportunity to participate in the Company's equity. Reseller
units represented approximately 59% of the Company's subscribers at December
31, 1996.
RETAIL OUTLETS. The Company focuses its retail distribution on Company-owned
stores. The Company believes that this distribution channel offers an
opportunity to directly access the general consumer marketplace. The
Company's stores are in secondary markets, as opposed to major urban markets,
resulting in less competition and generally higher pricing than the major
markets.
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The Company operated 45 stores at December 31, 1996, and intends to expand
this distribution channel.
STRATEGIC ALLIANCES. The Company believes that the addition of a nationwide
spectrum through the acquisition of the Nationwide License will allow the
Company to enter into regional and national alliances with businesses with
broad geographic communication needs.
ACQUISITIONS
Since 1994, the Company has purchased the following paging operations:
<TABLE>
PAGERS IN
ACQUISITION LOCATION(S) DATE CLOSED SERVICE (1) PURCHASE PRICE
- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Contact(3) New York City March 1994 91,000 $ 19.0 million
Radio Call(4) New York City August 1994 57,000 7.8 million
ChiComm(4) Chicago August 1994 30,000 9.8 million
High Tech(4) Chicago and Texas December 1994 2,000 0.9 million
Signet Charlotte(4) Charlotte March 1995 30,000 9.0 million
Carrier(4) New York City April 1995 31,200 6.5 million
Metropolitan(3) Houston May 1995 150,000 21.0 million
All City(4) Milwaukee May 1995 20,000 6.3 million
Americom(4) Houston July 1995 80,000 17.5 million
Lewis(4) Georgia September 1995 15,000 5.6 million
Gold Coast(4) Florida September 1995 6,000 2.3 million
Paging & Cellular(4) Houston October 1995 0(2) 9.5 million
Apple(3) Chicago December 1995 41,500 13.0 million
Sun(4) Florida January 1996 12,000 2.3 million
SigNet Raleigh(4) Raleigh January 1996 13,000 8.7 million
Page One(3) Georgia January 1996 30,000 19.7 million
AGR(3) Florida February 1996 50,000 6.5 million
Total(3) Florida February 1996 13,000 2.2 million
Williams(3) Florida February 1996 6,500 2.7 million
Georgialina(3) Georgia October 1996 27,000 11.4 million
CalPage(3) California October 1996 45,000 17.2 million
Modern(3) Pennsylvania March 1997 18,000 9.2 million
------- --------------
Total Acquisitions 768,200 $208.1 million
------- --------------
------- --------------
</TABLE>
(1) At the date the acquisition closed.
(2) Paging & Cellular was the Company's largest reseller, serving more than
40,000 subscribers in Texas.
(3) Acquired all of the outstanding capital stock.
(4) Acquired substantially all of the paging assets.
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 solutions-oriented and value-added
approach, 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, competition also comes from publicly-held
corporations and other large companies that have greater financial resources
than the Company. Among the Company's competitors are Paging Network, Inc.,
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Arch Communications Group, Inc., MobileMedia Corporation, AirTouch
Communications, Metrocall, Inc. and PageMart Wireless, Inc.
A variety of wireless two-way communication technologies, including
cellular telephone services, narrowband and broadband personal communications
services, enhanced specialized mobile radio and mobile satellite services are
currently in use or under development. Although these technologies currently are
more highly priced than paging services or are not commercially available,
technological improvements could result in increased capacity and efficiency for
wireless two-way communication and, accordingly, could result in increased
competition for the Company. In addition, future technological advances in the
telecommunications industry could create new services or products competitive
with the paging services currently provided by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
advances and new services, such as narrowband and broadband personal
communication services, which will increase the amount of spectrum available for
paging or similar services. Moreover, changes in technology could lower the cost
of competitive services and products to a level at which the Company's services
and products would become less competitive or the Company would be required to
reduce the prices of its services and products. There can be no assurance that
the Company will be able to develop or introduce new services and products to
remain competitive or that the Company would not be adversely affected in the
event of such technological developments.
NETWORK DESIGN AND SOURCES OF EQUIPMENT AND PAGERS
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.
The Company currently purchases most of its pagers from Motorola, Inc.
("Motorola"). The Company purchases its transmitters from two competing sources
and its paging terminals from Glenayre Technologies, Inc. ("Glenayre"), a
manufacturer of mobile communications equipment.
REGULATIONS AND LICENSES
The paging systems owned by the Company are subject to regulation by the
FCC pursuant to the Communications Act of 1934 (the "Act"). In 1996, the Act
was substantially amended by passage of the Telecommunications Act of 1996
("1996 Act"), which mandates, INTER ALIA, that telephone local exchange carriers
("LECs") provide interconnection to any telecommunications carrier (including
paging operators like the Company) at any technically feasible point and at
rates, terms and conditions that are just, reasonable and nondiscriminatory. By
order dated August 8, 1996 (the "August 8 Order"), and as required by the 1996
Act, the FCC issued rules to implement these statutory provisions. The United
States Court of Appeals for the Eighth Circuit stayed the August 8 Order, but
subsequently lifted the stay with respect to the FCC's rules governing
interconnection between LECs and commercial mobile radio service ("CMRS")
providers, which includes paging carriers like the company.
The FCC's LEC-CMRS interconnection rules: (i) mandate reciprocal
compensation between LECs and interconnecting carriers with respect to the
transport and termination of local calls; (ii) forbid LECs from assessing
access charges or charges for terminating calls originating on the LEC
network; (iii) establish cost-based default proxies for interconnection,
access, transport and termination of calls; and (iv) allow CMRS carriers,
including paging carriers, to renegotiate pre-existing interconnection
agreements to provide for reciprocal compensation without risk of contract
penalties. The FCC did not apply its default proxies to interconnection
between LECs and paging carriers; rather, it deferred determination of paging
carriers' costs to a further proceeding, and placed the burden on paging
carriers to establish cost-based transport and termination charges.
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The foregoing provisions of the 1996 Act and FCC rules promulgated
thereunder may reduce the costs incurred by the Company in interconnecting to
LEC networks, although no assurance can be given that such cost reductions will
ultimately be realized. Moreover, notwithstanding the lifting of the stay
discussed above, the August 8 Order and corresponding FCC rules remain subject
to judicial review and may be modified, remanded for further proceedings, or
vacated.
The Company, or its wholly-owned subsidiaries, currently hold FCC licenses
for radio common carrier ("RCC"), 929 MHz private carrier paging ("PCP"),
Business Radio Service ("BRS") and Special Emergency Radio Service ("SERS")
frequencies, which are used to provide one-way paging service. The Company
holds numerous licenses for RCC and PCP frequencies in several major
metropolitan areas nationwide. In addition, the Company has acquired a
nationwide RCC license that allows it to establish transmitting facilities on a
common 931 MHz frequency anywhere in the United States. The Company holds
licenses for SERS systems in eleven major metropolitan areas, and holds numerous
licenses for BRS frequencies in major metropolitan areas nationwide. In one
market where the SERS license is held by a local hospital association, the
Company acts as operator and manager of the paging system, subject to the
licensee's ultimate control and authority.
SERS and BRS frequencies (and five PCP frequencies) are licensed by the FCC
on a shared, site-by-site basis. When a frequency is shared by more than one
license in the same geographic area, technical measures must frequently be
implemented to prevent each license from interfering with another's
transmissions. Based on its experience to date, the Company believes that the
quality and reliability of its paging systems are not impaired by sharing
frequencies with other SERS and BRS licenses.
RCC and most PCP frequencies were previously licensed on a site-by-site,
exclusive basis. Under the FCC's rules governing exclusive frequency
assignments, once a frequency is licensed to a licensee at a specific location,
no other carrier may utilize the frequency within a prescribed distance (set
forth in the FCC's rules) from the licensed location.
On February 24, 1997, the FCC released an order establishing rules pursuant
to which geographic market licenses for RCC and exclusive PCP frequencies will
be assigned on the basis of competitive bidding or auctions. Unless stayed,
modified or reversed on reconsideration, the new rules will become effective on
May 11, 1997. Thereafter, the FCC will issue licenses for exclusive use of each
exclusive 929 MHz PCP frequency and each 931 MHz RCC frequency for each of 47
Rand McNally Major Trading Areas ("MTAs), Alaska, and the U.S. territories.
Exclusive licenses for RCC frequencies in bands other than 931 MHz will be
issued on the basis of Economic Areas ("EAs"), as defined by the U.S. Department
of Commerce. MTA and EA licensees will be permitted to utilize their
frequencies anywhere within their respective MTAs or EAs without obtaining FCC
consent, subject to protection of incumbent, co-channel licensees.
To ensure the right to expand its existing RCC and PCP systems, the Company
will be required to obtain coincident MTA and EA licenses through competitive
bidding (unless the Company is the sole applicant for a particular frequency in
a specific market, in which case it will receive the license without bidding).
Should the Company be unsuccessful in obtaining any such geographic licenses, it
will be unable to expand existing system coverage areas without first obtaining
the MTA or EA licensee's consent (which the licensee will have no obligation to
give). Such MTA or EA licensee, however, will be required to protect the
Company's existing operations from interference, will be unable to use the
frequency within the prescribed distance from the Company's existing locations,
and must comply with the FCC's minimum construction/coverage requirements to
retain its license. In addition, 929 and 931 MHz frequencies previously
assigned on an exclusive, nationwide basis, including the Company's nationwide
931 MHz RCC license, will be exempted from geographic licensing and competitive
bidding.
All the Company's existing RCC licenses have ten year terms that expire in
April 1999; prior to the expiration date, renewal applications must be filed
with the FCC. The Company's PCP and BRS licenses have five and ten year terms,
depending on the date of issuance; licenses issued since 1995 have ten year
terms. The Company's SERS licenses have five year terms.
Renewal applications for RCC, PCP and BRS frequencies are routinely granted
where the licensee has provided "substantial" service and has complied with FCC
rules and regulations. SERS licenses are renewed where
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the licensee is in compliance with FCC rules and regulations. Although the
Company is unaware of any circumstances that would prevent grant of any
renewal application, no assurance can be given that any of the Company's
licenses will be renewed. If licenses are not renewed by the FCC, then
alternative spectrum will have to be obtained and the underlying system
reconfigured.
The FCC may temporarily or permanently restrict operation of any licensed
facility to eliminate or resolve signal interference caused by that operation.
The FCC may also revoke or condition licenses, or impose fines or forfeitures
for failure to comply with either the terms and conditions of the license or the
provisions of the Act or any FCC rule, regulation or order issued pursuant to
the Act.
SECURITY SYSTEMS' OPERATIONS
GENERAL
The Company's security systems' services are provided through the Company's
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 and Puerto Rico. The systems consist
of radio transmitters, or "TracPacs," which are disguised in items of value.
When such an item is removed 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 35 security systems in 26 major
metropolitan markets within the United States and Puerto Rico. The Company
had 29,501 TracPacs under lease to its customers at December 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 1997), which will provide affordable security
tracking on university and hospital 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 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.
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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.
REGULATIONS, LICENSES AND PATENTS
The PTS systems operated and leased by the Company are subject to
regulation by the FCC pursuant to the Act. ETS operates under experimental
licenses granted by the FCC for the nonexclusive use of radio frequencies for
the operation of the PTS systems. Although the FCC has proposed establishing a
five-year term for experimental licenses, these licenses are currently issued
for a two-year term and are subject to renewal upon expiration. In addition,
the FCC may revoke or cancel an experimental license at any time. The existing
experimental license held by ETS expired on October 1, 1996, and a timely filed
renewal application is now pending. The subject license has been routinely
renewed every two years since it was initially granted to its previous holder in
1974. Thus, ETS ordinarily would have no reason to believe that its
experimental license would be revoked or canceled, or that its pending renewal
application would be denied. The FCC, however, recently adopted an order
establishing a Low Power Radio Service ("LPRS") in the 216-17 MHz frequency band
to provide permanent spectrum on a secondary, non-interfering basis for, INTER
ALIA, law enforcement tracking service. Pursuant to the order, LPRS users,
including ETS, may operate nationwide without having to apply for licenses or
pay licensing fees, although all transmissions must be limited to no more than
100 milliwatts effective radiated power.
Due to its substantial investment in equipment manufactured for the
experimental frequency, ETS intends to use LPRS spectrum either to establish new
PTS systems or to retrofit existing systems where justified by growth or other
market considerations. ETS, therefore, anticipates a continuing need for an
experimental license. No assurance can be given that ETS's ability to renew and
hold its experimental license will be unaffected by establishment of the LPRS.
The Company has perpetual licenses from the seller of the PTS product line
for the use of technology and software related to the systems.
EMPLOYEES
The Company employed approximately 831 full and part-time personnel at
December 31, 1996, none of whom are subject to collective bargaining
arrangements. The Company believes that its relationship with its employees is
excellent.
RISK FACTORS
The nature of the business activities conducted by the Company subjects the
Company, its stockholders and the holders of the Company's indebtedness to
certain risks. The following is a summary of some of the material risks
relating to the Company's business activities.
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INTEGRATION OF ACQUISITIONS
Since March 1, 1994, the Company has purchased 22 paging operations and
acquired the Nationwide License. There can be no assurance that the Company will
be able to integrate the paging operations of each of the acquired companies
successfully. See "Strategy."
HIGH DEGREE OF LEVERAGE; RESTRICTIONS IMPOSED BY LENDERS
The Company is highly leveraged. At December 31, 1996, the Company had
approximately $154.4 million of debt outstanding, and the Company's long-term
debt as a percentage of total capitalization was approximately 54%.
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 working capital, capital
expenditures, acquisitions or other purposes, should it need to do so, may be
impaired; (ii) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to interest payments, 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 in general.
The ability of the Company to continue making interest payments will be
largely dependent upon its future performance. Because borrowings under the
Company's 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 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 raise sufficient
funds through asset sales.
The Company's credit facility and the indenture governing the Company's
senior subordinated notes (the "Indenture") 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
- - Credit Facilities" and "- Senior Subordinated Notes."
DEBT SERVICE; DEFICIT OF EARNINGS TO FIXED CHARGES
For the year ended December 31, 1996, the Company's earnings were
insufficient to cover fixed charges by $40.0 million. The ability of the
Company to continue making interest payments on its indebtedness will be largely
dependent upon its future performance. Many factors, some of which will be
beyond the Company's control (such as prevailing economic conditions), will
affect its performance. Because borrowings under the Company's credit facility
will bear interest at rates that will fluctuate with certain prevailing interest
rates, increases in such prevailing interest rates will increase the Company's
interest payment obligations and could have an adverse effect on the Company.
There can be no assurance that the Company will be able to generate sufficient
cash flow to cover required interest 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 raise sufficient funds
through
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<PAGE>
asset sales. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE
Because the Company operates a significant portion of its business through
its subsidiaries, the Company's cash flow and its ability to service debt are
substantially dependent upon the cash flow of its subsidiaries and the payment
of funds by those subsidiaries to the Company through loans, dividends or
otherwise. The subsidiaries, however, are legally distinct from the Company and
have no obligation, contingent or otherwise, to make any funds available for
such payment. The ability of the Company's subsidiaries to make such payment
will be subject to applicable state laws. Claims of creditors of the Company's
subsidiaries will generally have priority as to the assets of such subsidiaries
over the claims of the Company and the holders of the Company's indebtedness.
Except as otherwise permitted in the Indenture, the Company's subsidiaries may
not incur indebtedness. However, all of the Company's subsidiaries are
guarantors of the indebtedness under the Company's credit facility and have
granted security interests in substantially all of their assets to secure such
indebtedness. As a result of these factors, the Company's senior subordinated
notes are effectively subordinated to all liabilities of the Company's
subsidiaries. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
FUTURE PROFITABILITY
As a result of recent commercial paging acquisitions, the Company's average
revenue per unit ("ARPU") has declined in the last few years. At the same time,
due to decreases in vendor costs and economies of scale resulting from the
integration of these acquisitions, the Company's average operating cost per
subscriber has also decreased in recent years. There can be no assurances that
the Company's average operating cost per subscriber will continue to decrease
along with decreases in ARPU. The Company was profitable in 1994. However, due
to the incurrence of significantly greater depreciation, amortization and
interest expenses in 1995 and 1996 as a result of the Company's recent
acquisitions of commercial paging operations and the issuance of the Company's
senior subordinated notes and borrowings under the Company's credit facility,
the Company was not profitable in 1995 and 1996. Such increased expenses may
continue to increase the net loss, and, if continued, 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 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 the buildout of infrastructure, new product development,
the purchase of equipment and acquisitions. 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 Company's credit facility
and the Indenture limit, and will limit in the future, 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".
RISKS OF CAMPUSTRAC AND NAME-BASED NUMERIC PAGING
The Company will be required to invest a substantial amount of capital in
order to develop its new CampusTrac and name-based numeric paging products.
Based on the current schedule, the Company anticipates the launch of these
products could begin by the end of 1997. The amount of capital expenditures
could vary significantly based on several factors, including the cost of
equipment and the design and configuration of the networks. Because the
programs will be new services, there is no existing market, and there can be no
assurance that a market for the new products will develop. In addition, the new
programs will require the use of new technology, and there can be no assurance
that such technology can be successfully applied to the new programs.
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<PAGE>
SUBSCRIBER TURNOVER
The rate of net subscriber additions for service providers such as the
Company may be significantly affected by subscriber cancellations or "churn".
In order to realize net growth in units 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 churn rate is in line with 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
COMPETITION AND TECHNOLOGICAL CHANGE
The Company faces direct competition in all of its paging markets.
Competition for subscribers to the Company's paging services is based primarily
on the price and quality of services offered and the geographic area covered.
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, competition also comes from publicly-held corporations and other
large companies that have greater financial 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 and products that could compete
directly with the services and products being provided or developed by the
Company. Recent and proposed regulatory changes by the FCC are aimed at
encouraging such new services and products. Moreover, changes in technology
could lower the cost of competitive services and products to a level at which
the Company's services and products would become less competitive or the Company
would be required to reduce the prices of its services and products. There can
be no assurance that the Company will be able to develop or introduce new
services and products to remain competitive or that the Company will not be
adversely affected in the event of such technological developments. See
"Business - Paging Operations - Competition" and "- Security Systems' Operations
- - Competition."
DEPENDENCE ON SUPPLIERS
The Company does not manufacture any of the pagers used in its paging
operations. The Company buys most of its pagers 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 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 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/COST OF ADDITIONAL FREQUENCIES
The paging industry and the PTS systems operated and leased by the Company
are subject to regulation by the FCC and, depending on the jurisdiction, may be
regulated by state regulatory agencies. There can be no assurance that either
the FCC or those state agencies having jurisdiction over the Company's business
will not adopt regulations or take other actions that would adversely affect the
business of the Company. See "Business - Paging Operations - Regulations and
Licenses" and "- Security Systems' Operations - Regulations, Licenses and
Patents." The FCC requires many of those seeking new frequencies, including the
Company and its competitors, to purchase them through an auction process where
more than one person seeks the same frequency or there are otherwise conflicting
applications. In addition, the Company may purchase additional frequencies from
third parties. The Company cannot predict the cost of acquiring additional
frequencies in the future.
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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. See "Directors and
Executive Officers of the Registrant."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K are not
based on historical facts, but are forward-looking statements that are based
upon numerous assumptions as of the date of this report that could prove not to
be accurate. These statements appear in a number of places in this report and
include statements regarding the intent, belief or current expectations of the
Company, its officers or its directors with respect to, among other things: (i)
acquisitions and product development; (ii) the Company's financing plans; (iii)
trends affecting the Company's financial condition or results of operations; and
(iv) regulatory matters affecting the Company. Actual events, transactions and
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to achieve 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." The Company disclaims any
obligation to update the forward-looking statements contained in this Annual
Report on Form 10-K.
ITEM 2. PROPERTIES
The Company currently leases approximately 30,927 square feet of office
space in Dallas, Texas, which is also the location of its executive offices.
This lease provides for a rental rate at an effective rate of approximately
$28,000 per month and expires in September 2000. The Company also leases office
space for its SuperCenters, paging terminals and marketing office locations in
each of the metropolitan areas where it has paging operations, as well as 45
counter locations. Such leases provide for effective monthly rental rates
ranging from $135 to $21,000 per month and expire on various dates through 2003.
The Company's transmitters for its paging systems are located on commercial
broadcast towers, buildings and other fixed structures. The Company has leases
and other agreements and arrangements relating to its transmitter sites. The
Company's receiving equipment for its PTS security product is located on fixed
structures and buildings, owned and managed primarily by the law enforcement
authorities participating in the PTS system. The Company has agreements
relating to its use of these sites.
ITEM 3. LEGAL PROCEEDINGS
The Company, its directors, and certain of its officers have been sued 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; MOLINA V. PRONET INC., AT 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 common 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
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<PAGE>
alleged class of plaintiffs who purchased shares in the Company's $100
million public offering, which closed on June 5, 1996 (the "Offering").
Other actions purport to include claims on behalf of all purchasers of the
Company's common stock during an alleged class period. The state cases have
been consolidated into a single action, which alleges violation of the
Securities Act of 1933 in connection with the Company's Offering. The
federal actions have been consolidated into two separate actions, depending
upon the nature of the claim raised. The court had previously appointed a
lead plaintiff in both actions, as that term is used in the Private
Securities Litigation Reform Act of 1995. That plaintiff has recently moved
to be relieved of that position, and the Company expects the court to appoint
a new lead plaintiff. In the meantime, the Company anticipates that its
responsibility to answer, plead or otherwise move against the pending federal
complaints will be deferred until a new lead plaintiff is appointed by the
court.
The Company will vigorously defend the actions. The Company anticipates
that the plaintiffs will claim substantial damages. Because these cases are in
the early stages of discovery, the Company cannot predict the amount of damages,
if any. The final outcome of the issues that are the subject of these actions
could have a material adverse effect on the Company's results of operations in
1997 and in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 20, 1996, the Company held its Annual Meeting of Stockholders.
The following items were voted on and approved at the meeting.
(a) ELECTION OF DIRECTORS. The following individuals were nominated and
elected as directors of the Company:
Votes For Votes Withheld
---------- --------------
Mr. Thomas V. Bruns 10,304,809 123,298
Mr. Harvey B. Cash 10,304,709 123,398
Mr. Edward E. Jungerman 10,297,709 130,398
Mr. Jackie R. Kimzey 10,294,699 133,408
Mr. David J. Vucina 10,295,191 132,916
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") trades on the Nasdaq National
Market tier of The Nasdaq Stock Marketsm under the symbol "PNET."
The following table sets forth the range of high and low last reported
sales prices for the Company's Common Stock as reported by the NASDAQ National
Market System for the periods indicated. At February 28, 1997, the number of
record holders of the Company's Common Stock was 202 and the approximate number
of beneficial shareholders was 5,000.
1996 1995
--------------------- ------------------
HIGH LOW HIGH LOW
-------- -------- --------- -------
1st Quarter $29 $20 7/8 $19 $13 7/8
2nd Quarter 33 1/2 10 3/8 22 1/8 17 3/4
3rd Quarter 12 3/4 6 1/16 32 1/8 20 1/4
4th Quarter 8 15/16 4 1/4 30 13/16 23 3/4
The Company has not paid any dividends since its incorporation and does
not anticipate paying cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain any earnings to finance the
expansion of operations and to fund acquisitions. Moreover, the Company's
credit facility and the Indenture prohibit the payment of dividends or other
distributions on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
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ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected financial data for the Company for each of
the last five years.
<TABLE>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE, RATIO, UNIT AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues (1) . . . . . . . . . . . $ 87,239 $ 56,108 $ 33,079 $ 19,234 $ 16,845
Product sales (2). . . . . . . . . . . . . 15,817 10,036 6,639 2,040 1,855
---------- -------- -------- -------- --------
Total revenues . . . . . . . . . . . . . . 103,056 66,144 39,718 21,274 18,700
Depreciation and amortization
expense . . . . . . . . . . . . . . . . . 40,624 18,662 8,574 4,656 4,077
Operating income (loss). . . . . . . . . . (24,635) (270) 3,189 2,732 1,834
Interest expense . . . . . . . . . . . . . 15,370 8,640 1,774 292 310
Net income (loss). . . . . . . . . . . . . (40,043) (7,697) 693 1,574 1,754
Net income (loss) per share. . . . . . . . (4.07) (1.23) 0.16 0.40 0.43
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . 2,286 10,154 666 530 131
Working capital (deficit). . . . . . . . . (1,927) 3,242 (3,119) 812 1,130
Total assets . . . . . . . . . . . . . . . 311,716 186,969 73,273 30,296 28,128
Long-term debt including
current maturities. . . . . . . . . . . . 148,691 99,319 9,500 3,903 3,460
Total liabilities. . . . . . . . . . . . . 178,067 137,413 23,038 9,937 8,325
Total stockholders' equity . . . . . . . . 133,649 49,556 50,235 20,359 19,803
OTHER DATA:
Pagers in service at end of period . . . . 1,270,954 856,302 353,830 130,000 114,356
TracPacs in service at end of period . . . 29,501 27,548 27,595 25,841 19,210
Pagers in service per employee (3) . . . . 1,648 1,619 1,325 1,000 880
ARPU - Paging (4). . . . . . . . . . . . . $ 6.17 $ 6.57 $ 8.51 $ 10.23 $ 10.48
ARPU - Tracking (5). . . . . . . . . . . . 18.42 15.90 16.52 15.90 14.75
Operating, selling, general and
administrative costs per paging
subscriber (6). . . . . . . . . . . . . . 4.68 4.78 5.08 7.91 7.80
Cash flow from operating activities (7). . 160 12,470 11,952 7,144 6,720
EBITDA (8) . . . . . . . . . . . . . . . . 24,798 18,392 11,763 7,388 5,911
EBITDA margin (9). . . . . . . . . . . . . 28% 32% 36% 36% 34%
Capital expenditures (10). . . . . . . . . $ 14,534 $ 9,773 $ 2,811 $ 2,565 $ 2,315
Ratio of total debt to EBITDA (11) . . . . 6.2x 6.4x 0.9x 0.5x 0.6x
Ratio of EBITDA to
interest expense. . . . . . . . . . . . . 1.6 2.1 6.6 25.3 19.1
</TABLE>
(1) Service revenues consist of fixed monthly, quarterly, annual and bi-annual
service and leasing fees.
(2) Product sales include pager and paging equipment sales and other security
systems' income.
(3) Calculated by dividing pagers in service at the end of each period by the
number of employees at the end of the period presented. This calculation
excludes employees directly related to the security systems' business.
(4) ARPU - Paging (average revenue per paging unit) is calculated by dividing
paging systems' average monthly service revenues for the last quarter of
the period by the average number of pagers in service at the beginning of
such months.
(5) ARPU - Tracking (average revenue per tracking unit) is calculated by
dividing security systems' service revenues for the last month in the
period by the number of tracking units in service at the beginning of such
month.
(6) 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.
(7) Cash flow from operating activities is derived from the statement of cash
flows and differs from EBITDA (as defined below) primarily due to interest
expense and changes in working capital.
17
<PAGE>
(8) EBITDA is earnings before other income (expense), income taxes,
depreciation and amortization and nonrecurring charges. 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.
(9) Calculated by dividing EBITDA by the remainder of total revenues less cost
of products sold for the period presented.
(10) Excludes acquisition and leased pager costs.
(11) Calculated by dividing total debt at the end of the period by EBITDA for
the 12 months ended on the last day of the period.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for discussion of factors that materially affect the comparability
of the information reflected in the "Selected Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company provides wireless messaging services through its paging and
security systems operations. Until 1994, paging services were provided solely to
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 23 completed acquisitions, the
Company's results of operations for prior periods may not be indicative of
future performance. See "Business - Strategy" and "- Paging Operations -
Acquisitions."
The Company is a solutions-oriented organization dedicated to
individualized customer service focused on identifying market opportunities in
the wireless communications market where it can provide users with enhanced
wireless services. The Company focuses its activities in five regional
SuperCenters centered in 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 Stockton, California. At December 31, 1996, the Company had
1,270,954 pagers in service, which was the seventh largest domestic subscriber
base of all publicly traded paging companies in the United States.
As one of its enhanced wireless communications services, through its
wholly-owned subsidiary, ETS, the Company markets radio-activated electronic
tracking security systems primarily to financial institutions throughout the
United States. The systems consist of TracPacs which are disguised in items of
value. When such an item is removed 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, 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 an emphasis on customer care and
quality of service, and as a result its paging business currently has a "churn"
rate in line with the industry average of 3.1% (source: The State of the U.S.
Paging Industry: 1995, September 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 in line with 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%.
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
18
<PAGE>
broadening its customer base and distribution channels, the percentage of
customers who own and maintain their paging equipment rather than leasing it
from the Company is likely to increase. This, together with competitive factors,
may result in declining service revenues per subscriber since these customers
will not pay a leasing fee as part of their monthly charge. However, the Company
will not incur the capital costs related to these COAM pagers. Additionally,
"ARPU" for pagers served through resellers is lower than for direct sales due to
the wholesale rates charged to this distribution channel. Such resellers do,
however, assume all selling, marketing, subscriber management and related costs
that would otherwise be incurred by the Company.
Product sales and costs are also likely to increase as the business mix
shifts in favor of COAM units. The Company's objective is to break even on
product sales, but it may selectively offer discounts due to promotional offers
or competitive pressures.
The Company currently enjoys low operating costs per unit due to the
efficiency of its operations. It expects that the continued development of its
business around its SuperCenters will result in 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 has grown
at a compound annual rate of approximately 43% over the past four years,
while cash flows from operating activities has decreased at a compound annual
rate of 61% for the same period. Cash flows from operating activities is
derived from the statement of cash flows and differs from EBITDA primarily
due to interest expense and changes in working capital. EBITDA growth is
expected to continue although near term EBITDA margins may be slightly
impacted by legal costs, start-up costs associated with certain SuperCenters
and new enhanced products and services, and the buildout of existing and
acquired frequencies in the Company's marketplaces. Cash flow from operating
activities is expected to fluctuate based upon the changes in working capital
and fluctuations in interest expense resulting from changes in the prevailing
interest rates and the level of borrowings on the Company's revolving line of
credit. Non-cash and financing-related charges for the Company's acquisition
program have negatively impacted earnings in 1995 and 1996 and have the
potential to continue this 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 Modern are not reflected in this discussion.
PAGING SYSTEMS' RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Service revenues . . . . . . . . . . . . . $ 81,368 $ 50,805 $28,015
Product sales. . . . . . . . . . . . . . . 15,776 9,899 6,506
-------- -------- -------
Total revenues. . . . . . . . . . . . . . . . 97,144 60,704 34,521
Net book value of products sold . . . . . . . (13,238) (9,357) (6,605)
-------- -------- -------
Net revenues (1). . . . . . . . . . . . . . . 83,906 51,347 27,916
Cost of services. . . . . . . . . . . . . . . (24,508) (13,218) (7,972)
-------- -------- -------
Gross margin. . . . . . . . . . . . . . . . . 59,398 38,129 19,944
Sales and marketing expenses. . . . . . . . . 15,469 7,937 6,530
General and administrative expenses . . . . . 22,990 15,048 4,713
Depreciation and amortization expenses. . . . 39,043 17,122 7,017
Nonrecurring charges. . . . . . . . . . . . . 8,809 -- --
-------- -------- -------
Operating income (loss) . . . . . . . . . . . $(26,913) $ (1,978) $ 1,684
-------- -------- -------
-------- -------- -------
EBITDA. . . . . . . . . . . . . . . . . . . . $ 20,939 $ 15,144 $ 8,701
-------- -------- -------
-------- -------- -------
</TABLE>
(1) Net revenues represent revenues from services, rent and maintenance plus
product sales less net book value of products sold.
19
<PAGE>
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 Completed Acquisitions. Net revenues increased to $83.9 million
in 1996 from $51.3 million in 1995 and from $27.9 million in 1994. This
increase was primarily due to a 48% increase in pagers to 1,270,954 at December
31, 1996, from 856,302 at December 31, 1995, and a 142% increase at
December 31, 1995, from 353,830 at December 31, 1994. The increase in pagers
in service was primarily due to the Completed Acquisitions. In addition,
internal growth accounted for 218,152 and 128,772 units during 1996 and 1995,
respectively, which represents annualized internal growth rates of approximately
25% and 36%, respectively.
ARPU was $6.17, $6.57 and $8.51 for the quarters ended December 31, 1996,
1995, and 1994, respectively. This decrease was due to a further shift in the
Company's subscriber base from direct to indirect distribution channels which
generate lower revenues per subscriber. The Company's subscriber base was 76%
COAM at December 31, 1996 compared to 67% at December 31, 1995 and 53% at
December 31, 1994. The Company believes that ARPU will continue to decrease,
although at a slower rate, as the Company continues to expand its indirect
distribution channel.
PRODUCT SALES LESS NET BOOK VALUE OF PRODUCTS SOLD was $2.5 million in
1996, $542,000 in 1995 and ($99,000) in 1994. The margin increased in 1996
and 1995 from the prior years primarily due to the increase in product sales.
Management anticipates that the Company's margins on pager sales 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 classified as general and administrative expenses in 1995 and 1996.
Since the infrastructure of the Company changed in 1995, the nature of certain
expenses changed also. Accordingly, 1994 expenses were not reclassified. In
the aggregate, costs of services, sales and marketing expenses and general and
administrative expenses increased by 74% and 88% for the years ended December
31, 1996 and 1995, respectively, compared to the respective years ended December
31, 1995 and 1994 as a result of the Company's internal growth and acquisitions.
In total, these costs were $63.0 million (75% of paging systems' net revenues)
for the year ended December 31, 1996, compared to $36.2 million (71% of paging
systems' net revenues) and $19.2 million (69% of paging systems' net revenues)
for the years ended December 31, 1995 and 1994, respectively. The increase in
these costs as a percentage of net revenues for the years ended December 31,
1996 and 1995 from the comparable periods in 1995 and 1994, respectively, 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 $59.4 million (71% of paging systems' net revenues) in 1996 from
$38.1 million (74% of paging systems' net revenues) in 1995 and from
$19.9 million (71% of paging systems' net revenues) in 1994. The decrease in
gross margin as a percentage of paging systems' net revenues in 1996 was due to
the increased expenses related to recent acquisitions, start-up costs associated
with certain SuperCenters and the buildout of existing and acquired frequencies
in its marketplaces, primarily consisting of telephone, salaries, tower rent,
pager parts and third party access fees. The increase as a percentage of net
revenues in 1995 was primarily due to the reclassification of certain operating
expenses previously discussed. 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 and as revenues
from new systems increase to offset these costs. The cost of services increased
to $24.5 million in 1996 from $13.2 million in 1995 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 $15.5 million (18% of
paging systems' net revenues) in 1996, $7.9 million (15% of paging systems' net
revenues) in 1995 and $6.5 million (23% of paging systems' net revenues) in
1994. The increase as a percentage of paging systems' net revenues in 1996 was
due to the increase in the number of retail stores (from 13 at December 31,
1995, to 45 at December 31, 1996), the majority of expenses of
20
<PAGE>
which are sales and marketing, including increased advertising, salaries,
commissions and travel expenses. 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, as a percentage of paging
systems' net revenues, may increase slightly in the future due to the
Company's focus on expanding its direct distribution channel.
PAGING SYSTEMS' GENERAL AND ADMINISTRATIVE EXPENSES were $23.0 million
(27% of paging systems' net revenues) in 1996, $15.0 million (29% of paging
systems' net revenues) in 1995 and $4.7 million (17% of paging systems' net
revenues) in 1994. The decrease as a percentage of paging systems' net
revenues in 1996 was due to savings resulting from the integration of certain
acquisitions completed in 1996 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 by
lower general and administrative expenses. The increase as a percentage of
net revenues in 1995 was due to the reclassification of certain operating
expenses as previously discussed. Management anticipates that paging systems'
general and administrative expenses as a percentage of net revenues will
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. Management
also anticipates that legal costs could increase in the near future as the
Company defends itself against certain lawsuits described in "Item 3. Legal
Proceedings." Because these cases are in the early stages of discovery, the
Company cannot predict the amount of costs, if any.
PAGING SYSTEMS' DEPRECIATION AND AMORTIZATION EXPENSES were $39.0 million,
$17.1 million and $7.0 million in 1996, 1995 and 1994, respectively. The
increase was primarily due to the amortization of intangibles arising from the
Completed Acquisitions. 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 $8.8 million in 1996. These
costs represent nonrecurring costs related to the terminated merger with
Teletouch Communications, Inc. ("Teletouch") and related financing, consisting
primarily of underwriting, advisory, legal and accounting fees and merger
financing costs. See "Financial Statements and Supplementary Data - Note L -
Acquisitions" for further discussion.
EBITDA for the paging systems' operations was $20.9 million (25% of
paging systems' net revenues), $15.1 million (29% of paging systems' net
revenues) and $8.7 million (31% of paging systems' net revenues) for 1996,
1995 and 1994, respectively. The decrease in EBITDA as a percentage of net
revenues in 1996 and 1995 from the prior years was the result of increased
expenses related to the increased level of acquisition activity during those
years from the prior year as well as the buildout of the Company's
SuperCenters, consisting primarily of salary, telephone, pager parts, third
party access fees and tower rent expenses. The Company believes EBITDA will
increase over time as the Company continues to integrate the Completed
Acquisitions, spreads its costs over a larger subscriber base and achieves
resulting economies of scale and operating efficiencies.
21
<PAGE>
SECURITY SYSTEMS' RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Revenues
Service revenues. . . . . . . . . . . . . . $ 5,871 $ 5,303 $ 5,064
Product sales . . . . . . . . . . . . . . . 41 137 133
-------- -------- --------
Total revenues. . . . . . . . . . . . . . . . 5,912 5,440 5,197
Cost of products sold . . . . . . . . . . . . (6) (64) (39)
-------- -------- --------
Net revenues (1). . . . . . . . . . . . . . . 5,906 5,376 5,158
Cost of services. . . . . . . . . . . . . . . (1,416) (1,178) (1,213)
-------- -------- --------
Gross margin. . . . . . . . . . . . . . . . . 4,490 4,198 3,945
Sales and marketing expenses. . . . . . . . . 211 319 207
General and administrative expenses . . . . . 420 631 676
Depreciation and amortization expenses. . . . 1,581 1,540 1,557
-------- -------- --------
Operating income. . . . . . . . . . . . . . . $ 2,278 $ 1,708 $ 1,505
-------- -------- --------
-------- -------- --------
EBITDA. . . . . . . . . . . . . . . . . . . . $ 3,859 $ 3,248 $ 3,062
-------- -------- --------
-------- -------- --------
(1) Net revenues represent revenues from services, rent and maintenance plus
product sales less cost of products sold.
SECURITY SYSTEMS' TOTAL 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 six systems in 1996, three systems in 1995 and two systems in
1994. The number of TracPacs in service at the end of 1996 was 29,501, a 7%
increase compared to the end of 1995. The number of TracPacs in service at the
end of 1995 was 27,548, a minimal decrease compared to 27,595 at the end of
1994.
SECURITY SYSTEMS' OPERATING INCOME was $2.3 million, $1.7 million and
$1.5 million for 1996, 1995, and 1994, respectively. The increase in
operating income resulted primarily from increased revenues and decreased
general and administrative expenses.
EBITDA for security systems' operations was $3.9 million (65% of security
systems' net revenues) in 1996, $3.2 million (60% of security systems' net
revenues) in 1995 and $3.1 million (59% of security systems' net revenues) in
1994. This increase was primarily due to increases in net revenues and
decreases in general and administrative expenses.
OTHER INCOME (EXPENSE)
Other income (expense) includes interest income generated from
short-term investments and interest expense incurred. Interest expense
increased in 1996 and 1995 from the prior years primarily as a result of
interest due on the senior subordinated notes which were issued in June 1995
and increases in the outstanding amounts under the Company's revolving line
of credit. Interest expense is expected to continue to fluctuate based on
changes in the outstanding amounts under the revolving line of credit.
FEDERAL INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards of
$45.7 million for income tax purposes that expire in years 2005 through 2011.
For the year ended December 31, 1996, the primary differences between the U.S.
Federal statutory tax rate and the effective rate in the Company's historical
financial statements are state income taxes, net operating losses with no
benefit and the amortization of goodwill related to stock acquisitions, which is
not deductible for tax purposes.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During 1996, 1995 and 1994, the Company financed the majority of its
growth, other than acquisitions, through internally generated funds. Net cash
provided by operating activities was $160,000 in 1996, $12.5 million in 1995
and $12.0 million in 1994. The net decrease in cash provided by operating
activities in 1996 from 1995 was primarily due to increases in the net loss,
accounts receivable, inventory 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
a decrease in other assets. The net increase in cash provided by operating
activities in 1995 from 1994 was primarily due to increases in depreciation
and amortization and the provision for losses on accounts receivable, offset
by an increase in accounts receivable and a decrease in net income.
Acquisitions prior to September 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 Company's revolving line of credit and to fund the
remaining acquisitions in 1995. The Company funded $7.3 million of the cash
for acquisitions in the first quarter of 1996 with proceeds from the sale of
the senior subordinated notes issued in 1995, with the remaining amounts
financed with borrowings under the Company's revolving line of credit. The
purchase of the Nationwide License in July 1996 was funded with $28 million
in proceeds from the Company's equity offering in June 1996 and $15 million
with borrowings under its revolving line of credit. The Company funded the
$21.7 million cash portion of acquisitions in the fourth quarter of 1996 with
borrowings under its revolving line of credit. The $8.9 million cash portion
of the acquisition of Modern in 1997 was also funded with borrowings under
its revolving line of credit. The Company anticipates that its ongoing
capital needs will be funded with additional borrowings and net cash
generated by operations.
CAPITAL EXPENDITURES
At December 31, 1996, the Company had invested $108.1 million in system
equipment and pagers for its major metropolitan markets and $12.9 million in
system equipment and TracPacs for its 35 security systems.
Capital expenditures for paging systems' equipment were $13.6 million in
1996, $8.4 million in 1995 and $2.1 million in 1994 (excluding assets acquired
pursuant to the Completed Acquisitions), and $931,700 for security systems'
equipment and TracPacs in 1996, $1.4 million in 1995 and $728,500 in 1994.
Except for those assets acquired through acquisitions and any capital
costs associated with new enhanced products and services, the Company expects
to meet its capital requirements in 1997 with cash generated from operations.
Although the Company had no material binding commitments to acquire capital
equipment at December 31, 1996, the Company anticipates capital expenditures
for 1997 to be approximately $24.0 million for the purchase of pagers and
system equipment for its current paging systems' operations and approximately
$660,000 for the manufacture of TracPacs and the purchase of system equipment
for its security systems' operations.
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 have converted 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 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 with proceeds from the Offering in June 1996.
23
<PAGE>
Also in June 1996, the Company entered into a new agreement with the Lender
for $300 million of senior secured credit facilities ("Former Credit
Facilities"), to be used to finance non-hostile acquisitions of paging
businesses, capital expenditures and general corporate purposes. The Former
Credit Facilities were amended in September 1996 ("Credit Facilities") reducing
the amount of credit available from $300 million under the Former Credit
Facilities to $150 million under the Credit Facilities. The $150 million under
the Credit Facilities consist of a $25 million revolving line of credit maturing
December 31, 2003, and a $125 million two year revolving line of credit which
converts July 1, 1998 to a term loan maturing December 31, 2003. The borrowings
bear interest, at the Company's designation, at either (i) the Alternate Base
Rate ("ABR") plus a margin of up to 1.5% or (ii) the Eurodollar Base Rate plus
a margin of up to 2.75%. 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. A
commitment fee of either .375% or .5% on the average daily unused portion of the
Credit Facilities is required to be paid quarterly. At December 31, 1996, the
Company had approximately $9.9 million of available funds under the Credit
Facilities.
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 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 Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the
"Securities Act"). 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 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. Also in June 1996, 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 senior subordinated notes related to the
Teletouch merger. 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 capital expenditures and for working capital and
general operating needs. If the Offering had occurred as of the beginning of
1996, net loss per share would have been $3.48 for the year ended December 31,
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, 1995
and 1996, the Company completed 21 acquisitions at a total cost of $198.9
million. The 21 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. On
March 1,
24
<PAGE>
1997, the Company acquired substantially all of the outstanding capital stock
of Modern for a purchase price of $9.2 million. This acquisition was
accounted for as a purchase and was funded by borrowings under the Credit
Facilities.
At December 31, 1996, the Company had deferred payments of $5.7 million
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 discretion, either in cash or shares of the Company's Common Stock
based on current market value at the date of payment. In January of 1997, the
Company paid $4.9 million in cash and issued 46,232 shares of its Common Stock
in payment of $5.7 million of deferred payments related to various
acquisitions.
LITIGATION
The final outcome of the issues subject to litigation as described in "Item
3 - Litigation" and "Note M - Litigation" to the Consolidated Financial
Statements could have a material adverse effect on the Company's results of
operations during fiscal year 1997 or subsequent periods. Because the cases are
in the early stages of discovery, 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 as of
the date of this release that could prove not to be accurate. These statements
appear in a number of places in this report and include statements regarding the
intent, belief or current expectations of the Company, its officers or its
directors with respect to, among other things: (i) acquisitions and product
development; (ii) the Company's financing plans; (iii) trends affecting the
Company's financial condition or results of operations; and (iv) regulatory
matters affecting the Company. Actual events, transactions and results may
materially differ from the anticipated events, transactions or results described
in such statements. The Company's ability to achieve 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". The Company disclaims any obligations to
update the forward-looking statements contained herein.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
ProNet Inc.
We have audited the accompanying consolidated balance sheets of ProNet Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index to Financial Statements and
Financial Statement Schedule at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ProNet
Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
DALLAS, TEXAS
FEBRUARY 5, 1997,
EXCEPT FOR NOTE N, AS TO WHICH THE DATE IS
MARCH 4, 1997
26
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
A S S E T S
DECEMBER 31,
-------------------
1996 1995
-------- --------
CURRENT ASSETS
Cash and cash equivalents............................. $ 2,286 $ 10,154
Trade accounts receivable, less allowance for doubtful
accounts of $939 and $1,018 as of December 31, 1996
and 1995, respectively............................... 13,747 7,498
Federal income tax receivable......................... 497 990
Inventories........................................... 2,760 1,574
Other current assets.................................. 2,499 1,937
-------- --------
21,789 22,153
EQUIPMENT
Pagers................................................ 59,003 36,789
Communications equipment.............................. 49,134 26,051
Security systems' equipment .......................... 12,897 11,866
Office and other equipment............................ 11,454 7,179
-------- --------
132,488 81,885
Less allowance for depreciation....................... (50,718) (34,203)
-------- --------
81,770 47,682
GOODWILL AND OTHER ASSETS, net of accumulated
amortization of $22,297 and $9,266 as of December 31,
1996 and 1995, respectively............................ 208,157 117,134
-------- --------
$311,716 $186,969
-------- --------
-------- --------
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES
Trade payables........................................ $ 10,452 $ 8,387
Other accrued expenses and liabilities................ 13,264 10,524
-------- --------
23,716 18,911
LONG-TERM DEBT.......................................... 148,691 99,319
DEFERRED CREDITS........................................ 5,660 19,183
STOCKHOLDERS' EQUITY
Common stock, $ .01 par value:
Authorized shares - 20,000
Issued shares - 12,871
Outstanding shares - 12,473......................... 129 70
Additional capital.................................... 180,694 56,617
Retained deficit...................................... (45,714) (5,671)
Less treasury stock at cost .......................... (1,460) (1,460)
-------- --------
133,649 49,556
-------- --------
$311,716 $186,969
-------- --------
-------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------- -------
REVENUES
Service revenues.............................. $ 87,239 $56,108 $33,079
Product sales................................. 15,817 10,036 6,639
-------- ------- -------
Total revenues................................ 103,056 66,144 39,718
Net book value of products sold............... (13,244) (9,421) (6,644)
-------- ------- -------
89,812 56,723 33,074
COST OF SERVICES
Pager lease and access services............... 24,508 13,218 7,972
Security systems' equipment services.......... 1,416 1,178 1,213
-------- ------- -------
25,924 14,396 9,185
-------- ------- -------
GROSS MARGIN.................................. 63,888 42,327 23,889
EXPENSES
Sales and marketing........................... 15,680 8,256 6,737
General and administrative.................... 23,410 15,679 5,389
Depreciation and amortization................. 40,624 18,662 8,574
Nonrecurring charges.......................... 8,809 -- --
-------- ------- -------
88,523 42,597 20,700
-------- ------- -------
OPERATING INCOME (LOSS)....................... (24,635) (270) 3,189
OTHER INCOME (EXPENSE)
Interest and other income..................... 285 1,291 173
Interest expense.............................. (15,370) (8,640) (1,774)
-------- ------- -------
(15,085) (7,349) (1,601)
-------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES........... (39,720) (7,619) 1,588
Income tax expense............................ 323 78 895
-------- ------- -------
NET INCOME (LOSS)........................... $(40,043) $(7,697) $ 693
-------- ------- -------
-------- ------- -------
NET INCOME (LOSS) PER SHARE..................... $ (4.07) $ (1.23) $ 0.16
-------- ------- -------
-------- ------- -------
WEIGHTED AVERAGE SHARES......................... 9,840 6,267 4,393
-------- ------- -------
-------- ------- -------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...................................... $ (40,043) $ (7,697) $ 693
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization........................ 40,624 18,662 8,574
Amortization of discount............................. 72 36 --
Deferred tax provision............................... (688) -- 293
Recoverable FIT...................................... 257 -- --
Provision for losses on accounts receivable.......... 1,712 1,034 570
Changes in operating assets and liabilities:
Increase in trade accounts receivable.............. (5,858) (1,788) (585)
Increase in inventories............................ (1,829) (542) (282)
Increase in other current assets................... (2,546) (190) (342)
Decrease in other assets........................... 4,088 -- --
Increase in trade payables and
other accrued expenses and liabilities......... 4,371 2,955 3,031
--------- -------- --------
Net cash provided by operating activities............ 160 12,470 11,952
INVESTING ACTIVITIES:
Purchase of equipment, net............................. (14,534) (9,773) (2,811)
Purchase of pagers, net of disposals................... (28,251) (6,998) (4,901)
Acquisitions, net of cash acquired..................... (97,514) (70,189) (36,828)
Computer system software, product
enhancements and other intangible assets............. (1,663) (1,591) (812)
Other.................................................. (531) (455) (21)
--------- -------- --------
Net cash used in investing activities................ (142,493) (89,006) (45,373)
FINANCING ACTIVITIES:
Senior subordinated debt offering-net.................. -- 95,583 --
Sale of common stock-net............................... 94,644 -- 28,916
Bank debt.............................................. 97,300 39,900 35,100
Payments on bank debt.................................. (48,000) (49,400) (29,000)
Exercise of incentive stock options for common stock... 65 1,494 267
Debt financing costs................................... (9,422) (1,469) (1,449)
Other.................................................. (122) (84) (277)
--------- -------- --------
Net cash provided by financing activities............ 134,465 86,024 33,557
--------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................................... (7,868) 9,488 136
CASH AND CASH EQUIVALENTS :
Beginning of year.................................... 10,154 666 530
--------- -------- --------
End of year.......................................... $ 2,286 $ 10,154 $ 666
--------- -------- --------
--------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
COMMON STOCK
PAR VALUE $0.01
---------------- RETAINED- TREASURY STOCK
SHARES PAR ADDITIONAL EARNINGS -----------------
ISSUED VALUE CAPITAL (DEFICIT) SHARES COST
------ ----- ---------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
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)
Net loss . . . . . . . . . . . . . . . . . (40,043)
Sale of common stock . . . . . . . . . . . 4,000 40 94,604
Exercise of incentive stock options. . . . 7 65
Common stock issued for acquisitions . . . 1,854 19 29,125
Common stock issued for
Employee Stock Purchase Plan . . . . . . 23 283
------ ----- -------- -------- --- -------
BALANCE AT DECEMBER 31, 1996 . . . . . . . . 12,871 $ 129 $180,694 $(45,714) 398 $(1,460)
------ ----- -------- -------- --- -------
------ ----- -------- -------- --- -------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
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 periods. 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.
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 $15.6 million and $5.7 million at December 31, 1996
and 1995, 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. Amortization of
the FCC licenses is deferred while the related system is not operational.
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, if
dilutive, for purposes of computing weighted average shares outstanding.
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.
31
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE A - ACCOUNTING POLICIES - CONTINUED
In order to achieve significant cost savings from volume purchases, the
Company currently purchases most of 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.
DERIVATIVE FINANCIAL INSTRUMENTS: The Company has only limited involvement
with derivative financial instruments and does not use them for trading
purposes. Derivative financial instruments are only used to manage interest
rate risks.
The Company may from time to time enter into interest rate swap agreements
which would be accounted for as a hedge of an obligation and, accordingly, the
net swap settlement amount would be recorded as an adjustment to interest
expense in the period incurred (see Note C - Long Term Debt). Gains and losses
upon settlement of a swap agreement would be deferred and amortized over the
remaining term of the agreement.
RECLASSIFICATION OF FINANCIAL STATEMENTS: The 1994 and 1995 financial
statements have been reclassified to conform to the 1996 financial statement
presentation.
NOTE B - BALANCE SHEET DETAIL
Other current assets consist of the following (in thousands):
DECEMBER 31,
-------------------
1996 1995
-------- --------
Security transmitter TracPacs... $ 1,273 $ 1,217
Other .......................... 1,226 720
-------- --------
$ 2,499 $ 1,937
-------- --------
-------- --------
Goodwill and other assets consist of the following (in thousands):
DECEMBER 31,
-------------------
1996 1995
-------- --------
Goodwill........................ $164,786 $108,153
Noncompetition agreements....... 9,804 4,750
Debt financing costs............ 11,034 6,980
FCC licenses.................... 34,665 150
Other........................... 10,165 6,367
-------- --------
230,454 126,400
Less accumulated amortization... 22,297 9,266
-------- --------
$208,157 $117,134
-------- --------
-------- --------
Other accrued expenses and liabilities consist of the following (in thousands):
DECEMBER 31,
-------------------
1996 1995
-------- --------
Deferred revenue................ $ 6,205 $ 4,891
Customer deposits............... 2,857 2,604
Accrued interest................ 1,285 1,002
Other........................... 2,917 2,027
-------- --------
$ 13,264 $ 10,524
-------- --------
-------- --------
32
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
-------------------
1996 1995
-------- --------
Senior subordinated notes....... $ 99,319 $ 99,319
Revolving line of credit........ 49,300 --
-------- --------
148,691 99,319
Less current maturities......... -- --
-------- --------
$148,691 $ 99,319
-------- --------
-------- --------
In June 1995, the Company completed a Rule 144A Offering of $100
million principal amount of its 11 7/8% senior subordinated notes due 2005.
Proceeds to the Company from the sale of the 1995 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 fair value of the 1995 Notes at December 31,
1996 was $93.5 million based on a quoted market price.
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 each June 15 and December 15, commencing December 15,
1995. The 1995 Notes are not 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 1995 Notes
with the SEC under the Securities Act. On October 6, 1995, the SEC declared the
1995 S-4 effective.
In June 1995, the Company entered into an agreement with The First National
Bank of Chicago, as Agent, making available a $125 million revolving line of
credit 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 have converted 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 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 with proceeds from the Offering.
Also in June 1996, the Company entered into a new agreement with the
Lender for $300 million senior secured credit facilities, to be used to
finance non-hostile acquisitions of paging businesses, capital expenditures
and general corporate purposes. The Former Credit Facilities were amended in
September 1996 reducing the amount of credit available from $300 million under
the Former Credit Facilities to $150 million under the Credit Facilities. The
$150 million under the Credit Facilities consist of a $25 million revolving
line of credit maturing December 31, 2003. The borrowings bear interest, at
the Company's designation, at either (i) the ABR plus a margin of up to
33
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE C - LONG-TERM DEBT - CONTINUED
1.5%, or (ii) the Eurodollar Base Rate plus a margin of up to 2.75%. 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. 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 Offering), the Lender can require that some portion of the proceeds be used
to make payments on outstanding borrowings under the Credit Facilities.
At December 31, 1996, the Company had approximately $9.9 million of
available funds under the Credit Facilities, based on financial and operating
covenants.
Effective August 13, 1996, the Lender began 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 December 31, 1996, approximately 67% of
the total indebtedness was at a fixed rate of interest.
The weighted average interest rate on the outstanding 1995 Notes and line
of credit during 1996 and 1995 was 11.5% and 12.9%, respectively. Total
interest paid was $ 15.0 million, $7.8 million and $1.7 million for 1996, 1995
and 1994, respectively.
NOTE D - DEFERRED CREDITS
Deferred credits consist of the following (in thousands):
DECEMBER 31,
----------------
1996 1995
------ -------
Deferred payments............... $5,660 $18,495
Deferred tax liability.......... -- 688
------ -------
$5,660 $19,183
------ -------
------ -------
At December 31, 1996, the Company had deferred payments outstanding related
to the Page One and SigNet Raleigh acquisitions of $4.86 million and $800,000,
respectively, which are due and payable one year from the closing of the
respective transactions. In January 1997, the Company paid $4.9 million in cash
and issued 46,232 shares of its Common Stock in payment of $5.7 million of the
Page One and SigNet Raleigh deferred payments, respectively. The balances are
payable, at the Company's discretion, either in cash or shares of the Company's
Common Stock based on current market value at the date of payment.
In 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 and
deferred $18.5 million in payments related to various acquisitions. In 1996,
the Company paid $1.0 million in cash and issued 769,664 shares of its Common
Stock in payment of $18.5 million of various deferred payments and deferred $5.7
million in payments related to various acquisitions.
In July 1995, the Company filed a Form S-3 Registration Statement (the
"1995 S-3") to register the resale of 2,000,000 shares of the Common Stock
issued in payment of the purchase prices or deferred payments related to the
purchase prices for the Company's acquisitions.
34
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE D - DEFERRED CREDITS - CONTINUED
In October 1996, the Company filed a Form S-3 Registration Statement (the
"1996 S-3") to register the resale of 1,500,000 shares of its Common Stock in
payment of the purchase prices or deferred payments related to the purchase
prices for the Company's acquisitions.
NOTE E - INCOME TAXES
At December 31, 1996, net operating loss carry forwards of $45.7 million
were available to reduce income taxes and expire in years 2005 through 2011.
The valuation allowance increased during 1996 in recognition of the
Company's 1996 operating losses and management's belief that the realization of
the deferred tax asset in the near term is remote.
Significant components of deferred tax liabilities and assets are as follows
(in thousands):
<TABLE>
DECEMBER 31,
--------------------
1996 1995
--------- --------
<S> <C> <C>
Deferred tax liabilities: Tax over book depreciation .................. $ (3,197) $ (2,343)
Other - net.................................. (1,002) (575)
--------- --------
Total deferred tax liabilities.......... (4,199) (2,918)
Deferred tax assets: Net operating loss carry forwards............ 15,540 3,727
Alternative minimum tax credit............... 652 225
Investment tax credit........................ 69 147
Other - net.................................. 1,442 2,236
--------- --------
Total deferred tax assets............... 17,703 6,335
Valuation allowance for deferred tax assets.. (13,504) (4,105)
--------- --------
Net of valuation allowance................... 4,199 2,230
--------- --------
Net deferred tax liabilities............................................ $ 0 $ (688)
--------- --------
--------- --------
</TABLE>
Significant components of the provision for income taxes are as follows (in
thousands):
1996 1995 1994
------- ------ ------
Federal current tax expense..................... $ -- $ -- $ 506
Current benefits from investment tax credits.... -- -- --
Federal deferred tax expense (benefit).......... (688) -- 293
State income taxes.............................. 1,011 78 96
------- ------ ------
$ 323 $ 78 $ 895
------- ------ ------
------- ------ ------
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows (in thousands):
<TABLE>
1996 1995 1994
--------- -------- ------
<S> <C> <C> <C>
Tax expense (benefit) at U.S. statutory rates.... $ (13,505) $ (2,590) $ 540
Non-deductible goodwill amortization.............. 1,036 633 298
Net operating losses with no benefit(1)........... 12,469 1,138 --
Change in valuation allowance..................... (688) 1,323 (19)
State income taxes, net of Federal benefit........ 1,011 51 63
Other............................................. -- (477) 13
--------- -------- ------
$ 323 $ 78 $ 895
--------- -------- ------
--------- -------- ------
</TABLE>
(1) Excludes benefit from stock options exercised.
35
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE E - INCOME TAXES - CONTINUED
Federal income tax paid amounted to $0, $132,000 and $755,000 in 1996,
1995 and 1994, respectively. Payments made in 1995 were refunded to the Company
in the first quarter of 1996. In 1996, 1995 and 1994, $65,000, $156,000 and
$112,000 in state income taxes were paid, respectively.
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, 1996 and 1995. As of December 31, 1996, no shares of preferred
stock had been issued.
In July 1995, the Company filed the 1995 S-3 to register the resale of
2,000,000 shares of its Common Stock issued in payment of 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 $4.5 million of the purchase price of Apple. In
1996, the Company issued 181,524 shares of Common Stock in payment for $4.9
million of the purchase price of various acquisitions, 769,664 shares of Common
Stock in payment of $17.4 million of deferred payments of various acquisitions
and 5,000 shares of Common Stock in payment of consulting services relating to
an acquisition.
In June 1996, the Company issued four million shares of its Common Stock at
a price of $25 per share in an underwriters public offering. If this offering
had occurred as of the beginning of 1996, net loss per share would have been
$3.48 for the year ended December 31, 1996.
In October 1996, the Company filed the 1996 S-3 to register the resale of
1,500,000 shares of its Common Stock issued in payment of the purchase prices or
deferred payments related to the purchase prices for the Company's acquisitions.
In October 1996, the Company issued 897,771 shares of Common Stock in payment
for $6.8 million of the purchase price of CalPage.
Total shares of common stock reserved for future issuance under stock
option plans, the 1995 S-3 and the 1996 S-3 were 3,338,661 and 3,722,615 at
December 31, 1996 and 1995, respectively.
NOTE G - STOCK OPTION PLANS
THE 1987 STOCK OPTION 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. Due to a reduction in the trading
price of the Common Stock, in December 1996 all outstanding options with an
exercise price greater than $6.00 were re-priced at $6.00 to provide further
incentive to the Company's employees.
At December 31, 1996, incentive stock options for 40,325 shares which vest
over a three-year period, 5,000 shares which vest over a four-year period and
764,100 shares which vest over a five-year period were outstanding. These
outstanding options had a weighted average remaining contractual life of 6.2
years and weighted average exercise price of $5.80. There were 811,657 and
818,777 shares of Common Stock reserved for future issuance and exercise of
outstanding options under the 1987 Plan at December 31, 1996 and 1995,
respectively. Of the outstanding options, 448,925 and 334,045 shares were
exercisable at December 31, 1996 and 1995, respectively.
36
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G - STOCK OPTIONS PLANS - CONTINUED
Stock option activity was as follows: NUMBER OF OPTION PRICE
SHARES PER SHARE
----------- ----------------
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 canceled....................... (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 canceled....................... (17,900) 5.38 -- 11.00
---------
Options outstanding at December 31, 1995.... 777,845 2.75 -- 20.25
Options granted........................ 53,000 20.875
Options exercised...................... (7,120) 5.38 -- 14.75
Options canceled....................... (14,300) 7.63 -- 18.50
---------
Options outstanding at December 31, 1996.... 809,425 2.75 -- 6.00
---------
---------
THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Non-Employee Director Stock 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, 1996, there were options outstanding and exercisable
for 15,000 shares at an option price per share of $6.00. At December 31, 1996,
these outstanding options had a weighted average remaining contractual life of
5.0 years. At December 31, 1995, 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 options became fully exercisable at the date of grant and were
outstanding at December 31, 1996 and 1995, with per share prices of $6.00 and
$7.63, respectively. At December 31, 1996, these outstanding options had a
weighted average remaining contractual life of 4.5 years.
Due to a reduction in the trading price of the Common Stock, in December
1996 all outstanding options with an exercise price greater than $6.00 were re-
priced at $6.00 to provide further incentive to the Company's non-employee
directors.
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
37
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G - STOCK OPTION PLANS - CONTINUED
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. In 1996, 6,571 and 16,304 shares were purchased with
payroll deductions withheld during the six month offering periods ending
December 31, 1995 and June 30, 1996, respectively. On January 3, 1997, 47,834
shares were purchased with payroll deductions withheld during the six month
offering period ending December 31, 1996.
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.
Due to a reduction in the trading price of the Common Stock in December
1996, all outstanding options with an exercise price greater than $6.00 were re-
priced at $6.00 to provide further incentive to the Company's employees.
At December 31, 1996, incentive stock options for 177,000 shares which vest
over a one year period, 45,000 shares which vest over a three year period and
396,000 shares which vest over a five year period were outstanding. These
outstanding options had a weighted average remaining contractual life of 9.5
years and a weighted average exercise price of $6.00. There were 1,000,000
shares of Common Stock reserved for future issuance and exercise of outstanding
options under the 1995 Plan at both December 31, 1996 and 1995. Of the
outstanding options, 2,499 shares were exercisable at December 31, 1996. None
of the outstanding options were exercisable at December 31, 1995.
Stock option activity was as follows: NUMBER OF OPTION PRICE
SHARES PER SHARE
----------- ----------------
Options outstanding at December 31, 1994.... -- --
Options granted........................ 10,000 $18.25
Options exercised...................... -- --
Options canceled....................... -- --
--------
Options outstanding at December 31, 1995.... 10,000 18.25
Options granted........................ 649,500 5.63 -- 27.50
Options exercised...................... -- --
Options canceled....................... (41,500) 7.56 -- 23.38
--------
Options outstanding at December 31, 1996 618,000 5.63 -- 6.00
--------
--------
38
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE G - STOCK OPTION PLANS - CONTINUED
FAIR VALUE OF OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options, because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), requires the use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock option equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value of that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.1%
and 7.2%; no dividend yield; a volatility factor of the expected market price
of the Company's Common Stock of 0.6; and a weighted-average expected life of
the option of 5.5 years. The weighted average grant-date fair value and
exercise price of options granted during 1996 was $2.61 and $5.63,
respectively, for options whose exercise price equals the market price of the
Company's Common Stock on the date of grant, and $1.98 and $6.00,
respectively, for options whose exercise price exceeds the market price of
the Company's Common Stock on the date of grant. The weighted average
grant-date fair value and exercise price of options granted during 1995 was
$9.21 and $15.83, respectively, with all option exercise prices equaling the
fair value of the Company's Common Stock on the date of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different than those of the traded
Common Stock, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employees stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's unaudited pro forma information follows (in thousands except for
per share information):
DECEMBER 31,
-----------------------
1996 1995
--------- --------
Net loss $(40,417) $(7,761)
Net loss per share (4.11) (1.24)
These pro forma disclosures are not likely to be representative of the
effects on reported net income(loss) for future years, as these calculations
only include options granted in 1995 and thereafter as required by FAS 123.
The effect of the stock option repricing in December 1996 is not shown due to
its immateriality.
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 1996, 1995 and 1994, the Company contributed
$130,000, $71,000 and $43,000, respectively, to the plan which represents 25%,
20% and 15% of all employee contributions.
39
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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):
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
Service revenues:
Pager lease and access fees......... $ 81,368 $50,805 $28,015
Security systems' equipment fees.... 5,871 5,303 5,064
-------- ------- -------
87,239 56,108 33,079
Product sales:
Pager and paging equipment.......... 15,776 9,899 6,506
Other security systems' income...... 41 137 133
-------- ------- -------
15,817 10,036 6,639
-------- ------- -------
Total revenues...................... $103,056 $66,144 $39,718
-------- ------- -------
-------- ------- -------
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 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 at and for the
years ended December 31, 1996, 1995 and 1994 follows (in thousands).
<TABLE>
PAGING SECURITY ADJUSTMENTS
SYSTEMS' SYSTEMS' AND
OPERATIONS OPERATIONS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
1996
Total revenues.................. $ 97,144 $ 5,912 $ -- $103,056
Cost of products sold........... (13,238) (6) (13,244)
-------- ------- ------ --------
$ 83,906 $ 5,906 $ -- $ 89,812
Operating income (loss) before
general corporate expenses..... $(18,253) $ 2,809 $ -- $(15,444)
General corporate expenses...... (9,191)
Interest and other income....... 285
Interest expense................ (15,370)
--------
Income before income taxes...... $(39,720)
--------
--------
Identifiable assets at December
31, 1996....................... $278,983 $12,307 $ -- $291,290
Corporate assets................ 20,426
--------
Total assets at December 31,
1996........................... $311,716
--------
--------
Capital expenditures............ $ 13,602 $ 932 $ -- $ 14,534
Depreciation and amortization... 36,896 1,450 2,278 40,624
</TABLE>
40
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE I - SEGMENT INFORMATION - CONTINUED
<TABLE>
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............ $ 8,425 $ 1,348 $ -- $ 9,773
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............ $ 2,082 $ 729 $ -- $ 2,811
Depreciation and amortization... 6,393 1,226 955 8,574
</TABLE>
NOTE J - COMMITMENTS
The Company leases office space and transmitter sites under operating
leases expiring through 2003. Rent expense was $8,822,000, $4,514,000 and
$2,422,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum payments under non-cancelable operating leases are as follows
(in thousands):
1997.......................... $ 6,429
1998.......................... 4,500
1999.......................... 3,273
2000.......................... 2,358
2001.......................... 926
-------
$17,486
-------
-------
41
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE K - QUARTERLY DATA (UNAUDITED)
The following summarizes the quarterly operating results of the Company for
the years ended December 31, 1996 and 1995 (in thousands except per share
amounts).
<TABLE>
THREE MONTHS ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1996
Total revenues..................... $24,162 $ 24,815 $ 25,477 $ 28,602
Operating loss..................... (2,492) (10,246) (3,714) (8,183)
Loss before income taxes........... (6,124) (14,047) (7,364) (12,185)
Net loss........................... (6,124) (14,147) (7,488) (12,284)
Net loss per share................. (.89) (1.76) (.65) (.98)
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)
</TABLE>
NOTE L - ACQUISITIONS
The Completed Acquisitions, which were all accounted for as purchases,
consisted of the following:
<TABLE>
PAGERS IN
ACQUISITION LOCATION(S) DATE CLOSED SERVICE (1) PURCHASE PRICE
- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Contact New York City March 1994 91,000 $ 19.0 million
Radio Call New York City August 1994 57,000 7.8 million
ChiComm Chicago August 1994 30,000 9.8 million
High Tech Chicago and Texas December 1994 2,000 0.9 million
Signet Charlotte Charlotte March 1995 30,000 9.0 million
Carrier New York City April 1995 31,200 6.5 million
Metropolitan Houston May 1995 150,000 21.0 million
All City Milwaukee May 1995 20,000 6.3 million
Americom Houston July 1995 80,000 17.5 million
Lewis Georgia September 1995 15,000 5.6 million
Gold Coast Florida September 1995 6,000 2.3 million
Paging & Cellular Houston October 1995 0(2) 9.5 million
Apple Chicago December 1995 41,500 13.0 million
Sun Florida January 1996 12,000 2.3 million
SigNet Raleigh Raleigh January 1996 13,000 8.7 million
Page One Georgia January 1996 30,000 19.7 million
AGR Florida February 1996 50,000 6.5 million
Total Florida February 1996 13,000 2.2 million
Williams Florida February 1996 6,500 2.7 million
Georgialina Georgia October 1996 27,000 11.4 million
CalPage California October 1996 45,000 17.2 million
------- --------------
Total Completed Acquisitions 750,200 $198.9 million
------- --------------
------- --------------
</TABLE>
(1) At the date the acquisition closed.
(2) Paging & Cellular was the Company's largest reseller serving more than
40,000 subscribers in Texas.
42
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE L - ACQUISITIONS - CONTINUED
In 1996, the Company signed a definitive agreement involving the merger
of the Company and Teletouch. The Company also signed a letter of intent to
purchase substantially all of the assets of Ventures in Paging, L.C. ("VIP").
In the third quarter of 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 $8.8 million
incurred by the Company in connection with the proposed Teletouch merger were
recorded during the year ended December 31, 1996. These charges consist
primarily of underwriting, advisory, legal and accounting fees and merger
financing costs. The Company also elected not to pursue the acquisition of
the assets of VIP.
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.
The following unaudited 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 (in thousands except for per share information):
DECEMBER 31,
---------------------
1996 1995
-------- --------
Total revenues $112,529 $111,086
Net loss (42,246) (17,854)
Net loss per share (3.47) (1.55)
In 1996, the Company signed a definitive agreement to purchase all of the
outstanding capital stock of Modern. As further discussed in Note N - Subsequent
Events, this acquisition was completed in March 1997 and was accounted for as a
purchase for an approximate cost of $9.2 million. Such acquisition is not
included in the pro forma results as shown above.
NOTE M - LITIGATION
The Company, its directors, and certain of its officers have been sued 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., AT AL.,
No. 3-96CV1795-P; 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
43
<PAGE>
PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE M - LITIGATION - CONTINUED
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 state cases have been consolidated into a single
action, which alleges violation of the Securities Act of 1933 in
connection with the Company's Offering. The federal actions have been
consolidated into two separate actions, depending upon the nature of the
claim raised. The court had previously appointed a lead plaintiff in both
actions, as that term is used in the Private Securities Litigation Reform Act
of 1995. That plaintiff has recently moved to be relieved of that position,
and the Company expects the court to appoint a new lead plaintiff. In the
meantime, the Company anticipates that its responsibility to answer, plead or
otherwise move against the pending federal complaints will be deferred until
a new lead plaintiff is appointed by the court.
The Company will vigorously defend the actions. The Company anticipates
that the plaintiffs will claim substantial damages. Because these cases are
in the early stages of discovery, the Company cannot predict the amount of
damages, if any. The final outcome of the issues that are the subject of
these actions could have a material adverse effect on the Company's results
of operations in 1997 and in the future.
NOTE N - SUBSEQUENT EVENTS
In January 1997, the Company paid $4.9 million in cash and issued 46,232
shares of its Common Stock in payment of $5.7 million of various deferred
payments.
On March 4, 1997, the Company announced the completion of the
acquisition of Modern, which added more than 18,000 subscribers. The
acquisition was completed for approximately $9.2 million, comprised of
approximately $8.9 million in cash and 50,000 shares of the Company's Common
Stock paid at closing. This acquisition was accounted for as a purchase, and
the cash portion was funded by borrowings under the Company's Credit
Facilities.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The financial statements filed as part of this Report are listed in
the Index to Financial Statements and Financial Statement Schedules
following Part IV of this Report.
(a) (2) The financial statement schedules filed as a part of this Report are
listed in the Index to Financial Statements and Financial Statement
Schedules following Part IV of this Report.
(a) (3) The following documents are filed or incorporated by reference as
exhibits to this Report:
3.1 - Restated Certificate of Incorporation dated July 31, 1987 (filed as an
exhibit to the Company's Registration Statement on Form S-4 (File No.
33-60925) filed July 7, 1995, and incorporated herein by reference).
3.2 - Certificate of Designation of Series A Junior Participating Preferred
Stock dated April 11, 1995 (filed as part of the Company's
Registration Statement on Form 8-A dated April 7, 1995, and
incorporated herein by reference).
3.3 - Certificate of Amendment to Restated Certificate of Incorporation
dated June 12, 1995 (filed as an exhibit to the Company's Current
Report on Form 8-K, dated July 5, 1995, and incorporated herein by
reference).
3.4 - Restated Bylaws of the Company, as amended (filed as an exhibit to the
Company's Current Report on Form 8-K filed April 19, 1995, and
incorporated herein by reference).
4.1 - Indenture, dated as of June 15, 1995, between the Company and First
Interstate Bank of Texas, N.A., as Trustee (filed as an exhibit to the
Company's Current Report on Form 8-K, dated July 5, 1995, and
incorporated herein by reference).
4.2 - Registration Rights Agreement, dated as of June 15, 1995, between the
Company, Lehman Brothers, Inc., Alex. Brown & Sons Incorporated and
Paine Webber Incorporated (filed as an exhibit to the Company's
Registration Statement on Form S-4 (File No. 33-60925) filed July 7,
1995, and incorporated herein by reference).
4.3 - Rights Agreement, dated as of April 5, 1995, between the Company and
Chemical Shareholder Services Group, Inc., as Rights Agent, specifying
the terms of the rights to purchase the Company's Series A Junior
Participating Preferred Stock, and the exhibits thereto (filed as an
exhibit to the Company's Registration Statement on Form 8-A dated
April 7, 1995, and incorporated herein by reference).
45
<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 June 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).
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).
46
<PAGE>
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, 1996 (filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 30, 1996, and
incorporated herein by reference).
10.33 - Second Amended and Restated Credit Agreement dated as of June 14,
1996, among the Company, The First National Bank of Chicago,
individually and as Agent and the Lenders party thereto (filed as
an exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1996, and incorporated herein by
reference).
10.34 - Amendment No. 1 to Credit Agreement dated as of September 30, 1996, by
and among the Company, each of the Company's subsidiaries, The First
National Bank of Chicago, individually and as Agent and the Lenders
party thereto (filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1996, and
incorporated herein by reference).
21 - Subsidiaries of the Company .*
23 - Consent of Ernst & Young LLP, Independent Auditors. *
47
<PAGE>
(b) - Reports on Form 8-K: On October 10, 1996, the Company filed a Current
Report on Form 8-K relating to pro forma financial information for
the 1996 S-3. On October 24, 1996, the Company filed a Current Report
on Form 8-K relating to the acquisitions of CalPage and Georgialina.
On November 15, 1996, the Company filed Amendment No. 1 to its Current
Report on Form 8-K filed on May 6, 1996, relating to the historical
financials of certain pending and completed acquisitions.
- -------------------
* Filed herewith
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRONET INC.
Date: March 28, 1997 By: /s/ Jan E. Gaulding
----------------------------------
Jan E. Gaulding,
Senior Vice President, Treasurer,
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jackie R. Kimzey Chairman, Chief Executive Officer
- ------------------------------- (principal executive officer)
Jackie R. Kimzey and Director March 28, 1997
/s/ David J. Vucina President, Chief Operating
- ------------------------------- Officer and Director March 28, 1997
David J. Vucina
/s/ Jan E. Gaulding Senior Vice President,
- ------------------------------- Treasurer and
Jan E. Gaulding Chief Financial Officer
(principal financial and
accounting officer) March 28, 1997
/s/ Thomas V. Bruns
- ------------------------------- Director March 28, 1997
Thomas V. Bruns
/s/ Harvey B. Cash
- ------------------------------- Director March 28, 1997
Harvey B. Cash
/s/ Edward E. Jungerman
- ------------------------------- Director March 28, 1997
Edward E. Jungerman
</TABLE>
49
<PAGE>
PRONET INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------------------------ ------ ------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(2) DESCRIBE (1) OF PERIOD
----------- ---------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Deducted from asset accounts:
Allowance for doubtful
accounts.......................... $ 135,000 $ 570,000 $122,000 $ 295,000 $ 532,000
---------- ---------- -------- ---------- ----------
---------- ---------- -------- ---------- ----------
YEAR ENDED DECEMBER 31, 1995
Deducted from asset accounts:
Allowance for doubtful
accounts.......................... $ 532,000 $1,034,000 $388,000 $ 936,000 $1,018,000
---------- ---------- -------- ---------- ----------
---------- ---------- -------- ---------- ----------
YEAR ENDED DECEMBER 31, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts.......................... $1,018,000 $1,712,000 $460,000 $2,251,000 $ 939,000
---------- ---------- -------- ---------- ----------
---------- ---------- -------- ---------- ----------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Amounts represent beginning balances related to acquired companies as of
the acquisition dates.
S-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of the Company and its
subsidiaries are included in this Report pursuant to Item 8 of this Report:
PAGE
----
Report of Ernst & Young LLP, Independent Auditors................ 26
Consolidated Balance Sheets-December 31, 1996 and 1995........... 27
Consolidated Statements of Operations For the Years Ended
December 31, 1996, 1995 and 1994............................... 28
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1996, 1995 and 1994............................... 29
Consolidated Statements of Stockholders' Equity For the
Years Ended December 31, 1996, 1995 and 1994.................... 30
Notes to Consolidated Financial Statements For the Years
Ended December 31, 1996, 1995 and 1994.......................... 31
The following financial statement schedule of the Company and its
subsidiaries is included in this Report pursuant to Item 14 of this Report:
PAGE
----
Schedule II - Valuation and Qualifying Accounts............... S-1
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
<PAGE>
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
3.1 - Restated Certificate of Incorporation dated July 31, 1987 (filed
as an exhibit to the Company's Registration Statement on Form S-4
(File No. 33-60925) filed July 7, 1995, and incorporated herein
by reference).
3.2 - Certificate of Designation of Series A Junior Participating
Preferred Stock dated April 11, 1995 (filed as part of the
Company's Registration Statement on Form 8-A dated April 7, 1995,
and incorporated herein by reference).
3.3 - Certificate of Amendment to Restated Certificate of Incorporation
dated June 12, 1995 (filed as an exhibit to the Company's Current
Report on Form 8-K, dated July 5, 1995, and incorporated herein
by reference).
3.4 - Restated Bylaws of the Company, as amended (filed as an exhibit
to the Company's Current Report on Form 8-K filed April 19, 1995,
and incorporated herein by reference).
4.1 - Indenture, dated as of June 15, 1995, between the Company and
First Interstate Bank of Texas, N.A., as Trustee (filed as an
exhibit to the Company's Current Report on Form 8-K, dated July
5, 1995, and incorporated herein by reference).
4.2 - Registration Rights Agreement, dated as of June 15, 1995, between
the Company, Lehman Brothers, Inc., Alex. Brown & Sons
Incorporated and Paine Webber Incorporated (filed as an exhibit
to the Company's Registration Statement on Form S-4 (File No.
33-60925) filed July 7, 1995, and incorporated herein by
reference).
4.3 - Rights Agreement, dated as of April 5, 1995, between the Company
and Chemical Shareholder Services Group, Inc., as Rights Agent,
specifying the terms of the rights to purchase the Company's
Series A Junior Participating Preferred Stock, and the exhibits
thereto (filed as an exhibit to the Company's Registration
Statement on Form 8-A dated April 7, 1995, and incorporated
herein by reference).
10.1 - Form of Indemnification Agreement between the Company and certain
of the Company's Directors (filed as an exhibit to Amendment No.
1 to the Company's Registration Statement on Form S-1 (File No.
33-14956) filed July 10, 1987, and incorporated herein by
reference).
10.2 - Deferred Compensation Plan of the Company (filed as an exhibit to
Amendment No. 2 to the Company's Registration Statement on Form
S-1 (File No. 33-14956) filed July 15, 1987, and incorporated
herein by reference).
10.3 - 1987 Stock Option Plan of the Company (filed as an exhibit to
Amendment No. 4 to the Company's Registration Statement on Form
S-1 (File No. 33-14956) filed July 29, 1987, and incorporated
herein by reference).
10.4 - Agreement dated June 15, 1988, between the Company and Texas
Instruments Incorporated for the acquisition of assets including
the use of patents, technology and software related to ProNet
Tracking Systems (filed as an exhibit to the Company's Current
Report on Form 8-K, dated July 21, 1988, and incorporated herein
by reference).
10.5 - Nonqualified Stock Option Agreement of the Company dated May 22,
1991 (filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1991, and incorporated
herein by reference).
10.6 - Non-Employee Director Stock Option Plan of the Company (filed as
an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1991, and incorporated herein by
reference).
10.7 - Stock Purchase Agreement dated June 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
<PAGE>
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).
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
<PAGE>
(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, 1996 (filed as an exhibit to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
30, 1996, and incorporated herein by reference).
10.33 - Second Amended and Restated Credit Agreement dated as of June 14,
1996, among the Company, The First National Bank of Chicago,
individually and as Agent and the Lenders party thereto.
10.34 - Amendment No. 1 to Credit Agreement dated as of September 30,
1996, by and among the Company, each of the Company's
subsidiaries, The First National Bank of Chicago, individually
and as Agent and the Lenders party thereto (filed as an exhibit
to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996, and incorporated herein by
reference).
21 - Subsidiaries of the Company .*
23 - Consent of Ernst & Young LLP, Independent Auditors. *
_____________
* Filed herewith.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
STATE OF
NAME INCORPORATION
---- -------------
Professional Communications Systems, Inc.. . . . . . . . . . Texas
Electronic Tracking Systems Inc. . . . . . . . . . . . . . . Delaware
Contact Communications Inc.. . . . . . . . . . . . . . . . . Delaware
The Message Express, Inc.. . . . . . . . . . . . . . . . . . New York
Beepers to Go, Inc.. . . . . . . . . . . . . . . . . . . . . Delaware
Metropolitan Houston Paging Services, Inc. . . . . . . . . . Texas
A.G.R. Electronics, Inc. . . . . . . . . . . . . . . . . . . Florida
ProNet Subsidiary, Inc. . . . . . . . . . . . . . . . . . . Delaware
Strategic Products Corporation . . . . . . . . . . . . . . . California
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements:
Form S-8 No. 33-18977 pertaining to the 1987 Incentive Stock Option Plan of
ProNet Inc.; Form S-8 No. 33-52606 pertaining to the 1987 Incentive Stock Option
Plan of ProNet Inc.; Form S-8 No. 33-80382 pertaining to the 1994 Employee Stock
Purchase Plan of ProNet Inc.; Form S-8 No. 33-81220 pertaining to the Non-
Employee Director Stock Option Plan of ProNet Inc.; Form S-8 No. 33-66193
pertaining to the 1995 Long-Term Incentive Plan of ProNet Inc.; Form S-3 No. 33-
61279 pertaining to the registration of 2,000,000 shares of ProNet Inc.'s common
stock and Form S-3 No. 333-13907 pertaining to the registration of 1,500,000
shares of ProNet Inc.'s common stock, of our report dated February 5, 1997,
except for Note N, as to which the date is March 4, 1997, with respect to the
consolidated financial statements and schedule of ProNet Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
DALLAS, TEXAS
MARCH 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR PRONET INC. FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,286
<SECURITIES> 0
<RECEIVABLES> 14,686
<ALLOWANCES> 939
<INVENTORY> 2,760
<CURRENT-ASSETS> 21,789
<PP&E> 132,488
<DEPRECIATION> 50,718
<TOTAL-ASSETS> 311,716
<CURRENT-LIABILITIES> 23,716
<BONDS> 148,691
0
0
<COMMON> 129
<OTHER-SE> 133,520
<TOTAL-LIABILITY-AND-EQUITY> 311,716
<SALES> 103,056
<TOTAL-REVENUES> 103,056
<CGS> 13,244
<TOTAL-COSTS> 39,168
<OTHER-EXPENSES> 88,523
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,370
<INCOME-PRETAX> (39,720)
<INCOME-TAX> 323
<INCOME-CONTINUING> (40,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,043)
<EPS-PRIMARY> (4.07)
<EPS-DILUTED> (4.07)
</TABLE>
