PRONET INC /DE/, 10-Q, 1997-05-15

PRONET INC /DE/
10-Q, 1997-05-15
RADIOTELEPHONE COMMUNICATIONS

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<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
---------

(Mark One)

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997

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

Commission File Number 0-16029

ProNet Inc.
(Exact name of registrant as specified in its charter)

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

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

Registrant's telephone number, including area code: (972-687-2000)

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

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of March 31, 1997: 12,618,865.

================================================================================
<PAGE>

PRONET INC.

Index
<TABLE>
<CAPTION>
Part I. Financial Information
Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets at March 31, 1997 and
December 31, 1996........................................................ 1

Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996............................... 2

Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996............................................ 3

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

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations......................... 7

Part II. Other Information

Item 1. Legal Proceedings.......................................................... 13

Item 6. Exhibits and Reports on Form 8-K........................................... 14

SIGNATURES ........................................................................... 17
</TABLE>
<PAGE>

PART I. Financial Information

Item 1. Financial Statements

PRONET INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)

ASSETS

<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ----------
(Unaudited)

<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................... $ 3,087 $ 2,286
Trade accounts receivable, net of allowance for doubtful accounts....... 11,657 13,747
Federal income tax receivable........................................... 497 497
Inventories ............................................................ 2,305 2,760
Other current assets.................................................... 2,442 2,499
--------- ----------
19,988 21,789
EQUIPMENT
Pagers.................................................................. 59,055 59,003
Communications equipment................................................ 53,647 49,134
Security systems' equipment............................................. 13,693 12,897
Office and other equipment.............................................. 12,362 11,454
--------- ----------
138,757 132,488
Less allowance for depreciation......................................... (58,676) (50,718)
--------- ----------
80,081 81,770
GOODWILL AND OTHER ASSETS, net of amortization .............................. 213,306 208,157
--------- ----------
$ 313,375 $ 311,716
========= ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Trade payables.......................................................... $ 6,278 $ 10,452
Other accrued expenses and liabilities.................................. 16,318 13,264
--------- ----------
22,596 23,716
LONG-TERM DEBT............................................................... 169,208 148,691
DEFERRED CREDITS............................................................. -- 5,660
STOCKHOLDERS' EQUITY
Common stock............................................................ 131 129
Additional capital...................................................... 181,991 180,694
Retained deficit........................................................ (58,976) (45,714)
Less treasury stock at cost............................................. (1,575) (1,460)
--------- ----------
121,571 133,649
--------- ----------
$ 313,375 $ 311,716
========= ==========
</TABLE>

See notes to consolidated financial statements.

1
<PAGE>

PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
---------- -----------
(Unaudited)
<S> <C> <C>
REVENUES
Service revenues........................................................ $ 24,057 $ 21,016
Product sales........................................................... 4,876 3,146
---------- -----------
Total revenues.......................................................... 28,933 24,162
Net book value of products sold......................................... (3,539) (2,781)
---------- -----------
25,394 21,381
COST OF SERVICES
Pager lease and access services......................................... 7,186 5,512
Security systems' equipment services.................................... 431 275
---------- -----------
7,617 5,787
---------- -----------
GROSS MARGIN............................................................ 17,777 15,594
EXPENSES
Sales and marketing..................................................... 4,224 4,039
General and administrative.............................................. 6,361 5,340
Depreciation and amortization........................................... 16,010 8,707
---------- -----------
26,595 18,086
---------- -----------
OPERATING LOSS.......................................................... (8,818) (2,492)

OTHER INCOME (EXPENSE)
Interest and other income............................................... 83 27
Interest expense........................................................ (4,427) (3,659)
---------- -----------
(4,344) (3,632)
---------- -----------
LOSS BEFORE INCOME TAXES................................................ (13,162) (6,124)
Income tax expense........................................................... 100 --
---------- -----------
NET LOSS................................................................ $ (13,262) $ (6,124)
========== ===========

NET LOSS PER SHARE........................................................... $ (1.05) $ (0.89)
========== ===========

WEIGHTED AVERAGE SHARES...................................................... 12,582 6,909
========== ===========
</TABLE>

See notes to consolidated financial statements.

2
<PAGE>

PRONET INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
---------- -----------
(Unaudited)

<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................................... $ (13,262) $ (6,124)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation............................................................ 12,110 5,471
Amortization............................................................ 3,901 3,236
Amortization of discount ............................................... 18 18
Provision for losses on accounts receivable............................. 462 348
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable...................... 1,749 (2,143)
(Increase) decrease in inventories.................................... (297) 625
(Increase) decrease in other current assets........................... 57 (104)
Increase (decrease) in trade payables and
other accrued expenses and liabilities.............................. (1,326) 6,324
---------- -----------
Net cash provided by operating activities............................... 3,412 7,651
INVESTING ACTIVITIES:
Purchase of equipment, net.............................................. (3,183) (5,811)
Purchase of pagers, net of disposals.................................... (4,510) (9,899)
Acquisitions, net of cash acquired...................................... (14,114) (31,647)
Computer system software, product enhancements
and other intangible assets......................................... (1,925) (372)
Other................................................................... 569 (12)
---------- -----------
Net cash used in investing activities................................... (23,163) (47,741)
FINANCING ACTIVITIES:
Bank debt............................................................... 20,500 32,000
Other................................................................... 52 25
---------- -----------
Net cash provided by financing activities............................... 20,552 32,025
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 801 (8,065)
CASH AND CASH EQUIVALENTS:
Beginning of period..................................................... 2,286 10,154
---------- -----------
End of period........................................................... $ 3,087 $ 2,089
========== ===========
</TABLE>

See notes to consolidated financial statements.

3
<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1997

Note A - Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Form 10-K for ProNet Inc. (the "Company") filed with the
Securities and Exchange Commission (the "SEC") on March 28, 1997.

Goodwill and Other Assets: Goodwill and other assets consist of the following
(in thousands):

<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Goodwill.................................... $ 171,851 $ 164,786
Debt financing costs........................ 11,036 11,034
FCC Licenses................................ 34,665 34,665
Other....................................... 22,359 19,969
------------ ------------
239,911 230,454
Less accumulated amortization............... 26,605 22,297
------------ ------------
$ 213,306 $ 208,157
============ ============
</TABLE>

Goodwill is amortized using the straight-line method over a fifteen
year term. Debt financing costs consist of costs incurred in connection with the
Company's senior subordinated notes and revolving line of credit and are
amortized over periods not to exceed the terms of the related agreements.
Amortization of the FCC licenses is deferred while the related system is not
operational.

Net Loss Per Share: Net 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.

Reclassification of Financial Statements: The 1996 financial
statements have been reclassified to conform to the 1997 financial statement
presentation.

New Accounting Pronouncements: In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, Earnings per Share,
which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact of Statement No. 128 on the
calculation of primary and fully diluted earnings per share is not expected
to be material.

4
<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note B - Long-Term Debt

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

<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Senior subordinated notes.................. $ 99,408 $ 99,391
Revolving line of credit.................... 69,800 49,300
------------ ------------
169,208 148,691
Less current maturities..................... -- --
------------ ------------
$ 169,208 $ 148,691
============ ============
</TABLE>

Note C - Deferred Credits

At December 31, 1996, the Company had deferred payments outstanding
related to the Cobbwells, Inc. dba Page One ("Page One") and SigNet Paging of
Raleigh, Inc. ("SigNet Raleigh") acquisitions of $4.9 million and $800,000,
respectively, which were due and payable one year from the closing of the
respective transactions. The balances were payable, at the Company's discretion,
either in cash or shares of the Company's common stock, $.01 par value (the
"Common Stock") based on current market value at the date of payment. In January
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.

Note D - Acquisitions

In early 1993, the Company announced its plans to commence a program of
acquiring businesses that serve the commercial paging market and offer
operational synergies when integrated within the Company's SuperCenters. During
1994, 1995 and 1996, the Company completed 21 acquisitions at a total cost of
$198.9 million and the purchase of a nationwide license (931.9125 MHz Radio
Common Carrier frequency) and associated system equipment (the "Nationwide
License") for $43 million. Effective March 1, 1997, the Company acquired all of
the outstanding capital stock of Modern Communication Corp. and Personal
Communications, Inc. ("Modern") for $9.2 million. The completed acquisitions
were accounted for as purchases and funded by borrowings under the Company's
revolving line of credit, proceeds from the sale of the senior subordinated
notes and issuances of shares of the Common Stock.

The pro forma unaudited results of operations for the three months
ended March 31, 1997 is immaterial. The pro forma unaudited results of
operations for the three months ended March 31, 1996, (which include
acquisitions closed as of March 31, 1997), assuming consummation of the
purchases at the beginning of the periods indicated, are as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
------------------
<S> <C>
Total revenues............................................. $ 28,756
Net loss................................................... (6,890)
Net loss per common share.................................. (0.99)
</TABLE>

These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions been made as of those dates or
of results which may occur in the future.

5
<PAGE>

PRONET INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note E - Income Taxes

For the three months ended March 31, 1997, 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.

Note F - 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., et 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 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 Company has been served in each action. The
Company has also accepted service on behalf of the individuals named in the
relevent actions. The Company and the individual defendants have filed
answers in each of the state cases. Two orders have been entered appointing
lead plaintiffs in the federal cases as provided for in the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). The plaintiffs
have filed consolidated complaints. The Company recently filed motions to
dismiss the complaints in the federal cases. Under the provisions of the
Reform Act, the federal cases are stayed until the motions to dismiss are
resolved.

On May 15, 1997, the Company announced that it had entered into an
agreement in principle to settle the securities class actions pending against
the Company in state and federal courts. The Company and its insurance
carriers will pay $5 million in cash to settle all claims against the Company
and its officers and directors. The Company will also assign to the
plaintiffs certain rights against one of its insurers and will issue one
million shares of ProNet stock to the class upon final court approval of the
settlement. The Company will also pay $2 million to the class if, within two
years from final approval of the settlement, the Company engages in a merger
or similar transaction in which control of the Company changes. The proposed
settlement is subject to execution of a definitive settlement agreement and
court approval. The proposed settlement does not resolve any claims asserted
against the underwriter defendants by the class plaintiffs or any potential
claims by the underwriters against the Company. The settlement terms include
a provision by which the Company's maximum exposure to claims of contribution
or indemnity to the underwriters is $6.5 million, plus any attorney fees
associated with the litigation. The Company intends to vigorously defend any
claims for contribution or indemnity which might be asserted against the
Company by the underwriters. 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.

6
<PAGE>

Item 2.

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

Overview

The Company provides wireless messaging services through its paging and
security systems operations. Until 1994, paging services were provided solely to
subscribers in the healthcare industry. Beginning in 1994, the Company broadened
its operating focus through the acquisition of paging businesses serving the
general commercial marketplace. As a result of 23 completed acquisitions, the
Company's results of operations for prior periods may not be indicative of
future performance.

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 March 31, 1997, the Company had 1,333,732 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, Electronic Tracking Systems Inc. ("ETS"), which
operates under the name of ProNet Tracking Systems ("PTS"), the Company markets
radio-activated electronic tracking security systems primarily to financial
institutions throughout the United States. The systems consist of radio
transmitters, or "TracPacs," which are disguised in items of value. When such an
item is removed from a financial institution without authorization, the TracPac
signals the appropriate law enforcement authorities, who in turn follow the
signal generated by the TracPac to recover the item and apprehend the suspect.

In both its paging and security systems operations, the Company builds
and operates communications systems and generates revenues from the sale and
lease of pagers, Intelligent Processing Terminal ("ipt") systems and security
devices and related access fees. The Company's revenues are derived primarily
from fixed monthly, quarterly, annual and bi-annual fees charged to customers
for paging and security tracking services. While a subscriber remains in
service, operating results benefit from this recurring monthly revenue stream
with minimal requirements for additional selling expenses or other fixed costs.
However, certain variable costs such as telephone and equipment charges are
directly related to the number of pagers in service.

Each month a percentage of the customer base disconnects service for a
variety of reasons. ProNet does, however, place substantial emphasis on customer
care and quality of service and as a result its paging business currently has a
monthly disconnect ("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 1.4%.

Currently, service revenues consist of two components - service fees
and unit leasing fees. As the Company pursues its strategy of expanding into new
markets, increasing its coverage within its existing service areas and
broadening its customer base and distribution channels, the percentage of
customers who own and maintain ("COAM") their paging equipment rather than
leasing it from the Company is likely to increase. This, together with
competitive factors, may result in declining service revenues per subscriber
since these customers will not pay a leasing fee as part of their monthly
charge. However, the Company will not incur the capital costs related to these
COAM pagers. Additionally, average revenue per unit ("ARPU") for pagers served
through resellers is lower than for direct sales due

7
<PAGE>

to the wholesale rates charged to this distribution channel. Such resellers do,
however, assume all selling, marketing, subscriber management and related costs
that would otherwise be incurred by the Company.

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

The Company currently enjoys low operating costs per unit due to the
efficiency of its operations. It expects that the development of its business
around its SuperCenters will result in 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 borrowing 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 1996 and the first three months
of 1997 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 since 1994.

Paging Systems' Results of Operations for the
Three Months Ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
--------- ----------
(in thousands)
<S> <C> <C>
Revenues
Service revenues.................................................... $ 22,529 $ 19,558
Product sales....................................................... 4,870 3,124
--------- ----------
Total revenues.......................................................... 27,399 22,682
Net book value of products sold......................................... (3,539) (2,781)
--------- ----------
Net revenues (1)........................................................ 23,860 19,901
Cost of services........................................................ (7,186) (5,512)
--------- ----------
Gross margin............................................................ 16,674 14,389
Sales and marketing expenses............................................ 4,215 3,956
General and administrative expenses..................................... 6,298 5,161
Depreciation and amortization expenses.................................. 15,631 8,311
--------- ----------
Operating loss.......................................................... $ (9,470) $ (3,039)
========= ==========
EBITDA.................................................................. $ 6,161 $ 5,272
========= ==========
</TABLE>

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

Paging systems' net revenues for the quarter ended March 31, 1997
increased to $23.9 million, a 20% increase from $19.9 million for the quarter
ended March 31, 1996. For the quarter ended March 31, 1997, service revenues
increased to $22.5 million, a 15% increase from $19.6 million for the comparable
period in 1996. These increases are

8
<PAGE>

primarily attributable to a growing subscriber base achieved through greater
market penetration in existing markets and three acquisitions between March 31,
1996 and March 31, 1997. Pagers in service increased 28% to 1,333,732 at March
31, 1997 from 1,039,222 at March 31, 1996. The increase in pagers in service was
primarily the result of these recent acquisitions. In 1994, 1995 and 1996, most
of the Company's growth in pagers in service was from acquisitions. In addition,
internal growth accounted for approximately 44,800 units during the quarter
ended March 31, 1997, which represents year over year, an internal growth rate
of approximately 20%.

ARPU was $5.83 for the quarter ended March 31, 1997 compared to $6.69
for the quarter ended March 31, 1996. 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 March 31, 1997 compared to 72% at March 31, 1996. 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 $1.3 million for
the quarter ended March 31, 1997, compared to $343,000 for the comparable period
in 1996. The margin increased in 1997 primarily due to increases in product
sales and the sale of a frequency. Management anticipates that the Company's
margins may vary from market to market due to competition and other factors.

Paging systems' gross margin (net revenues less cost of services) was
$16.7 million (70% of paging systems' net revenues) for the three months ended
March 31, 1997, compared to $14.4 million (72% of paging systems' net revenues)
for the comparable period in 1996. The decrease in gross margin as a percentage
of paging systems' net revenues 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 and third party access fees. The
Company currently anticipates that these margins will decrease slightly in the
short term, but will increase in the future as cost efficiencies and integration
savings are achieved and as revenues from new systems increase to offset these
costs. The cost of services increased to $7.2 million for the three months ended
March 31, 1997, compared to $5.5 million for the comparable period of the prior
year, as a result of the increased costs of servicing a substantially larger
subscriber base resulting from both internal growth and acquisitions.

Paging systems' sales and marketing expenses were $4.2 million (18% of
paging systems' net revenues) for the three months ended March 31, 1997,
compared to $4.0 million (20% of paging systems' net revenues) for the
comparable period of the prior year. The increase was due to the increase in the
number of retail counter locations (from 37 at March 31, 1996, to 51 at March
31, 1997), the majority of expenses of which are sales and marketing, including
increased advertising and commissions. The decrease as a percentage of paging
systems' net revenues was primarily due to savings resulting from the
integration of certain acquired retail counters and the elimination of redundant
expenses. These expenses as a percentage of paging systems' net revenues may
increase slightly in the future due to the Company's focus on expanding its
direct distribution channel.

Paging systems' general and administrative expenses were $6.3 million
(26% of paging systems' net revenues) for the quarter ended March 31, 1997,
compared to $5.2 million (26% of paging systems' net revenues) for the
comparable period in 1996. The stabilization as a percentage of paging systems'
net revenues was due primarily to the integration of certain acquisitions
completed since March 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 with lower general
and administrative expenses. 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 Note F - Litigation.

Paging systems' depreciation and amortization expenses for the three
months ended March 31, 1997 were $15.6 million, an 88% increase from $8.3
million for the comparable period in 1996. The increase was primarily due to the
depreciation of additional paging equipment from acquisitions and capital
investment for buildout of frequencies

9
<PAGE>

and system support. The Company expects this trend in depreciation and
amortization expenses will continue in the near term as a result of continued
capital investment in paging equipment to support the Company's growth.

EBITDA for paging systems' operations was $6.2 million (26% of paging
systems' net revenues) for the three months ended March 31, 1997, compared to
$5.3 million (26% of paging systems' net revenues) for the three months ended
March 31, 1996. The Company believes EBITDA will increase slightly as a
percentage of net revenues over time as the Company continues to integrate the
acquired operations, spreads its costs over a larger subscriber base and
achieves resulting economies of scale and operating efficiencies.

Security Systems' Results of Operations for the
Three Months Ended March 31, 1997 and 1996

<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
--------- ----------
(in thousands)
<S> <C> <C>
Revenues
Service revenues.................................................... $ 1,528 $ 1,458
Product sales....................................................... 6 22
--------- ----------
Total revenues.......................................................... 1,534 1,480
Cost of products sold................................................... -- --
--------- ----------
Net revenues (1)........................................................ 1,534 1,480
Cost of services........................................................ (431) (275)
--------- ----------
Gross margin............................................................ 1,103 1,205
Sales and marketing expenses............................................ 9 83
General and administrative expenses..................................... 63 179
Depreciation and amortization expenses.................................. 379 396
--------- ----------
Operating income........................................................ $ 652 $ 547
========= ==========
EBITDA.................................................................. $ 1,031 $ 943
========= ==========
</TABLE>

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

Security systems' total revenues increased 4% to $1.5 million for the
three months ended March 31, 1997, from $1.5 million for the comparable period
in 1996. The increase was due to the installation of two new systems since March
31, 1996, as well as expansion of and additional penetration in existing
markets. The number of TracPacs in service increased 2% to 28,949 at March 31,
1997, from 28,409 at March 31, 1996.

Security systems' operating income was $652,000 at March 31, 1997,
compared to $547,000 for the comparable period in 1996. The increase in
operating income resulted primarily from increased revenues and decreased sales
and marketing and general and administrative expenses.

EBITDA for the security systems' operations was $1.0 million (67% of
security systems' net revenues) for the three months ended March 31, 1997,
compared to $943,000 (64% of security systems' net revenues) for the same period
in 1996. This increase was primarily due to increases in net revenues and
decreases in sales and marketing and general and administrative expenses.

Other Income (Expense)

Other income (expense) includes interest income generated from
short-term investments and interest expense incurred. The period-to-period
fluctuations in interest expense have resulted primarily from changes in the
outstanding amounts under the Company's revolving line of credit. Interest
expense increased in the first quarter of 1997 primarily as a result of
increased borrowings under the 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 and changes in interest rates.

10
<PAGE>

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 three months ended March 31, 1997, 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.

Liquidity and Capital Resources

During 1996 and 1997, the Company financed the majority of its growth,
other than acquisitions, through internally generated funds. Net cash provided
by operating activities was $3.4 million for the three months ended March 31,
1997, compared to $7.7 million for the comparable period in 1996. The decrease
in net cash provided by operating activities was primarily due to increases in
net loss and inventories and decreases in trade payables and other accrued
expenses and liabilities, offset by increases in depreciation, amortization and
the provision for losses on accounts receivable and decreases in accounts
receivable and other current assets. 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

As of March 31, 1997, the Company had invested $112.7 million in system
equipment and pagers for its major metropolitan markets and $13.7 million in
system equipment and TracPacs for its 34 security systems.

Capital expenditures for paging systems' equipment were $3.2 million
for the three months ended March 31, 1997 compared to $5.3 million for the
comparable period in 1996 (excluding assets acquired pursuant to the
completed acquisitions). Capital expenditures for security systems' equipment
and TracPacs for the three months ended March 31, 1997 were $31,000 compared
to $496,000 for the comparable period in 1996.

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 March 31, 1997, the Company anticipates capital expenditures for
the remainder of 1997 to be $16.8 million for the purchase of system equipment
for its current paging systems' operations and $629,000 for the manufacture of
TracPacs and the purchase of system equipment for its security systems'
operations.

Credit Facilities

The $150 million under the Company's revolving line of credit
consists of a $25 million revolving line of credit maturing quarterly through
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 "Credit
Facilities"). 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

11
<PAGE>

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.

Senior Subordinated Notes

In June 1995 the Company completed a Rule 144A offering of $100 million
principal amount of its 11 7/8% senior subordinated notes due 2005 (the "1995
Notes"). 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 its existing revolving line of credit.
The Company used the remaining proceeds to pursue the Company's acquisition
strategy, to purchase frequency rights, to make capital expenditures for
buildout of the Company's regional paging systems and for enhanced services, and
for working capital and general corporate purposes.

The 1995 Notes are general unsecured obligations of the Company and are
subordinated to all existing and future senior debt of the Company. The
indenture provides that the Company may not incur any debt that is subordinate
in right of payment to the senior debt and senior in right of payment to the
1995 Notes. The indenture also contains certain covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, engage in transactions with affiliates, sell assets
and engage in certain other transactions. Interest on the 1995 Notes is payable
in cash semi-annually on each June 15 and December 15, commencing December 15,
1995. The 1995 Notes will not be redeemable at the Company's option prior to
June 15, 2000.

The Company filed a Form S-4 Registration Statement (the "1995 S-4") on
July 7, 1995 to register the 1995 Notes with the SEC under the Securities Act of
1933, as amended (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 its
existing revolving line of credit, $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 senior subordinated notes
related to a terminated merger with Teletouch Communications, Inc. 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 Company's Common Stock. On March 1, 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 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.

12
<PAGE>

Litigation

The final outcome of the issues subject to litigation as described in
"Item 1 - Legal Proceedings" and "Note F - 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.

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 filing 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 events, transactions
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, regulatory approval, economic
conditions, the impact of competition and pricing, the availability of
appropriate candidates for acquisition by the Company, 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" included in the Form 10-K for the Company filed with the SEC on March
28, 1997. The Company disclaims any obligations to update the forward-looking
statements contained herein.

PART II. Other Information

Item 1. Legal Proceedings

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 alleged class of plaintiffs who purchased shares in the
Company's $100 million public offering, which closed on June 5, 1996. Other
actions purport to include claims on behalf of all purchasers of the
Company's common stock during an alleged class period. The 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 Company has been served in each action. The
Company has also accepted service on behalf of the individuals named in the
relevent actions. The Company and the individual defendants have filed
answers in each of the state cases. Two orders have been entered appointing
lead plaintiffs in the federal cases as provided for in the Reform Act. The
plaintiffs have filed consolidated complaints. The Company recently filed
motions to dismiss the complaints in the federal cases. Under the provisions
of the Reform Act, the federal cases are stayed until the motions to dismiss
are resolved.

13
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

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 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).

14
<PAGE>

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 Contact Communications Inc., 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, Contact Communications Inc.,
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

15
<PAGE>

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).
(b) - Reports on Form 8-K: No Current Reports on Form 8-K were filed by the
Company during the quarter ended March 31, 1997.

- ----------

16
<PAGE>

SIGNATURES

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

PRONET INC.
(Registrant)

DATE: May 15, 1997 By: /s/ Jan E. Gaulding
--------------------------
Jan E. Gaulding
Senior Vice President, Treasurer and
Chief Financial Officer
(principal financial and accounting officer)

17
<PAGE>

EXHIBIT INDEX

Exhibit Description Number
Number ----------- ------
- ------

18
<PAGE>

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 Contact Communications Inc., 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, Contact Communications Inc.,
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).

19
<PAGE>

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).
27 - Financial Date Schedule.*

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

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR PRONET INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,087
<SECURITIES> 0
<RECEIVABLES> 12,653
<ALLOWANCES> 996
<INVENTORY> 2,305
<CURRENT-ASSETS> 19,988
<PP&E> 138,757
<DEPRECIATION> 58,676
<TOTAL-ASSETS> 313,375
<CURRENT-LIABILITIES> 22,596
<BONDS> 99,408
0
0
<COMMON> 131
<OTHER-SE> 121,440
<TOTAL-LIABILITY-AND-EQUITY> 313,375
<SALES> 28,933
<TOTAL-REVENUES> 28,933
<CGS> 3,539
<TOTAL-COSTS> 11,156
<OTHER-EXPENSES> 26,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,427
<INCOME-PRETAX> (13,162)
<INCOME-TAX> 100
<INCOME-CONTINUING> (13,262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,262)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)

</TABLE>